Report Raises Questions About Divestiture Solutions' Viability
Antitrust enforcers frequently attempt to solve anti-competitive mergers through divestitures, requiring spinoffs of assets to acquiring firms in places where there are anticompetitive overlaps. The Department of Justice (DOJ), when handling health insurance mergers, has exclusively relied on this approach. In a health insurance merger involving divestitures, beneficiaries from one of the merging parties simply switch insurance to a new insurer at the behest of the parties and DOJ. Consumers do not have a choice of being moved to the new insurer. Recently there has been growing criticism that divestitures are an antitrust remedy. In fact, a new study by Capitol Forum provides substantial evidence that divestitures in the health insurance market are inadequate to restore competition.
In March 2012, DOJ approved Humana’s $150 million acquisition of Arcadian Management Services, but required that the company divest around 12,700 Medicare Advantage members across fifty-counties in Louisiana, Arizona, Texas, Oklahoma, and Arkansas. Three separate buyers, Vantage Health, WellCare, and Cigna acquired Humana and Arcadian’s Medicare Advantage plans and covered lives. It was the DOJ’s belief that these companies would be capable of preserving long-term competition in the Medicare Advantage markets. They were soon disappointed. Two of three acquiring companies failed to restore competition.
The only completely successful divestiture was Vantage Health’s plan acquisition of Arcadian’s Medicare Advantage business in Louisiana. Vantage Health is a Louisiana-based insurer that acquired Arcadian’s 4,000 member Medicare Advantage market in twelve Louisiana parishes. The transition was relatively smooth, and as of today Vantage has maintained competition and competes in all twelves of the acquired markets.
This stands in sharp contrast to the other two acquiring companies. In January 2013 WellCare, a $7.4 billion Florida-based company, acquired 4,000 of Arcadian’s Medicare Advantage members in Arizona. This company looked like an excellent buyer, with the advantage of focusing exclusively on government managed care, and the Arcadian business it acquired was significant and robust. Nevertheless, WellCare’s business rapidly declined after the acquisition. In less than two years, WellCare lost 50% of its acquired members, and in January 2015, it completely abandoned the acquired Medicare Advantage markets. As a result, individuals in those markets now have less consumer choice.
Cigna, through its Medicare subsidiary HealthSpring, acquired 4,500 Medicare Advantage members in thirty-two rural counties in Texas, Oklahoma, and Arkansas. Cigna seemed like a strong buyer, with 386,000 Medicare Advantage members in thirteen states. Despite these advantages, Cigna turned out to be a poor competitor in the markets. In many counties it suffered rapid declines in membership, and by January 2016 Cigna had exited nineteen out of the thirty-two counties where it had acquired Humana or Arcadian customers. Post-divestitures, Cigna has proven to be a successful, long-term competitor in only thirteen of the thirty-two (or 40%) of the acquired markets.
Furthermore, the Centers for Medicare and Medicaid Services has placed sanctions on Cigna, citing “widespread and systematic failures” in its Medicare Advantage and prescription drug programs. Cigna can no longer enroll new members in its Medicare Advantage programs or market them until it corrects its problems. Since these problems will take time to address, it is possible that Cigna may be barred from competing for new members when the Medicare 2017 Open Enrollment Period begins.
As seen with two of the three acquiring companies in the Humana-Arcadian merger, divestitures failed to restore competition, and the resulting markets now possess substantially fewer Medicare Advantage plans leading to less consumer choice and higher prices. In the proposed mergers of Anthem-Cigna and Aetna-Humana, the divestitures sufficient to remedy the competitive harm of the mergers would be much larger and broader than the Humana-Arcadian matter, potentially involving hundreds of markets and millions of consumers. If the Humana-Arcadian divestitures only had a roughly 50% success rate, divestitures in either of these mega-mergers do not seem like an effective way to restore competition.