The DOJ’s simultaneous prosecutions of Aetna/Humana and Anthem/Cigna
Throughout Barack Obama’s presidency, both antitrust agencies focused a great deal of their time and work on the healthcare industry. This was due to myriad factors, perhaps the most significant being the passage of the Affordable Care Act (ACA), which resulted in new industry collaboration and combination. The FTC also brought crucial antitrust cases against so-called “pay-for-delay” patent settlement deals in the pharmaceutical industry that, the government alleged, protected expensive drug brands from more affordable generic competition. Those cases culminated in the Supreme Court’s decision in Actavis, which exposed those patent settlement deals to antitrust scrutiny in courts around the country. The Actavis case remains one of the most important courtroom victories for either antitrust agency over the past decade, and it created case law that allowed several subsequent pay-for-delay challenges to go forward in court.
But waves of consolidation in other healthcare-related industries also attracted considerable antitrust scrutiny over the past eight years. The FTC oversaw, and in some cases challenged, scores of hospital and healthcare provider mergers, and again established precedent through its courtroom successes. And as the Obama administration was drawing to a close, the Antitrust Division of the US Department of Justice did what few, if any, antitrust prosecutors had done before: challenged two market-defining mergers in the same industry at the same time. The proposed health insurance merger between national providers Aetna and Humana coincided with another insurance mega-merger between Anthem and Cigna. If the proposed Aetna/Humana and Anthem/Cigna mergers were allowed to go forward, the number of national providers of healthcare insurance in the US would have been cut from five to three – a massive amount of consolidation in an industry viewed as vital to tens of millions of US consumers and the employers who provide their healthcare plans.
Although both deals would have significantly reduced competition in the healthcare industry – as determined by two different district judges, and an appellate panel in the case of Anthem/Cigna – each transaction would have affected different, distinct insurance product markets, and required the insurers and their counsels to employ distinct legal arguments to defend their deals. The deals also required lawyers at the division to build and execute strategies to challenge the unique elements of both deals, while crafting a compelling antitrust narrative about the industry as a whole.
Ultimately, the companies’ arguments proved ineffective in court and both deals collapsed in the face of DOJ opposition. The decisions gave observers a final confirmation, if it was indeed necessary: after eight years of litigation victories, the government now had the means and methods to bring successful antitrust lawsuits to trial, and courts had made clear what antitrust arguments will succeed or fail when deciding antitrust matters.
A tale of two deals
Amid a wave of consolidation in the health insurance industry, Anthem announced in July 2015 that it would purchase Cigna for $48 billion. The announcement came just a few weeks after Aetna declared it intended to buy rival Humana for $37 billion.
At the time the companies disclosed their deals, Anthem and Cigna together covered 53 million beneficiaries nationally, while Aetna and Humana serviced 33.5 million. Anthem is also the largest member of the Blue Cross and Blue Shield Association, a federation of US health insurance organisations and companies. In a country of 321 million people, allowing the proposed mergers would have put healthcare payments for more than 40% of all Americans in the hands of just three insurance companies.
Both proposed transactions raised eyebrows on Capitol Hill and drew ire from healthcare providers, with whom health insurance companies contract and can negotiate lower prices based on bargaining power. Democratic Senator Richard Blumenthal sent a letter to the DOJ’s then antitrust division chief Bill Baer asking that the deals be considered together.
“When viewed together both of these proposed deals raise competitive concerns related to an increase of excessive buying (or monopsony) power, which could depress the reimbursement rates paid to physicians and lead to a reduction in quality of care,” he wrote. “The national implications are such that each individual merger cannot be reviewed independently from one another.”
Mark Bertolini, Aetna’s chief executive, felt differently. “While these transactions will likely be discussed together in the media and elsewhere under the broad heading of ‘industry consolidation’, they are actually two very distinct deals that involve different products and would result in two very different companies,” Bertolini said.
Aetna/Humana and Anthem/Cigna were undoubtedly going to face heightened antitrust scrutiny. Both US antitrust agencies said publicly they were keeping a close eye on the healthcare industry, which was undergoing massive changes, primarily as a result of the passage of Obama’s ACA.
Almost exactly a year after the companies announced their mergers, the DOJ filed an unprecedented double lawsuit to block both health insurance tie-ups. The deals “would leave much of the multitrillion-dollar health insurance industry in the hands of three mammoth insurance companies, drastically constricting competition in a number of key markets that tens of millions of Americans rely on to receive healthcare”, then attorney general Loretta Lynch said when announcing the lawsuits. The fact that Lynch made a statement at all is telling: the attorney general typically only attaches his or her name to an antitrust lawsuit when it is considered significant both in terms of economic effect and public profile. Aside from, perhaps, the division’s lawsuit against Apple in the e-books case, the health insurance merger trials would be the most watched antitrust matter during the administration.
Both Anthem and Aetna had incentives to go to court to try to save their deals – or at least see the lawsuits through to some conclusion – because of the large break-up fees attached to the mergers. If Anthem walked away from its tie-up, it would be forced to pay Cigna $1.85 billion. Meanwhile, Aetna was on the hook to pay Humana more than $1 billion. Such fees are intended to endow sellers with the backbone and resources to see tricky deals through to some decision. The steep price tag the sellers placed on breaking up suggests how difficult they believed the antitrust reviews and potential challenges would be.
The government filed the lawsuits as related in the District Court for the District of Columbia, and both cases were assigned to the same judge. But according to the lawsuits, the government believed each deal would affect a different market, as Bertolini had suggested. The division alleged that the Aetna/Humana combination would significantly reduce Medicare Advantage competition in more than 350 counties in 21 states. Humana is presently the second-largest Medicare Advantage insurer, while Aetna is the fourth-largest, according to the DOJ.
Meanwhile, the agency claimed the Anthem/Cigna deal would harm competition for millions of consumers who receive commercial health insurance coverage from national employers across the US; and from large-group employers in at least 35 metropolitan areas, including New York City and Los Angeles.
“Of the big five, only four insurers offer a nationwide commercial network sufficient to serve the country’s largest employers, known as ‘national accounts’,” the DOJ wrote in its complaint. “Anthem, working together with its fellow Blues, is one; Cigna is another. Anthem and Cigna view each other as close competitors for these accounts and have adopted strategies for winning national business from each other.” The division did say that both Aetna/Humana and Anthem/Cigna would harm patients who get their insurance through the exchanges created by the ACA.
Judge John Bates, to whom both cases were assigned, was confronted with the question of whether the DOJ’s bids to block both mergers should remain related. For cases to be related, the health insurers’ lawyers argued, there must be a direct factual nexus to all the core issues of the complaints – meaning there needed to be a set of issues in common that could be addressed at the same time in one courtroom. That was not true for the government’s lawsuits against the two mergers, the companies asserted.
The DOJ ultimately agreed, with Judge Bates writing in his order decoupling the cases that all parties had agreed the two mergers are “quite different: they involve different parties, different product and geographic markets, and raise very different factual issues.” Judge Bates was also inclined to accommodate the defendants’ requests that separate trial proceedings begin in 2016 so the companies could meet their contractual merger deadlines. “Given the complexity and importance of these cases, the court cannot feasibly try and decide both in that timeframe,” Judge Bates wrote. Anthem/Cigna was reassigned to another judge.
Anthem/Cigna: the efficiencies defence
The DOJ’s bid to block the deal between Anthem and Cigna landed with Judge Amy Berman Jackson, an Obama appointee and a relative antitrust novice on the bench. Judge Jackson was also dealt a curveball rarely seen in the antitrust world: the relationship between the merging parties bristled with contention. Throughout the trial, as Anthem lawyers stood in court and argued for the merger’s alleged benefits, Cigna lawyers sat aside, contributing little.
Along with not having a willing merger partner during the proceedings – which had been divided into two phases – Anthem also couldn’t “litigate the fix”, as happened in other recent merger challenges that landed in federal court. The company had no assets it could sell to fix the alleged anticompetitive harm of its deal with Cigna. Judge Jackson’s choice was binary: let the deal through as proposed – or block it altogether.
Before the trial began in November 2016, the DOJ had abandoned its claim about how the transaction would harm individuals who purchase insurance on the exchanges, allowing it to focus the first part of the trial on how Anthem’s acquisition of Cigna would affect large, national companies that rely on the insurers to provide healthcare coverage to their employees. The second part of the trial focused on how the merger would affect local geographic markets.
With no way to litigate the fix, Anthem defended its deal by claiming efficiencies: that the insurer would be able to negotiate lower reimbursement rates with hospitals and other providers following the merger; and savings would be passed on to national account customers. Those benefits would outweigh whatever harm to consumers the government had alleged, the companies argued.
But throughout the proceedings, by exploiting the tension between the two companies, the DOJ worked to make its case that the companies would have difficulty integrating their merger and achieving those efficiencies. “The integration work has not been completed and work has been stopped,” the government wrote in court documents in December. “Currently, the two companies do not even agree on the claimed benefits of the merger, or the purported efficiencies estimate published by Anthem in support of the merger shortly after this lawsuit was announced.”
The DOJ’s strategy won support from the bench. The contentiousness between Anthem and Cigna puzzled Judge Jackson, who, in her decision to block the transaction in February 2017, called Cigna’s unwillingness to move forward with the deal “the elephant in the room” that undermined Anthem’s case for the merger. During closing arguments for the first phase of the trial, Cigna lawyer Rick Rule, a partner at Paul, Weiss, Rifkind, Wharton & Garrison, spoke briefly to point out that the defence’s proposed findings of fact and conclusions of law represented the views of Anthem, and that some of the material was inconsistent with testimony given by Cigna witnesses. Cigna had mostly been deferring to Anthem lawyers up until that point and continued to do so afterward. “What am I supposed to make of that?” Judge Jackson asked.
Regardless of that tension, Judge Jackson found that Anthem’s claimed efficiencies were insufficient to save the deal: “They are not merger-specific, they are not verifiable and it is questionable whether they are ‘efficiencies’ at all,” as a larger buyer’s ability to obtain lower prices from suppliers based on its greater size post-merger “is not a cognisable defence to an antitrust case.”
Anthem appealed against Judge Jackson’s decision. The appeal, however, did little to quiet discontent at Cigna, which quickly attempted to kill the deal by suing Anthem for more than $14.8 billion for failing to pursue a strategy to win antitrust approval. Anthem then escalated the fight by filing its own lawsuit in the Delaware Court of Chancery, and successfully won a temporary restraining order to prevent Cigna from cancelling their merger contract.
In its brief to the US Court of Appeals for the District of Columbia Circuit, the DOJ argued that the district court “appropriately considered the strained relationship between Anthem and Cigna in weighing whether the claimed efficiencies are likely to be achieved.”
The contention between Anthem and Cigna ultimately appeared to be less of an issue at oral arguments. Instead, the appeals panel focused on the benefits Anthem alleged. One appellate judge, Republican appointee Brett Kavanaugh, said during court that savings from lower healthcare provider rates would be passed on to patients and companies, which would help ease the high cost of healthcare in the US. “On the pure law, if it’s going to help employers and employees reduce their healthcare costs, that seems like an improvement in competition, consumer welfare and that seems like a good: a positive,” Judge Kavanaugh said.
The division, meanwhile, insisted that by lowering provider rates, the merger would hurt hospitals and doctors. DOJ attorney Scott Westrich said antitrust law does not allow favouring one group over the other, adding that no court has ever held that anticompetitive effects in one market can be compensated by benefits created from anticompetitive conduct in another. But Judge Kavanaugh replied: “We haven’t had a case like this. The insurance market is unusual, if not unique, in this circumstance.”
In a divided opinion, two of three judges on the panel agreed with the lower court that the proposed merger of Anthem and Cigna would raise prices paid by employers to cover their workers. However, Judge Kavanaugh dissented, arguing that because Anthem and Cigna would be able to pay lower reimbursement rates to healthcare providers once they were combined, the lower court should have considered this a merger-specific benefit to weigh against the harms to doctors and hospitals the DOJ alleged.
Nonetheless, writing for the majority, Judge Judith Rogers said the efficiencies claimed by Anthem were either not merger-specific or not verifiable. For example, she said, while the lower court ignored an efficiency specific to the merger – that the deal would allow Cigna to pay lower reimbursement rates in line with those Anthem pays – the error didn’t matter because Anthem still hadn’t proven it could obtain the lower rates for Cigna.
In its bid for the Supreme Court to review the DC circuit’s decision, counsel for Anthem argued that “the circuits are split on the fundamental issue of whether consumer welfare and efficiencies should be considered in evaluating the legality of a merger,” as the Supreme Court has not heard a merger case since the “substantial evolution” in antitrust economics during the past 40 years.
But University of Pennsylvania law professor Herbert Hovenkamp, whose scholarship was cited repeatedly by Anthem’s petition and both the DC circuit majority and dissent, told GCR at the time that he did not think this description characterised the appellate ruling accurately.
“It’s not like this case simply said there’s no such thing as an efficiencies defence. At most you can say this court ruminates about the issue and wonders if there’s an efficiencies defence, given that the Supreme Court has never embraced it,” he said.
Ultimately, the conflict between Anthem and Cigna prevented the case from ever making it to the Supreme Court. Less than a week after Anthem petitioned the Supreme Court to hear its case, a judge in the Delaware Court of Chancery denied Anthem’s request for a preliminary injunction to hold its deal with Cigna together, effectively killing the proposed merger. On 12 May, Anthem announced it would stop pursuing Cigna, even though the Delaware judge had offered the company the chance to appeal against his decision.
More than four months after Judge Jackson issued her initial order blocking the deal, Anthem/Cigna was no more. Alleged efficiencies again failed to save an otherwise anticompetitive merger, according to the courts.
Aetna/Humana: “litigating the fix” and market definition
Judge Bates, who presided over Aetna/Humana, could in many ways be described as the exact opposite of Judge Jackson. While Judge Jackson, the antitrust newcomer, furiously took notes throughout Anthem/Cigna, Judge Bates mostly just listened and occasionally asked questions.
Judge Bates had presided over a number of major antitrust matters, and had handed the government a loss in the FTC’s case against Arch Coal’s acquisition of Triton Coal. The agency had alleged that the merger would increase Arch Coal’s market share by more than 30%, making it presumptively unlawful under the precedent set in the Supreme Court’s Philadelphia National Bank decision. According to Baker Botts partner and former FTC official Stephen Weissman, Arch Coal has been the only case since 2004 in which the government argued that structural presumption of antitrust harm, and lost.
The DOJ pursued a similar litigation strategy in Aetna/Humana. The government alleged that in every county listed in its complaint, Aetna’s and Humana’s combined market share would be at least 35% – high enough to assume it would lead to consumer harm under Philadelphia National Bank. “The proposed transaction also would significantly increase concentration in already concentrated markets,” the agency said.
Along with arguing the presumption, the DOJ claimed that factors laid out in the Supreme Court’s Brown Shoe ruling showed that Medicare Advantage was a relevant product market and not interchangeable with Original Medicare and other forms of health insurance available to seniors. Congress introduced Medicare Advantage, originally called Medicare Part C, in 1997 to allow seniors to opt out of traditional Medicare and instead obtain government-subsidised health insurance through private insurers.
Meanwhile, Aetna and Humana contended throughout the trial that the government and the healthcare industry had long viewed Original Medicare and Medicare Advantage plans as operating in the same product market: both were essentially government-backed health insurance products to serve seniors who need assistance affording it, the health insurers asserted.
Judge Bates found the companies’ arguments unpersuasive. “Aetna and Humana compete in a Medicare Advantage product market that does not include Original Medicare, as both contemporary business documents and econometric evidence confirm,” he wrote in his January 2017 opinion blocking the deal. “In that market, which is the primary focus of this case, the merger is presumptively unlawful – a conclusion that is strongly supported by direct evidence of head-to-head competition as well.”
Unlike Judge Jackson, Judge Bates was required to evaluate whether the health insurers’ proposed divestitures would effectively replace competition that would be lost if the companies were to merge. A few weeks after the division sued to block their deal, Aetna and Humana announced they had entered into separate agreements to sell certain Medicare Advantage assets to Molina Healthcare, a smaller third-party insurer, for $117 million.
In its opening statement, the DOJ called Molina Healthcare a “trivial” competitor in the market, unfit to operate the accounts Aetna and Humana proposed to sell. And when John Molina – the divestiture buyer’s chief financial officer and son of the company’s founder – testified before Judge Bates in December, the government tried to depict his company as inexperienced and unable to handle an influx of Aetna and Humana customers.
Ryan Kantor, assistant chief of the division’s Litigation I section, put several emails in front of Molina, sent in the months leading up to the proposed divestiture, that purportedly showed the executive’s scepticism of being able to handle the acquisition. In one email exchange, a fellow board member told Molina that the insurer was “woefully under-resourced to be able to take [the acquisition] on.” Molina responded that he agreed “wholeheartedly”.
Aetna attempted to rebut these arguments, with J Mario Molina, Molina Healthcare’s chief executive, testifying that his company was more than capable of handling the 290,000 Medicare Advantage members. He also went so far as to say that Aetna and Humana may have awoken a sleeping giant by giving it so many assets.
But Molina’s contentions ultimately proved unsuccessful. Judge Bates sided with the DOJ, pointing out in his opinion that Molina is primarily a Medicaid company, and has a history of unsuccessful attempts at expanding into Medicare Advantage markets.
A few weeks after Judge Bates issued his decision giving the Obama administration one of its final antitrust victories, Aetna and Humana called off their merger. Aetna also confirmed it would pay Humana the $1 billion break-up fee and cancel the sale of assets to Molina. The national healthcare insurance market would remain at five companies.
The administration’s final antitrust lessons
There are reasons for the two court losses that were, of course, unique to the insurance mergers: that Anthem and Cigna openly fought about the merits of their deal clearly damaged the pro-merger arguments Anthem’s lawyers made. But asking to concentrate power in a market as publicly wrought as health insurance proved to be challenging regardless. The additional wrinkles in the companies’ arguments ended their chances of success and helped secure the twin victories for the government.
Still, the results of the cases should be lessons to future antitrust enforcers and defence lawyers about what will, and will likely not, persuade courts overseeing antitrust challenges to mergers. The government’s argument on appeal in the Anthem/Cigna case is particularly interesting: that antitrust harms or benefits should not be limited to a narrow view of costs, and how those costs affect consumers. Even if the merged company’s newfound bargaining power would lower reimbursement rates and slash healthcare costs for patients and companies, that should not outweigh the harm the deal might inflict on doctors and hospitals – and how that harm might affect the patients they treat. The higher rates that Cigna paid doctors and hospitals were in part to afford advancements in care, and how that care is delivered. If Cigna began reimbursing providers at the same low levels as Anthem, the government argued, the advancements in care and treatment would be lost, and patients would suffer. The court eventually found that the consumer benefits Anthem claimed were either unrealistic or not specifically related to the Cigna merger, and the appeals court backed that decision.
As if more evidence were needed, the district and appeals court decisions should cast significant doubt on whether merging companies can defeat government antitrust challenges based on alleged efficiencies alone. Indeed, as the panel in the appeals decision noted: “It is not at all clear that [efficiencies] offer a viable legal defence to illegality under Section 7 [of the Clayton Act].”
As others have pointed out in this book, “litigating the fix” has proven to be a risky courtroom strategy at best, as it has the potential to inject chaos into the conflict where it otherwise would not exist. Rather than being forced simply to rely on the merging parties’ business documents and customer data to challenge the deal, the government can turn to the potential buyer’s documents, public statements and other evidence – all of which could be problematic for the defence in several ways. That was certainly the case in the Aetna/Humana deal, where emails from proposed third-party buyer Molina Healthcare questioning the company’s ability to adequately serve the divested patients did much to sabotage the deal.
The litigation strategies employed in both cases mirror the lessons found throughout this book. The government will use a company’s own business documents to challenge a deal, including those of any potential third party put forward as a divestiture buyer. And the next time the government goes to trial against a deal, it will have a pile of case law before it that suggests that claims of efficiencies cannot salvage a merger that meets the presumption of harm found in Philadelphia National Bank.
If that is the lasting litigation legacy of the Obama administration, it is indeed a successful one for the government.