Thoughts on UNH/CHANG Deal

Last week, the DOJ filed a civil lawsuit to  block UnitedHealthcare/Optum’s acquisition of Change Healthcare. Credit Suisse https://www.credit-suisse.com highlighted their thoughts in their note “DOJ Sues to Block UNH/CHNG Deal, UNH Reportedly Planning to Litigate: What’s Next?”

According to Credit Suisse analysts, DOJ taking action against the deal had increasingly seemed likely. Some media outlets are also reporting that UNH plans to challenge the DOJ’s lawsuit, which is also not a surprise to the analysts.

However, this could result in CHNG shares likely being range-bound for the next 6-9 months. This could also mean that fundamental investors (where the analysts have seen significantly increased interest in CHNG recently) are unlikely to rush to get involved. However, fundamentally, the analysts continue to believe CHNG shares should trade at LDD NTM EBITDA valuations, given their attractive market positioning & growth profile.

The analysts briefly spoke with CHNG management on February 26, 2022. The company notes that they are disappointed with the DOJ decision but are unwilling to comment on the next steps forward at this moment.

In terms of next key catalysts to watch for a) Confirmation from UNH that they indeed plan to challenge the lawsuit b) CHNG’s willingness to extend the merger agreement beyond April, c) Any changes to the merger agreement as part of the extension (termination fee, higher purchase price, etc.). The analysts discuss all of the items/catalysts in the Note.

The DOJ filed a civil lawsuit to block UNH’s acquisition of CHNG. The complaint alleges that the transaction would harm competition in commercial health insurance markets, as well as in the market for a vital technology used by health insurers to process health insurance claims and to reduce healthcare costs.

A key argument against the transaction is that UNH could use the vast amount of data and technology from CHNG for their own business purposes & control their competitors access to innovations in healthcare technology. The DOJ alleges that the transaction would eliminate UNH’s only major rival for first-pass claims editing technology which is a critical product used to efficiently process health insurance claims.

DOJ also argues that the transaction would eliminate UNH’s only major rival for first pass claims editing technology, which is a critical product used to efficiently process health insurance claims.

The agency also argues that the transaction would eliminate the independence of CHNG that today provides a variety of participants across the healthcare ecosystem. This includes electronic data interchange (EDI) clearinghouse services, and first-pass claims editing solutions, which review claims under the health insurer’s policies and relevant treatment protocols. Finally, the DOJ argues that the transaction would allow UNH to tilt the playing field in their favor, harming current competition and allowing UNH to control and distort the course of innovation in this industry for the foreseeable future.

The DOJ outlined three ways in which the proposed transaction would substantially lessen competition and harm consumers: First: it would give United broad access to their health insurer rivals’ competitively sensitive information through Change’s first pass claims editing solution and EDI clearinghouse and would substantially lessen competition in the markets for the sale of commercial health insurance to national accounts and large group employers.

Second: United’s acquisition of Change’s first pass claims editing solution and EDI clearinghouse would enable United to raise the costs of their health insurance rivals, reducing their ability to compete with UNH. This would likely substantially lessen competition in the markets for the sale of commercial health insurance to national accounts and large group employers. Post transaction, United could raise their health insurance rivals costs through means such as denying or delaying their access to innovations that would provide greater efficiency in claims processing.

Third: UNH and CHNG are the two most significant competitors in the first-pass claims editing solutions market, with a combined market share of at least 75%. The Proposed transaction would eliminate head-to-head competition between United and Change and tend to create a monopoly in that market.

One of the core strengths and focus areas of Optum over the last few years has been acquiring and integrating attractive assets across various aspects of healthcare (care delivery, data analytics, pharmacy, etc.). In fact, in their lawsuit, the DOJ noted UNH is “A serial acquirer that has purchased more than 35 healthcare companies over the last 10 years.”

UNH could challenge the ruling since a blocked deal could set an unfavorable precedent for UNH in regard to future M&A, especially on the Optum side of the company where M&A has been a key strategic tactic. With UNH being an important client for CHNG, CHNG seems unlikely to walk away from the deal if UNH wants to extend the agreement beyond April.

Some investors have argued that CHNG could push for a higher purchase price if that were to be the case. With CHNG shares trading at a 25% deal spread, the Credit Suisse analysts do not see that as a likely scenario. If the agreement is extended, the analysts believe UNH and CHNG could agree on a merger termination fee (which surprisingly has not been part of the current agreement) to provide CHNG some protection against the deal uncertainty as well as an incentive for CHNG to stay on the deal.

If the agreement with UNH is discontinued, the analysts at Credit Suisse do not expect there will be another buyer of CHNG, at least in the near term. Given the DOJ’s concerns over UNH using CHNG to gain an unfair competitive advantage in the commercial insurance markets, the analysts do not believe another managed care organization is likely to step in.

Further, with Cerner being acquired by Oracle, the potential for a CERN/CHNG combination also appears unlikely. Lastly, a large technology company looking to gain a meaningful entry into healthcare could be a future possibility, but anything happening soon is unlikely.

Credit Suisse provides some interesting tidbits from the filed complaint. While the official complaint contains a multitude of interesting pieces of information around the transactions itself, relevant end markets and other topics, the analysts have included some of them below in an unedited format.

Change is the leading independent, supplier of technologies used by healthcare providers to submit health insurance claims and by health insurance companies to evaluate and process these claims. It is not owned by any healthcare provider of health insurer, Change operates the nation’s largest electronic data interchange (EDI clearinghouse, which transmits data between healthcare providers and insurers, allowing them to exchange insurance claims, remittances, and other healthcare-related transactions.

Claims and remittances are referred to as “claims data.” The claims data shows, among other things, the treatment an individual receives and the insurance coverage that they have and provides a window into the inner workings of the health insurers and their plans. Change also sells a license to their separate state-of-the-art claims editing technology that enables health insurers to process, in real time, millions of healthcare claims each day to ensure compliance with their health insurance policies.

Nearly all of United’s major health insurance competitors rely on Change’s EDI clearinghouse and claims editing technology to compete with United’s commanding health insurance business, and they have leveraged these tools to save billions of dollars each year.

Change’s technologies are critical tools that allow United’s health insurance competitors to keep healthcare costs down for their members and pay providers’ claims quickly so they can compete more effectively with United and one another for health insurance customers.

Change is the leading independent provider of technology used to transmit and review health insurance claims. As Change told analysts in 2019 “the SCALE, size, and independence of our business is a competitive advantage.” It has access to a vast trove of competitively sensitive claims data that flows through their EDI clearinghouse with over a decade’s work of historic data as well as billions of new claims each year.

According to United, 50% of all medical claims in the U.S. pass through Change’s EDI clearinghouse. Change’s self-described “pervasive network connectivity,” including approximately 900,000 physicians, 118,000 dentists, 33,000 pharmacies, 5,500 hospitals, and 600 laboratories means that even when United’s health insurer competitors choose not to be a Change customer, health insurers have no choice but to have their claims data pass through Change’s EDI clearinghouse.

Not only does Change process vast amounts of competitively sensitive claims data, but they also have secured unfettered rights to use over 60% of this data for their own business purposes including, using claims data for healthcare analytics. Additionally through their claims editing product, Change has access to the proprietary plan and payment rules for all of United’s most significant health insurance competitors.

United’s proposed acquisition of Change also would eliminate  significant head-to-head competition between United and Change to supply first-pass claims editing solutions, which are how software and services health insurers use to help adjudicate claims. Today, United and Change compete to supply first-pass claims editing solutions to health insurers.

As the United pricing team explained, “Change is our big competitor for this product. We have been approving 20%-25% discounts consistently when Change is in the mix, But United’s proposed acquisition of Change would give United over 75% share of the market for first-pass claims editing solutions and eliminate this competition, leaving insurers at the mercy of a vertically integrated monopolist that has every incentive to raise prices and reduce quality and innovation.  

For more information on the Credit Suisse note, “DOJ Sues to Block UNH/CHNG Deal, UNH Reportedly Planning to Litigate: What Next?”, ask questions, provide feedback, or news, email Jailendra Singh at jailendra.singh@credit-suisse.com or call 212-325-8121.

 

 

 

 

 

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