What Blocked Mergers Mean for Managed Care

To say managed care firms have had to deal with a tumultuous operating environment would be a major understatement. Uncertainties surrounding Affordable Care Act mandates, an unstable public exchange market, and increased competition have combined to pressure the operations of Aetna, Anthem, Cigna, Humana, and UnitedHealth. However, the ultimate outcomes of the proposed Anthem/Cigna and Aetna/Humana mergers have been the pressure points for the sector. With that as the backdrop, the recent rulings by the two respective federal courts in blocking both deals have significant repercussions for the space. Accordingly, Aetna and Humana terminated their agreement amicably, with Aetna paying Humana a $1 billion breakup fee. On the other side of the spectrum, Anthem and Cigna are still squabbling over the ultimate fate of their deal, with Cigna seeking to exit the agreement and Anthem insisting on fighting to close the transaction.

While there are many moving parts, we anticipate making significant changes to our fair value estimates for Aeta, Anthem, Cigna, and Humana. We are likely to increase our fair value estimates for Aetna and Anthem as a result of less value destruction given what we believe to be extremely rich offer prices for their respective targets. We also will likely lower our fair value estimates for Cigna and Humana as our standalone valuations for both firms are materially below their acquisition offer prices. We are maintaining our fair value estimate for United as our outlook for the firm has not materially changed given these developments. On the competitive advantage side, we don’t expect the collapse of the mergers to impact our moat ratings for these firms.

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