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A tale of two mergers: Following their losses in DOJ merger challenges, Anthem fights on and Aetna gives up

In the past month, the DOJ and several state governments scored two trial wins in their challenges to mergers among some of the country’s largest health insurers.  First, Judge Bates of the District of Columbia blocked the combination of Aetna and Humana, finding that the “proffered efficiencies do not offset the anticompetitive effects of the merger.”  Weeks later, Judge Jackson of the same district scuttled a deal between Anthem and Cigna, which she found “likely to lessen competition substantially” in the relevant market.  (Jackson’s full opinion was filed under seal and is in the process of being redacted for public release.  In the meantime, she released a summary.)

The DOJ’s challenges to the two mergers focused on different aspects of the healthcare industry.

In the Aetna case, the dispute focused in part on an issue of market definition.  The government contended that the Aetna–Humana merger would have led to a presumptively unlawful concentration in 364 counties in the market for Medicare Advantage plans (which are offered by private insurers).  The defendants contended that the proper market should include Original Medicare plans (those offered directly by the government), which would make concentration permissible.  The court sided with the government, finding that Aetna and Humana currently compete in a product market that does not include Original Medicare.  The court analyzed in detail the relationship between Original Medicare and Medicare Advantage, finding that MA plans are differentiated in a number of important respects from Original Medicare plans, that Aetna’s and Humana’s internal documents show that the companies focused their competition on MA plans, and that seniors who initially chose an MA plan and later switch plans tend not to switch to an Original Medicare plan but rather to a different MA plan.  Separately, the court found that the Aetna-Humana merger would substantially reduce competition in the market for individual plans offered on public exchanges in at least three counties in Florida.

The court also determined that the defendants did not meet their burden of proving “extraordinary efficiencies” sufficient to overcome the government’s prima facie case.  According to defendants’ expert, $2 billion in cognizable efficiencies would have flowed yearly to the combined company, and another $300 million to the government and consumers.  The government’s expert found only $73.2 million in cognizable efficiencies.  In the end, the court did not find sufficient evidence that marginal cost reductions would be passed on to consumers at a high enough rate to overcome the anticompetitive effects of the merger.

In the Anthem case, the relevant market was for health insurance plans sold to “national accounts”—employers with more than 5,000 employees.  There, too, the post-merger level of concentration would have been presumptively illegal.  And the court rejected Anthem’s argument that the merger would have allowed Cigna members to access the greater discounts that Anthem has negotiated with providers, resulting in $2 billion in savings.  It found that those savings were not “merger-specific,” because they are “based upon the application of existing discounts to an existing patient population that the companies have already delivered to the providers.”  Furthermore, the court noted that any customers who value the Anthem discounts can choose Anthem, noting that the coexistence of Anthem’s focus on aggressive provider contracts and Cigna’s focus on clinical management and patient behavior represents just the type of competition the antitrust rules are supposed to foster.

Aside from these factors, the unfolding of the Anthem trial was remarkable, with Cigna officials providing testimony that undermined Anthem’s defenses and with Cigna itself cross-examining the defense expert and refusing to sign Anthem’s Findings of Fact and Conclusions of Law.  While Anthem characterized these bizarre developments as the result of a mere “rift between the CEOs,” the court noted that the relationship is fraught with disagreements and that “the pre-merger integration planning that is necessary to capture any hoped-for synergies is stalled and incomplete”—perhaps concluding that the defendants’ failure to cooperate at trial reflected the relationship as a whole.

The epilogues to the two trials have been dramatically different.  On one hand, Aetna and Humana announced this week that they have abandoned their merger plans, with Aetna paying its former acquisition target a $1 billion breakup fee.

Anthem, though, is not going down without a fight.  It has filed an appeal along with an emergency motion for expedited review, arguing that it needs the case resolved before the impending April 30, 2017 termination date or will suffer irreparable harm from the loss of the merger opportunity.

In its brief on the merits, Anthem says that the district court failed to properly weigh the billions of dollars in savings to employers and employees that would result from the merger.  The finding that these savings were not “merger-specific,” says Anthem, was due to the mistaken conclusion that medical-cost discounts are not part of the insurers’ offerings—when in fact those discounts are often “decisive” in an insurer’s ability to win business. Anthem argues that this error and others constitute a failure by the district court to measure the effects of the proposed merger based on the longstanding benchmark of “consumer welfare.”

But Anthem will be fighting a two-front war, as its partner has reached the opposite conclusion about whether to proceed.  Cigna has sued in the Delaware Chancery Court for a declaratory judgment of its entitlement to terminate the deal and to a $1.85 billion breakup fee plus billions more in damages.  Anthem then sought, and on Wednesday obtained, a restraining order to prevent Cigna from terminating the deal as the parties’ arguments about Cigna’s right to terminate play out.

We will continue to monitor these cases and report on future developments.