Big Insurance was dealt a significant blow on Monday, January 23. A federal judge in Washington D.C. ruled in favor of the Department of Justice (DoJ) and blocked the proposed $37 billion merger of Aetna and Humana because it would have anti-competitive effects in violation of federal antitrust laws. All eyes are now on DoJ’s parallel case (also proceeding apace in D.C., but before a different federal judge), which aims to stop an even larger, $48 billion merger of two more mega-insurers: Anthem (the largest member of the Blue Cross network) and Cigna.
These are the largest proposed insurance mergers in American history—indeed, Aetna, Cigna, Blue Cross and United are the only insurers left with a national presence—and they come at time of unprecedented industry consolidation and uncertainty in the insurance markets. So Monday’s ruling, in which the court described the deal as part of the current health care merger “frenzy”– was extremely important.
It is no small detail that the DoJ that won the Aetna/Humana case was the Obama Administration DoJ. Trump’s appointees have yet to assume leadership of the Antitrust Division. Some believe that the intense trend toward consolidation of the health care industry that has characterized the market in recent years (and was the subject of a Yale Law School/Health Affairs symposium last year) was itself occasioned by Obama-era policies, including the Affordable Care Act (ACA). On that front, the court’s ruling also made news about Aetna’s much-publicized withdrawal from the ACA’s insurance exchanges last year, a departure widely viewed at the time as a symptom of the ACA’s weaknesses. According to the court, however, Aetna’s withdrawal was, at least in part, not a business decision about the ACA, but a strategy to “improve its litigation position.” It remains unclear how the new Administration will approach these issues, including the likely appeal of this case.
Overview Of The Case
The Justice Department’s challenge to the merger focused on two distinct health insurance products sold by Aetna and Humana: Medicare Advantage plans, sold under the arm of the Medicare program that allows seniors to buy insurance on the private market, and individual insurance sold on the ACA’s exchanges in 17 counties in three states where the overlap between the companies was significant. In a remarkably thorough 158-page opinion—the case was tried and the opinion delivered in about a month, warp speed by major antitrust litigation standards—Judge John Bates found both aspects of the merger ran afoul of antitrust law standards.
Competition In Medicare
The most significant issues in the case concerned the fast growing market for Medicare Advantage plans, particularly whether those plans are close enough substitutes with traditional Medicare (the Medicare program administered by the federal government) for traditional Medicare to actually compete with them. It was critical for the companies to show that kind of competition with traditional Medicare because Aetna and Humana have extremely high market share in Medicare Advantage in 364 counties across 21 states, leaving the court looking for countervailing competitive forces.
In ruling against the insurers, the court relied on the “ubiquitous” internal documents of the merging parties evidencing direct competition between them and other MA plans, and the scarcity of strategic documents evidencing competition with traditional Medicare. Judge Bates also relied on economic studies showing that MA customers tend to switch to other MA plans rather than traditional Medicare and that those beneficiaries preferred the distinct features of MA plans (e.g. lower costs, extra benefits, and caps on cost sharing). Analyzed under antitrust law precedents, evidence that a segment of customers has a “durable preference” for a product, such that other products would not constrain the exercise of market power by the merging parties, is usually dispositive.
Perhaps the best argument for the insurers was that, regardless of MA customers’ durable preferences for those plans, MA plans face significant competition at the initial point at which seniors enter the market and make their choice: when they “age into” Medicare, i.e. become eligible at age 65 and decide which kind of Medicare program to select. Here, the court took an unusually deep dive into complex econometric studies examining whether in practice, seniors’ preferences were so firmly established that they would choose MA plans even in the face of higher prices and/or reduced benefits, and ultimately sided with the government’s experts.
Had the court ruled the other way, that MA and Medicare are in fact direct competitors, that decision likely would have precipitated a wave of acquisitions of MA plans across the United States. This is because, in most of the country, MA’s market presence is dwarfed by traditional Medicare. The end result might have been the end of MA as a market-based alternative offering choices for seniors.
A few other points are worth noting about this part of the ruling. The companies had argued that competition would be assured in the market thanks to the role of the federal regulator: CMS exercises a measure of control over the pricing, margins, and benefits of MA plans. Nevertheless, the court concluded that even such federal regulation was unlikely to ameliorate the harmful effects of the merger. The court also emphasized a number of important barriers to entry in the MA market, including the difficulties associated with assembling a competitive provider network and the importance of establishing brand recognition and high rankings under the CMS “Star” rating system.
To many, the most promising avenue for approval of the merger rested with the defendants’ agreement to divest, to Molina Healthcare, their MA plans in all of the 364 counties in which competitive problems arose. However, the court found that the relevant legal standard– whether divestiture would “replace the competitive intensity lost as a result of the merger”– was not met. The court observed that Molina’s experience, which was primarily in Medicaid managed care sector, did not transfer to success in Medicare Advantage markets. Perhaps most persuasive was the doubt expressed by Molina itself. Again, internal company communications were damaging, as they suggested that Molina’s leadership saw the merger as risky proposition.
Competition On The Exchanges
The debate over the anticompetitive effects of the merger on the ACA’s insurance exchanges was very different. Here, the insurers did not argue that the 17 counties the government identified as at risk for excessive consolidation were the incorrect market, or that Aetna and Humana did not offer overlapping products in that market. Rather, the insurers argued that, regardless, lessened competition is now a non-issue because Aetna withdrew from the insurance exchanges serving those 17 counties soon after the lawsuit was filed.
No one disputed the fact of Aetna’s withdrawal. Instead, what was at the center of the disagreement was why Aetna withdrew. Aetna publicly defended its decision to withdraw as a “business decision” and provided evidence during the case—which the opinion rehearsed at great length—of shortcomings in the design and implementation of the ACA that made doing business on the insurance exchanges less profitable than expected. Aetna’s withdrawal, as noted above, fed a swell of a criticism at the time about the ACA’s design, especially when it came to the insurance markets.
While not doubting the market conditions Aetna described, or doubting that they might have affected some of Aetna’s business decisions, the court did not believe that Aetna’s withdrawal from the exchanges in the 17 counties were for business reasons. Instead, once again relying on internal company communications, the court found evidence that the withdrawals were motivated by the lawsuit: Aetna sought both to make good on an earlier threat to DoJ to pull out of ACA exchange markets if the government attempted to stop the merger, and also to improve its litigation position.
This finding of motivation was relevant because it supported the government’s argument that Aetna could, and might wish to, easily reenter those markets in the future. As the court noted, Aetna was indeed planning to operate in those markets as recently as when the complaint was filed; the temporary lack of consolidation caused by Aetna’s withdrawal last year was not enough to diminish the anticompetitive risk of the deal.
On this front, the court also rejected the insurers’ argument that a special legal standard of “actual potential competition” should be applied to the merger. This standard, never endorsed by the Supreme Court, would have prevented the court from examining the merger’s effects on potential future competition. In rejecting that standard in favor of traditional antitrust analysis, the court stated that
the case law does not support defendants’ approach of viewing competition as an on-off switch where a merging party can simply switch it off entirely by withdrawing from a market (potentially temporarily). Rather, courts routinely view competitors that may have one foot in and one foot out of the market as actual competitors.
Here again, the court mentioned its findings on Aetna’s motive for withdrawing from the exchanges. “Where the government has alleged that Aetna acted intentionally in order to evade judicial review,” the court wrote, “it would be especially inappropriate to apply a legal framework that would limit judicial inquiry. Courts appropriately guard their ability to ascertain the actual facts at issue, rather than allow a party to thwart judicial review through its own machinations.”
Applying that standard, and looking at Aetna’s profitability numbers for the three states affected—Florida, Georgia, and Missouri—the court found it likely that Aetna would reenter the exchange market in Florida, given the company’s past profitability there, and found the merger impermissible on that basis. Because the Georgia and Missouri exchanges had not previously been profitable, the court did not find a risk of illegal competition from the merger in the complaint counties in those states.
Finally, with respect to the merger as a whole, both the MA and the public exchange aspects, the court was not persuaded by the insurers’ claims that the merger would produce $2.8 billion in efficiencies, or that a substantial portion of efficiencies produced would be passed along to consumers. This has been a sticking point in many past health care mergers. It has been consistently difficult for defendants to prove real efficiencies from integration and how those efficiencies would benefit patients.
Looking Ahead
The district court’s decision is extremely thorough and grounded in a strong factual record. Thus, Aetna and Humana may have a hard road ahead if they decide to appeal. Nevertheless, Aetna has a strong incentive to appeal or to enter into negotiations with the Trump administration for a settlement agreement due to the $1 billion break-up fee it will owe to Humana if the merger fails.
As for the new administration’s position, any health reforms it pursues are likely to rely on competitive provider and payer markets, just as the ACA does. Given President Trump’s health pronouncements promising enhanced competition in insurance markets, defending the district court’s decision on appeal would appear to be the more principled position for it to take. Nevertheless, the President has made contradictory statements that indicate a preference for more lax antitrust enforcement than his predecessor and, in an extraordinary departure from protocol, has even entertained discussions with parties contemplating mergers before his DoJ has had an opportunity to review them.
There is no evidence, moreover, that any reforms the new administration might advance would quell the thirst for consolidation in the industry. Many health care business leaders feel, ACA or no ACA, “bigger” is now essential for a company’s success. Complicating matters further, the administration is going to have to win over the support of the business community, including the insurance community, for any effort to “repeal and replace.” In this connection, it is not inconceivable that the administration might be willing to strike a deal with the large insurance companies on mergers to gain their support for its reforms.
Lastly, don’t forget the states. The DoJ complaint was joined by state attorneys general from eight states and the District of Columbia, many of which are unlikely to acquiesce in a settlement and have independent authority under state antitrust law to pursue remedies of their own against the companies, even if the federal government drops the case. (For an interesting parallel to what happened to the Clinton DoJ’s antitrust action against Microsoft when Bush was elected, see here.) Plus, we still await the decision in the even-bigger-stakes Cigna/Anthem case, which raises questions about the relevant market in a different insurance sector; the market for national accounts; the competitive implications of the national Blue Cross network; and how to evaluate purported efficiencies arising from lowering payments to providers.
Bottom line: the story of the mega-mergers is far from over.
from Health Affairs BlogHealth Affairs Blog http://ift.tt/2kj5UOp
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