Podcast Recap: Possible Cigna/Humana Merger
EP: 72 of the FLATLINING Podcast
Last week Matthew and Ron broke down what may or may not happen in the recently announced Cigna-Humana merger proposal. Matthew brings us up to speed on some history with Cigna and other mergers and our team looks at why stocks are mixed about this possible deal, how the Federal Trade Commission (FTC) analyzes these mergers, and what effect they may have on the healthcare market.
Ron kicks it off by discussing how there are some complimentary elements to this proposal. With Humana being large in the Medicare Advantage (MA) market and no commercial insurance and Cigna having no Medicare Advantage product currently but a larger portfolio in the commercial insurance business this could bode well for the merger to go through.
According to Ron, Cigna tried to make a go at MA, but ran afoul of the Centers for Medicare & Medicaid Services (CMS). He explained that when Cigna was audited, CMS found that they had submitted false information on the severity of some patients, and falsified their diagnosis codes. To make matters worse for them Ron said, they did not satisfactorily correct their errors when CMS came back around to check and were hit with a $172 million fine. Ron said it could be that Cigna realizes they are not very good at MA, and buying someone who is good at MA, like Humana, is the way to go.
Matthew pointed out that Humana’s stock has flattened out after the announcement, but Cigna’s stock took a 9% drop and has not recovered. He shared a clip from CNBC’s Jim Cramer who doesn’t think the merger will go through. Then asked Ron his thoughts on this. Ron explained how anti-trust laws affect mergers and how the FTC looks at market consolidation. He said what is critical in this case is the question of “What is the market?” Ron thinks that if the parties can define the “market” as just MA, and make that the focus of the FTC review, then the merger could go through.
Ron then provides a good primer on the analysis of how the FTC looks at mergers using the Herfindahl-Hirschman Index (HHI) a mathematical calculation of market concentration before and after a merger takes place. He provided the example of the failed Aetna-Humana merger from several years ago that would have consolidated up to 29% of the market. A Cigna-Humana merger would only bring Cigna’s 2% market share and combine it with the 18% from Humana resulting in a 20% market share, much lower than an Aetna-Humana merger would. Ron shared his rough calculations using the HHI for the MA marketplace before the merger and it is at 1794 which is considered “moderately concentrated”. According to Ron, anything between 1500 and 2500 falls into this category. He said problems start when you move above 2500 into what is called a “Highly Concentrated” market. In this case, Ron said, the HHI only rises to 1866 well below the 2500 mark. He concludes that if the parties can keep the focus on MA they will likely not have any problem with the HHI.
According to Ron, if the deal doesn’t go through it will likely be for some other type of issue*. Matthew asked about the Pharmacy Benefits Programs from the companies and if these could be a problem for the merger, but Ron pointed out “Even in that marketplace the two of them combined are not going to change the concentration that much.”
So how will this merger affect physicians? Ron states it clearly, “Market consolidation on the payer side is never going to be good for physicians.” When the new proposed Cigna product gains market share, Ron said it will allow Cigna to act more like the market leader United Healthcare (UHC). According to Ron, UHC often negotiates contracts that result in lower than Medicare reimbursement rates which hurts physicians who make it their mission to serve the elderly and those who count on Medicare patients for volume. It won’t happen overnight, he said, but in the end, it won’t be good for physician reimbursement. Matthew pointed out that physicians need to be on the lookout for contract amendments coming to their office if the deal goes through.
The team wraps up the discussion on politics and recent comments from former president Donald Trump, who said he would eliminate the Affordable Care Act (ACA). Ron thinks it’s political speak, playing to a segment of his base, and points out there isn’t any other plan that has been put forward to replace it. Matthew pointed out that the ACA is popular with additional subsidies from the Biden administration and Ron said that if you eliminated the ACA, 40 million people would lose coverage. Not good if you are looking to please your voters he commented. In the end, our team points out that getting rid of the ACA is not something that appears to be registering with voters as no one else is talking about this right now.
Ron closes with his thoughts on this political season and the struggles of both sides bringing winning policies to the forefront and Matthew lets us know where you can check out the upcoming debates.
*CNBC reported this morning that Cigna is pulling out of the deal and is buying back $10 billion in stock. You can read the full report here.