Aetna-Humana Merger Blocked

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The District of Columbia federal court recently ruled that a proposed $37 billion merger between health insurance giants Aetna and Humana cannot proceed, granting the US Department of Justice’s bid to block the combination on antitrust grounds (United States v. Aetna, Inc., et al., January 23, 2017, Bates, J.).  The Aetna/Humana deal is one of two blockbuster health insurance company mergers that have been challenged by Justice, the other being the Anthem/Cigna deal that remains pending before a different judge in the same court.

The proposed merger would create the largest seller of Medicare Advantage plans, and the challenge by the Department of Justice alleged, among other things, that the effect of the transaction may be to substantially lessen competition in the market for individual Medicare Advantage plans in 364 counties across 21 states.  The district court ultimately agreed, rejecting the insurers’ efforts to expand the relevant market definition to include both Original Medicare plans, which are offered directly by the government, and Medicare Advantage plans offered by private payers.

The Aetna court’s 156-page opinion wrestles with a Medicare Advantage market that was created by Congress to compete with Original Medicare.  The DHS Center for Medicare and Medicaid Service (“CMS”) lays down the ground rules for that competition, controlling entry and forcing exits in the Medicare Advantage marketplace.  CMS administers an annual bid process to determine which Medicare Advantage plans will be offered to seniors in the coming year, including a price benchmark upon which all Medicare Advantage policies are constructed.  The CMS benchmark represents the average cost to Original Medicare for providing standard benefits to enrollees in each county in America, and is the maximum amount that CMS will pay a Medicare Advantage Organization (“MAO”), on a capitated basis, to provide benefits to enrollees of a particular county.  The CMS benchmark is therefore the touchstone against which all Medicare Advantage plans are priced and operated.  The Aetna decision also shows CMS dictating Medicare Advantage reimbursements, policing margin caps, and benching (sanctioning) non-compliant providers for years at a time.

Even though Medicare Advantage was created to compete with Original Medicare – and under pervasive CMS regulation, the Medicare Advantage market can fairy be said to orbit around Original Medicare – still the Aetna court excluded Original Medicare from its relevant market.  The court concluded that Medicare Advantage does not sufficiently compete with Original Medicare, crediting the government’s evidence that both industry and the parties themselves seem to recognize a distinct Medicare Advantage market.  Throughout the decision, the court relied heavily on Aetna and Humana internal presentations and emails describing competition between Medicare Advantage providers, but barely mentioning competition with Original Medicare.  The court also emphasized other differentiators between Original Medicare and Medicare Advantage – particularly the latter’s limited provider networks, cap on out-of-pocket expenses, and prescription drug benefits – to conclude that these were really two different product markets.

In the Aetna decision, the parties’ internal emails and presentations are sometimes at risk of becoming the tail wagging the dog.  The decision held that a “strong inference must be drawn” from these internal materials, but the ultimate question is not whether industry personnel perceive two different markets, or whether their emails focus on one set of rivals while seemingly ignoring another.  The real issue is whether consumers take action in two different markets – whether substantial cross-elasticity of demand exists between Medicare Advantage and Original Medicare.  Here, econometric regression analysis provided a fairly robust answer that lends confidence to the court’s decision:  Medicare Advantage customers do not usually switch to Original Medicare in response to price increases.  But the reason for that has everything to do with the way Congress and CMS have shaped these two Medicare offerings.

Defining Original Medicare out of the relevant product market sounded the merger’s death knell.  In a market so confined, a combined Aetna/Humana entity represented a merger to monopoly in 70 of the 364 Medicare Advantage counties on which DOJ based its complaint.  Nor was it a heavy lift for DOJ to meet the relaxed burdens of a Section 7 case by demonstrating that a merger of such behemoths “may” give rise to anticompetitive conditions in the remaining counties at issue.  Aetna and Humana argued that the government’s approach oversimplified the health insurance market and discounted CMS’s role in dictating terms and policing compliance within the Medicare Advantage marketplace.  But throughout the decision, the court emphasized the parties’ own business records – which seemingly aligned with the government’s analysis – and minimized the role CMS plays in shaping (even dictating) Medicare Advantage terms, including price levels.

Aetna represents the relatively rare outcome where two functionally interchangeable products exist in separate markets.  The decision acknowledged at several points the tremendous force of gravity that the federal CMS agency exerts on the Medicare Advantage marketplace, but the court’s analytical tools seemed to be at a loss for how to quantify the impact of the government’s role.  The decision minimized CMS’s profound impact on price parameters for Medicare Advantage policies, but the government acts as a virtual monopsonist in this market because it controls entry and sets pricing benchmarks.  It would be interesting to know how much of every dollar spent in the Medicare Advantage market is paid by CMS.

Healthcare is the most complex market going in today’s economy – a teeming “multiverse” of many different competitions being waged under different rules in parallel dimensions of space and time.  Industry observers cite the Affordable Care Act (“ACA”) as a prime motivator for the flurry of deal-making among insurers and others in the health care sector.  But long before ACA, healthcare market dynamics were favoring consolidation and integration in every direction.  Over the past 30 years, the healthcare industry has been increasingly defined by expanding integrated hospital systems, consolidating pharmaceutical and medical device companies, employer purchasing groups, and large third-party payers – the biggest of which is the federal government with its Medicare and Medicaid programs.  Each player is struggling for leverage in the arena to influence or control clinical decisions, while capturing a better share of the healthcare dollar.

United States v. Aetna, Inc. reflects a blossoming trend of antitrust scrutiny in a healthcare sector that many considered immune to antitrust liability in the not-too-distant past.  Enforcement agencies are pressing antitrust claims in the healthcare arena and winning cases they tended to lose twenty years ago.  Agency victories in this sector could lend a platform to private party antitrust foreclosure suits that traditionally struggled.  Increasing consolidation, market definition complexities, the local nature of healthcare geographic markets, and agency activism make this sector particularly vulnerable to antitrust liabilities, putting a new premium on careful planning and compliance measures.