Wednesday, August 31, 2016

No. 177: Annuities, Pensions, and the Theft of Benefit Payments

The August 1980 issue of The Insurance Forum carried an article about unclaimed death benefits. However, the subject did not catch fire until July 28, 2010, when Bloomberg News carried an article by reporter David Evans. The article, which dealt with life insurance owned by members of the military, strongly criticized life insurance companies for using the Social Security Death Master File (DMF) to help them stop the theft of annuity benefit payments while failing to use the DMF to help them pay unclaimed death benefits. The New York Times, The Wall Street Journal, and The Washington Post immediately picked up the story, and I wrote about it in the October and November 2010 issues of the Forum. I have never seen a discussion of the magnitude of the theft of annuity benefit payments.

The Notification Problem
A life annuity is a series of payments, often monthly, made to an annuitant. In many instances, the payments are contingent on the survival of the annuitant. Thus the benefits payable under many annuities are supposed to stop when the annuitant dies. When I refer to annuitants, I also have in mind pensioners who receive benefit payments from private employer-sponsored pension plans, from federal, state, and local government pension plans, and from the Social Security System.

Annuity and pension benefit payments are invariably made by mail or by direct deposit into the annuitant's or pensioner's bank account. Thus the insurance company or pension plan depends on a survivor to provide notification of the death of the annuitant or pensioner so that the company or the pension plan can stop the benefit payments. However, a survivor may pretend the annuitant or pensioner is still alive and thereby steal the continuing benefit payments. When the payment comes by check, a survivor may forge the deceased person's endorsement on the check and thereby steal the payment. When the payment goes into a joint bank account owned by the annuitant (or pensioner) and a survivor, it may be even easier for the survivor to steal the continuing payments.

A Recent Example
On August 15, 2016, in a joint press release, New York State Attorney General Eric Schneiderman and Comptroller Thomas DiNapoli announced an indictment charging John H. Eydeler III, a 66-year-old Arizona resident, with grand larceny in the second degree, a class C felony. He allegedly stole over $100,000 in benefits from a New York State pension plan. The benefits were intended for Eydeler's mother, a retired nurse, who died in October 1998. The indictment was filed in a state court in Albany. Here is an excerpt from the press release:
According to investigators, Eydeler concealed his mother's death in 1998 from the New York State and Local Employees Retirement System. As a result, between October 1998 and January 2010, over $100,000 in pension benefits were deposited into a bank account in the name of Eydeler's deceased mother. Eydeler then allegedly diverted these monies to himself by claiming to have power of attorney for his mother and writing checks to himself every month for over a decade.
At Eydeler's arraignment, he pleaded not guilty. If convicted, he would face "up to five to fifteen years" in state prison.

General Observations
Over the years I have seen examples of legal actions against persons who allegedly stole annuity or pension benefits. However, I have not seen any discussions of the magnitude of the problem. I think there are large numbers of such incidents, but many thefts may not be large enough to warrant criminal charges.

I am not mentioning this subject to defend life insurance companies who use the DMF to try to minimize annuity theft while not using the DMF to try to pay unclaimed death benefits. Rather, I am mentioning the subject to point out that the companies may have had—and may still have—a major problem in dealing with the theft of annuity benefit payments.

Available Material
I am offering a complimentary 12-page PDF consisting of the 1-page press release issued by the New York State attorney general and the comptroller, the 2-page article in the August 1980 issue of the Forum, the 4-page article in the October 2010 issue the Forum, and the 5-page article in the November 2010 issue of the Forum. Email and ask for the September 2016 package relating to the theft of annuity benefit payments.


Thursday, August 25, 2016

No. 176: Annuity Churning Leads to Federal Prison Time for an Agent

On September 14, 2016, Gary Edward Hibbing, a former insurance agent, will report to a federal prison to begin serving a sentence for actions related to the churning of annuities. The federal charges to which he pleaded guilty are wire fraud and unlawful monetary transactions, but his insurance license had been revoked earlier for, among other things, annuity replacements described as "twisting." Where the apparent sole motive for replacements is to generate agent commissions, I have used the securities industry's word "churning" instead.

The State Charges
On March 4, 2013, the Oklahoma insurance commissioner issued an order revoking the insurance licenses of Hibbing and his wife. According to the order, the respondents had sold replacement annuities to one particular senior citizen in 2007, 2008, 2009, and 2010, and to another senior citizen in 2010. The order said the respondents had provided false information not only to the senior citizens but also to the insurance companies that had issued the annuities. The order described the scheme as "a deliberate and concerted effort to receive exorbitant upfront commissions each year at the financial expense of senior citizens." The order also said the respondents had violated various Oklahoma statutes, including the prohibition against twisting.

The Federal Charges
On February 4, 2015, a U.S. Attorney in Oklahoma filed a 24-count grand jury indictment against Hibbing. It consisted of 15 counts of wire fraud, four counts of unlawful monetary transactions, and five counts of aggravated identity theft. (See U.S.A. v. Hibbing, U.S. District Court, Northern District of Oklahoma, Case No. 15-cr-29.)

Among the companies mentioned in the indictment are Allianz Life Insurance Company of North America, PHL Variable Insurance Company, Security Benefit Life Insurance Company, Aviva Life and Annuity Company of New York, Forethought Life Insurance Company, and National Western Life Insurance Company. Among the allegations in the indictment is that Hibbing had continued to engage in his scheme even after the Oklahoma insurance commissioner had suspended his license.

On April 4, 2016, Hibbing pleaded guilty to two counts of wire fraud and two counts of unlawful monetary transactions. In exchange, the government agreed to dismiss the other 20 counts in the indictment.

On August 18, 2016, the judge sentenced Hibbing to 27 months in federal prison, followed by three years of supervised release. The judge also ordered him to pay restitution of $356,000 divided among 16 clients and $129,000 to Allianz. Hibbing waived appeal and the case was closed.

The Plea Agreement
Hibbing's plea agreement includes the statement that "The sentence imposed in federal court is without parole." By signing the agreement, he expressed his understanding of that fact.

One of the attachments to the plea agreement is Hibbing's "statement of facts." Here are paragraphs 6 and 7 of the statement:
6. Between October 2007 and March 2013, I formulated and executed a scheme to defraud and to obtain money and property from the insurance companies I represented and from my clients by making various material false representations to them:
  • I caused some clients to buy multiple annuities, year after year, by telling them falsely that doing so was to their financial advantage when actually it was not.
  • I intentionally withheld important information from some clients about the surrender fees they would have to pay to terminate one annuity contract early and invest in the next.
  • I made material false representations to the insurance companies by submitting documents that incorrectly stated my clients' reasons for terminating annuities, that my clients understood the financial costs to themselves, and that the funds being used to buy the annuities were not derived from the termination of previous annuities.
  • I intentionally hid from the insurance companies the movement of clients' funds among annuity products by using different insurance companies and by fraudulently representing that some of the products were sold by my wife, who was an insurance agent, when in fact she had nothing to do with the transactions.
7. I caused the insurance companies to send my clients the proceeds of their surrendered annuities in the form of checks. Then I caused those clients to deposit their checks into their bank accounts, as opposed to having the funds sent directly to the insurance companies issuing the new annuities. By doing so, I fraudulently masked the movement of funds among annuities from the insurance companies.
General Observations
It is not often that we hear of an insurance agent going to prison for something other than felony theft. In this case, however, the churning activity was so brazen and extensive that it warranted the involvement of federal prosecutors. The extent of churning activity in the annuity market is not known, but I fear it is widespread.

Available Material
I am offering a 28-page complimentary PDF consisting of the Oklahoma insurance commissioner's order (6 pages), the federal grand jury indictment (11 pages), Hibbing's full statement of facts in his plea agreement (5 pages), and the judge's sentencing order (6 pages). Send an email to and ask for the August 2016 package relating to the Hibbing case.


Thursday, August 18, 2016

No. 175: Long-Term Care Insurance—A Follow-Up and a Correction

In No. 174 (posted August 11, 2016) I said I have long expressed the opinion that the problem of financing long-term care (LTC) cannot be solved through the mechanism of private insurance. I offered a complimentary package that included some of my articles explaining the reasons for my opinion. Some readers asked how I think the problem of financing LTC should be addressed. Although some of the articles in the package provide hints about my answer to the question, they do not spell it out adequately. Here I undertake to answer the question more fully. Before doing so, however, I will correct something I said in No. 174 and add additional information about matters discussed there.

A Correction
In No. 174, in the discussion of "The Conseco Separation," I said incorrectly that Beechwood Re is an affiliate of CNO Financial Group. I should have said that Beechwood and CNO have a reinsurance relationship. In December 2013, subsidiaries of CNO—Washington National Insurance Company and Bankers Conseco Life Insurance Company—ceded about $500 million of LTC insurance reserve liabilities to Beechwood. See, for example, page 16 of CNO's 2015 10-K report as filed with the Securities and Exchange Commission (SEC) on February 19, 2016.

Additional Information about Beechwood
In the same section of No. 174 I mentioned Beechwood's ties to Platinum Partners, a $1.25 billion hedge fund. According to a front-page article by Rob Copeland in The Wall Street Journal on July 26, 2016, Platinum and individuals associated with it are under investigation by the SEC and federal prosecutors. Details about those ties are in an 8-K (significant event) report that CNO filed with the SEC on August 1, 2016.

Additional Information about the FIO Roundtable
In No. 174 I mentioned the "Long Term Care Insurance Roundtable" convened on August 4 by the Federal Insurance Office (FIO). I have tried unsuccessfully to obtain the statements made by any of the presenters. Some of them said it was a "closed" or "off-the-record" meeting, perhaps to encourage participants to speak freely. I have seen the July 11 email in which organizations were "invited to attend," but it did not mention the meeting being closed. I question the idea of a closed meeting on a subject of such importance to the public.

The Enactment of Medicare
In the years leading up to the enactment of Medicare in 1965, it became clear there was no way for private insurance to solve the problem of financing the medical expenses of the elderly. I have seen extensive discussions of how President Lyndon Johnson accomplished passage of the Civil Rights Act and the Voting Rights Act, but I have not seen extensive discussions of how he accomplished passage of Medicare. I have always considered enactment of Medicare a political miracle. What happened prior to 1965 with the financing of medical expenses for the elderly is precisely what is happening today with the financing of LTC. It has become clear that private insurance cannot solve the problem of financing LTC.

The Latest Newspaper Article
On August 14, 2016, a lengthy article entitled "When Your Life Insurance Gets Sick," by reporters Julie Creswell and Mary Williams Walsh, appeared on the front page of the business section of the print edition of The New York Times. The article appeared online the day before under the title "Why Some Life Insurance Premiums Are Skyrocketing."

The article focuses on low interest rates as the primary culprit in the sharp cost-of-insurance increases on many universal life policies and mentions use of "various financial maneuvers." Low interest rates are certainly an important contributor to the problem, but there are other important contributors as well. For example, the article makes no mention of the impact of stranger-originated life insurance.

Near the end of the article is a discussion of premium increases on LTC insurance. While low interest rates are certainly a problem for LTC insurance companies, there are many other serious problems. Some of them are discussed on pages 58-61 in the July 2008 issue of The Insurance Forum.

In April 2010, following enactment of the Patient Protection and Affordable Care Act (PPACA), the Kaiser Family Foundation (KFF) issued a report describing "a national voluntary insurance program known as the Community Living Assistance Services and Supports program" (CLASS Act). The CLASS Act was part of the PPACA. The program would have allowed working adults to make voluntary contributions through payroll deductions or directly. Adults with multiple functional limitations or cognitive impairments would have been eligible for benefits after paying premiums for at least five years. With the CLASS Act, the federal government "put its toe in the water" on financing LTC. The voluntary nature of the program was a major problem, because the only way to address the problem adequately is through a mandatory program. The CLASS Act was never launched, and Congress later repealed it.

General Observations
It should come as no surprise to readers of this blog and my other writings that I favor a single-payer mandatory system of universal health insurance, or what is sometimes called "Medicare for All." See, for example, No. 12 (posted December 4, 2013) and Chapter 17 of my 2015 book entitled The Insurance Forum: A Memoir.

One suggestion would be to expand the current Medicare program to include the financing of LTC. Another suggestion would be to enact a universal health insurance program that would include the financing of LTC. I recognize that neither of these suggestions can be implemented under current political conditions. However, anyone who wonders about my suggestions for addressing the problem of financing LTC now knows where I stand.

In the absence of implementation of one of the above suggestions, I have one recommendation for consumers. I think they should embark on a savings program, such as that described in the concluding section of the July 2008 Forum article.

Available Material
I am offering a 22-page complimentary PDF consisting of the invitation to the FIO roundtable (1 page), the agenda for the FIO roundtable (8 pages), the KFF report on the CLASS Act (4 pages), the July 2008 Forum article (5 pages), and the CNO 8-K report filed August 1, 2016 (4 pages, without exhibits). Email and ask for our August 2016 FIO/KFF/Belth/CNO package.


Thursday, August 11, 2016

No. 174: Long-Term Care Insurance—Another Nail in the Coffin

For 25 years I have expressed the opinion that the financing of long-term care (LTC) is a problem that cannot be solved through the mechanism of private insurance. During that period, many nails have been driven into the coffin of LTC insurance, but in recent years the number has been increasing. Here I provide background on the subject, describe a few recent developments, and discuss a July 2016 shocker and its aftermath.

An Offer from Union Fidelity Life
In 1987 I received in the mail questionable promotional material from Union Fidelity Life Insurance Company about its offer of LTC insurance. I wrote to a company spokesman expressing concern. A company executive responded by saying the insurance was in the developmental stage. He invited me to serve as a consultant, but I declined the offer. I wrote about the incident in the February 1988 issue of The Insurance Forum. That was my first article about LTC insurance.

A Study by Consumer Reports
The June 1991 issue of Consumer Reports, the monthly magazine of Consumers Union, contained a study critical of LTC insurance marketing practices and policy provisions. The study did not rate any LTC insurance policies as "excellent" or "very good." In the August 1991 issue of the Forum I explained the reasons for the policy provisions and why there can never be "excellent" or "very good" LTC insurance policies. I said the LTC exposure violates certain principles necessary for the proper functioning of private insurance, and the troublesome policy provisions are an effort to address those violations. I expressed the opinion that the problem of financing LTC cannot be solved through private insurance.

An Offer from a Genworth Predecessor
In 1997 I received in the mail a questionable promotional letter about guaranteed renewable LTC insurance offered by General Electric Capital Assurance Company, a predecessor of Genworth Financial. The letter contained this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes in your health." I wrote to the company expressing concern that the sentence, although technically correct, was deceptive. I said the letter should make clear that the company has the right to increase premiums on a class basis. The company officer who had signed the letter defended it by saying, among other things, that the company had never raised rates on existing policyholders and had an "internal commitment to rate stability." The comments are ironic in view of Genworth's huge premium increases in recent years. Later, without telling me, the company quietly removed the sentence from its promotional letters. The first of my two articles about the incident was in the May 1997 issue of the Forum.

Policy Transfers
Over the years most of the companies selling LTC insurance have gotten out of the business. In 2003, for example, Teachers Insurance and Annuity Association of America (TIAA), which caters primarily to the academic market, stopped selling LTC insurance and transferred its 46,000 existing policies to Metropolitan Life Insurance Company. Many of my academic colleagues, who had bought LTC insurance from TIAA because of its stellar reputation, were furious. The first of my three articles about the transfer was in the March/April 2004 issue of the Forum.

A California LTC Insurance Sales Letter
In 2007 California mailed a sales letter to six million citizens of the state urging them to buy LTC insurance. A front-page story in The Wall Street Journal, which discussed the sales letter, prompted me to write on the subject. The sales letter was on California stationery showing the state seal and the name of then-Governor Arnold Schwarzenegger. A private lead-development company drafted the letter, and it was accompanied by a postage-paid reply card. The lead-development company sold the reply cards to LTC insurance agents.

My article was in the July 2008 issue of the Forum. I explained, in more detail than in my August 1991 article, the reasons why the financing of LTC cannot be handled through private insurance.

The Conseco Separation
In 2008 Indiana-based Conseco, Inc., which is now CNO Financial Corp., announced a plan to separate itself from Pennsylvania-domiciled Conseco Senior Health Insurance Company (CSHI), a financially troubled LTC insurance subsidiary. Over a period of 11 years, Conseco had poured $915 million of capital into CSHI to keep the company solvent.

The plan of separation provided for Conseco to create an independent trust in Pennsylvania, transfer CSHI to the trust, and rename the company Senior Health Insurance Company of Pennsylvania (SHIP). The Pennsylvania insurance commissioner approved the plan, and Conseco implemented it. Later, when he was a former commissioner, he testified during a court proceeding in the Penn Treaty case (discussed below) that he had approved the plan because Conseco had threatened to allow CSHI to become insolvent if he did not approve the plan. In other words, the commissioner handed off the CSHI problem to later commissioners. The first of my three articles about the separation was in the November 2008 issue of the Forum.

Today SHIP continues to run off the LTC business; that is, SHIP is not selling new LTC insurance policies. In February 2015, in a sign of financial trouble, and with the approval of another Pennsylvania insurance commissioner, SHIP borrowed $50 million by issuing a five-year surplus note, on which interest and principal payments must be approved in advance by the commissioner. The lender (the buyer of the surplus note) was Beechwood Re, a Bermuda-based CNO affiliate.

SHIP needed the infusion to bring its risk-based capital above regulatory action level. However, it is not clear how a capital-starved company in runoff can afford to pay interest and principal on a surplus note. Indeed, it appears SHIP has yet to make an interest payment. In other words, SHIP remains a problem for CNO despite the separation. Whether SHIP will remain solvent until all its business runs off remains to be seen. (Beechwood Re was mentioned in a front-page story in The Wall Street Journal on July 26, 2016, because of ties to Platinum Partners, a $1.25 billion hedge fund that is under investigation by the Securities and Exchange Commission and two sets of federal prosecutors.)

The Rehabilitation of Penn Treaty
In 2009 Penn Treaty Network America Insurance Company, a Pennsylvania-domiciled LTC insurance company, became insolvent. The Pennsylvania insurance commissioner filed in state court a preliminary rehabilitation plan and said he intended to file a formal rehabilitation plan later. Instead, he filed a petition to liquidate the company. Penn Treaty's parent company intervened and opposed the liquidation petition. The case led to a bench trial, after which the judge denied the liquidation petition and ordered the commissioner to develop a rehabilitation plan. The commissioner filed an amended rehabilitation plan and later a second amended plan. Most recently the commissioner filed a liquidation petition. If approved, it would trigger coverage by state guaranty associations and assessments against other insurance companies. I wrote about the Penn Treaty case in the August 2012 issue of the Forum.

Claims Practices at Ability Insurance
Several companies in the LTC insurance business, after getting out of the business, transferred their existing LTC insurance policies to Nebraska-domiciled Ability Insurance Company. The company became the defendant in a lawsuit in federal court. The plaintiff alleged that the company's claims practices were outrageous. In April 2012, after a jury trial, the company was hit with a $12.3 million judgment, including $10 million of punitive damages. In December 2012 the Nebraska director of insurance placed the company under a supervision order. In January 2013 a private equity firm acquired the company.

I wrote about Ability in the May 2013 issue of the Forum. In the process I learned of a claims practice I had never seen before. The company tried—over the telephone on recorded calls—to persuade elderly persons who had filed claims to withdraw their claims. An investigatory firm retained by the Nebraska director discovered the practice and the recordings. The callers often provided deceptive and even false information in the calls. What was even more astounding was that callers often made their pitches to persons who did not have the claimant's power of attorney.

A Recent Development at Genworth
In February 2016 Genworth Financial announced a "strategic update" that included actions "aimed at separating and isolating" the company's LTC insurance business. One action was a "destacking plan" that would transfer ownership of a life insurance and annuity company (Genworth Life and Annuity Insurance Company, or GLAIC) from the LTC company (Genworth Life Insurance Company, or GLIC) to a holding company. Genworth said the destacking plan was subject to regulatory approvals. I discussed this and related matters in three posts—Nos. 144 (2/16/16), 154 (4/7/16), and 155 (4/13/16).

On page 97 of its 10-Q quarterly report filed with the Securities and Exchange Commission on August 3, 2016, Genworth mentioned the destacking plan. The company said:
We originally targeted to complete these actions by the middle of 2017. However, after discussions with regulators, we believe as a first step, we may only be able to distribute a portion of GLAIC to the holding company, which we expect to complete by the end of the first half of 2017. In addition, we anticipate that a further reduction in GLIC's ownership of GLAIC may occur in the future if GLIC's operating results improve.
The July 2016 Shocker
The federal Long-Term Care Security Act of 2000 requires the U.S. Office of Personnel Management (OPM) to make it possible for federal employees to buy LTC insurance that is paid for entirely by the employees. OPM created the Federal Long Term Care Insurance Program (FLTCIP). In 2002, after competitive bidding, OPM awarded a seven-year contract to a consortium of John Hancock Life & Health Insurance Company and Metropolitan Life Insurance Company. The two companies formed Long Term Care Partners (LTCP) to administer the program. In 2009, after competitive bidding, OPM awarded the second seven-year contract to Hancock alone, and LTCP became a subsidiary of Hancock. In July 2016 OPM awarded the third seven-year contract to Hancock, which was the only bidder and one of the few major companies still selling LTC insurance. OPM then announced huge premium increases.

The National Active and Retired Federal Employees Association expressed outrage, saying: "This massive, 83 percent premium increase will come as a shock to the more than 274,000 federal employees and annuitants and their spouses enrolled in the FLTCIP." The association said participants face an average premium increase of more than $1,300 per year. However, participants have options, including benefit reductions instead of premium increases.

The FIO LTC Insurance Roundtable
On August 4, 2016, in the wake of the July 2016 shocker, the Federal Insurance Office (FIO) in the U.S. Department of the Treasury convened a three-hour "Long Term Care Insurance Roundtable." I think it was a by-invitation-only session. Among the "participants" were insurance companies (Ameriprise, CNA, CNO Financial, Genworth, Guardian Life, Health Care Service Corp., John Hancock, LifeSecure, Massachusetts Mutual, New York Life, Northwestern Mutual, RiverSource, Transamerica, and UnitedHealth), insurance trade and professional organizations (American Academy of Actuaries, American Council of Life Insurers, America's Health Insurance Plans, National Association of Insurance Commissioners, and National Organization of Life and Health Guaranty Associations), state insurance regulators (Connecticut, Florida, Maryland, New York, and Pennsylvania), federal agencies (Department of the Treasury, Department of Health and Human Services, Federal Reserve Board of Governors, Office of Management and Budget, and White House National Economic Council), and nonprofit organizations (AARP, Alzheimer's Association, Bipartisan Policy Center, California Health Advocates, Center for Economic Justice, and National Council on Aging). The agenda had five parts:
  1. Welcome and Opening Remarks from Senior Officials of the U.S. Department of the Treasury. (15 minutes)
  2. Private long-term care insurance and retirement security. Presenters were from Treasury and HHS. (30 minutes)
  3. Cost shift resulting from reduction in private long-term care insurance market. Presenters were from ACLI and AHIP. (1 hour)
  4. State regulation and impact on availability of private long-term care insurance. Presenters were the Connecticut and Pennsylvania insurance commissioners and the president of NOLHGA. (1 hour)
  5. Next steps at the Federal level. The two subtitles were "Further developments of Federal policy in support of private long-term care insurance" and "Follow-up meetings." (15 minutes)
General Observations
State insurance regulators, who approve premium increases on LTC insurance policies, face a dilemma. When they approve increases requested by the companies, policyholders are furious because of the financial burden placed on them. On the other hand, when the regulators deny requested increases, companies may be forced into insolvency. Regulators often compromise by allowing part but not all of the increases, and require companies to offer policyholders the option of benefit reductions instead of increased premiums.

Several state insurance regulators and Congressional committees have held hearings on LTC insurance. I am aware of no one who has publicly expressed agreement with me that the problem of financing LTC cannot be solved by private insurance. The agenda of the August 4 FIO roundtable mentions the need to help private LTC insurance companies but fails to mention the futility of the effort.

It is not clear what would happen to the FLTCIP if, in the bidding for a fourth seven-year contract in 2023, there are no bidders because Hancock has withdrawn from the LTC insurance business and there are no other major companies still engaged in the business. In that event, I think Hancock would run off its LTC business, including the FLTCIP business, and it would no longer be possible to accept enrollment from new federal employees or old federal employees who had not enrolled previously.

Available Material
I am offering a complimentary 36-page PDF containing the documents released at the FIO roundtable (8 pages) and eight Forum articles mentioned in this post (28 pages). Email and ask for the August 2016 package relating to LTC insurance.


Monday, August 1, 2016

No. 173: Health Insurance Megamergers and the U.S. Department of Justice

On July 21, 2016, the Antitrust Division of the U.S. Department of Justice (DOJ) filed, in federal court, complaints asking the court to block two proposed health insurance megamergers. One is Anthem's acquisition of Cigna. The other is Aetna's acquisition of Humana. The complaints allege that the mergers would "substantially lessen competition" and thereby violate Section 7 of the Clayton Act. DOJ did not demand a jury trial in either case. (See U.S. v. Anthem and U.S. v. Aetna, U.S. District Court, District of Columbia, Case Nos. 1:16-cv-1493 and 1494.)

The Plaintiffs
The complaint against Anthem includes as plaintiffs the District of Columbia and 11 states: California, Colorado, Connecticut, Georgia, Iowa, Maine, Maryland, New Hampshire, New York, Tennessee, and Virginia. The complaint against Aetna includes as plaintiffs the District of Columbia and eight states: Delaware, Florida, Georgia, Illinois, Iowa, Ohio, Pennsylvania, and Virginia.

The Attorneys
DOJ is represented by attorneys in the Antitrust Division. The states are represented by their attorneys general. Anthem is represented by attorneys at White & Case. Cigna is represented by attorneys at Cadwalader, Wickersham & Taft. Aetna is represented by attorneys at Jones Day. Humana is represented by attorneys at Crowell & Moring.

The Judge
Both cases were assigned to Senior U.S. District Judge John D. Bates. President George W. Bush nominated him exactly one week before 9/11. The Senate confirmed him in December 2001. He took senior status in October 2014.

The Complaint against Anthem
The complaint against Anthem is divided into 11 parts: (1) Introduction, (2) The Defendants and the Merger, (3) Background on Commercial Health Insurance, (4) This Merger Likely Would Substantially Lessen Competition for the Sale of Health Insurance to National Accounts, (5) This Merger Likely Would Substantially Lessen Competition for the Sale of Health Insurance to Large-Group Employers, (6) This Merger Likely Would Substantially Lessen Competition in the Sale of Health Insurance on the Public Exchanges, (7) This Merger Likely Would Substantially Lessen Competition for the Purchase of Healthcare Services, (8) Absence of Countervailing Factors, (9) The Defendants Have Not Proposed a Remedy That Would Fix the Merger's Anticompetitive Effects, (10) Violation Alleged, and (11) Request for Relief. Here are the first and last paragraphs of the complaint:
1. Anthem's proposed $54 billion acquisition of Cigna would be the largest merger in the history of the health-insurance industry. It would combine two of the few remaining commercial health-insurance options for businesses and individuals in markets throughout the country. And in doing so, it would substantially lessen competition, harming millions of American consumers, as well as doctors and hospitals.
86. Plaintiffs request: (a) that Anthem's proposed acquisition of Cigna be adjudged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18; (b) that the Defendants be permanently enjoined and restrained from carrying out the planned acquisition or any other transaction that would combine the two companies; (c) that Plaintiffs be awarded their costs of this action, including attorneys' fees to Plaintiff States; and (d) that Plaintiffs be awarded such other relief as the Court may deem just and proper.
The Answer by Anthem
On July 26, Anthem filed a paragraph-by-paragraph answer to the complaint. Anthem admits some points, denies some points, and in some instances "lacks knowledge or information sufficient to form a belief." Here is Anthem's answer to the first and last paragraphs of the complaint (paragraph numbers cited within the answers are those in the complaint):
1. Anthem, an insurance holding company, admits that it is proposing to acquire Cigna, another insurance holding company, valued at approximately $54.2 billion, a valuation based on the pre-announcement closing price of Anthem's common stock on the New York Stock Exchange on May 28, 2015. Anthem denies the remaining allegations in Paragraph 1. Anthem avers that the acquisition will increase competition and result in cost savings, efficiencies, and other benefits that will make healthcare more affordable and accessible to consumers. Indeed, the Complaint itself admits that Anthem today generally obtains lower rates from healthcare providers than Cigna does (Compl. ¶¶ 45, 50), and that the combined firm likely will be able to "reduce the rates" (Compl. ¶ 71) that healthcare providers charge to Anthem and Cigna customers. The Complaint also admits that "[m]ost large employers buy self-insured plans" and that each such employer retains "the risk of its employees' healthcare costs" (Compl. ¶ 16), meaning that the lower rates obtained by the combined firm will automatically flow to consumers.
86. Anthem denies that any of the requested relief is permitted or appropriate. Anthem asserts the following [seven affirmative] defenses without assuming the burden of proof on such defenses that would otherwise rest with Plaintiffs: [1] The Complaint fails to state a claim upon which relief can be granted. [2] The pricing and other aspects of the sale of insurance are regulated and overseen by federal and state laws and regulatory bodies, including, but not limited to, the Affordable Care Act and state filed rate regimes. These regulatory conditions ensure that competition will not be substantially lessened but will remain robust post-acquisition. [3] Granting the relief sought is contrary to the public interest. [4] The proposed acquisition is procompetitive. The acquisition will result in substantial efficiencies and other procompetitive effects that will directly benefit consumers in greater access to affordable healthcare. These benefits outweigh any alleged anticompetitive effects. [5] The complaint fails to adequately allege any relevant product markets or relevant geographic markets. [6] New and rapid entry, as well as expansion, by competitors will ensure that there will be no harm to competition, consumers, or consumer welfare. [7] Anthem reserves the right to assert any other defenses as they become known to Anthem. WHEREFORE, Defendant Anthem, Inc. respectfully requests that this Court deny the Plaintiffs' requested relief, dismiss this action with prejudice [permanently], and grant such other and further relief as may be proper and just.
The Complaint against Aetna
The complaint against Aetna is divided into eight parts: (1) Introduction, (2) The Defendants and the Merger, (3) This Merger Likely Would Substantially Lessen Competition for the Sale of Medicare Advantage Plans, (4) This Merger Likely Would Substantially Lessen Competition for the Sale of Health Insurance on the Public Exchanges, (5) Absence of Countervailing Factors, (6) Aetna's Proposed Remedy Will Not Fix the Merger's Anticompetitive Effects, (7) Violation Alleged, and (8) Request for Relief. Here are the first and last paragraphs of the complaint:
1. Aetna's proposed $37 billion merger with Humana would lead to higher health-insurance prices, reduced benefits, less innovation, and worse service for over a million Americans.
69. Plaintiffs request: (a) that Aetna's proposed acquisition of Humana be adjudged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18; (b) that the Defendants be permanently enjoined and restrained from carrying out the planned acquisition or any other transaction that would combine the two companies; (c) that Plaintiffs be awarded their costs of this action, including attorneys' fees to Plaintiff States; and (d) that Plaintiffs be awarded such other relief as the Court may deem just and proper.
The Joint Press Release by Aetna and Humana
As of July 29, when I ended work on this post, Aetna had not yet filed in court an answer to the complaint. However, on July 21, Aetna and Humana issued a joint press release entitled "Aetna and Humana To Vigorously Defend Their Pending Transaction" and subtitled "Combined Company Would Improve Affordability, Quality and Consumer Choice." The final sentence of the first paragraph says: "A combined company is in the best interest of consumers, particularly seniors seeking affordable, high-quality Medicare Advantage plans."

The Status Conference
On July 29, Judge Bates issued an order granting Anthem's July 25 motion for an expedited status conference, and scheduling it for August 4. He also ordered that the conference be held jointly with the parties in the Aetna case, and that the parties file, by August 2, "explanations of their positions as to the timing of proceedings and whether proceedings should or should not be conducted jointly with those in [the Aetna case], up to and including trial." After the status conference, the judge probably will issue an order laying out a preliminary schedule for both cases.

General Observations
The complaints are strong. They say the four companies are among the "big five" in health insurance. The other is UnitedHealthcare. If both mergers are consummated, we would have the "big three." Sprinkled through the complaints are expressions such as "presumptively unlawful," "lessen competition," "increase concentration," "monopolist," and "monopsonist." One thing I consider worrisome is the possibility that the combined companies would have the power to negotiate reduced payments to healthcare providers. This could have the effect of making it more difficult for consumers to have access to providers, especially physicians.

The complaint against Anthem, with reference to large-group employers, has a U.S. map in paragraph 41 showing 35 metropolitan areas where more than 65 million people live. The complaint against Aetna, with reference to Medicare Advantage plans, includes an appendix listing 364 counties in 21 states where the loss of competition would be acute.

The lists of plaintiff states are interesting. Only the District of Columbia, Georgia, Iowa, and Virginia are plaintiffs in both cases. Connecticut, home of Aetna and Cigna, is a plaintiff only in the Aetna case. Indiana, home of Anthem, is not a plaintiff in either case. Kentucky, home of Humana, is not a plaintiff in either case.

Available Material
I am making available two complimentary PDFs. One is a 65-page package containing the 43-page complaint against Anthem and the 22-page answer by Anthem. The other is a 43-page package containing the 39-page complaint against Aetna and the 4-page press release by Aetna and Humana. Email Ask for the August 2016 package about Anthem and/or the August 2016 package about Aetna.