Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 2 of 29 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION IN RE BLUE CROSS BLUE SHIELD : ANTITRUST LITIGATION : Master File 2:13-cv-20000-RDP MDL 2406 : : : : This document relates to : Subscriber Track cases DECLARATION OF DR. ARIEL PAKES Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 3 of 29 I, Ariel Pakes, declare: 1. I am the Thomas Professor of Economics in the Department of Economics at Harvard University where I teach courses in Industrial Organization, the Economics of the Health Care Industry, and Econometrics. I received a Bachelor of Arts and a Masters of Arts with distinction from Hebrew University in 1971 and 1973, respectively. I received a Masters of Arts and a Ph.D. from Harvard University in 1976 and 1979, respectively. I received the Frisch Medal of the Econometric Society in 1986 and was elected as a fellow of that society in 1988. I was elected to the American Academy of Arts and Sciences in 2002 and to the National Academy of Sciences in 2017. I was the Distinguished Fellow of the Industrial Organization Society in 2007 and was appointed a Distinguished Fellow of the American Economic Association in 2019. I received the Jean Jaques Laffont Award (for research that combines economic theory and empirical work) in 2017 and the BBVA Frontiers of Knowledge in Economics Management and Finance Award in 2018. In 2020 I became Clarivate Web of Science Citation Laureate. My curriculum vitae is attached as Appendix A. 2. I previously submitted class certification and merits expert reports in this matter on behalf of the Subscriber Plaintiffs. A summary of my class certification report (“Damage Report”) can be found at ECF No. 2411-1. 3. I have been asked by Settlement Class Counsel to apply the methodologies I used to calculate estimated damages within Alabama in those reports to obtain an estimate of the damages for the nationwide Damages Class identified in the Settlement Agreement. 4. To do so, I apply the percentage changes in margins I found in my Damage Report. The report analyzed the effect of a Blue from one service area entering a neighboring service area; the specific territory I analyzed for entrance was the state of Alabama. By margin, I mean premium 1 Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 4 of 29 minus insurance claims divided by premiums. That is, the margin is the fraction of premiums that did not go to covering the direct payments the health insurer made to health care providers. 5. My analysis considers a range of hypothetical different possible entry scenarios for potential entry (non-Blue-branded or Blue-branded) in the absence of the challenged rules, including the following: • that there would have been entry in all states • that there would only have been entry in states where the local Blue is “dominant”, where dominant is defined as having a market share of fifty per cent or more, • that there would have only been entry in states where Anthem Blue Cross operated in a neighboring state, and • that there would only have been entry in states where a Blue was dominant and where Anthem operated in a neighboring state 6. The calculation for the subset of states which had Anthem Blue Cross as a neighbor was made for two reasons. First, as discussed extensively in my report, Anthem has historically demonstrated a desire to expand outside of its exclusive service area. Second, as also discussed extensively in my report, Blues that neighbor a market are likely to find it less costly and more lucrative to enter that market. 7. My report does not contain an analysis of entry into the ASO market. However, I understand that the damages from restricting entry into the ASO market from 2015 to 2019 has been determined as a reasonable estimate to be 6.5% of total damages. As a result, I used that fraction to estimate damages to ASOs (or Self-Funded Accounts as the term is used in the Settlement Agreement). 8. The data that went into the calculations. To apply my estimates to the different subsets of markets, I require premiums and claims costs by segment, rating area, and year from 2008 to 2019 in the fully insured market. To the extent possible these numbers were taken from 2 Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 5 of 29 reports made to NAIC (the National Association of Insurance Commissioners).1 The NAIC data is only available from 2010 to 2018. We use the Bureau of Labor Statistic’s producer price index’s component index for Direct Health and Medical Insurance Carriers and the 2010 and 2011 premiums and claims data to predict (or “backcast”) premiums and claims costs for 2008 and 2009. We make an analogous forward looking forecast for 2019. 9. Results. Total damages are presented in Table 1. The damages calculated in the first two rows of these two tables are just for the counterfactual where the FI market is impacted by entry. The third row provides the damages that resulted from the restrictions in the ASO market between 2015-2019 calculated as described above. Table 1 10. Conclusion. Depending on the entry scenario, damages nationwide for the Damages Class over the Settlement Class Period are estimated to range from $18.6 billion to $36.1 billion. 1 Some adjustments were made to ensure the data used were appropriate for the study. There are states with Blues that were only very partially engaged in the market, and we did not want to count such “fringe” insurers as creating damages due to market dominance, so we omitted possible damages from Blues with market shares of less than 5%. We also omitted data on states where reported margins where either negative or greater than one, on the grounds that this was likely a result of reporting errors. 3 Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 6 of 29 I declare under penalty of perjury the foregoing is true and correct. Ariel Pakes October 30, 2020 Cambridge, MA 4 Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 7 of 29 Appendix A Ariel Pakes Curriculum Vita August 30, 2020 Personal Academic Address: Department of Economics Harvard University Littauer, Room 117 Cambridge MA, 02138 Contact Information Office Telephone: (617) 495-5320 Fax (617) 495-7730 E-mail: [email protected] Web site: http://scholar.harvard.edu/pakes Home Address: 215 Brattle Street Cambridge, MA 02138 Telephone: (617) 945-1203 Citizenship: Dual U.S. and Canadian Married to: Juliana Rojas Pakes. Two children. Education Degrees Ph.D. Harvard University, June 1979. M.A. Harvard University, 1976. 1 Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 8 of 29 M.A. The Hebrew University of Jerusalem, June 1973, with distinction. B.A. The Hebrew University of Jerusalem, June 1971. Thesis Topic Economic Incentives in the Production and Transmission of Knowledge: An Empirical Analysis. Primary Fields (in alphabetical order) Econometrics, Industrial Organization, Productivity and Technological Change. Employment • Mark and Sheila Wolfson Visiting Professor, Stanford University, Spring 2018. • Trione Visiting Professor, Stanford University, Spring 2015. • Thomas Professor of Economics, Department of Economics, Harvard University, July 2005 to present. • Visiting Professor NYU, 2005/2006 academic year. • Professor of Economics, Department of Economics, Harvard University, July 1999 to July 2005. • Visiting Professor, Department of Economics, Harvard University, Spring 1999. • Visiting Professor, Department of Economics, University of Chicago, Fall 1998. • Charles and Dorothea Dilley Professor of Economics, Yale University, 1997 to 1999. • Professor of Economics, Yale University, 1988 to 1997. • Associate Professor (with tenure), Department of Economics, Univer- sity of Wisconsin-Madison, 1986 to 1988. 2 Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 9 of 29 • Associate Social Science Research Institute, 1986 to 1988. • Visiting Research Associate, Economic Growth Center, Yale University, Fall, 1985. • Senior Lecturer in Economics (with tenure), The Hebrew University of Jerusalem, 1984 to 1986. • Visiting Assistant Professor, Department of Economics, University of Wisconsin, Madison, 1984-1985. • Lecturer in Economics, The Hebrew University of Jerusalem, 1980 to 1984. • Lecturer in Economics, Harvard University, 1979. Honors and Awards From Academies or Societies. • Selected as a Web Of Science, Citation Laureate, 2020. The article cited was "Automobile Prices in Market Equilibrium" which was joint with Steve Berry and Jim Levinsohn, and published in Econometricain 1995. • Elected as a fellow of the International Association of Applied Economists, 2019. • Appointed a Distinguished Fellow of the American Economic Associa- tion, 2019. • BBVA Frontiers of Knowledge Award in Economics, Finance and Man- agement, 2018. (joint with Robert Porter and Tim Bresnahan). Cita- tion: \Motivated by important and policy-relevant questions in applied economics they developed methodologies that had a significant and long- lasting impact on subsequent work in industrial organization as well as other applied fields". • Elected to the National Academy of Sciences, 2017. 3 Case 2:13-cv-20000-RDP Document 2610-11 Filed 10/30/20 Page 10 of 29 • Recipient of the 2017 Jean-Jacques Laffont Prize. Citation: Awarded annually and recognizes an internationally renowned economist whose research is in the spirit of Professor Jean-Jacques Laffont’s work, and combines both theory & empirics. • Industrial Organization Society Distinguished Fellow, 2007. • Elected Fellow of the American Academy of Arts and Sciences, 2002. • Elected Fellow of the Econometric Society, 1988.