U.S. moves to block massive health insurer deals led by Anthem, Aetna

By Caroline Humer and Carl O'Donnell

NEW YORK (Reuters) - U.S. antitrust officials on Thursday moved to block an unprecedented consolidation of the national health insurance market, filing suit against Anthem Inc's (ANTM.N) proposed purchase of Cigna Corp (CI.N) and Aetna Inc's (AET.N) planned acquisition of Humana Inc (HUM.N).

The U.S. Department of Justice said the two multibillion dollar mergers would reduce competition, raise prices for consumers and stifle innovation if the number of large, national insurers were to fall from five to three.

It was the latest example of the Obama administration challenging massive combinations in major industries, from oilfield services to telecommunications.

"We will not hesitate to intervene. We will not shy away from complex cases," U.S. Attorney General Loretta Lynch told a news conference on Thursday. "We will protect the interests of the American people."

The deals would hurt consumers in the different markets served by the four companies, from medical coverage provided by large corporations to their employees to Medicare Advantage plans for the elderly and insurance sold to individuals on exchanges created under President Barack Obama's healthcare reform law, the Justice Department said.

"We have no doubt that these mergers would reduce competition from what it is today," said Principal Deputy Associate Attorney General William Baer, who spearheaded the antitrust reviews.

Aetna and Anthem had each argued that their proposed purchases would help lower prices for consumers, by giving them greater leverage in negotiating with doctors and hospitals.

Aetna and Humana said on Thursday they plan "to vigorously defend the companies' pending merger," which is worth $33 billion.

Aetna Chief Executive Mark Bertolini said the company has proposed divesting enough assets to ensure competition in markets where it overlaps with Humana.

"If we can't come to a negotiation on what markets to divest, although we have two very complete remedies in front of the Department of Justice now, I think I'm willing to let a judge decide," Bertolini told business news channel CNBC. "We'll go all the way we need to to make this happen."

Anthem had a more muted response, saying it was committed to working towards a settlement with the Justice Department for its $45 billion transaction. Cigna said it was evaluating its options. It does not believe a deal would close before 2017, "if at all."

Shares in Humana rose nearly 9 percent. After news of the lawsuit, Humana raised its 2016 earnings forecast on Thursday, saying its core businesses, Medicare Advantage and Healthcare Services, are doing better than expected.

Cigna shares rose more than 4 percent, while Aetna and Anthem were up about 2 percent. Speculation that the U.S. would block both deals have weighed on shares of all four insurers for several weeks.

CONCERN FOR DIFFERENT CONSUMERS

In the suit against Aetna, the Justice Department cited specific concerns about damage to 1.6 million people in 364 counties who are customers of Medicare Advantage, the program that serves older people.

It also said there were issues for the individual plans sold on Obamacare exchanges, where the government has sought to spur competition and keep prices low.

About 20 state insurance departments were required to review the Aetna-Humana deal. One state, Missouri, came out firmly against it, while others, including California and New York, approved it after reaching a settlement.

In the suit against Anthem-Cigna, the antitrust regulators said the combination would substantially lessen competition in an already consolidated industry, harming millions of Americans, doctors and hospitals.

The Justice Department said it was concerned about the impact on the national corporate business, which serves large companies that employ workers around the country and it said has only four competitors.

It also said there were issues with local business markets, the individual Obamacare exchanges and the impact that a combined company could have on contracts with doctors.

Doctors and hospitals had urged the Justice Department to try to block the deal, saying it was anticompetitive, and some large employers were also against the combination.

Aetna and Anthem had each proposed asset sales to the regulators, but they did not create strong enough competitors and they did not solve the issues, Baer said.

Eleven states and the District of Colombia joined the Justice Department suit against Anthem and Cigna; eight states and DC joined the suit against Aetna and Humana.

The unusual move against two deals in the same industry represents a repeat of history for Baer, who was head of the department's Antitrust Division until a short time ago and is now the No. 3 official in the Justice Department.

In March 1998, Baer asked a court to stop a major consolidation of the U.S. drug wholesaling business. McKesson Corp (MCK.N) had sought to buy AmeriSource Health Corp, and Cardinal Health (CAH.N) wanted to buy Bergen Brunswig Corp. A court granted the preliminary injunction.

Humana's significant outlook increase, along with the strength of their apparent intention to fight for the merger in court, "has encouraged a lot of investors,” said Morningstar analyst Vishnu Lekraj.

“I don't know how successful they're going to be in court in fighting this,” Lekraj added.

(Reporting by Caroline Humer and Diane Bartz in Washington DC, additional reporting by Jon Stempel, Lewis Krauskopf and Carl O'Donnell and Bill Berktot in New York; Editing by Michele Gershberg and Nick Zieminski)