Why health insurance companies should reconsider attempting mega-mergers in the future

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Aetna, Humana, Anthem and Cigna spent more than $2 billion trying to complete their respective mergers.

After all that has transpired with two scuttled health insurance mergers, it may be time for the industry to focus on providing more value for customers rather than “swallowing rivals,” according to one expert.

Last summer, the Justice Department sued to block Anthem’s bid to acquire Cigna and Aetna’s proposed purchase of Humana. Then, two different federal judges struck down the deals, ruling that they would unlawfully reduce competition in certain health insurance markets.

Aetna and Humana have since abandoned their plans to merge, but Anthem is pursuing an appeal—an effort complicated by the fact that Cigna has filed suit against it seeking to exit their merger contract and collect damages.

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The pursuit of greater market power has not come cheaply, Leemore Dafny, Ph.D., a professor of business administration at the Harvard Business School, wrote in a perspective piece for the New England Journal of Medicine.

The insurers spent more than $2 billion trying to complete their deals, and Anthem and Aetna are due to pay $2.85 billion in breakup fees plus “possibly billions more in damages,” she noted.

In both cases, the judges didn’t buy the insurers’ arguments that their deals wouldn’t unduly reduce competition or harm consumers. What’s more, the judges “admonished them for bad behavior,” Dafny pointed out.

Indeed, in the ruling against the Aetna-Humana merger, Judge John Bates wrote that Aetna stopped offering public exchange plans in certain counties in order to bolster its defense for the acquisition of Humana. Then, executives appear to have tried to conceal that motivation, he said.

Some left-leaning lawmakers also accused CEO Mark Bertolini of threatening a market exit in order to gain leverage in its merger case. 

In Anthem and Cigna’s case, meanwhile, Judge Amy Berman Jackson made note of the unusual animosity between the two would-be merger partners, which she called the “elephant in the courtroom” that ultimately served to undermine the insurers’ case.

Given how those two deals turned out, the “silver lining” of it all would be if insurers learned from those experiences, Dafny argued. They should now realize that it is wiser to spend their energy on “growing by offering superior value” rather than simply becoming bigger, she concluded.

Anthem, however, does not see it that way, as it has said it believes there is still “sufficient time and a viable path forward” to complete its acquisition of Cigna. A panel of federal judges heard oral arguments in the insurer's appeal in late March, but have not yet issued a ruling.