Shareholders Appear Concerned Over Proposed Aetna-Humana Deal
Shareholders seem concerned over a recently announced deal in which Aetna would purchase Humana, the Wall Street Journal reports (Hoffman/Wilde Mathews, Wall Street Journal, 7/6).
On Friday, Aetna announced it reached a $37 billion deal to purchase Humana, which could make it the nation's second-largest insurer. The deal is subject to shareholder approval. It is expected to close in late 2016.
The combined companies would generate an estimated operating revenue of $115 billion this year. More than half of that revenue would come from the companies' offerings in Medicare and Medicaid. Overall, the merged entity would have more than 33 million beneficiaries.
However, federal regulators could block the merger. Antitrust officials at the Department of Justice and Federal Trade Commission have displayed a willingness to block deals if they believe the mergers could negatively affect consumers (Bray/Abelson, "DealB%k," New York Times, 7/3)
Experts Say Shareholders Seem Concerned
Shares of Humana at closing on Monday dropped to 15.4% below the value Aetna offered to compensate shareholders in the deal, while shares of Aetna also fell by 6.4%. According to experts, the declines signal shareholders might be worried about whether the deal will meet antitrust standards for approval.
Further, shareholders also might be concerned about weaknesses that already exist in Humana's business. One expert said individuals and hedge funds might be wary of jumping on the merger because if "[e]verything goes right" with the deal, they could possibly "make a ton of money," but if "[o]ne thing goes wrong, you get killed" (Wall Street Journal, 7/6).
Aetna shareholders might be hesitant to approve the deal given Humana's lower earnings projections. Humana's stocks are currently trading well under the price proposed by Aetna. Jeffrey Loo, equity analyst at Standard & Poor's, said, "Aetna shareholders have to approve the deal, and with such a large premium, there is some outside chance that shareholders will not approve it" (Humer , Reuters, 7/6). David Windley, an analyst at Jefferies, added, "The risk is around the earnings outlook for Humana" (Kutscher, Modern Healthcare, 7/6).
Analysts and investors said the largest concern right now is whether the deal would gain federal approval under antitrust laws. While the companies had hoped to get in ahead of an expected trend of mergers between large insurers, the deal "could be bundled together" with other proposed mergers for antitrust review, according to Aetna CEO Mark Bertolini.
The threat of other deals among large insurers could cause federal regulators to block the Aetna-Humana merger, according to the Journal (Wall Street Journal, 7/6). Regulators could look at the companies' Medicare Advantage business, which overlaps in nine states. If the companies combine, they would hold MA market shares of:
- 88% in Kansas;
- 80% in West Virginia;
- 58% in Iowa; and
- 51% in Missouri.
In addition, the regulators could also look at the effects the merger would have on Medicaid managed care plans throughout the country. According to Reuters, attorneys general in various states said Monday they would be prepared to review the proposal.
Aetna Confident, Experts Worried About Deal Not Going Through
Still, Bertolini said Monday he is confident federal regulators will approve the deal. He said, "We took a conservative view of what we would need to divest" in the proposal and consulted with regulatory experts. He added, "We believe that given the legal advice we have ... that this is a very manageable transaction" (Humer , Reuters, 7/6).
Further, some experts contend Humana shareholders might be worried about what the market would look like for Humana if the deal is not approved. According to the Journal, Humana on Monday lowered its 2015 earnings projections to $7.75 per share, down from its initial projection range of $8.50 to $9 per share (Wall Street Journal, 7/6). Humana CEO Bruce Broussard said the revised earnings projection resulted from higher-than-expected health care use among elderly beneficiaries in Medicare Advantage plans (Humer , Reuters, 7/6).
Thomas Carroll, an analyst at Stifel Financial, said, "If the deal falls apart, then the market really looks at Humana and says, 'What are its earnings capabilities over the next few years and what are the macro risks with Medicare Advantage?,'" adding, "You would see the stock push back" (Wall Street Journal, 7/6).
Some Worry Mergers Could Decrease Competition
Meanwhile, some observers have also expressed concern over mergers among large insurers because they could limit market competition, the Washington Post's "Wonkblog" reports (Johnson, "Wonkblog," Washington Post, 7/6).
For example, American Hospital Association spokesperson Alicia Mitchell said, "Any potential deal of this magnitude needs rigorous scrutiny. That's why the AHA will call upon the DOJ and Congress to exercise a significant level of scrutiny" over the Aetna-Humana proposal (Humer , Reuters, 7/6).
If the deals are approved, the effects on consumers likely would not be seen until 2016 because premium prices for next year already will be decided, according to "Wonkblog." Still, research has shown limited choices in the market could lead to larger premiums in the future.
Some See Benefits
However, some experts argue reducing the number of large insurers in the country could have some benefits. Katherine Hempstead, who directs the Robert Wood Johnsons Foundation's sector on health insurance, said, "Always, consumers should be wary when sellers gain market power" but '[t]here are a couple reasons not to panic." According to Hempstead, one of those reasons "is that the business is really regulated," with regulators "scrutiniz[ing]" insurers' rates and not allowing them to "just charge whatever they" want.
Ana Gupte, senior research analyst and managing director at Leerink Partners, added limits imposed under the Affordable Care Act, such as those set on insurers' profits and the rate-setting process, "will make sure there are consumer protections." She noted, "If anything, I think [the mergers] allo[w] the larger entities to provide more affordable products."
In addition, Vishnu Lekraj, senior analyst at Morningstar, said, "Theoretically, [the mergers] would ... curb the growth in premiums over time, because the companies are going to become more efficient and will be able to negotiate better reimbursement terms with hospitals and doctors."
California Insurance Commissioner Dave Jones (D) disagreed, noting, "There is no requirement the insurers pass on the savings, and historically I don't think it has worked out that way" ("Wonkblog, Washington Post, 7/6).This is part of the California Healthline Daily Edition, a summary of health policy coverage from major news organizations. Sign up for an email subscription.