(A version of this Health Alert was published by Forbes.)

One month ago, I noted that the market was pricing a very high risk premium into two of three take-overs among health insurers. In a volatile stock market, the merger-arbitrage spreads for the three deals currently in play are remarkably stable. Anthem’s take-over of Cigna and Aetna’s take-over of Humana continue to be viewed as highly risky, while Centene’s take-over of HealthNet is viewed as almost certain to take place as announced.

Chart  I shows the expected rates of return for investors shorting the spread of these three mergers, as they have evolved from the shares’ closing prices on June 24 (the date Anthem’s bid for Cigna turned from hostile to friendly) to yesterday. Each rate of return assumes it will take until the third quarter of 2016 for each deal to close.

Investors buying shares in HealthNet to deliver in exchange for cash and Centene shares appear confident that this deal will close, demanding a return of only 3 percent. This is understandable because HealthNet is geographically concentrated in California, Arizona, and the Pacific Northwest, operating in all market segments. Centene, on the other hand, is exclusively a Medicaid and Children’s Health Insurance Program carrier that operates in about half the country. There are unlikely to be antitrust concerns.

The other two deals – Anthem’s takeover of Cigna, and Aetna’s takeover of Humana – are trading at spreads indicating rates of return of over 20 percent, an extremely high risk premium. Opponents of the mergers have started to launch their campaigns, designed to provoke public and political opposition to health plans’ consolidation.

Two major lobbying forces, the American Medical Association (AMA) and the American Hospital Association (AHA) have recently launched their campaigns opposing the mergers.

On September 8, the AMA released a detailed analysis, concluding:

The combined impact of proposed mergers among four of the nation’s largest health insurance companies would exceed federal antitrust guidelines designed to preserve competition in as many as 97 metropolitan areas within 17 states, according to new special analyses of commercial health insurance markets issued today by the American Medical Association (AMA).

The mergers would also raise significant competitive concerns in additional markets. All told, the two mergers would diminish competition in up to 154 metropolitan areas within 23 states.

In a letter to the Assistant Attorney General of the U.S. Department of Justice’s Antitrust Division and the U.S. Secretary of Health & Human Services (September 1), the AHA condemned the Aetna-Humana deal:

The transaction is likely to lessen competition substantially in violation of Section 7 of the Clayton Act. The harm the transaction threatens to consumers—and particularly to senior citizens and other vulnerable populations who depend on Medicare Advantage programs for their health care—is large and durable. Almost one in three Medicare beneficiaries, amounting to 16.8 million people, obtain their health care through a Medicare Advantage plan.

Humana and Aetna are leaders in this critical market. Their merger will increase already high levels of concentration even further, making the combined company the largest Medicare Advantage insurer in the country with one million more members than the current largest insurer, UnitedHealthcare.

In a previous letter (August 5), the AHA similarly attacked the Anthem-Cigna combination:

There is a material risk that the transaction is likely to substantially reduce competition, in violation of Section 7 of the Clayton Act.

The geographic breadth of the transaction’s potential anticompetitive effects and the number of consumers at risk are also sweeping. The transaction threatens to reduce competition in the sale of commercial health insurance in at least 817 relevant geographic markets, defined as Metropolitan Statistical Areas (MSAs) or rural counties.

Recognizing the need to respond with force, the insurers have been ramping up their lobbying investment significantly:

Aetna on Aug. 14 hired Bloom Strategic Counsel, CGCN Group, The Gibson Group and West Front Strategies. They will join two other lobbying firms Aetna already had working on its behalf, Capitol Hill Consulting Group and Sidley Austin.

Meanwhile, Cigna last week hired Polaris Government Relations, Heather Podesta + Partners and Wilmer Cutler Pickering Hale and Dorr, giving the company representation with ties to both Democratic and Republican lawmakers.

Seth Bloom, a former general counsel to the Senate Judiciary Committee, a panel that has planned hearings on the mergers in September, is among Aetna’s new stable of lobbyists. So is Joseph Gibson, a former attorney with the House Judiciary Committee, which also plans to scrutinize the proposed mergers in a series of hearings beginning next month.

Both Bloom and Gibson have close ties to GOP lawmakers.

Meanwhile, one of Cigna’s new lobbyists is Heather Podesta, a major fundraiser for the Democratic Party.

(Ana Radelat, “Aetna, Cigna Hire Lobbyists To Help Win Mergers,” Hartford Courant, August 31, 2015).

The consolidation has not yet featured in the presidential campaign. However, if the deliberations drag into the third quarter of 2016, it is easy to anticipate this hot potato being tossed around by the candidates as they struggle with the challenge of health reform, post-Obamacare. The high risk premium merger arbitrageurs are demanding in these deals is clearly warranted.

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