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Justice Department sues to block two health-care mega-mergers

(Darron Cummings/AP)

This story has been updated.

The Obama administration on Thursday sued to block two blockbuster mergers involving health insurers, setting up a potential showdown with four of the nation’s largest carriers covering tens of millions of individuals and families.

Allowing Anthem’s $54 billion acquisition of Cigna, which would be the largest health insurance merger in history, and Aetna’s $37 billion deal to buy Humana would harm consumers by increasing premiums, reducing benefits and slashing competition in many parts of the country, the Justice Department said in two lawsuits filed Thursday. The industry is now dominated by five large insurers, which would be cut to three by these deals.

“These mergers may increase the profits of Aetna and Anthem. But they would do so at the expense of consumers, employers and health professionals across the country, inflicting costs that cannot be measured in dollars alone,” U.S. Attorney General Loretta E. Lynch said during a news conference to discuss the suits, filed in the U.S. District Court for the District of Columbia.

The insurers have argued that the mergers would benefit consumers, because the combined companies would reap administrative savings and economies of scale that would allow them to operate more efficiently. They have also argued the bigger companies would offer more competitive products, partly because the companies would have more clout to strike better deals with health-care providers.

But the Justice Department’s analysis found that the Anthem-Cigna deal would effectively reduce to three the number of companies with national networks big enough to serve the largest employers. The Aetna-Humana deal would reduce competition in the fast-growing private Medicare market, called Medicare Advantage, in hundreds of counties scattered across the country. Both deals, the Justice Department said, would threaten competition in some of the public marketplaces established by President Obama’s signature health-care law, the Affordable Care Act.

The Obama administration has made competition in the health insurance industry a priority. In a recent essay published in the Journal of the American Medical Association, Obama suggested that a Medicare-like public plan should be provided in marketplaces where there isn’t sufficient competition among private insurers.

“I think they are trying to ensure that President Obama’s legacy and the people, consumers who benefited from ACA, are protected. This is a way to do it,” said Carl Tobias, a professor at the University of Richmond School of Law.

Taken together, the cases would mark one of the Justice Department’s most high-profile antitrust fights in years and further expose fissures between the Obama administration and the business community, which is already frustrated by steps the Treasury Department took recently to cripple some trans-Atlantic mergers that would have allowed companies to lower their taxes.

The administration torpedoed the $100 billion merger of pharmaceutical giants Pfizer and Botox-maker Allergan earlier this year and went to court to block the marriage between Staples and Office Depot. On Wednesday, the Justice Department cleared the merger of the world’s largest beer makers, Anheuser-Busch InBev and SABMiller, but only after the companies agreed to sell off significant parts of their businesses.

Companies were on pace to set a record for mergers and acquisitions. But the Justice Department’s lawsuits could slow that.

“This is one of the most important antitrust interventions in the last eight years. They are betting the ranch with their actions here,” said Gene Kimmelman, who served as chief counsel for the Justice Department’s antitrust division from 2009 to 2012.

Aetna and Humana issued a joint statement saying that they planned to “vigorously defend” their merger. As of March 31, Aetna had 23 million medical health plan members and Humana had more than 14 million; according to 2015 estimates, the combined company would have revenues of $115 billion.

“A combined company will result in a broader choice of products, access to higher quality and more affordable care, and a better overall experience for consumers. Aetna and Humana look forward to making this clear in court, where a judge will review the transaction based on its merits,” the companies said.

In its joint statement, Aetna and Humana suggested that divestitures should be a way to alleviate regulators’ concerns about competition. At a news conference, the principal deputy associate attorney general, William Baer, said that in neither deal was there evidence that such a strategy could work to preserve competition.

Anthem, which has 39 million members in its health plans, said it was “fully committed” to a legal battle or a settlement with the Justice Department that would allow the deal to move forward. But Cigna, with 15 million medical health plan members, said it was evaluating its options.

“In light of the DOJ’s decision, we do not believe the transaction will close in 2016, and the earliest it could close is 2017, if at all,” Cigna said.

Anthem would pay Cigna a $1.85 billion termination fee if the deal falls apart because of  a failure to get regulatory approval, according to the companies’ agreement. Humana would receive a termination fee of $1 billion if the Aetna agreement falls apart.

This comes at a time when the Justice Department and Federal Trade Commission, which share responsibility on antitrust cases, have become increasingly critical of industry consolidation. Both agencies have been particularly circumspect about consolidation in the health-care industry with the FTC suing to stop several hospital mergers over the past year.

Competition within the industry is slated to shrink even if the mergers don’t go through. Humana announced separately Thursday that it would discontinue some of the plans it offers through 15 states’ Affordable Care Act marketplaces “across a number of geographies.”

“For 2017, Humana will no longer be offering on-exchange plans in certain states where we had a very limited presence,” Alex Kepnes, a company spokesman, said in an email.

There isn’t much evidence on how insurance mergers affect health-care prices, but generally, markets with more insurers also have lower premiums, according to a Commonwealth Fund brief published last year. A study of the 1999 Aetna-Prudential merger found that it resulted in increases in premiums for large group insurance. After the 2008 merger of Sierra Health and UnitedHealth, premiums for small-group insurance in several Nevada markets rose 13.7 percent compared with similar cities not affected by the merger.

“The insurance market is already fairly highly consolidated in many areas, if not most areas,” said Leemore Dafny, a professor at Harvard Business School. “No well-informed expert would categorically say that mergers are good or mergers are bad; it’s just that the research we have on insurance consolidation suggests that it hasn’t been good.”