Commissioner Statement on Acquisition of Health Net by Centene Corporation

Mar 22, 2016

California Department of Insurance
March 22, 2016

SACRAMENTO, Calif. - Today Commissioner Jones issued the following statement on the acquisition of Health Net, Inc. by Centene Corporation:

"Today, I approved the acquisition of Health Net Inc. and Health Net Life Insurance Company by Centene Corporation, with strong conditions required of Centene and Health Net to protect California's consumers. After thorough review including extensive public input, I concluded that this transaction provides an opportunity to bring new capital and resources from a major national health insurer largely outside of California (Centene) to enable a California health insurer (Health Net) to continue to compete and offer consumers additional choices in California's individual, small group, and large group commercial health insurance market.

The conditions for my approval of this merger include:

Merger costs will not be imposed on California policyholders. None of the costs of the merger, including any and all executive compensation pay-outs, will be passed on to consumers.
Health Net will maintain and grow its commercial line of business. Growth commitments and investment requirements, to ensure that Centene continues to invest substantially in Health Net Life and both companies seek to expand Health Net Life's presence and ability to compete in California's individual, small group and large group health insurance markets.
Health Net Life will continue to offer products through Covered California.
Centene and Health Net Life must provide sufficient networks of medical providers and timely access to medical providers and hospitals.
Centene and Health Net Life must improve the quality of care delivered through their health insurance.
An adequate distribution channel for Health Net health insurance must be maintained.
Senior management for Health Net's California operations must remain in California and restrictions are placed on Centene's ability to "re-domesticate" or move Health Net Life out of state.
Centene will invest further in California by making a $200 million infrastructure investment by establishing a California call center, bringing new jobs to California.
Centene and Health Net will invest an additional $30 million in California's low and moderate income neighborhoods, with investments prioritized for health facilities.

"There are many reasons to be skeptical about health insurance mergers. Economic studies of past health insurance mergers have found that health insurance mergers have not benefitted consumers with lower prices. Studies show that health insurance prices increased after mergers. This merger and the current condition of the companies involved, however, present circumstances which led me to conclude that, with strong and comprehensive conditions, this particular merger was in the best interest of Californians.

"Health Net Life Insurance, despite its name, is a health insurance company. Health Net Life has had declining market share and declines in covered lives in its commercial health insurance business. The merger with Centene provides Health Net Life with access to additional capital and resources to better position Health Net to compete successfully in a California market dominated by three much larger health insurers (Kaiser, Anthem Blue Cross of California, and Blue Shield of California) and several other national health insurers (e.g. United Health Care, Aetna, CIGNA). In California's free market system of private health insurance there is no guarantee with regards to the ultimate outcome of competition, but after consideration of the extensive public testimony and voluminous record I have concluded that this merger provides Health Net Life with resources needed to compete, whereas disapproving the merger will leave Health Net Life continuing to struggle with declining market share and losses-an ultimately unsustainable position and one that could result in the loss of the fourth largest health insurer in the market with concomitant decrease in competition.

"As part of the Department's review process, I held a daylong public hearing to which the public was invited and given the opportunity to ask questions directly of the Centene and Health Net executives. I was not required to do so by law, but I believe the public has a right to know about and participate in merger proceedings. I gave members of the public the opportunity to question directly the executives of Centene and Health Net. We also requested and obtained from Centene and Health Net voluminous documents about the companies and their operations, to better to be able to assess the merger proposal. We heard hours of public testimony. All of this information was considered as a part of my decision. Most if not all of the many organizations and individuals which testified at the public hearing, including consumer organizations, did not seek denial of the merger. Instead, consumer organizations, medical providers and others testified that if the merger is approved, it should include conditions to make sure that Health Net continues to compete in California's health insurance market and that it improves access and quality of care associated with Health Net.

"Based on all of these considerations, I approved this transaction for several important reasons.

The merger provides the opportunity to bring additional capital and resources from outside California to assist a California health insurer that has faced losses and declining market share. The merger provides the opportunity to increase competition and choice for California consumers, with Health Net after the merger better positioned to compete against larger state and national competitors;
The acquisition is not a conversion or acquisition of a non-profit health insurer where publicly enabled non-profit resources are being converted to private gain, but is instead an arms-length transaction between for-profit health insurers;
I have approved the merger subject to an extensive and comprehensive set of strong consumer oriented conditions and requirements, which have been agreed to by Centene and Health Net. Some of those conditions are set forth above.

"The merger conditions also include reporting and monitoring requirements and establish significant financial consequences to Centene and Health Net in the event that requirements and conditions are not met.

"To prevent Health Net Life from being at a competitive disadvantage with regard to its dramatically larger competitors, some of the conditions and specific requirements, which impact Health Net Life's business plans going forward, had to be kept confidential. If Health Net Life's competitors were able to see all the conditions and requirements I have required they could take advantage of this information to the detriment of Health Net Life, the California market, and California consumers.

"California's private health insurance market is dominated by a limited number of health insurers. The market is what economists describe as an oligopolistic market. It is also what economists describe as a "naturally" oligopolistic market-to compete successfully in the private health insurance market requires considerable size, resources, capital, infrastructure, expertise, and market share. Without the strong consumer-oriented conditions and the additional outside capital and resources the merger brings to Health Net Life, there is significant risk of further consolidation of the market with the loss of a significant existing health insurer. The approval of this merger with strong consumer-oriented conditions will enable Health Net to have access to additional capital and resources to better position it to compete against larger rivals and continue to offer additional health insurance choices to consumers. The ultimate outcome of that competition lies within the hands of Centene, Health Net, the market, Health Nets' competitors, and consumers and businesses who will decide where they want to purchase health insurance. California is better off, however, with a stronger Health Net better able to compete and offer consumers and businesses more choice in health insurance products."