When it was revealed during antitrust litigation of a merger that would create the largest payer in the country that one of the companies had created an integration team kept secret from the other, District Judge Amy Berman Jackson asked: “How do you work on integration without talking to the person you’re integrating with?”
The key question for Anthem CEO Joseph Swedish reveals a lot about the saga of the merger. What began as a mutually agreed upon acquisition now seems more like a hostile takeover in some ways and has drawn increased attention from federal antitrust enforcement.
The $54 billion deal is still on because, although Cigna has been at best a reluctant participant for months, Anthem won’t give up. It would be a surprise if the merger does end up successful.
Regardless, other health insurance companies and hospitals looking into M&A activity can learn a lot from the debacle.
How we got here
Anthem and Cigna proposed to merge in 2015 and they were able to get required regulatory approvals from some states and company shareholders before the U.S. Department of Justice's (DOJ) antitrust division filed a lawsuit in July 2016 to block the deal. The concerns that the division and the several states that joined the lawsuit had were that the combined company would substantially harm competition in the health insurance market for national accounts, lead to increased prices to consumers and hinder innovation efforts. The agency received support in court from top industry groups, including the American Medical Association (AMA) and the American Hospital Association (AHA).
The two companies (Anthem more so than Cigna) argued in court that the combined company would generate certain efficiencies that would benefit consumers, such as about $2.4 billion in medical cost savings. But Jackson of the District of Columbia Court ruled in favor of the DOJ in February and blocked the deal.
The court decision wasn't enough for Anthem to stop trying. Unlike Aetna and Humana, which ended their $37 billion merger plans after a federal judge ruled in favor of the DOJ and blocked their deal as well, Anthem decided to take the decision to the Court of Appeals later that month hoping it would see things differently.
Anthem filed a motion to expedite the appeal days later, stating that the federal judge had "made serious errors of law, fact, and logic." The deal again received opposition from the AMA, the AHA, among others. The AHA argued that the companies would have a detrimental impact on efforts to innovate with providers at a time when these are most needed as the industry continues its push toward value-based care.
Judges treated the Aetna-Humana antitrust case differently than the Anthem-Cigna case. They considered Aetna's and Humana's share in the Medicare Advantage market and their presence in the Affordable Care Act’s individual market. Anthem’s and Cigna’s competition against each other for national accounts in the health insurance industry is a big part of what made it so difficult for them to prove that their claimed efficiencies would offset any harms to competition.
In addition, Aetna and Humana mutually agreed on the decisions made throughout the process. Anthem and Cigna, on the other hand, have been disagreeing on several matters regarding the merger, including on who would be in leadership positions at the new company.
The question that needed to be answered in court was: Will the deal significantly harm competition in the market and ultimately consumers? But the infighting between the two companies had a big impact on their ability to make the case that the combined company would be able to implement any efficiencies effectively. In the court decision that blocked the deal, the judge argued Anthem has urged "the Court to look away, and it attempts to minimize the merging parties’ differences as a 'side issue,' a mere 'rift between the CEOs.' But the Court cannot properly ignore the remarkable circumstances that have unfolded both before and during the trial."
Anthem is in it to win it
Anthem has tried practically everything not just to have the deal go through but also to get Cigna back on board. It tried to extend the contractual deadline once more and failed as Cigna believes it’s time for the two companies to go their separate ways.
Anthem has adamantly argued that the combined company would benefit consumers. But after the court ruled that it would lead to dampened competition in the health insurance market, Cigna filed a lawsuit against Anthem attempting to terminate the deal and seeking more than $13 billion in damages.
Anthem is now hoping to prevent Cigna from terminating the deal, even though the contractual deadline (April 30) has already passed. The hearing for the preliminary injunction is set for May 8.
After the Court of Appeals announced its 2-1 decision, Anthem issued a statement reinforcing its commitment to completing the transaction. The company said “the demonstrated efficiencies make this a pro-competitive, consumer friendly transaction” and that it is “currently reviewing the opinion and will carefully evaluate” its remaining options. There is still the option of taking it to the Supreme Court.
Cigna wants out
The two payers have already lost billions of dollars throughout the approval process of the deal. This is why Cigna is asking for a lot more money that the amount they had agreed Anthem would pay in the contract – $1.85 billion.
Cigna just deferred to Anthem in its appeal brief as required by the contract. Anthem is supposed to be the leader of the two in all legal proceedings related to the deal’s approval process. Also, Cigna refused to extend the contractual deadline any further per Anthem’s request (the original deadline was January 31). Yet Anthem filed a lawsuit of its own and was granted a temporary restraining order against Cigna.
Federal officials urged the court last year to release certain documents that showed the two companies had accused each other of breaching the terms of their contractual agreement. The documents were later released.
The court documents from 2016 gave a sense of how nasty the bickering between the two companies had gotten, with Cigna saying that they had “disagreed over certain issues, including integration planning.” Anthem CEO Joseph Swedish said how the two companies planned to integrate was “unacceptable” in letter sent to Cigna CEO David Cordani in December 2015, according to a Law360 report.
The report adds that DOJ attorney Scott I. Fitzgerald brought up a letter in court from an Anthem employee saying the company wanted to establish a “separate, highly confidential Anthem-only” staff that would work on the integration process but “without Cigna’s knowledge or support.” Fitzgerald also showed a letter from the chairman of Cigna’s board of directors that accused Anthem of “taking actions that erode, rather than maximize, the value to be achieved from the transaction.”
Earlier this year, Cordani indicated that the company could still have as much as $14 billion in capital to spend on future M&A activity. Experts believe Cigna would go after a smaller insurer with a larger presence in the Medicare and/or Medicaid markets.
The table below is an excerpt of one created and published by Anthem when it announced its request for a temporary restraining order which highlights a few more details about the companies’ ongoing squabbling:
| Integration Efforts | |
|---|---|
| Anthem | Cigna |
| Anthem retains a team of 165 professionals at McKinsey & Company to integrate the companies. | Cigna refuses to allow meetings with its senior management team, a necessary step to integration. Cigna also consistently delays producing data, preventing completion of an integration plan. |
| Anthem and McKinsey work to implement a key component of integration known as “Value Capture,” which was the process by which the synergies and efficiencies for the newly formed company would be identified and realized, the centerpiece defense for the Merger. | Cigna refuses to engage in the “Value Capture” work to identify synergies and efficiencies after March 2016 due to alleged “deal uncertainty.” By July, Cigna refuses to participate in any integration work at all, severely damaging the centerpiece defense for the Merger. |
| Pre-Trial Efforts | |
| Anthem | Cigna |
| After the DOJ commences litigation, Anthem issues a press release stating that it “is fully committed to challenging the DOJ’s decision in court,” as required under the Agreement. | Cigna refuses to join Anthem’s press release and instead issues its own press release stating that it is “evaluating its options” and questioning whether the transaction “could close . . . at all.” |
| Anthem asserts the common interest privilege to protect sensitive Merger-related documents from discovery. | Cigna sends letters to Anthem manufacturing a false record of breach, and then helps the DOJ obtain those letters and communications during discovery, including by disavowing the Merger parties’ common interest privilege. |
| Trial Efforts | |
| Anthem | Cigna |
| Anthem presents substantial testimonial and documentary evidence at trial to support the key defense that the Merger would create efficiencies that would generate significant medical cost savings, the vast majority of which ultimately would be passed along to consumers. | Cigna’s CEO provides testimony attacking the ability of the combined companies to achieve medical cost savings. |
| Anthem requests Cigna’s input on its proposed findings of fact and conclusions of law. | Cigna not only refuses to comment on the proposed findings of fact and conclusions of law, but also refuses to sign these key documents, in effect opposing the factual and legal basis for the Merger. |
| Appeal Efforts | |
| Anthem | Cigna |
| Anthem files a notice of appeal, a motion to expedite and an appeal brief. | Cigna refuses to agree to appeal the decision as required under the Merger Agreement. |
| Cigna severely damages the opportunity to obtain expedited appellate review by wrongfully purporting to terminate the Merger Agreement before the DOJ’s opposition to Anthem’s motion to expedite the appeal is due. | |
Other payers can learn from their mistakes…
Payers looking to merge with close competitors should expect a lot of scrutiny from antitrust regulators that could last months or even years. If this wasn’t clear before, it should be by now.
Antitrust enforcement has been blocking more and more mergers in multiple sectors within the healthcare industry. This could be because the industry has seen more of this kind of activity in recent years. Another reason could be that companies have been trying to merge with close competitors.
“The two courts sent a clear message: If you want to merge with a competitor, that's not likely to get through the legal process,” Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University Heinz College, told Healthcare Dive. “Any insurer that is thinking about a merger certainly has to take that into account.”
….and so can hospitals
There has been a lot of M&A activity in the hospital space lately. And the Federal Trade Commission (FTC) has been succeeding at blocking more and more of these deals. So the same message that has been sent to payers goes to those in the hospital industry.
Gaynor used the recently failed Advocate-Northshore merger as an example of how the FTC works to ensure that deals involving hospital systems in the same general area won't harm consumers through increased prices and reduced quality of care, as well as to prevent monopolies and duopolies.
“Mergers in both the health insurance and hospital industries are being blocked and I think that draws a pretty clear line in the sand.”
Martin Gaynor
Professor of economics and health policy, Carnegie Mellon University Heinz College
“If there are two hospital systems that are thinking of merging and they are each other close competitors, I would imagine, I would hope, that they're thinking twice about it,” Gaynor said.
The main takeaway from all of this: Don’t get involved with a company that is too close of a competitor, especially if that company doesn’t know when it’s time to let go.
