Is Aetna Holding Obamacare Hostage to Get the Humana Deal Done?

From Tyler Durden: Health insurance giant Aetna Inc (NYSE:AET) is using an unique tactic to escape antitrust scruity around its proposed merger with Humana, threatening to leave Obamacare completey if the deal isn’t approved.

Aetna already made waves earlier this week when it announced on Monday that it would exit 11 of 15 state exchanges in which it offers Obamacare plans as a result of mushrooming financial losses. While that move was largely expected due to the inherent flaws in Obamacare, today it surprised market watchers, and its shareholders, again by handing an ultimatum to the Department of Justice, and thus the US government, threatening it would immediately reduce its presence in the remaining Affordable Care Act exchanges and cancel a planned expansion, if its merger with Humana was blocked.

Amusingly, the analysis of the announcement broke down firmly along party line: according to some, the previous decision to exit more than two-thirds of Obamacare exchanges was the first shot across the DOJ’s bow, coming a few weeks after the Department of Justice filed a suit to stop the Humana merger. Prominent Republicans, including Donald Trump’s campaign, said the move, which came after similar ones by other major insurers, reflected flaws of the ACA. Others, notably those with a more Democratic bent, including Elizabeth Warren, suggested that Aetna’s stance on the exchanges was affected by the Justice Department’s decision. “The health of the American people should not be used as bargaining chips to force the government to bend to one giant company’s will,” she wrote in a Facebook post.

Of course, it could well be both. As the WSJ notes, Aetna wouldn’t be the only insurer to link its exchange position to a hoped-for deal. Anthem has publicly said that if it is able to consummate its acquisition of Cigna , a combination that is also facing a Justice Department suit, the merged company would likely expand into nine new exchange states.

In a July 5 letter to the Justice Department, reviewed by The Wall Street Journal, Aetna said that if the Humana deal drew a legal challenge, “instead of expanding to 20 states next year, we would reduce our presence to no more than 10 states.” In addition, the letter, signed by Aetna Chief Executive Mark T. Bertolini, said the insurer believed “it is very likely that we would need to leave the public exchange business entirely and plan for additional business efficiencies should our deal ultimately be blocked.”

Sure enough, one month later, Aetna executed on its warning with a dramatic reduction of its Obamacare offerings. It may only escalate from there.

The company said in the letter that an antitrust suit or a successful prevention of its deal would create financial strains that would force it to pull back from the exchanges, where it was losing money. “Although we remain supportive of the Administration’s efforts to expand coverage, we must also face market realities. Our customers expect us to keep their insurance products affordable and continually improving, and our shareholders expect that we will generate a market return on invested capital for them,” the letter said.

While it is undisputed that contrary to expectations, Obamacare has ended up being a far greater drain on profits than insurance providers had expected – on August 2, Aetna disclosed that its ACA plans had lost approximately $200 million in the second quarter of 2016 and were expected to lose more than $300 million this year – this type of “bargaining” with the government is disturbing, as it suggests a quid-pro-quo arrangement with the government is not only possible but expected when making corporate decisions.

An Aetna spokesman told the WSJ the letter came in response to a Justice Department request. After it was sent, “we then gained full visibility into our second quarter individual products loss, which is what ultimately drove us to narrow our 2017 public exchange presence,” he said.

Call it non-GAAP visibility.

In the letter, Aetna told the Justice Department that it was “challenged to get to break even this year” on its exchange business. CEO Bertolini wrote that, despite Aetna’s past support for the exchanges, “unfortunately, a challenge by the DOJ to that acquisition and/or the DOJ successfully blocking the transaction would have a negative financial impact on Aetna and would impair Aetna’s ability to continue its support, leaving Aetna with no choice but to take actions to steward its financial health.

Specifically, he wrote, if the Justice Department sued to block the Humana combination, “we will immediately take action to reduce our 2017 exchange footprint,” canceling the planned five-state expansion, and “we would also withdraw from at least five additional states where generating a market return would take too long for us to justify, given the costs associated with a potential breakup of the transaction.”

But, Bertolini added, if you allow the deal to take place, all shall be well, because if the deal closed without an antitrust challenge, Aetna would “explore how to devote a portion of the additional synergies…to supporting even more public exchange coverage over the next few years.

There is another name for this: crony capitalism of the worst kind, a hallmark feature of the Obama administration’s new normal.

Aetna shares rose $1.06 (+0.89%) to $119.99 in Wednesday afternoon trading. AET stock has gained 11% year-to-date, versus a 7% rise in the S&P 500 in the same period.


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