Judge Reveals Shady Side of Crushed Aetna-Humana Merger, Banks to Lick their Wounds, Aetna to Get Pummeled

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Why these mega-mergers? Fees, egos, and pricing power.

On Monday, a federal judge blocked Aetna’s $34-billion acquisition of Humana. Combined they would have formed the second largest health insurer, behind the also under-attack Anthem-Cigna merger. The court cited antitrust grounds related to Medicare Advantage insurance plans, where their combined pricing power would ultimately raise the costs that consumers pay for coverage.

But Wall Street loved the deal that had been announced with such great hoopla in 2015. It was the year of the mega-mergers. The bigger the better. Money was growing on trees. And investment banks would have made a bundle.

How big would the combined entity have been? In January this year, Aetna had a Medicare Advantage enrollment market share of 7.2%, and Humana of 16.9%. The largest player was UnitedHealth with 23.7% (chart). The merger would have given Aetna-Humana a share of 24.1%. And the top two players would have controlled nearly 50% of the US market. And in numerous areas, one of them would have totally dominated. That fits the definition of an oligopoly.

US District Judge John Bates put it this way in his 158-page opinion filed Monday:

Federal regulation would likely be insufficient to prevent the merged firm from raising prices or reducing benefits, and neither entry by new competitors nor the proposed divestiture to Molina [another health insurer] would suffice to replace competition eliminated by the merger.

And thus, Judge Bates said, the merger would “likely substantially lessen competition” for Medicare Advantage plans in 364 counties and also in certain Florida public insurance exchanges.

But the judge also revealed a shadier side to the deal.

Aetna threatened the government last summer with pulling out of 11 of the 15 states where it participated in the Obamacare individual insurance markets, claiming it was a “business decision.” The threat was made while the Department of Justice was investigating the merger but before it filed its antitrust lawsuit. It was a shot before the bow. After the lawsuit was filed, Aetna followed through on its threat.

And Judge Bates put his finger on it: It wasn’t just a “business decision,” he wrote. There was more to it. “Aetna tried to leverage its participation in the exchanges for favorable treatment from DOJ regarding the proposed merger.”




Aetna then tried to cover up that connection between the threat to pull out of those markets and the antitrust investigation to the point where the “repeated efforts to conceal a paper trail about the decision-making process” bordered on “malfeasance,” he wrote.

Judge Bates determined that there was “persuasive evidence that when Aetna later withdrew from the 17 counties, it did not do so for business reasons, but instead to follow through on the threat that it made earlier.”

Aetna said it is “giving serious consideration to an appeal.” But if the deal remains in its current collapsed form, a lot of money is going to reverse course, and not just in the stock market and among merger arbs: according to the DealBook, the three investment banks advising the companies could lose $88 million of their $101 million in fees:

Citigroup, which advised Aetna, would have received $45 million in fees. So far, it has already been paid $5 million. It could lose around $40 million

Lazard, which also advised Aetna, would have received $15 million. So far, it has been paid $5 million. It could lose around $10 million

Goldman Sachs, which advised Humana, would have received $41 million. So far, it has been paid $3 million. It could lose around $38 million.

And Aetna gets to pay Humana a breakup fee of about $1 billion, if the deal remains in its collapsed form.

The ripples might spread further. Last summer, while it was at it, the DOJ also sued to block Anthem’s acquisition of Cigna, which would create the largest health insurer in the US. Originally, the deal was valued at $54 billion. The case went to trial last year but the court hasn’t ruled yet.

If that deal collapses, the investment banks advising both companies will lose $93 million in fees, of the total fees of $126 million. And perhaps the judge might throw in a few revelations as well. We cannot wait.

IBM is in trouble and desperate hype is apparently required. Read…  Big Shrink to “Hire” 25,000 in the US, as Layoffs Pile Up




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  29 comments for “Judge Reveals Shady Side of Crushed Aetna-Humana Merger, Banks to Lick their Wounds, Aetna to Get Pummeled

  1. Jan 24, 2017 at 9:03 am

    wow! an Anti-Trust issue in Health Insurance? ..WOW; Who Knew!…
    Lucky no such thing exists in our Too Big To Fail banking System. Too bad we had an atty Genl from a a law firm that defends the big banks (where he s since returned) who was short listed by the Banking Industry (which basically chose the whole 2008 Prez Cabinet (https://newrepublic.com/article/137798/important-wikileaks-revelation-isnt-hillary-clinton)
    It must be so surreal for other countries too be told they should be more like us.

    • bill
      Jan 24, 2017 at 4:53 pm

      The US gov’t is just a subsidiary of big business.

  2. Kent
    Jan 24, 2017 at 9:15 am

    Great article Wolf. Interesting to see the real politics at work behind the scenes. Companies like Aetna cannot come up with any competitive advantage to grow their market and profits, so the only option is to create an oligopoly where they can be a monopoly to their customers and monopsony to their vendors (the healthcare community).

    And then hold the government hostage to making it all happen. Nice to see a judge doing his job. In this day and age, seeing federal officials doing the right thing needs to be celebrated. Maybe it will incentivize the others.

  3. Valuationguy
    Jan 24, 2017 at 9:44 am

    While I applaud Judge Bates ruling…I believe he missed a key opportunity to stop the gaming in its tracks and send a chilling message to corporate america that the legal BS gravy train they have benefited from is running out of track.

    As the judge in the case…he had the ability to pierce client-lawyer privilege to actual reach the truth that his ruling mentioned but didn’t sanction the companies’ lawyers for claiming.

  4. Cyrus
    Jan 24, 2017 at 10:16 am

    I’m so disappointed; after this merger we could have yearly increase 30%-40% in our insurance premium. Now, we have to be happy with that pesky 15%-20% increases. I’m trying so hard to just give my money to these poor insurance companies who care for us so much, and this judge won’t allow me.

    On the serious side of things, at least we have one judge that can’t be bought.

  5. robt
    Jan 24, 2017 at 10:21 am

    This is just a symptom. The cause is the forced abandonment of actuarial standards for ‘Obamacare’, making so-called insurance nonviable.

  6. walter map
    Jan 24, 2017 at 10:27 am

    One has to feel badly for the ‘health care’ racketeers: after the banksters have finished robbing the country there won’t be anything left for them to steal.

  7. RD Blakeslee
    Jan 24, 2017 at 11:03 am

    President Teddy Roosevelt (famous as a trust-buster) said he didn’t oppose bigness per se. I think he was short sighted. Bigness encompasses power, power corrupts and individual human liberty is oppressed.

    There is a significant movement toward localizing business enterprise in the U.S.

    http://www.commondreams.org/views/2010/05/10/why-local-economies-matter

  8. Chicken
    Jan 24, 2017 at 11:13 am

    I thought these companies had been given a new charter to produce social justice votes? Surely they expect and deserve to be compensated?

    Well, maybe there was no specific fine print in the contract, and there’s the gotcha.

    I’m not sure what’s wrong with Canada’s system, seems they’re happy with it.

    • Kent
      Jan 24, 2017 at 1:23 pm

      “I’m not sure what’s wrong with Canada’s system, seems they’re happy with it.”

      Are the people that matter: bankers, insurance companies, hedge funds, PE owners really happy with the Canadian system? I haven’t heard that.

    • robt
      Jan 24, 2017 at 9:51 pm

      What’s wrong with Canada’s system is that it takes something like 70% of Canada’s budget in taxes and new debt – 500 dollars a month for every resident in Canada (not workers, everybody) and the system is in trouble though it is not even approaching maturity yet.
      Waiting lists for many treatments run up to a year, and getting a doctor’s appointment can take months, depending on the specialty. Naturally they’re trying to control costs by squeezing doctors and drug dispensaries.

      • rvette454
        Jan 25, 2017 at 1:41 am

        Not exactly, “The proportion of Canada’s gross domestic product will reach 11.6% in 2012 down from 11.7% in 2011 and the all-time high of 11.9% in 2010.[33] Total spending in 2007 was equivalent to 10.1% of the gross domestic product which was slightly above the average for OECD countries, and below the 16.0% of GDP spent in the United States.[34] ^ CIHI p.55. The popularity of Canadian healthcare is apparent, “In a Canadian National Population Health Survey of 17,276 Canadian residents, it was reported that 0.5% sought medical care in the US in the previous year. Of these, less than a quarter had traveled to the U.S. expressly to get that care. “The various levels of government pay for about 70% of Canadians’ healthcare, although this number has decreased somewhat in recent years.[48]CIHI.

        • robt
          Jan 25, 2017 at 12:41 pm

          As you quote: ““The various levels of government pay for about 70% of Canadians’ healthcare, although this number has decreased somewhat in recent years.”
          GNP is not government budget. Canada Federal Budget 317 Billion (Revenue 287B, deficit 30B). I relate it to the Federal Budget because the Feds kick back money to the provinces for healthcare. It’s all tax money and debt, wherever it comes from.
          From the CIHI report you quote, link below:
          Canada Healthcare Cost 211 Billion.
          Cost Per Person:
          “Total health spending in Canada is
          expected to reach $211 billion in 2013,
          or $5,988 per person. For the third year
          in a row, the rate of increase, 2.6%,
          has not kept pace with inflation and
          population growth.
          Spending per person is forecast to be
          highest in Newfoundland and Labrador
          ($7,132) and Alberta ($6,787) and
          lowest in British Columbia ($5,775)
          and Quebec ($5,531).”
          https://www.cihi.ca/en/nhex_infosheet_2013_en.pdf
          Another way to look at it is that for every worker, if we assume families of three, pays 18,000 dollars a year for ‘free’ healthcare, in a combination of taxes and debt. Not many families of three consume 18,000 dollars of healthcare a year.
          Many require nothing or close to it, so where does the money go?
          The system is not yet mature, but already rationing is taking place through elimination of treatments and imposition of supplementary charges. Squeezing the doctors rather than the bureaucrats is another method, as is price fixing of medicine and dispensing charges.
          The problem with all public healthcare is infinite demand and finite resources, a recipe for severe rationing or bankruptcy in the future. It is unsustainable.

        • rvette454
          Jan 26, 2017 at 10:28 pm

          …..”Historical NHE, 2014: NHE grew 5.3% to $3.0 trillion in 2014, or $9,523 per person, and accounted for 17.5% of Gross Domestic Product (GDP). Medicare spending grew 5.5% to $618.7 billion in 2014, or 20 percent of total NHE. Medicaid spending grew 11.0% to $495.8 billion in 2014, or 16 percent of total NHE.” so we are in better shape in a mainly privatised system of health care? Both Meidicare and Medicaid account for 36% of total expenditure, and they cover all those above 65 or indigent, not exactly your prime “good health” catagory’s. Canada has had a increase in the amount of new doctors for many years, not because they are “squeezed” as you call it. You can cherry pick facts and make assertions with them, but that will not prove your entire point. American healthcare accounts for nearly the same % of G.N.P as Canada, and very few are crossing the border to get American care, fact is most that do come for cosmetic surgery.

        • robt
          Jan 25, 2017 at 12:43 pm

          Wait times, for some treatments, 2 to 5 years:
          https://en.wikipedia.org/wiki/Healthcare_in_Canada#Wait_times

        • rvette454
          Jan 26, 2017 at 10:32 pm

          Canada has many who live miles from any health facility, could that extend the wait time in those few instances?

        • rvette454
          Jan 26, 2017 at 10:39 pm

          …..and everyone in Canada has some sort of insurance, in America 25% of individual bankruptcy has medical bills as the major contributing cause. Cause of bankruptcy in Canada? over-extension of credit.

  9. wkevinw
    Jan 24, 2017 at 11:20 am

    I don’t know that trying to use leverage is a significant issue. That’s PR/grandstanding by the judge. Either the merger impacts stakeholder (e.g. shareholder, public, consumer, etc.) competition/performance or it doesn’t. I think they have enough evidence that it does. If so, they should not allow the merger.

    The fees are always interesting. These spin-offs and M&A are always suspect; see Xerox: Make an acquisition and then spin it off a couple of years later. What a bunch of BS designed to rape the treasury of the company for executive and banker bonuses.

    I suspect there really are lots more monopolies than the DOJ wants to admit: Apple? Microsoft? Facebook? Google? Qualcom? I’m not sure, but if AT&T was a monopoly a few decades ago, I think these companies are monopolies.

    Where are the legal “profession”, DOJ, Commerce, etc., Economics and Business University departments on this important issue? Negligent.

    Thanks for the post.

    • Petunia
      Jan 24, 2017 at 11:50 am

      One of the biggest problems with the legal profession is their lack of knowledge in other disciplines. The injury lawyers know some medicine, and the good financial lawyers all work for the bad guys. The biggest legal black hole is in tech, even the lawyers don’t understand it.

    • Kam
      Jan 24, 2017 at 12:44 pm

      As our dirty elite destroyed the American worker, and our corrupt politicians suckled the crony bankers/corporatists by encouraging market consolidation, via regulation, the American economy died.

      Wolf: 1. What is the Percentage of GDP attributable to “Government” in 2016 vs. 1976? That should tell half the story- every dollar of government, the tax consumer, has to be plucked out of the tax payer, the value creator.
      2. What is the FIRE percent of GDP over the same years.

      • Kent
        Jan 24, 2017 at 1:28 pm

        “every dollar of government, the tax consumer, has to be plucked out of the tax payer, the value creator.”

        That is a common misunderstanding. Unlike all others, the federal government actually spends the money first, then taxes it back. So the money it gets back is the money it put in in the first place. Now the folks it takes the money from may not be the same as the folks who received the money, but that is politics.

      • Jan 24, 2017 at 1:57 pm

        Federal government (not including state and local) outlays in 2016 amounted to 20.4% of GDP. And to 19.8% in 1976.

        Here’s the chart:
        https://fred.stlouisfed.org/series/FYONGDA188S

      • Intosh
        Jan 24, 2017 at 4:29 pm

        “our corrupt politicians suckled the crony bankers/corporatists by encouraging market consolidation, via regulation, the American economy died”

        You mean DEregulation? Didn’t deregulation help create the “too-big-to-fail” banks?

        Darwanian capitalism always tends to create a few lions in the food chain, a stratification where the top is seldom replaced. Monopolies/oligopolies are the norm under the law of the jungle. In the relatively young high-tech web space, you see the giants of the market grab smaller competitors left and right all the time. There is semblance of active competition only because it is a nascent market. But fact is, competition, choice and innovation could have been greater. Perhaps you have heard of the collusion between the tech giants regarding recruiting that is now subject of a class action?

  10. RD Blakeslee
    Jan 24, 2017 at 11:38 am

    “These spin-offs and M&A are always suspect; see Xerox: Make an acquisition and then spin it off a couple of years later.”

    The buying and re-selling of whole companys (or other valuable entities, e.g. “flipping” houses) is also designed to convert income into capital gains, taxed at a lower rate.

  11. Bruce E. Woych
    Jan 24, 2017 at 5:45 pm

    There seems to be an awful lot of excess money being thrown around that should be going to reducing cost to patients and alleviating catastrophic risk. When we speak of health care markets, it is never clear that this involves private equity, bank profiteers and strategic price loading for profits that have nothing to do with medical care development or delivery. I don’t understand why this aspect of our health care insurance is not better protected, or at least exposed. Nowhere in this otherwise great article is there any mention of the fact that for profit insurance is breaking the cost structure of medical care itself, and far exceeds the “evidence base” evaluation of cost efficiency over actual effectiveness. Expedience at profit driven outcome is blindsiding the medical economy and apparently that is simply business as usual.

  12. roddy6667
    Jan 25, 2017 at 10:18 am

    We should switch to a single payer model like Canada and leave the health insurance companies to die on the vine. The nation would also spend at least 30% less on health care with better results.
    Nah, it would never happen. It’s not corrupt enough.

  13. George McDuffee
    Jan 25, 2017 at 2:12 pm

    Question to Wolf and the group:

    How large do “private” medical insurers have to get before the difference between their services/costs and the services /costs of a single payer governmental system, e. g. medicare for all, disappear?

    A single payer system would eliminate sales and marketing costs, e. g. superbowl ads, minimize executive/CEO compensation, and avoid duplicate support systems such as multiple computer systems, claim forms, computer programs, etc.

    How much money are we willing to waste to preserve the facade of “private” medical insurance?

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