Amazon Strikes Again: CVS To Buy Aetna For $69BN In Year"s Largest Deal, "Reshaping Health Care"

A deal that was months in the making is finally official, with Aetna"s board of directors approving on Sunday the health insurer’s sale to drugstore chain operator CVS Health Corp for approximately $207 per share in cash and stock, in a deal worth $67 billion, multiple news sources reported on Sunday afternoon. The purchase price represents a premium of 29% to where Aetna shares were trading before the WSJ first reported that the two companies were in talks in October.

The deal will be this year’s largest corporate acquisition, and in combining one of the nation’s largest pharmacy benefits managers (PBMs) and pharmacy operators with one of its oldest health insurers, will "reshape health care" by bringing a large insurer and a big provider of pharmacy services under one roof.

According to the agreed terms of the deal, which will be announced later on Sunday, Aetna shareholders will receive $145 per share in cash and 0.8378 CVS Health shares for each Aetna share. According to Reuters, "Aetna shareholders will own about 22% of the combined company, while CVS shareholders will own the remainder." As part of the acquisition, three Aetna directors, including Aetna’s Chairman and CEO Mark Bertolini, will join CVS’s board of directors. After the deal closes, Aetna will operate as a separate unit run by members of the current management.

The acquisition will be financed with a mix of cash and debt. Barclays, Goldman Sachs and Bank of America have committed to provide $49 billion of financing, Bloomberg reported.

With Aetna currently employing 49,500 while CVS has 204,000 full and part-time employees, the combined company will boast a quarter million workers, if only for the time being. The deal, which is expected to close in the second half of 2018, will create cost savings of about $750 million, which means tens of thousands of layoffs.

Some more on the companies" background: CVS, with annual revenue of $178 billion, is a major pharmacy-benefits manager in addition to its vast collection of drugstores, some of which already have retail clinics. Aetna, with revenue of around $63 billion, is the third-largest U.S. health insurer, providing coverage to around 22.2 million members enrolled in employer, Medicare, Medicaid and other plans.

The deal comes as healthcare payers and pharmacies are responding to rapidly changing factors, including Obamacare, rising drug prices "and the threat of competition from online retailers such as Amazon.com", Reuters noted. In fact, as Morgan Stanley pointed out two weeks ago, Amazon"s imminent entry into the healthcare sector has been cited as one of the primary catalysts behind the AET/CVS deal:

As a reminder, this is how Morgan Stanley summarized the rationale behind the just announced merger:

Drug retailers have the most opportunities to adjust their business models and lower cost structures to defend against Amazon. Within the drug supply chain, the threat of Amazon’s entry into drug retail is accelerating vertical integration, and is cited as a driver behind the rumored CVS/Aetna merger. In our view, the combination would diversify profits away from the supply chain, help create a narrow preferred network, and act as a first step in repurposing the retail footprint to create a new healthcare-retail delivery model. If drug retailers don"t change  this model, we estimate ~10% risk to profits. CVS has also announced free same-day delivery in New York City, proactively preparing for a potential Prime Now entry, in our view.

As a result, the deal “feels more defense than offense,” Ana Gupte, an analyst with Leerink Partners LLC, said recently. In Aetna’s case, “I don’t see a path to growth” in its current configuration, she said.

“One of the problems with the health-care system is it’s so fragmented and there’s so little coordination,” Bessemer Ventures" Steve Kraus told Bloomberg. “A better vertically integrated less-siloed system is a good thing in my mind.”

In this context, Reuters points out that CVS plans to use its low-cost clinics to eventually save more than $1 billion per year on health care costs for Aetna’s roughly 23 million medical members. It adds that a combined insurer and PBM will also likely be better placed to negotiate lower drug prices, and the arrangement could boost sales for CVS’s front-of-store retail business.

It"s not just imminent layoffs however, as the combined company expects to invest billions in the coming years to add clinics and services, largely financed by diverting funds away from other planned investments.

That could eventually cut costs substantially, with the clinics serving as an alternative to more expensive hospital emergency room visits.

 

Meanwhile, deeper collaboration between Aetna’s insurance business and CVS’s PBM division could drive down drug costs by adding clients and boosting the PBM’s leverage with drugmakers.

In recent years, independent PBMs have been criticized for keeping drug prices high amid potential conflicts of interest with insurance company clients, because they could potentially keep cost savings from drug negotiations rather than passing them on to patients.

Alternatively, PBM margins have been pressured and health insurers have sought to cut costs amid steep prescription drug price rises and requirements to care for even the sickest patients under the Affordable Care Act.

* * *

Analysts cited by Reuters said the CVS-Aetna deal could prompt other healthcare sector mega-mergers, as rivals scramble to emulate the strategy.

It could spur a merger between Walgreens Boots Alliance Inc and Humana Inc, or between Humana and Wal-Mart Stores Inc, Ana Gupte, analyst at Leerink Partners, said recently.

On Nov. 30, Express Scripts Holding Co.’s top executive said the company would be open to a deal at the right price, though wasn’t actively looking for one. “We don’t need to sell to be very successful in the future, but we are always open to others who may all of sudden conclude they want what we have,” Express Scripts CEO Tim Wentworth said in an interview. He also mentioned the possibility of partnering with Amazon on a drug distribution arrangement.

The deal, and any subsequent follow through, is not without risk of regulatory intervention: last year Aetna tried to buy rival Humana Inc to gain leverage to control costs, but antitrust regulators killed the deal as well as a proposed merger between Anthem and Cigna. Furthermore it is unclear if the DOJ, which recently sued to block the Time Warner-AT&T deal, won"t issue another antitrust veto. That could happen if the DOJ shifts its attention to vertical mergers:

Although CVS and Aetna’s planned merger does not directly consolidate the health insurance or pharmaceutical industries, the U.S. Department of Justice has been taking a closer look at so-called vertical mergers, where the companies are not direct competitors.

 

Last month, the Justice Department sued to block AT&T Inc’s planned $85.4 billion merger with Time Warner Inc, saying the integration of a content producer with a distributor could reduce consumer choice.

Reuters concedes that "the CVS-Aetna deal could attract similar scrutiny if regulators feared it could block Aetna customers from frequenting other pharmacies or contracting with other PBMs" even as four antitrust experts said there is little doubt the deal will be approved, although it might need to meet conditions to convince antitrust enforcers to sign off.

It is unclear whether it would be evaluated by the U.S. Federal Trade Commission or the Justice Department but that decision might be made based on which agency is less busy, said Matthew Cantor of law firm Constantine Cannon.

 

“(The companies) want the FTC to get it. The reason that the FTC is better at this point is that the Justice Department has just broken with decades of precedent of how to deal with vertical mergers,” said Cantor, referring to the decision to refuse conduct remedies and file a lawsuit to stop AT&T from buying Time Warner.

According to Bloomberg Intelligence"s Jennifer Rie, the CVS-Aetna deal antitrust prospects may depend on which U.S. regulator is tasked with reviewing it.

The Federal Trade Commission has been less critical of consolidation among companies in adjacent businesses, known as vertical consolidation. The Justice Department, on the other hand, last month sued to block the merger of AT&T Inc. and Time Warner Inc., a vertical deal.

 

Michael Newshel, an analyst at Evercore ISI, said the DOJ effort to block the AT&T-Time Warner deal does raises concerns but a CVS-Aetna deal does have a path forward. Aetna would likely need to divest some or all of its Medicare drug plan business, he said.

In addition to regulatory risk, the combination faces substantial challenges, "including the huge operational task of knitting together the companies’ diverse operations so that customer experiences are smooth and seamless. The deal isn’t likely to deliver as many cost-cutting benefits as combinations with more direct overlap, such as Aetna’s scuttled acquisition of Humana, analysts said. CVS will need to keep much of Aetna’s infrastructure since it doesn’t currently provide health insurance."

As noted by the WSJ, as part of the deal CVS plans to repurpose portions of its pharmacies so they become community health centers where customers can go to get answers to more questions about their health and coverage and how to manage the cost of it. The pharmacies will have space dedicated to wellness, and provide services for things like vision, hearing and nutrition.

It's Not Just Illinois: Connecticut Faces Friday Day Of Reckoning

With Illinois facing a Friday night deadline by which it has to come up with its first fiscal budget in three years or face a downgrade to junk resulting in what a policymaker called a "death spiral", another mini drama is taking place in Connecticut, which is also facing big budget problems as wealthy residents, hedge funds and major corporations flee the state"s high taxes and its fiscal future gets murkier by the day.

Just today, we reported that Aetna, the insurance giant founded in Hartford where it has been for the past 164 years, announced it would move its headquarters to New York City despite intensive lobbying efforts by Connecticut officials. The move, which followed a departure by GE of its Fairfield HQ of 40 years, is a blow to the company’s hometown, which is facing severe financial problems. Hartford"s problems are a representation of the troubles facing the entire state: while Illinois" story is familiar, Connecticut has the distinction of the third-worst ratings in the country, only behind Illinois and New Jersey after S&P, Moody"s and Fitch all downgraded the state last month in what officials described as a "call to action" for state leaders.

“We’ve been downgraded by everybody in the last six months, and in the last year two or three times,” Senate Republican President Len Fasano said cited by Fox news. “If we don’t pass a budget, I think we will see a further downward spiral.”

And, just like Illinois (and 14 other states), Connecticut faces a Friday day of reckoning: the state has yet to pass a fiscal 2018 budget by the June 30 deadline.

“We must immediately take the necessary steps to mitigate the current year deficit and then balance the ... budget with recurring measures to reduce spending and structural solutions to our long-term problems,” a spokesperson for the Connecticut Office of Policy and Management said in response to Moody’s downgrade.

It"s not just the rating, however.

Connecticut’s deficit has reached $5 billion, and according to an analysis by Pew, the state only has $240 million in its "rainy day fund"; just five states have a smaller cushion. Much of the financial troubles are tied to the state’s pension system, which two-term Democratic Gov. Daniel Malloy’s office is seeking to address with a new plan to save the state $24 billion in “coming years.” One solution offered by Malloy is to require new state employees to be covered under a new hybrid pension system. The agreement, which Malloy’s office made with the state union, is tentative and awaiting legislative approval.

“Connecticut can and will adopt a responsible, balanced budget for the coming biennium—the question is how best to handle our finances until that happens,” Malloy said. He offered a short-term “mini-budget” to allow “more time to negotiate a full budget, without making our current problems any worse and without further jeopardizing the state’s bond rating.”

But, like in Illinois, Republican Fasano told Fox News the governor’s budget is not seeing support on “either side of the aisle.” “His proposal decimates municipalities, social services and has no support, so we did our own budget,” Fasano said. “He has really shown the propensity of turning this state in a very negative direction.”

What makes things even more complicated is the even split in the State Senate:

Fasano serves as the State Senate’s Republican president in conjunction with the Democratic president. This is a special situation, as for the first time in decades, the State Senate is split evenly in the historically blue state.

“We are tied, 18-18, and that’s making it more difficult because the Democrats can no longer plow across the finish line a progressive agenda, fiscally speaking—so they can’t figure out what to do,” Fasano said. “Senate Republicans are the only ones with a line-by-line, detailed and balanced budget.”

Fasano claimed the budget put forth by Senate Republicans changes taxes and includes structural provisions that would help keep businesses in the state, although if Aetna is any indication, it"s not nearly enough.

“We are doing things to try to attract people to stay here as best we can, given the fact that we have a $5 billion deficit,” Fasano said. “If we do not pass a budget by June 30, we have sent a message, I think to everyone, that we have no idea what we’re doing, and that is not going to give [comfort] to people to buy or stay here.”

Those who have already left the state, mostly affluent hedge fund managers who have migrated to Florida, already got the message.

And while Aetna"s depature was a hit to the state, the state capital Hartford has been struggling with a financial quagmire of its own, even as we reported in early May, meeting last month to discuss the option of filing bankruptcy. “We know that now more than ever, we are in competition across all industries –not just with Massachusetts or New York state, but more specifically with Boston and New York City,” Malloy said last month.

Another problem is the fundamental deterioration in the state"s economy.

Connecticut’s unemployment rate rose to 4.9 percent in April, up from 4.5 percent in January. “Keeping those employees in Connecticut is far more important than where Aetna plants its corporate flag,” Malloy said. Malloy is looking to boost jobs with the approval this week to begin construction on the state’s third casino.

The Democratic governor remains optimistic, however, and his office told Fox News that companies like Xerox, Sikorsky, and Vineyard Vines, among others, have committed to the state over the last two years. But Fasano said he spoke with GE executives before they left and they cited state financial issues.

“They said Connecticut continues to tax at rates that make it unaffordable for businesses, people to stay here and didn’t see what Connecticut looked like seven or eight years from now,” he said. “... That’s the same analysis I’ve heard from a number of businesses as to why they’re leaving. The progressive agenda this governor put forth is now coming home to roost.”

* * *

So will CT pass a state budget? There was some 11th hour hope on Thursday, when AP reported that Connecticut House Democrats said they"ve come up with a two-year budget proposal that could be ready for a vote on July 18. The last minute $40 billion two-year plan would increase the state"s 6.35% sales tax to 6.99% to help maintain funding to cities and towns. It would also provide municipalities with additional ways to generate local revenue and restore the local property tax credit against the personal income tax.

The proposal was being offered up Thursday as lawmakers grappled over whether to pass Democratic Gov. Dannel P. Malloy"s three-month, stop-gap budget before the fiscal year ends on Friday. Malloy says it will be less draconian than having him run state government using his limited executive authority.

And, of course, there"s disagreement, about whether to vote on the mini budget. If the disagreement is not overcome by Friday, Connecticut could soon be in the same financial straits as Illinois.

Incidentally, the muni bond market - with its usual glacial delay - finally noticed that not all is well, and today yields on AAA-rated 10-year muni bonds rose 7 basis points to close at 1.95% , the biggest one day absolute increase since Dec. 15. There was a similar move for 5-year muni bonds which rose 5bps on the day to end at 1.34% now up 10 bps week-to-date, also the largest day-over-day move since December 15.

ACA Architect Gruber Blames Trump For Obamacare's Epic Collapse

You knew it was coming, and now the day has finally arrived that the esteemed professor of MIT, and one of the original architects of Obamacare, Jonathan Gruber, is touring the media circuit blaming the epic collapse of Obamacare on President Trump.  Here is an exchange from last night with Chris Wallace on Fox News:

Gruber:  "Look, and whose fault is this?  Before President Trump was elected there were no counties in America that did not have an insurer.  Since President Trump"s been elected, a massive degree of uncertainty..."

Wallace:  "Wait, you"re going to blame the problems with Obamacare on President Trump?"

Gruber:  "We had a situation under Obamacare where there was a one-time premium increase last year that made up for the fact that insurers massively under-priced in the first two years.   

The problem was fixed.  Insurer profits were trending positively.  Insurers were saying positive things about their ability to stay in the exchanges and succeed.

Then you have a President who comes in, undercuts open enrollment, doesn"t honor the obligations this law makes to insurers, and, as a result, premiums are going up and insurers are exiting."

Forward to the 7:50 mark for the relevant exchange:

Watch the latest video at video.foxnews.com

And, since Gruber insists that "all" the "insurers were saying positive things" about Obamacare in 2016, we thought we"d take a look back for ourselves.  Ironically, this quote from Aetna CEO Mark Bertolini in August 2016, in which he announced that "structural challenges facing public exchanges" had forced him to the decision to withdraw from Obamacare completely in 2017 seemed slightly less than "positive" to us.

“While we are pleased with our overall results, in light of updated 2016 projections for our individual products and the significant structural challenges facing the public exchanges, we intend to withdraw all of our 2017 public exchange expansion plans, and are undertaking a complete evaluation of future participation in our current 15-state footprint,” said Aetna Chief Executive Mark T. Bertolini. Aetna had previously made regulatory filings indicating it was considering growing into five new state marketplaces in 2017.

“Nobody is getting adequately reimbursed.”

But, perhaps we just don"t understand the quote correctly. 

Of course, Gruber is the same academic who was caught on film repeatedly telling students and other professors that Obamacare only passed courtesy of the "stupidity of American voters."

Obamacare 'Explosion' Could Come On May 22nd, Here's Why

After a stunning healthcare defeat last week, delivered at the hands of his own party no less, Trump took to twitter to predict the imminent "explosion" of Obamacare.

ObamaCare will explode and we will all get together and piece together a great healthcare plan for THE PEOPLE. Do not worry!

— Donald J. Trump (@realDonaldTrump) March 25, 2017

The Democrats will make a deal with me on healthcare as soon as ObamaCare folds - not long. Do not worry, we are in very good shape!

— Donald J. Trump (@realDonaldTrump) March 28, 2017

As it turns out, that "explosion" could come faster than anyone really expects as legislators and health insurers have to make several critical decisions about the 2018 plan year over the next 2 months which could seal Obamacare"s fate.

As the Atlanta Journal Constitution points out today, the Trump administration has until May 22nd to decide whether they will continue to pursue the Obama administration"s appeal to provide subsidies to insurers who participate in the federal exchanges. 

Of course, any decision to remove those subsidies would likely result in yet another massive round of premium hikes and further withdrawals from the already crippled exchanges where an astounding number of counties across the country have already been cut to just 1 health insurance provider.  And, as we"ve pointed out before, higher rates = lower participation = deterioration of risk pool = higher rates....and the cycle just repeats until it eventually collapses.

As background, in 2014, House Republicans sued the Obama administration over the constitutionality of the cost-sharing reduction payments (a.k.a. "taxpayer funded healthcare subsidies"), which had not been appropriated by Congress.  Republicans won the initial lawsuit but the Obama administration subsequently appealed and now Trump"s administration can decide whether to pursue the appeal or not.

One key to insurers selling plans in the marketplace are reimbursements they receive called cost-sharing reductions. These aren"t the same as the tax credits that people receive to help pay their premiums; it is financial assistance to help low-income people pay their out-of-pocket costs, such as deductibles. The Congressional Budget Office projected those payments would add up to $7 billion this year and $10 billion in 2018.

But for insurers, there"s a question over how long that money will be delivered, due to an ongoing political and legal dispute about whether the cost-sharing money should be distributed at all.

In 2014, House Republicans sued the Obama administration over the constitutionality of the cost-sharing reduction payments, which had not been appropriated by Congress. The lawmakers won the lawsuit, and the Obama administration appealed it. Late last year, with a new administration on the other end of the suit, the House sought to pause the proceedings — with a deadline for a status update in late May.

The Trump administration and House lawmakers have to report to the judge this spring. If the Trump administration drops the appeal, it would mean the subsidies would stop being paid — a huge blow to the marketplaces and millions of people. If lawmakers wanted the payments to continue, they would have to find a way to fund them. One opportunity for that is coming up fast, the continuing resolution that must be passed by April 28. If the Trump administration continues the lawsuit, it will be in the odd position of fighting its own party.

The CBO estimates the payments would total roughly $10 billion in 2018.

As we"ve noted before, several large insurers, including UnitedHealth Group and Aetna, have already made the decision to exit Obamacare due to financial losses.  Now, Molina Healthcare is also pondering whether it would be able to continue to participate in the absence of federal subsidies.

Big insurers like UnitedHealth Group and Aetna have mostly left the individual market over the years, citing financial reasons. Several counties across the country only have one insurer offering ObamaCare plans.

Now Molina Healthcare is signaling it may downsize its presence in the market, or pull out altogether, if Congress or the administration doesn’t act to stabilize it. Molina has 1 million exchange enrollees in nine states this year.

“We need some clarity on what’s going to happen with cost-sharing reductions and understand how they’re going to apply the mandate,” said Molina CEO Dr. Mario Molina.

Asked if Molina would leave ObamaCare if the payments are stopped, the CEO said: “It would certainly play into our decision. We’ll look at this on a market-by-market basis. We could leave some. We could leave all.”

Mario Molina, chief executive of Molina Healthcare, predicted that if the cost-sharing reductions are not funded, it could result in premium increases on the order of 10 to 12 percent.

While all this uncertainty swirls, health insurers must decide — soon — whether to make rate filings to sell insurance in 2018. The deadline varies by state, but for those that have marketplaces run by the federal government, it is June 21. Filing doesn"t mean that insurers will participate; they"ll have months more to negotiate and could still drop out. But it"s the first step toward offering plans in 2018 and should provide a signal about what the marketplaces are likely to look like.

Meanwhile, it seems pretty likely that Obamacare couldn"t survive another collapse in coverage like we saw in 2017 (charts per the New York Times):

2016 healthcare insurance carriers by county:

2017 healthcare insurance carriers by county:

The first step is admitting you have a problem.

Aetna CEO Says Obamacare In "Death Spiral" And "It's Getting Worse"

Back in the summer of 2016, as Obamacare rates were being set for the 2017 plan year, we repeatedly argued that the entire system was on the "verge of collapse" as premiums were soaring, risk pools were deteriorating and insurers were pulling out of exchanges all around the country leaving many Americans with just a single "option" for health insurance (see "Obamacare On "Verge Of Collapse" As Premiums Set To Soar Again In 2017").

And while Democrats may be all too willing to quickly dismiss our analysis, they may want to listen to the warnings of the CEO of one of the country"s largest health insurers who says that Obamacare is in a "death spiral."  In speaking with the Wall Street Journal, Aetna CEO Mark Bertolini said, among other things, that the "risk pools are deteriorating in the ACA" to a point that it would inevitably result in more withdrawals this year.   Per The Hill:

"It"s not going to get any better; it"s getting worse."

"That logic shows just how much the risk pools are deteriorating in the ACA," Bertolini said.

He added: "I think you will see a lot more withdrawals this year. ... There isn"t enough money in the ACA as structured, even with the fees and taxes, to support the population that needs to be served."

"It is in a death spiral," he said, but did not say whether Aetna would participate in the exchanges in 2018.

And, while his commentary was mostly doom and gloom, if there was one silver lining from Bertolini"s interview, it was his acknowledgement that at least "mathematics education in the United States is working" since consumers seem to be able to run the simple math required to figure out that paying ~$12,000 per year in premiums for a family of 4, plus $6,000 in deductibles, all for a service they never use, is a bad deal.

"You know that mathematics education in the United States is working when someone says, let me see, i"m going to pay this much premium, i"ve got a $6,000 deductible, and when I go to the doctor i"m going to pay cash...so premium, plus deductible, plus paying cash...why do I do this?  I"ll just pay the penalty and move on."

"And so that risk keeps leaving and risk inside the pool keeps getting worse...the rates continue to chase it...and the participants start to leave, either at the bottom of the risk pool or the plans themselves."

Of course, Bertolini"s comments today followed yesterday"s announcement from Humana that, due to an "unbalanced risk pool" (i.e. not enough healthy, young people paying massive premiums to balance out the risk of older, sicker customers), they would be pulling out of all Obamacare exchanges nationwide in 2018.  Per Humana"s press release:

Regarding the company’s individual commercial medical coverage (Individual Commercial), substantially all of which is offered on-exchange through the federal Marketplaces, Humana has worked over the past several years to address market and programmatic challenges in order to keep coverage options available wherever it could offer a viable product. This has included pursuing business changes, such as modifying networks, restructuring product offerings, reducing the company’s geographic footprint and increasing premiums.

All of these actions were taken with the expectation that the company’s Individual Commercial business would stabilize to the point where the company could continue to participate in the program. However, based on its initial analysis of data associated with the company’s healthcare exchange membership following the 2017 open enrollment period, Humana is seeing further signs of an unbalanced risk pool. Therefore, the company has decided that it cannot continue to offer this coverage for 2018. Through the remainder of 2017, Humana remains committed to serving its current members across 11 states where it offers Individual Commercial products. And, as it has done in the past, Humana will work closely with its state partners as it navigates this process.

Meanwhile, Trump seized on the announcement saying that as "Obamacare continues to fail" his administration would "repeal, replace & save healthcare for ALL Americans."

Obamacare continues to fail. Humana to pull out in 2018. Will repeal, replace & save healthcare for ALL Americans. https://t.co/glWEQ0lNR4

— Donald J. Trump (@realDonaldTrump) February 14, 2017

Frankly, we"re shocked at all of this!  Turns out that whole "adverse selection bias" was a real thing...who could have known? 

Federal Judge Blocks "Anticompetitive" Anthem Aquisition Of Cigna

Moments ago a federal judge blocked health insurer Anthem from acquiring rival Cigna, the second court ruling in recent weeks to deal a decisive blow to health insurers seeking consolidation as a cure to the substantially higher operating costs plaguing the industry as a result of Obamacare.  The ruling echoed a decision by a different judge last month who blocked Aetna’s plans to take over Humana.  Though the two proposed insurer combinations were different in many ways, both judges found that merging top industry rivals threatened higher prices without the necessary patient benefits to offset those higher costs.  Per the Wall Street Journal:

The decision, by U.S. District Judge Amy Berman Jackson, said the proposed $48 billion deal violated federal antitrust law because it would create an unacceptable reduction in the number of companies that can serve large national employers that insure their workers.

Of course, as the Journal notes, while the decision could be challenged by Aetna, rising tensions between the two companies make an appeal unlikely. 

While Aetna is considering a possible appeal in its case, Wednesday’s ruling almost certainly kills the Anthem-Cigna transaction, as discord between the companies has grown considerably since they announced their deal in July 2015.

At the deal’s inception, the insurers said their marriage would create a diversified, innovative and more efficient health insurer. But the two sides’ relationship soured over time as they clashed over leadership styles and visions for the future.

The companies squabbled during the Justice Department’s review of the transaction and eventually accused each other of violating the merger agreement.

As we noted last summer, several massive health insurers were forced to pull out of Obamacare exchanges all around the country after losing $100"s of millions of dollars serving unprofitable markets in 2016.  Aetna even warned that failure to close proposed mega-mergers in the industry would only result in further withdrawals and less customer options. 

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.

The two maps below prove the point above beautifully by illustrating the epic collapse of Obamacare coverage in just 1 year.  A collapse that has left a stunning number of people across the country with only 1 option for health insurance.  Meanwhile, healthcare shoppers in Pinal County, Arizona will actually be left with no options in 2017 as all carriers have abandoned service there. (charts per the New York Times)

2016 healthcare insurance carriers by county:

2017 healthcare insurance carriers by county:

Of course, if Republicans have their way then the entire original premise of this merger may be rendered moot in a few months anyway.

Aetna's Takeover Of Humana Blocked As Anticompetitive

Back in August, we reported of a fascinating case of crony capitalism, whereby Aetna gave the DOJ a not too subtle ultimatum which boiled down to the following: "If the Humana deal is blocked, we exit Obamacare."

Well, be careful what you wish for, because six months later, and with Obamacare well on its way out, moments ago a US federal judge blocked Aetna"s $37 billion deal to buy rival insurer Humana, thwarting one of two large mergers that would reshape the U.S. health-care landscape. The judge"s ruling, which was filed in Federal court in Washington, said the deal would be "anticompetitive"adding that the deal  would have hurt competition among insurers.

U.S. District Judge John D. Bates ruled the Justice Department had proven its case that the merger would unlawfully threaten competition.

The judge said the transaction could mean higher prices and reduced services for seniors who purchase the private Medicare plans known as Medicare Advantage. He also said the merger would harm competition on public insurance exchanges in parts of Florida.  With the deal now scrapped, Aetna will owe Humana a $1 billion breakup fee.

Of course, with Obamacare on its way out, it would not be a surprise if the insurance companies would not have quietly preferred that the deal was blocked. For now, however, the shareholders of Aetna are less than excited, sending the stock of the company nearly 3% lower, while Humana was rebounded to almost unchanged after plunging as much as 7% in kneejerk reation.

Mad As Hell

Fair warning, my family just received a 61.5% increase in our healthcare insurance premium of 2017, on top of last year’s 24.8% increase, so I am quite annoyed at the moment.  For my non-US readers, perhaps what follows will interest you as a means of understanding how and why Donald Trump came to be elected President.  I am going to be channeling some of my inner crank today.

If you want to understand why Trump won the recent US presidential election, you can"t overlook the economic data.  If you do, his victory may look mighty confusing, alarming even.  But once you understand the degree to which the average US family and the entire Gen-X and Millennial generations are being completely hosed economically, everything starts to take shape.

As most struggling Americans can tell you, real household income has gone nowhere for more than 20 years:

This multi-decade burden of "running ever faster just to stay in the same place" is what led many US voters to reject Hillary Clinton, the establishment candidate, and instead roll the dice on the iconoclast promising to upend the system.

But if Trump"s plan to “make America great again” means a return to the 1980s and 1990s when median real incomes climbed smartly, he’s not going to be able to pull that rabbit out of the hat, I’m afraid.  None of the conditions in place then are with us today including cheap, abundant energy (remember, oil was $10 a barrel in 1998); not to mention that we were riding the tailwinds produced by all of the gains from the early, explosive stage of the technology and internet revolutions.

Instead, we"re at a stage where the pie is no longer expanding -- it"s now a zero-sum game where those with power are using their advantage to continue to increase the size of their slice at the expense of the rest of us. The US now routinely subjects its citizens to racketeering, charging excessive prices that are increasingly cumbersome to avoid. One example among thousands; a Viagra pill that costs less than $1 in India, costs over $38 in the US:

(Source)

Cell phone plans in the US are 2x to 3x more expensive (and more limited in terms of both data and speed) than any of the other countries I’ve traveled to in the past few years.  A phone bill from AT&T in Hong Kong is a single page long and clearly explains how your unlimited high speed plan ended up costing you around $30/mo. In contrast, my bill from the same company in the US runs about 30 pages, and seems intentionally opaque in helping me understand why I"m spending over $100/mo for a limited data plan with much slower speeds.

There"s no good reason for this except that in the US, companies have learned they can get away with predatory tactics by “wearing down” customers with gigantic, indecipherable billing statements.

This is pure racketeering. Your phone carrier is counting on your cable company to be running the same complexity scam.  Ditto especially for all of your insurance providers whom you just know, in your heart, you"ll have to battle ferociously with for what you"re owed should you ever need to really use that coverage.

And it"s not just corporations; the government is in on the action, too. The US tax code is now over 74,600 pages in length, and the IRS cannot even get close to answering questions accurately.  Yet the citizen is on the hook for getting everything exactly right or else incurring stiff penalties, necessitating the use of expensive CPAs -- which is still no guarantee that an auditor"s subjective judgment might go against you. 

Fun fact: during the first 26 years of its existence, the US income tax code grew by 104 pages. Over the past 30 years, it has grown by 50,000 pages.

While our politicians to expand the tax code, as far as I know nobody from any US government agency has been at all interested in the obvious price collusion displayed in this chart:

(Source)

Believe it or not, there are two price lines on this chart (one red, one blue) from supposedly independent companies who are allegedly competing with each other -- but most clearly are not. Humalog and Novalog are both manufactures of injectable insulin.

Insulin is an absolutely vital, non-substitutable necessity for people with diabetes and these companies saw fit to collude and jack up the prices over 1000% in ten years, from $25 a vial to over $250.

Why would two separate companies maintain the exact same price for their competing products for 20 years? I don’t have any other explanation except for collusion.

In any sane, rational and caring nation this wouldn"t have happened. But under Bush, and then Obama, such predatory behavior went completely uninvestigated let alone punished. 

So it"s no wonder then that so many people looked at the ‘status quo’ candidacy of Hillary Clinton and said No thanks.  Many families cannot afford more years of status quo predation by the unchecked rapaciousness of US cartels -- er, corporations -- and their government protectors.

Look, we all knew that the faux recovery seen over the past seven years had to end sometime, sooner or later. A “recovery”, mind you, that never actually happened except in the fantasy press releases of the government"s statistical fabricators, lovingly reproduced by unquestioning “journalists” working for corporate entities harboring deep conflicts of interest.

But the “little people” (hereby defined as those occupying the bottom 95% of the socioeconomic ladder) have long known they"ve been getting screwed. Sadly, it"s just getting worse.

The Obamacare Disaster

Obamacare (a.k.a. the Affordable Care Act) is a disaster. We always knew it was going to be. Why? Because it represents the single largest give-away to the health insurance industry in our lifetime. 

Obama and the DC politicians crafted the Affordable Care Act as a monstrously large bill. And they failed to take on the biggest source of fat in the entire system: the healthcare insurance companies themselves. Of course, these companies have very well-funded lobbyists and  pushing back against them on would have required real leadership and possibly cost some political capital.  So they were left entirely alone, with all of the massive increases in healthcare premium costs left to be borne by “somebody” other than them.

Well that “somebody” has turned out to be pretty much everybody:

Obamacare Benchmark Premiums to Rise 25% in Sharpest Jump Yet

Oct 24, 2017

Monthly premiums for benchmark silver-level plans are going up by an average of 25 percent in the 38 states using the federal HealthCare.gov website, the U.S. Department of Health and Human Services said in a report today.

Last year, premiums for the second-lowest-cost silver plans went up by 7.5 percent on average across 37 states.

(Source)

Now what’s both fascinating and part of the electorate anger is that the same government that forced Obamacare on everyone is also the same government that swears that health care inflation is running at only 2.5% to 3.5% per year over the past few years. Here are the governments numbers:

(Source)

I find myself wondering what country (or planet?) those numbers are for. Because for those who actually pay for their health insurance, the answer for sure isn"t either "America" or "Earth".

In total, US health care premiums have fully tripled since 1999.

But for fun, using the government’s own CPI-Med data from the table above, if healthcare premiums had tracked the government’s stated rate of inflation between 2006 and 2015 then they would be some $2500 less today than they actually are:

People are angry because they are being lied to. Or more accurately: lied to while being robbed. 

Even worse, while the rate of health care inflation is being understated at the individual premium level shown above, it"s also wildly understated in the larger inflation statistic used to level-set everything from cost-of-living adjustments (COLA) to pay raises across the country.

As explained in the Fuzzy Numbers chapter of The Crash Course, even though healthcare spending is nearly 18% of GDP, for some reason healthcare comprises only 5.85% of the CPI basket:

[C]urrently CPI-MED accounts for 5.825% of the overall CPI. Increases in the share of medical expense paid by individuals (as opposed to their insurers), will not affect CPI levels. 

(Source)

And:

U.S. health care spending grew 5.8 percent in 2015, reaching $3.2 trillion or $9,990 per person.  As a share of the nation"s Gross Domestic Product, health spending accounted for 17.8 percent.

(Source)

Does it make any sense to record something that"s nearly 18% of GDP as only 5.8% of your inflationary experience? Nope, it sure doesn’t. Unless your desire is to mask the actual rate of inflation.

In simple terms, just healthcare"s share of inflation alone comes to (0.25)*(0.18) = 4.5%.  That’s more than twice the rate of the supposed total inflation we are experiencing all by itself.  Throw in rising rents, car prices, and energy and it’s far more likely that an urban consumer is experiencing total price inflation closer to 6% or more per year.

Now, if you were a government bean-counter who want to mask the impact of a rapidly-rising factor within the nation’s inflation rate, presumably to blunt the statistical damage and make things look rosier than they actually are, all you need do is weight that item less in the basket used to calculate inflation.

For example, if the vegetables making up 18% of the cost of your shopping cart have gone up in price by a whopping 25%, that’s going to leave a mark. 

But what the government does is pretend that your shopping cart only has 6% vegetables, and is increasing at a much lower annual rate -- say 3.2%. Voila! Reported price inflation for carrots and celery is now much lower: (0.06)*(0.032) = 0.12%.

Even though you"re forking out 4.5% more at the grocery counter, the government is loudly telling everyone you"re only seeing an increase of 0.12% 

This is infuriating, of course. 

Here’s what this looks like in chart form. Total inflation is being sold to us as low – "too low" and "dangerously low" even. But I’ve helpfully included where the chart would show the total rate if were only what we"re seeing with health care costs:

(Source)

Imagine how much higher it would be if we added in the actual inflation observed in other costly sectors like food, housing and education. Obviously there’s something desperately wrong going on here.

This is statistical lying and weaseling of the worst sort, which of course everyone can see through because it gets harder and harder each year to balance the family budget. If you"re alarmed by fake news, perhaps you should be more alarmed by fake data, something the US government has perfected and continues to perpetuate. 

All of this is deeply unfair. And -- surprise! -- people really get annoyed when they"re constantly lied to. Eventually their trust goes right out the window. Is it any wonder that a profoundly status quo candidate (HRC) could not sway the voters in rural America, where these trends and insults are even more acutely felt than in urban areas? The status quo is figuratively and literally killing these people. 

As mentioned earlier, my family"s health care plan premium went up over 60% in cash costs alone this year. The rate of increase is an even larger when the plans" reduced benefits and increased deductibles are factored in. The out-of-pocket amount for my family will be pretty close to $30,000 this year before any insurance actually kicks in.

In other words, I"m subsidizing somebody.

Unfortunately, that somebody is probably not a lower-income person up the street who badly needs coverage, but rather someone in the C-suite at one of the major heath companies. 

Check out the 2013 compensation packages for the CEOs of the major US health insureres.  They"re truly breathtaking:

Maybe 2013 was a standout year, and is an errant data point.  Maybe things moderated in 2014? 

Nope.  Everybody apparently deserved an even more massively large payout:

You have to wonder how much care was denied to patients in order to afford those executive salaries.  It also bears mentioning, that some of these CEOs ‘earned’ more by 10:30 a.m. on the first day of 2014 than the median household did during that entire year.

Put a different way, in order to pay out the compensation for Stephen Hemsley, the United Health CEO for 2014, nearly 4,000 families had to pay the full $16,351 amount for healthcare that year.  In what sort of world should 4,000 families have to pay close to a third of their total income to a single individual simply for the pleasure of having health insurance?

Greedy doesn’t begin to cover what’s going on here. If ever there was any sort of "social contract" between these companies and the public, it"s now utterly broken by the rewarding their upper management with tens of millions of dollars – each! – and then jacking up healthcare premiums on families simply because they can.  And now, thanks to the "Affordable" Care Act, you can now be fined for not forking over whatever insane price increases the healthcare cartel decides to dream up from their government protected boardrooms.

Bizarrely, the healthcare insurance options in many states have been vastly reduced as carriers claiming losses, while massive premium increases have been justified also on the basis of losses and reduced profits. I say "bizarrely" because you’d imagine, being a regular person, that such losses should show up in actual profit declines for the insurers.

Nope:

Making a killing under Obamacare: The ACA gets blamed for rising premiums, while insurance companies are reaping massive profits

Oct 28, 2016

While Americans continue to be hammered by rising health care costs, and while congressional lawmakers (with their taxpayer-subsidized health care) do nothing to lower the cost of pharmaceuticals and medical care, one group is reaping a windfall in profit: health insurance companies and their investors.

On Thursday, Aetna reported $734 million in profit on $15.8 billion in revenue for the three months that ended Sept. 30. The nation’s third-largest health insurer by revenue handily beat Wall Street estimates for the quarter.

Aetna’s earnings report came a week after UnitedHealth reported a 12 percent jump in revenue to $46.3 billion for the three months that ended Sept. 30 compared with the same period the previous year. The company collected $36.1 billion in insurance premiums, a sum 11 percent higher than for the year-ago quarter, while profits increased 29 percent to $1.98 billion.

A Salon analysis of regulatory filings found that the top five health insurers — UnitedHealth, Anthem, Aetna, Humana and Cigna — have doled out nearly $30 billion in stock buybacks and dividends from 2013 to 2015. (The Supreme Court ruled in favor of the Affordable Care Act in 2012.)

(Source)

Similar strong results were noted for Humana in their last earnings release.  So how can it be that all these companies are both reporting the need for massively higher premiums while also booking higher and higher profits?

Well, when you live in a country that routinely subjects its citizens to racketeering, this is exactly the sort of disconnect you have to live with. They say one thing; but you see with your own eyes, or experience with your own wallet, something completely different.

Conclusion

Obama’s main failing in the ACA was in not going directly after the powerful insurance industry and forcing its players to participate in the reduction of waste, and sharing in the costs. Instead, they got more than a free pass: they got millions of new enrollees with the right to ‘withdraw’ from any markets and exchanges where they felt their massive profits might take a ding. 

And withdraw they did, with 2 million people losing their coverage for 2017 due to major carriers pulling out of state exchanges. 

Just looking at the cost of healthcare alone, we can detect massive fraud and deceit being foisted on the American public today. What emerges from these many rackets is a corrosion of the social contract.  In a word, these arrangements are abusive.  

The enormous pressures we see across the globe, with the rise of what the mainstream news outlets (aka “largest purveyors of fake news”) are trying to label as ‘nationalism,’ are really in large measure simply a reaction to the economic oxygen having been sucked away from the populace of various countries and delivered into the hands of a very tiny elite.

Yes, that elite still controls the ‘news’ and therefore the narrative; but increasingly people are waking up and deciding for themselves that ‘something is wrong’. Not unlike a person slowly becoming aware that they have somehow fallen into and been the victim of an abusive relationship.

Let me be clear: if we do not somehow find the courage and appropriate leadership to begin righting these wrongs, this trajectory ends in tears.  And it shouldn’t be up to a government body to have to regulate proper action; the insurance companies themselves should have nobody but themselves to blame if they fail to self-regulate. 

Ditto for every major corporation that is running various rackets using a combination of predatory pricing, overly complex practices, and regulatory capture to operate as a cartel. 

If the elites don"t manage to figure out how to contain their greed, then an angry electorate is just the beginning of their troubles.  Anybody seeking to understand the political landscape really just needs to spend a little time on the eroding prosperity of the bottom 99% over the past 20 years.

In Part 2: How To Fix The Future we lay out how a critical movement is arising at this time in history. Each of us can assume a role to play in its formation and development, and therefore its eventual success or failure. It"s my personal belief that we are past the time where we can avoid major disruption, so each of us must be personally prepared as best we can for upheaval, while also working towards building a new and better narrative to live by.

Do you have the courage to participate?

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)