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A Closer Look at the Aetna-Humana Merger Loss by Jeff Spigel, Norm Armstrong and John Carroll, King & Spalding LLP

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A Closer Look at the Aetna-Humana Merger Loss by Jeff Spigel, Norm Armstrong and John Carroll, King & Spalding LLP Portfolio Media. Inc. | 111 West 19th Street, 5th Floor | New York, NY 10011 | www.law360.com Phone: +1 646 783 7100 | Fax: +1 646 783 7161 | [email protected] A Closer Look At The Aetna-Humana Merger Loss By Jeff Spigel, Norm Armstrong and John Carroll, King & Spalding LLP Law360, New York (February 6, 2017, 10:58 AM EST) -- The U.S. Department of Justice’s successful challenge to the proposed merger between Aetna and Humana has received substantial attention, and not just from antitrust and health care lawyers. Of course, anytime a $37 billion merger is blocked by the government, there will be headlines. Here, however, the D.C. district court’s decision itself is significant, not just for the way it approached certain health care antitrust issues, but also for its serious criticism of Aetna’s efforts to conceal evidence regarding its reasons for withdrawing from the insurance exchanges. The DOJ’s challenge is also among the final antitrust actions taken under the Obama administration, which aggressively scrutinized health care consolidations, and there is no indication Jeff Spigel that the agencies’ enforcement efforts in this industry will lessen in the new administration. Background Aetna announced its proposed acquisition of Humana on July 2, 2015. Just three weeks later, Anthem announced it had reached an agreement to acquire Cigna for $54 billion. Both mergers received widespread attention, with many analysts predicting hurdles for antitrust approval. Following a nearly year-long investigation, the DOJ and attorneys general of Delaware, Florida, Georgia, Illinois, Iowa, Ohio, Pennsylvania and the District of Columbia filed suit to enjoin Aetna’s acquisition of Humana. The complaint, filed on July Norm Armstrong 21, 2016, in the U.S. District Court for the District of Columbia, claimed that the merger would substantially lessen competition and would tend to create a monopoly in violation of Section 7 of the Clayton Act. On the same day and in the same court, the DOJ also sued to block the Anthem-Cigna merger in a separate action. After extensive discovery, the parties presented opposing arguments regarding the merger’s effects during a two-week bench trial that involved testimony from over 30 witnesses and hundreds of exhibits. In his written opinion issued on Jan. 23, 2017, Judge John D. Bates, a President George W. Bush appointee, found that Aetna’s acquisition of Humana would substantially lessen competition in Medicare Advantage plans and plans offered on certain John Carroll public-exchange markets and enjoined the merger. The Decision The court’s decision referenced the Anthem-Cigna merger and consolidation generally, but, according to the court, the case did not “hinge” on those issues; instead “the outcome here must depend on a detailed analysis of the likely effects of the merger in the challenged market.” Although Judge Bates’ 156-page opinion analyzed the usual antitrust issues associated with mergers (e.g., closeness of competition, barriers to entry, efficiencies, etc.), the decision centered on two issues: (1) whether Original Medicare (Medicare benefits offered directly by the government) competes with Medicare Advantage (Medicare benefits offered by private insurance entities); and (2) how to evaluate Aetna’s decision to withdraw from the public exchanges where it competed with Humana, when the decision appeared to have been made not for financial or business reasons, but to “evade judicial scrutiny of the merger.” Medicare Advantage vs. Original Medicare The court rejected Aetna/Humana’s arguments that Medicare Advantage is in the same antitrust product market as Original Medicare, because the parties’ documents and the econometric evidence showed that Original Medicare was not a sufficiently close substitute such that it would constrain the parties’ pricing in Medicare Advantage plans post-merger. The court did not hold that Original Medicare and Medicare Advantage did not compete at all, acknowledging that there is a “a degree of competition,” as seniors chose between Original Medicare and Medicare Advantage plans, and noting that Original Medicare serves as a “starting point for Medicare Advantage plan design.” Nevertheless, the court held that such limited competition does not mean that Original Medicare and Medicare Advantage should be included in the same antitrust product market. For one, the competitive structure of Original Medicare and Medicare Advantage differ. For instance, in contrast to Original Medicare, Medicare Advantage plans essentially compete in a bidding market that is subject to specific U.S. Centers for Medicare & Medicaid Services regulations that involve, among other things, the margins plans expect to earn. This bidding competition occurs between Medicare Advantage plans, and their pricing is not meaningfully affected by Original Medicare. This was confirmed by the econometric evidence, which showed there was limited switching between Original Medicare and Medicare Advantage. Furthermore, according to the court, the parties’ documents overwhelmingly show that their Medicare Advantage plans focus on competition with other Medicare Advantage plans, despite the fact that the parties were able to point to some documents that suggested there was some competition between Original Medicare and Medicare Advantage. Among other things, the parties “calculate market shares of a Medicare Advantage market.” They also prepare detailed assessments of the competition between Medicare Advantage plans that do not mention Original Medicare. According to the court, the parties have significant share of, and are especially close competitors in, the Medicare Advantage market, with Aetna having plans for “rapid growth” in the market absent the merger. Thus, the merger created significant potential anti-competitive harm in that market, which would not be sufficiently mitigated by the parties’ proposed divestiture to Molina Healthcare or federal regulation of Medicare Advantage, or outweighed by the deal’s efficiencies. The court’s analysis in Aetna/Humana regarding product market definition was rigorous and comprehensive, but it was not especially surprising. The approach was consistent with the case law and horizontal merger guidelines, and the DOJ has often taken the position in its enforcement actions that health insurance companies compete in relatively narrow product markets, such as HMO plans.[1] Exchanges The court also held that Aetna’s acquisition of Humana would substantially lessen competition in certain public exchanges, rejecting the parties’ argument that because Aetna had withdrawn from exchanges in the 17 complaint counties shortly after the DOJ’s complaint was filed, it should not be considered a competitor to Humana in those markets, and pointing out that Aetna made the decision not for business reasons but to “improve its litigation position and punish the Obama administration for challenging the merger.” Relying on United States v. General Dynamics Corp., 415 U.S. 486, 504-05 (1974), the court stated that “decisions not to engage in anticompetitive activities while under government scrutiny is a weak indicator of whether [it] will engage in anticompetitive actions in the future.” Even though Aetna’s withdrawal indicated there would not be actual competition between the parties in the near future absent the merger, Aetna could still be considered a potential competitor to Humana, and the elimination of that potential competition would have substantial anti-competitive effects. The court did not accept the government’s view that it should be assumed that Aetna would continue to compete in all 17 complaint counties, however. Rather, the court examined the parties’ documents and the econometric evidence to assess whether Aetna withdrew from counties for “sound business reasons” or to “improve its litigation position.” According to the court, several Aetna documents clearly showed that Aetna would have remained in the exchanges in three complaint counties in Florida but for the litigation. Thus, the court examined competition between Aetna and Humana in the three Florida counties, and found that competition would be substantially lessened in those counties. Notably, the court also criticized Aetna’s “repeated efforts to conceal a paper trail about decision-making related to the ACA exchanges.” This is where Judge Bates’ opinion stands out. It details Aetna’s efforts to hide evidence of its motives for withdrawing from the exchanges, which included Aetna’s business people being told by their lawyers to use attorney-client privilege “to prevent these documents from being produced in this documents” and to “call, rather than email, to avoid creating a written trail that could be used in discovery.” The court characterized Aetna’s actions as “bordering on malfeasance.” Implications and Health Care Antitrust Enforcement Going Forward The DOJ has achieved a substantial victory with deep and wide-ranging implications. It is the first time that the DOJ has blocked a health insurance merger, with another federal court decision regarding the DOJ’s challenge to the Anthem-Cigna merger looming. The decision, along with recent Federal Trade Commission victories in blocking hospital mergers, likely will continue to bolster the agencies’ health care antitrust enforcement, which is unlikely to recede anytime soon. The agencies’ health care antitrust enforcement has been aggressive under Presidents Bill Clinton, George Bush and Barack Obama, and there are no indications that this will
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