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

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

“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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  1. Clive

    Everyone’s favorite Great Uncle Capitalism (Warren Buffet) also played this “we’ll throw a tantrum and take our ball away if you don’t let us win” kind of extorting by either withdrawing or threatening to withdraw GEICO policy availability in some states which stood up to their business practices. Tragically, they all eventually caved.

    1. Harry

      Everyone favorite paedo uncle capitalism. One way or another uncle’s companies are gonna abuse you.

    2. oho

      Warren is a master—-behind that “aww shucks I’m just a boy from Omaha” demeanor is one ruthless, bad a___ capitalist hombre.

      hats off.

      1. Pete

        I read an interesting bio of him called snowball. Its a good read. You are right he is definitely, shall we say focused…


    Wait! Does this mean all these companies who help us pay for health care … will be pushed into a corner … from which they will be forced to – for lack of a more polite term – compete?!

    1. diptherio

      Unfortunately, no. It just means they’ll continue to screw us over using the methods they are now, and will have to find other, less obvious ways to increase the size of their bezzle.

  3. Alex

    Pedantic point on the DealBook quote – they ain’t losing anything, they’re just extracting less. Loss implies they had it in the first place. Business press drives me nuts with this painfully overused misdirection.

    1. Katharine

      But isn’t it the in thing to argue they should be allowed to sue for loss of profits they might have had? I wonder sometimes how far they might want to push that. Generally it seems safest to assume no limit.

      1. diptherio

        That would only work if they were foreign companies, then they could sue under WTO rules. They’ll no-doubt be changing their incorporation location to take advantage of this forthwith….

        1. Procopius

          Are you sure? It seems there is an international organization of arbitrators. There are, supposedly, hundreds of trade agreements already that require ISDS. The question of whether or not a domestic company can sue their own government seems to be one that would have to be arbitrated. At the very least one or more of the existing agreements probably has sloppy language that could justify an insistence that the arbitration must proceed. That was one of my big fears about TPP/TTIP/TIS.

    2. diptherio

      I know, that confused me for a second there too. I was thinking that maybe there was some deal-failure pay-out the banksters were on the hook for (or, rather, the banks that they control), but then I saw they were just doing subtraction. “They were gonna get $45M, but they only got $5, so they ‘lost’ $40M…because 45-5=40…”

      I’m putting a pin in this article, though, as yet another instance of bald-faced corporate lying. Not a shock, of course, but nice to have real-life examples to show to the skeptical. As Veblen put it, “industry is carried on for the sake of business, and not vice versa.”

  4. Em Tee

    If we could agree that health care is a utility, that should be regulated as such, it might help us to get to single payor. Let these guys bid for the exclusive right to be the one payor to all medical care providers, for say a ten year period, and dictate and proscribe their profit margin %.
    The others can compete to sell add-on coverage a la AFLAC to the 10%.
    Steve Jobs (RIP) and Uncle Warren can buy whatever they choose.

    1. JustAnObserver

      Interestingly this would be IIRC the Swiss health care model where Swiss citizens are required to buy coverage from heavily regulated private insurance companies for a state mandated level of care. The amount they pay is relatively modest but they can then buy top-up/extra to e.g. cover private rooms. If you look at graphs of the health care costs of the rest of the developed world Switzerland has the highest but its still a long way below the out-of-control USA.

      1. Anon

        Actually, everyone who needs serious hospital care should be in a private room. The noise and commotion of “semi-private” rooms has been shown to be inimmical to the calm rest needed to recover quickly from serious illness. (BTDT)

        1. HotFlash

          Here in Canada, our govt insurance covers ‘ward’, which works out to semi-private (4 to a room). Seriously ill patients get what they need — ICU, stepdown, private, whatever, as required, by dr or nurse order. Recovering patients, OTOH, often benefit from the company. I know I appreciated it during my one and only hospital stay.

        2. Felix_47

          .Wards were safer. One nurse could watch 15 or 20 patients with a scan around the room or the next door neighbor can shout out.. I can’t tell you how many dead patients I have encountered………silently dead in their private rooms.

  5. Northeaster

    Aside from the ROI since 2008 and the passage of Obamacare, I pulled Form-4’s from public insurers and tallied them since Obamacare’s passage. Health insurer executives have sold back their shares to the tune of over $1.5 billion dollars, meanwhile, these same insurers cry poor mouth. Their campaign donations at both state and federal levels certainly earned them the returns they were looking for.

  6. ChrisPacific

    Well, that is refreshing news. From memory Humana occupies a low cost position in many of the exchanges (low cost being a relative term in this case) and there is often a lot of daylight between them and the second cheapest. That means that if Humana can be eliminated, the price floor rises dramatically. A merger would have been the easiest way to do it. Now the other insurers will have to come up with more creative tactics. The participant network would seem like the next obvious point of attack.

  7. Will Cooper

    There’s no reforming the Democratic Party. That’s a swamp that can’t be drained. Progressives and leftists need to strike out and gather under the aegis of an uncompromising political party of, for, and by the working class. The Socialist Equality Party (www.wsws.org) qualifies as such. Corporations and billionaire oligarchs own the Democrats lock, stock, and barrel, and the actions that the party’s leaders have taken since Trump’s inauguration suggest that they’re not going to forego their “Big Capitalist” supporters.

  8. RBHoughton

    That is a lonely but reassuring bit of news out of the West – an unbribed Judge upholding the Rule of Law and demanding competition from businessmen.

    I applaud his courage whilst observing that businessmen almost never compete unless its at the grass roots of capitalism – the shop keeper and artisan. The earlier comments about the Sage of Omaha are indicative.

    The rule for several decades has been ‘market-adapted pricing’ whereby the man with most market share sets the prices and the ‘also rans’ discount off that. For more settled products like commodities there’s a cartel to set prices. When oh when will we make capitalism great again.

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