Aetna-Humana and the challenges of regulating while outsourcing

The health insurance industry has been in flux over the past few years, from the phasing in of major provisions of the Affordable Care Act (ACA) to a frenzy of consolidation. Of the country’s “big 5” health insurers (see table), UnitedHealth approached Aetna and Aetna approached Cigna about potential acquisitions. In July 2015, Aetna agreed to buy Humana for $37 billion and Anthem agreed to pay $54 billion for Cigna. Both deals were blocked by the Department of Justice (DOJ) and then litigated.

“Big 5” health insurers Market Value
UnitedHealth Group $155.7 billion
Aetna $41.3 billion
Anthem $41.1 billion
Cigna $38.2 billion
Humana $30.1 billion

Judge John Bates of the United States District Court for the District of Columbia recently enjoined the merger between Aetna and Humana. Judge Bates sided with the DOJ, concluding that the merger would likely substantially lessen competition in violation of antitrust law. He was not convinced that efficiencies resulting from the merger and then passed on to consumers—cost savings that come from a stronger negotiating position with respect to other healthcare players, for instance—would counteract the anticompetitive effects that would operate to consumers’ detriment.

While the opinion focused on the impact of the putative merger on consumers, it also raises concerns about the power dynamic between health insurance companies and the government. The case considered whether competition would be diminished in two product lines, one being individual plans offered on state public exchanges created by the ACA. The DOJ identified 17 counties across three states where market concentration in public exchanges would reach unlawful levels post-merger. Aetna and Humana disagreed, arguing that there is no current competition between the two companies in those locations because Aetna chose not to compete there in 2017. Citing Aetna’s internal emails as well as its correspondence with the DOJ and the Department of Health and Human Services (HHS), Judge Bates reasoned that Aetna’s withdrawal from those counties for 2017 carried little weight because the decision was made not “for business reasons” but instead to play the agencies off of each other and to “evade judicial scrutiny.”

The Obama administration relied on insurance companies to participate in the state public exchanges for the ACA’s success. Judge Bates found that Aetna threatened to limit its participation in the exchanges if the DOJ blocked the merger, and later carried through with that threat in the summer of 2016. Insurance company participation in the exchanges was a particular concern for the Obama administration at that time because UnitedHealth had just announced that it would pull out of most exchanges by 2017.

Aetna’s attempt at manipulating the DOJ and the HHS underscores the regulatory challenges that arise when the government both depends on private companies to carry out its mandate and regulates those same companies. The growing trend toward outsourcing government tasks to private companies has created a dense network of relationships between industry and government that can compromise the government’s prosecutorial role. Beyond the ACA’s state public exchanges, healthcare companies are awarded huge government contracts. McKesson ($1.022 billion), Health Net ($919 million), Merck ($807 million), Humana ($668 million), Pfizer ($500 million), and UnitedHealth ($445 million) each ranked in the top 25 recipients of federal contract money for fiscal year 2017. Aetna’s behind-the-scene communications with the DOJ and the HHS, which only came to light because of recent litigation, call into question whether and how a government that so heavily relies on industry to perform essential functions can remain an effective regulator.

These challenges only magnify as the number of private companies at issue diminish and their clout expands. Ironically, one reason cited for the movement toward consolidation in the health insurance industry is the pressure on profits exerted by the ACA. Both Aetna-Humana and Anthem-Cigna deals were made days after the Supreme Court upheld the ACA in King v. Burwell. Yet, those same consolidations would give insurance companies more leverage against the government, allowing them to negotiate better outcomes in regulatory disputes.

Anthem’s takeover of Cigna was blocked earlier today, though the decision is currently under seal. The future of the health insurance industry remains uncertain as the new administration has yet to reveal its plans for rolling back the ACA and to appoint the top two antitrust enforcement officials.