The Department of Justice is widely expected to be nearing a decision on Aetna's $34 billion deal with Humana and Anthem's $54 billion agreement to buy Cigna, one year after the mega-health insurance mergers were announced.
For months, analysts thought the Anthem-Cigna deal was the more challenged of the two when it comes to regulatory approval, because of the potential impact their combination would have on competition in the commercial large-employer market.
Now, investors are increasingly concerned regulators could block Aetna and Humana's merger because of the potential dominance the combined company would have in the market for private Medicare health plans known as Medicare Advantage. These fears were fanned by reports, citing unnamed sources, that claimed federal regulators raised significant concerns about this issue.
"Humana today trades at a 45 percent discount to the implied acquisition price (of $230 per share), which has widened since the middle of June as skepticism has increased about their potential to get the deal closed," said Steven Halper, an analyst at FBR Capital Markets.
The combined firm's Medicare Advantage enrollment would be nearly 4.5 million members, accounting for 25 percent of national enrollment this year. UnitedHealth Group is currently the largest Medicare Advantage health insurer with 3.8 million members, or about 21 percent of enrollment.
In order to win approval from the Justice Department, the companies have reportedly offered to divest regional plans covering roughly 350,000 members, and have reportedly received bids from smaller Medicare rivals WellCare Health and Centene, but analysts say regulators may not see the sales alone as enough to maintain competition.
"The question is not can you find a buyer for the plans… but will the government approve the buyer?" said Halper. "There are many markets … where there's too much overlap and unfortunately no qualified buyer for these plans if the government insists on having an existing market participant … who's familiar with the local market."
It's an issue that arose following Humana's acquisition of Arcadian Health for $150 million in 2012. As condition of approval, the Justice Department required the companies to divest plans in five states, representing 13,000 Medicare Advantage members. As part of the DOJ's consent decree, Humana sold the plans to WellCare, Cigna and a Louisiana-based regional insurer Vantage Health.
Like other private health insurance plans, Medicare Advantage plans use provider networks to try to control costs and offer competitive premiums for seniors. Without those networks in place, new insurers in local markets can face a significant competitive disadvantage.
A study by antitrust policy researchers at The Capitol Forum found that two years after the Humana sale of Arcadian assets, Vantage Health was the only insurer still operating the plans it had bought from Humana in 2015. Cigna and WellCare were unable to offer competitive plans and exited the markets.
But antitrust attorney Mark Rust said the companies could make a case that even if they became the dominant Medicare Advantage provider, it would still leave plenty of competition in the market because of the traditional Medicare option.
"Depending on how you define the market, Aetna-Humana may account for 25 percent of the market, or they may account for 5 percent… depending on how you define the product," said Rust, a managing partner at Barnes and Thornburg, who does not represent Aetna or Humana.
The companies have argued in their state insurance regulatory filings that traditional Medicare should be considered as a market alternative to Medicare Advantage. Two out of 3 Medicare enrollees still choose to enroll in the traditional plan.
However, in its 2012 complaint against Humana, DOJ officials dismissed that argument, saying Medicare Advantage and traditional Medicare are separate and distinct health plan products.
Analysts say the two options are structured quite differently. Medicare Advantage is more like the kind of private insurance plans most Americans get from employers.
"In a sense, it's one-stop shopping," said Gretchen Jacobson, associate director at the Kaiser Family Foundation. "You just have one plan."
Traditional Medicare, known as Part A, covers hospitalization costs. Beyond that, seniors pay a premium of $100 per month for medical coverage that pays for things like doctor visits, and they can buy a supplemental Medigap plan to help cover out-of-pocket expenses. They can also buy additional coverage for drugs, under Medicare Part D plans.
Researchers at the Kaiser Family Foundation say only about 5 percent of seniors switch from Medicare Advantage to the traditional option on an annual basis. Part of the reason may be Medicare rules that make it hard to switch.
"They may not be able to get a Medigap policy to help wrap around for their cost-sharing," said Jacobson. "The only time when you're absolutely guaranteed to get a Medigap policy is when you turn 65."
Under Medicare rules, seniors who don't enroll for supplemental plans when they're first eligible at age 65 can be denied coverage in some states for pre-existing health conditions.
Still, the DOJ's view on this issue has not been put to the test in court, said Rust. If federal regulators choose to sue Aetna and Humana to block the merger, the structure of the overall Medicare market could become a central argument.
"We don't have any cases on this yet, and it will all come down to the view of a federal judge, wearing his or her cap as an economist, basically," he said.
FBR's Halper still sees a 65 percent chance that the DOJ will reach a divesture agreement with Aetna and Humana to approve the deal. He and other analysts are less confident Anthem and Cigna will gain federal approval.
If the deals are blocked, Halper expects the companies will have to consider going to court to fight for approval. The Anthem-Cigna deal includes a $1.8 billion breakup fee if they don't. The Aetna-Humana agreement has a $1 billion breakup fee.
That said, he can also see an argument for just moving on.
"You've had four companies tied up in a regulatory process that has lasted a year," he said. "If I'm the CEO of those companies ... I need to get on with my life. I don't want to go another whole year through a regulatory process."
A DOJ spokesman declined to comment on the health insurer regulatory review. A spokesman for Aetna maintains that the company continues to cooperate with the DOJ.