Follow Up: Anthem Merger Bid For Cigna Is Scuttled

A federal appeals court upheld the earlier decision of a lower court regarding the proposed merger of two of the largest healthcare insurance providers: Anthem and Cigna. The court opinion cited concerns about cost impacts to the consumer and the lack of competition in the healthcare insurance marketplace as the main issues with the proposed deal.

The backlash against this proposed marriage of two of the top three largest insurance providers had reached a critical mass in recent days. The pressure came from a variety of interested parties within the healthcare industry as well as from consumer interest groups.

The situation is further complicated because Anthem and Cigna are currently in a lawsuit against one another regarding that “breakup fee” clause that I detailed in my earlier coverage of this proposed mega-deal. The clause entails that Anthem pays Cigna $1.85 billion if this merger was to be derailed and not come to fruition.

Cigna is suing Anthem demanding payment of the fee. Anthem is counter-suing trying to force Cigna to stay in the merger deal. The resistance from several states and the federal government caused Cigna to look for ways to exit the deal. This situation has grown ugly very quickly, and the legal team for Anthem seems undeterred by this ruling. They are insisting they are going to find a way to gain approval for this merger.

Anthem and their legal team can spin this any way they would like, and they have 1.8 billion reasons why they are looking to pursue this merger. The reality is that the proposal is all but scuttled. The appeals court decision today affirms that and should be viewed as an indication that this proposal should be abandoned.
The lawsuits are another whole matter that is entirely separate and could take several different routes throughout that convoluted process. The regulatory reviews from the different government agencies ultimately had concerns about pricing and the monopolistic impact that the merger would have on consumer choice.

The combined Anthem/Cigna also would have been a major player in the provision of healthcare insurance to the business community. The potential influence on pricing and the subsequent effect that would have on the employee/employer splits on cost sharing for company provided healthcare coverage was a huge issue for certain states as well as the U.S. Court of Appeals.

This development comes just a few months after the Aetna – Humana proposed merger also collapsed during the review process. These mergers are the direct result of the consolidation route to optimize efficiency and maintain profitability during healthcare market changes due to the Affordable Care Act.

It should be noted that the proposed new healthcare plan changes are not fully known at this time, so the exact impact on the market is also unclear. The relentless pursuit of greed by these corporations in the healthcare industry is at the center of this particular situation.

The future of the Anthem/ Cigna proposed merger from the judicial perspective is either a “challenge” ruling on this verdict, which means that they can re-appeal this decision from the federal court. The other option is to attempt to take the case to the U.S. Supreme Court and see if they are granted a writ of certiorari to move that proceeding forward.

Some industry analysts and media types feel that a writ of certiorari is unlikely in this situation. The component that makes a Supreme Court review possible is the money involved with two companies of this size and the high powered legal representation that is involved in this case. It should be interesting to see how Anthem plans to move forward because they have the most at stake with the breakup clause taken under consideration.

The merger, for all intents and purposes, is opposed by about a dozen states and the federal court system as well as the regulatory bodies involved. This creates conditions where it is unlikely that it moves forward. The court ruling today cited this decision under the framework that it is a victory for the consumer because of the potential impact on pricing the combined entity could have exerted.

In my view, from covering mergers, I am not a proponent of monopolies. I also have learned that the bigger the merger in size, the more combustible it is when it becomes unraveled. This proposal is setback significantly, but it is not over yet. Anthem will not go quietly into the night paying a fee to Cigna, and Cigna is going to want the money from Anthem based on the agreement they had in place. It is going to get ugly in the weeks ahead, but most likely these two companies will be going toe-to-toe and not on their way to a monopoly styled merger.

Follow Up: Aetna Merger With Humana Is Scuttled

The proposed $34 billion merger between two healthcare giants: Aetna and Humana, has been scrapped by the order of the court system over concerns related to higher prices and less competition in the marketplace. Both companies considered an appeal of the court decision, but announced on Wednesday that they were going to accept the decision and dismantle the merger proposal.

The deal seemed doomed to fail from the start because of the enormous impact that it would have over the healthcare of millions of Americans. It would have condensed the number of companies which provide healthcare on a nationwide basis from five to just three. The combined entity would have held a sizeable portion of the Medicare Advantage market, which is a type of medical insurance product which replaces traditional Medicare with a plan that has lower monthly premiums but higher deductibles for most services.

The combined company would have held enormous influence at the negotiating table with other healthcare entities and would have been able to essentially set prices; which could have had drastic consequences to the consumer.

It ended up being these anti-trust concerns which ultimately spelled the demise of this proposed merger. This goes against the trend in recent years of these proposed mega-mergers eventually moving ahead and beyond the anti-trust issues. The uncertainty involving the national healthcare policy with the change in the U.S. Presidency to Donald Trump most definitely played a role in the eventual scuttling of this merger proposal by the senior level executives at both companies.

I have covered mergers and acquisitions for a few years now for many different news outlets. This proposed deal had a clause called a “breakup clause” which I have seen associated with other mergers in the past, where one party agrees to pay the other an agreed upon sum of money if the deal were to not come to fruition. In this situation the Aetna side agreed to pay a breakup fee to Humana.

The breakup fee is reportedly $1 billion that Aetna will pay to Humana, which after taxes is around $630 million. The two sides spent over a year and a half preparing this merger proposal, and all of that work, effort, and resources are now out the window. The shareholders of both entities will most assuredly have some strong feelings about the lost time and energy on this merger. The Aetna shareholders have the added grievance of the breakup fee or termination fee that is being paid out which will eat into profitably totals as well.

The recent negative news speculation regarding some of the Medicare Advantage products also likely played a role in the eventual breakup of this merger. The uncertainty in Washington right now over the future of the federal government decision making regarding a potentially new national health plan also certainly had to have been factored into this situation as well.

This merger was originally proposed during the previous administration in Washington and it was designed to offset some of the conditions in the marketplace that were created by the Affordable Care Act. Those conditions pushed both Aetna and Humana to pursue a merger to synergize their operational capabilities and to streamline their costs in order to maximize profitability.

The court system and regulatory bodies had scrutinized this deal pretty harshly from the onset. The emphasis of any proposed merger in an area as crucial to the public domain as healthcare is going to be treated differently than if two companies wanted to merge to bake bread and cookies in a more efficient manner.

The backdrop to this situation is an American public that has a general distrust of health insurance carriers and is paying more out of their budget for healthcare related services than ever before. The American public also has seen wage stagnation and increased costs for other goods and services and senior citizens feel the budget squeeze; which all of these factors contributed to the opinion of the court that the merger would have had a significant impact on the price and competition in the marketplace.

Furthermore, another factor that makes this merger different than other proposed M&A activity that I have covered in the past is that the path forward is unclear. I can usually speculate in other proposals that may have gone sideways about the next move for the companies involved. The fact that the landscape in the healthcare industry is already so limited on the national level, it leaves both Aetna and Humana with very limited options.

The path for Aetna may be to look at some regional acquisition targets to improve their presence further in certain regions of the country, but that is an incremental move for sure, as they already have a pretty significant overall national profile.

The path for Humana may be to diversify some of their operational capabilities by reviewing some options to expand into other insurance products beyond Medicare Advantage. I am not sure how successful that path will be based upon the potential scrutiny some of those potential activities may be met with from the court system.

The potential changes to the national healthcare policy will eventually guide the decision making of both companies as they navigate the new terrain of the industry at that point.

In the end analysis, the scuttling of this merger, at least at first glance, seems to be the appropriate decision by both the court system and the corporations involved. It would have limited competition in the marketplace and had a negative impact on price increases for a consumer base that has grown very weary of that narrative.

The potential consequences of this ultimately unsuccessful deal could present overarching implications for future M&A activity in the healthcare industry and other industries in the months and years ahead.