It's Off! Aetna and Humana's Merger Is a Bust

By Motley Fool

After determining that it's a bad deal for patients, a federal judge has dashed Aetna (NYSE: AET) and Humana's (NYSE: HUM) hopes of merging together to become the nation's biggest Medicare Advantage health insurer. Can these two companies succeed on their own?

In this clip from The Motley Fool's Industry Focus: Healthcarepodcast, analyst Kristine Harjes and Todd Campbell explain why this deal was blocked, and what it means to investors.

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A full transcript follows the video.

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This podcast was recorded on Jan. 25, 2017.

Kristine Harjes:Laststory of the day was something that just came out earlier this week,which is that the Humana-Aetna merger was blocked by a district court. This was a $37 billionmerger within the health insurance industry thata lot of people had their eye on.

Todd Campbell:Wetalked earlier about how the Dow Jones was eclipsing 20,000partly because of deregulation. Apparently, the Department of Justice,the district court judge didn't get that memo. TheDepartment of Justice basically has cried foul on this deal, they cried foul a while back,saying that by combining these two very large players inMedicare Advantage,it would cause a big problem topricing and access to health insurancewithin markets where they overlap. Thesetwo companies, Aetna and Humana,attempted to try and assuage the judge byagreeing to sell some assets toanother company calledMolina Health. However, whenpush came to shove and the judgelooked at all the different puts and takes, hedetermined that the risk was justfar too great in that Medicare Advantage segmentto go ahead and approve the combination of these two big companies.

Harjes:Right.When you look at the Medicare Advantage market,these are two of the three largest players, withUnitedHealthcarebeing the other one. This is a huge market. Thirty-one percent ofpeople on Medicare are enrolled in Medicare Advantage. And it's growing,the number of people enrolled in these private plans has tripledbetween 2004 and 2016. So the thinking is,with these companies combining, there'snothing that could happen, no newcompetitors, no divestitures,nothing that would avoid the competitive issues that would come up. Essentially,the verdict came down to,no matter what happens here,they should have just completed independently to win more customers rather than try to get togetherto have that bigger negotiating power and win that way.

Campbell:Right. Kristine,it's not like we're talking about a product that you can buyon [], regardless of what county you live in or what state or what town or whatever. Theseinsurance programs do not offerplans the same in every community. They can be very different,and different companies can participatein those different communities. So,you have very different competitive marketplaceswithin each specific county or town throughout the nation. AndI think the big risk was, OK, youconsolidate power, but these two very large players turning itinto the biggest player in Medicare Advantage,what happens in those communities that, say, are under-served? Where,maybe, UnitedHealthcare isn't currently participating in,or there aren't any other options. If you havethat kind of a situation and give that much pricing power oversomething as important as health insurance to these insurers, who's to say that they'regoing to act in the best interest of the patient, and compete and drive those prices down?

Harjes:Exactly. Moving forward with these companies, Aetna will owe Humana a $1 billion breakup fee. Interestingly, neither stock really moved a ton. WhatI think will be the key thing to watch here,after we've already seen this news report, iswhat happens with the merger betweenCignaandAnthem? There will be a ruling on that one soon. These areanother two health insurance companies. It's an even bigger deal, it's $48 billion. Andthey have even more national overlap. So,you definitely want to keep your eyes on that one.

Campbell:Yeah.I don't think there's a very good shot of that deal going through. I think Cigna and Anthemhaven't even put forward as good a united front as Humana and Aetna did.I'll be surprised if they go ahead and approve this. Listen, theMedicare Advantage Market specifically is growingand it's big. It's growing by about a million new subscribers annually. So,this is a lucrative business that is still attractive for these companies independently. Obviously, Humana is the most pure play of all four of these insurers, they get the majority of their salesfrom their Medicare Advantage business. So if you're interested in a stock ideathat would allow you to benefit from the fact thatyou have aging baby boomers who are going to beincreasingly going into the marketplaceand looking at their different Medicare options,maybe Humana is a name that should be back on your radar.

Harjes:Lookingmore broadly at the healthcare insuranceindustry, do you think that Humanaand the Medicare Advantage market would be the way to play this? If you couldonly buy one health insurer, is that what it would be?

Campbell:Well,the thing that's nice about that isyou don't have the risk of what's going on with the ACA. Yes, Humana hassome participation in the ACA programs. But it gets the bulk of its sales throughMedicare Advantage. Medicare Advantage is not impacted by the reform that's the repeal and replace ofObamacare or the ACA. So,you could look at it and say, the demographics support it, it's not asexposed to the risk ofwhat could come in the future of this industry. So,it's definitely one of the more intriguing playsnow that it's going to be on its own.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell owns shares of The Motley Fool owns shares of and recommends The Motley Fool recommends Anthem and UnitedHealth Group. The Motley Fool has a disclosure policy.