Featured Health Business Daily Story, Dec. 20, 2016

Anthem Leaders Likely Regret Pushing for a Speedy Trial With DOJ

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By ,
December 2016Volume 15Issue 12

It’s likely that Anthem, Inc. executives are regretting their decision to push for a speedy trial against the Dept. of Justice (DOJ) regarding Anthem’s effort to acquire Cigna Corp. (U.S. v. Anthem, Case No. 1:16-cv-01493). DOJ officials appointed by the incoming Trump administration might be more receptive to the proposed $51 billion deal.

During pre-Thanksgiving opening arguments Nov. 21, U.S. District Court Judge Amy Berman Jackson heard testimony from the DOJ about how the proposed merger would negatively impact competition for large self-insured employer contracts. Anthem’s attorneys argued that the combination of the two companies would mean lower coverage costs for members. On the second day of the hearing, CEOs from both companies took the stand. The judge didn’t allow reporters in the courtroom when Anthem CEO Joseph Swedish and Cigna CEO David Cordani testified. But transcripts were unsealed Nov. 28 following objections from seven media groups. The transcripts revealed the two top executives had significant disagreements about the proposed merger, The Wall Street Journal reported Nov. 28.

DOJ filed the lawsuit in July to block the deal (The AIS Report 8/16, p. 1), concluding that such a merger would substantially reduce competition in at least 35 metropolitan areas.

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If Jackson, an appointee of President Obama, opts not to issue a preliminary injunction to block the deal, part two of the trial is slated to begin Dec. 12 with the DOJ presenting evidence about local market concerns, Modern Health Care reported Nov. 12. If the court decides against the acquisition, Anthem would be required to pay a $1.85 billion break-up fee to Cigna.

Medical cost synergies are a huge impetus for companies to combine because the savings give them greater leverage when negotiating with provider groups, said Ana Gupte, an equities analyst at Leerink Partners, LLP. Gupte was one of three panelists at the 21st annual “Wall Street Comes to Washington” roundtable, which was held Nov. 15 at the Brookings Institution in Washington, D.C. By acquiring Cigna, Anthem would be able to expand its footprint far beyond the 14 states where it now operates and offer a full-service solution for employers of all sizes.

“It’s not perfect, but it gives them some independence from [the Blue Cross and Blue Shield Association] in trying to cobble together a national network for the national accounts market,” she said, adding that Anthem has been losing market share to Cigna in administrative services only accounts, as well as on the fully insured side. She noted that Anthem had pushed for the trial to take place before the end of the year. “That might be a decision they regret,” she said.

In a Nov. 22 research note, Ralph Giacobbe, a securities analyst for Citi Research, said among investors there is a definite debate over whether the Trump administration could take a different approach to the pending deals “as it is possible that a Republican White House could seek less punitive measures.”

When Anthem announced its intention to acquire Cigna last year (The AIS Report 8/15, p. 1), there was a notion that the Affordable Care Act was predicated on further consolidation of the managed care sector, and that the Obama administration would be supportive of such a merger, added Sheryl Skolnick, an analyst at Mizuho Securities, USA Inc., at the roundtable. “So there was a rude awakening when the DOJ actually started to talk in terms of challenging these things. These companies have made some pretty cogent arguments for why they need to merge. You want to build scale because scale is more efficient in this business. It is a scale business,” she told attendees. “They have been explaining to investors why these are mission-critical things and why they need to do it, and why they need to [fight] the DOJ challenge.”

The best environment for for-profit companies, such as Anthem, is one in which there is a monopoly and the barriers to entry are very high, suggested Matthew Borsch, an equities analyst at Goldman Sachs who also spoke at the event. Left to their own devices, for-profit companies will continue to merge into that configuration until they’re no longer allowed to continue.

If the acquisition is rejected, Anthem will need to reinvent itself and company leaders will need to explain to investors — who recently were told how critical a merger was — that the company will be strong without Cigna. “The best thing they could do is maybe ask the judge for a continuance until January,” she quipped. “I suspect a new DOJ will be a whole lot more interested in hearing what they have to say.”


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