State Regulators Green Light $6.8 Billion Health Insurance Merger

Both of California’s health insurance regulators Tuesday signed off on a $6.8 billion acquisition of Health Net, Inc. by St. Louis, Missouri-based Centene Corp., clearing the way for the deal to close.

The approvals, which followed eight months of sometimes heated negotiations and public hearings, were the final regulatory hurdles standing in the way of the transaction.

The merger is the smallest of three insurer mergers under review by state regulators.

The heads of both regulatory agencies noted that their consent comes with plenty of caveats.

Health Net, based in Woodland Hills, Calif., must keep its headquarters in the state, and the combined company must spend around $370 million to make improvements in both the quality of care and access to it.

Among the commitments: an investment to improve health outcomes, an upgrade in customer service and more reliable information on network physicians and hospitals.

“I feel good about the investments we have obtained and the quality improvement plans they are committed to,” said Shelley Rouillard, director of the Department of Managed Health Care. “We will be monitoring this over the coming years to ensure they carry out their commitments.”

One thing regulators could not exact from the insurers was an iron-clad guarantee to limit future premium increases.

The only concession in that regard was that Centene officials would be required to meet directly with regulators in an effort to resolve any disagreements over proposed rate hikes.

Some Health Net policies are regulated by the managed care department, others by the Department of Insurance.

Health Net provides insurance for roughly 3 million people in California. It sells health plans in the employer-sponsored and individual markets, and provides government-funded coverage through Medicare, Medi-Cal and the “dual” program for people who are eligible for both.

Health Net has more than 1.8 million Medi-Cal enrollees in the state.

In addition to its California business, Health Net sells policies in Arizona, Oregon and Washington — covering about 300,000 people — that are also part of the deal.

Regulators in other states, and the federal government, have already approved the transaction.

Centene operates health plans for 2.9 million members in 23 states, but currently has fewer than 200,000 enrollees in California — all of them in Medi-Cal plans.

Officials at Centene have said they see the merger as a way to get a strong foothold in the marketplace here, since Health Net is the fourth largest insurer in California, behind Kaiser Permanente, Anthem Blue Cross and Blue Shield of California.

Dave Jones, California’s insurance commissioner, said the fortification of Health Net through its union with Centene could help enhance competition in the state’s insurance market.

The merger “provides an opportunity to introduce new capital and new resources” to make Health Net more competitive, Jones said. “There are many reasons to be skeptical of health insurance mergers … but the conditions of this current merger led me to believe this was in the best interests of consumers.”

The regulators imposed the following conditions on the deal:

  • Construction of a $200 million service center in an “economically distressed” area of California that will create at least 300 jobs.

A requirement that Health Net’s key functions and operations remain in California, including its headquarters.

Establishment of a $65 million program to improve the health outcomes of enrollees, and another $75 million commitment to the state’s health care infrastructure for under-served groups.

A $30 million investment in the state’s low- and moderate-income neighborhoods, primarily in health facilities.

A commitment by Centene to invest “substantially” in Health Net to help expand its business and ability to compete in California.

An agreement not to pass any merger costs on to consumers.

Centene failed to return repeated phone calls seeking comment. But earlier in the day it said in a statement that it planned to close the deal shortly after securing the sign-offs from both state agencies.

The Department of Insurance is scheduled to hold a public hearing Mar. 29 on another pending merger — the proposed $54 billion deal between Anthem and Cigna. The other transaction still under regulatory scrutiny is a planned $37 billion Aetna-Humana tie-up.

Consumer advocates have pushed hard to impose conditions on mergers, and they may push harder on the other two deals, since they are bigger and could have a huge effect on competition and consumers, said Dena Mendelsohn, a staff attorney at San Francisco-based Consumers Union.

Mendelsohn said it was “too hard to say at this point” whether the Centene-Health Net deal will be good for California consumers. “There’s so much upheaval with all of the proposed mergers. We want to get a better picture when all of the merger decisions are out.”

But Jones said the merits of any one of the mergers can only be judged against the collective impact of all three.

“They need to be considered as part of the overall insurance market,” he said.

Anthony Wright, executive director of Health Access California, a nonprofit consumer advocacy group, said approval of the Anthem-Cigna and Aetna-Humana mergers could be trickier and require more stringent conditions.

Aetna, for example, has “been a bigger problem” in terms of “unreasonable” rate hikes, and that could tinge the regulators’ view of its proposed acquisition of Humana, Wright said.

“Many of these conditions are just to get insurers to abide by existing laws and regulations,” he said. “We don’t want existing problems to get bigger as companies get bigger.”

Chad Terhune contributed to this report

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