U.S. v. Aetna, Inc. Case No. 1:16-cv-01494-JDB
Last Monday, U.S. District Judge John D. Bates preliminarily enjoined the $37 billion merger between Aetna Inc. and Humana Inc. For the last several years, there has been a "rush to consolidate" in the health insurance industry. As part of that "merger frenzy," Aetna and Humana entered into a merger agreement on July 2, 2015. Aetna and Humana are part of the "Big 5" health insurers, along with Cigna, UnitedHealth, and Anthem. Cigna and Anthem concluded a trial earlier this month defending their proposed merger; a ruling is still pending on that merger.
After an investigation in the spring of 2016, the DOJ filed a complaint opposing the Aetna-Humana merger as a violation of the Sherman Act. Eight states and D.C. joined the DOJ in bringing the suit. In a detailed, 156-page opinion, Judge Bates agreed with the government and preliminarily enjoined the proposed merger because it is likely to substantially lessen competition in both the Medicare Advantage product market and on the Public Exchanges.
Crucial to the opinion is that Judge Bates held that Medicare Advantage is its own separate market from Original Medicare, even though the two markets offer functionally interchangeable products. In determining the product market definition, the court considered practical indicia, ordinary course of business documents, and econometrics. As a practical matter, the court found that the public views Medicare Advantage as a different product than Original Medicare. The court relied heavily on Aetna's ordinary course of business documents, including internal emails, presentations, and research that showed that Aetna viewed the Medicare Advantage plans of the Big 5 insurers as its "true competitors," not Original Medicare. The econometrics demonstrated that Medicare Advantage plans have a set of distinct customers. The court found the switching data particularly persuasive. The switching data demonstrated that customers tended to switch to other Medicare Advantage plans as a result of cancellation or price increase rather than to Original Medicare plans.
The court found that the merger was presumptively unlawful because Herfindahl-Hirschman Index ("HHI") analysis strongly suggested that the merger would lead to undue concentration in the market. In fact, HHI analysis showed that the market would be highly concentrated in all 364 complaint counties. In more than 75% of those counties, the HHI would increase to more than 5,000 points as a result of the merger (if the HHI is greater than 2,000, the market is considered "highly concentrated"). In the 70 counties in which Aetna and Humana are the only Medicare Advantage Organizations ("MAO") currently in the market, the post-merger HHI would reach a monopoly level. The government thus established a strong prima facie case based on econometrics and further supported its position with evidence that vigorous head-to-head competition would disappear with the elimination of a particularly aggressive competitor such as Aetna. The government's model indicated that premiums would increase by 60%, seniors would pay $360 million more in rebate-adjusted premiums, and taxpayers would pay an additional $140 million in higher payments from CMS to insurers. That is a total prediction of $500 million per year in combined anticompetitive harm to seniors and taxpayers.
The court rejected Aetna's and Humana's rebuttal arguments. It found that CMS regulation was not designed to deter and remedy anticompetitive harm; that the entry of new competitors was not timely, likely, or sufficient enough to counteract the anticompetitive effects of the merger; and that a proposed divestiture of certain Medicare Advantage plans to a third party, Molina Healthcare, would not counteract the loss of competition Instead, the court found that Molina's Medicaid experience did not indicate that it would be an effective Medicare competitor; it had no provider or value-based networks and would have difficulty building such networks; it had no contacts in a substantial number of the complaint counties; and by its own admission, it lacked the capacity to take on Medicare Advantage.
The court also analyzed the impact of the merger on the public exchanges. Shortly after the complaint was filed, Aetna withdrew its on-exchange plans for 2017 in the 17 complaint counties in Florida, Georgia, and Missouri. Aetna argued that its decision to withdraw from the exchanges in those states was a business decision because the risk corridors and reinsurance programs, which provided stability to the market, expired after 2016, and Aetna was losing more money than projected on the public exchanges. However, internal Aetna communications persuasively demonstrated that Aetna's withdrawal from those specific 17 counties was not a business decision, but was designed to improve its litigation position. It withdrew from other exchanges across the nation as part of a business decision, but did not apply the same profitability analysis to the 17 counties.
As a part of its analysis of competitive effects, the court considered Aetna's potential future actions. Because Aetna's decision to exit the 17 counties was not based on sound business reasons, the court discounted Aetna's withdrawal from those exchanges as evidence of its future conduct. A firm is assumed to be driven by its economic interests, especially its profit motive, the court explained. Following that logic, the court reasoned that because Aetna had been unprofitable in the 14 counties in Georgia and Missouri, it was unlikely to enter those markets again in the future. Thus, in those 14 counties, the merger would not produce anticompetitive effects. However, Aetna's exchange plans were profitable in three Florida counties and Aetna did not eliminate its off-exchange plans in those counties, leading Judge Bates to conclude that Aetna would be likely to offer on-exchange plans in those counties again after 2017. Anticompetitive effects would result from the merger in those three counties. The HHI scores in the three counties supported a presumption of anticompetitive levels of market concentration. The government again bolstered its prima facie case with evidence of harm to head-to-head competition.
Aetna and Humana attempted to argue a rarely-successful weakened firm defense on the grounds that Humana's price increases would result in its market share being too small to produce the adverse market effects predicted by the government. The court rejected the defense; there was no evidence that Humana faces a significant threat of failure, and its weakness could be (and is being) remedied by competitive means. The court also rejected the second rebuttal argument that the public exchange market is so volatile, with too many entries and exits, for an HHI analysis to accurately predict the state of competition in the future market. The companies had offered no evidence to support that argument.
Lastly, Aetna and Humana sought to defend the merger on the grounds that it will create substantial, procompetitive efficiencies. In order to succeed on such a defense, the claimed cost-saving efficiencies must benefit customers in the challenged markets and must be cognizable. The companies and the government offered competing experts, both of whom opined that some efficiencies would result from the merger. But most of those efficiencies would benefit the merged firm, not consumers. Further, the companies' efficiencies expert did not explain how the claimed efficiencies would pro-competitively affect the relevant market. The court thus concluded that the projected efficiencies were not cognizable, did not clearly benefit consumers and could be achieved without the merger. Thus, efficiencies would not be sufficient to mitigate the anticompetitive effects of the merger.
Aetna has stated that it will consider all available options, including a possible appeal. Most experts opine that it is a sound, well-analyzed decision that is based in a traditional antitrust legal framework and will be difficult to overturn. However, Aetna may be motivated to appeal because it has a $1 billion break-up fee that it must pay Humana if the merger does not occur. Alternatively, Aetna may try to negotiate a deal with the new Trump administration. How the Trump administration may react is unclear; Trump may be interested in finding an ally to support a new healthcare plan. However, a focus of such a healthcare plan will be on lower premiums and allowing a merger of this magnitude would not likely lead to more competitive pricing.
- Changes to your business practice must be based on sound business judgment, not to improve your litigation position.
- DOJ has had success recently opposing mergers by defining the market narrowly. Do not assume that a functionally interchangeable product or service will be in the same market. Products must be sufficiently close substitutes such that substitution to one could constrain any anticompetitive pricing in the other.
- Courts have shown an overall reluctance to approve these "goliath" mergers of direct competitors. In order to be successful, health care insurers must be able to demonstrate minimal anticompetitive effects and the existence of healthy competition unaffected by the merger. Evidence that consumers will not be harmed by increased premium costs and that reimbursement to the providers will not be reduced is part of the equation.
- Reliance on efficiencies must be supported by extremely strong empirical data that addresses both consumer effects and market effects.
- While econometrics and experts are important, the court also considered practical indicia and relied heavily on the ordinary course of business documents. Make sure that your internal documents support your legal position.
- Divestiture will reduce post-merger anticompetitive effects, particularly market concentration, only if the entity being divested will be a successful competitor in the market in the future.