News & Updates
December 28, 2016
With the first phase of the trial in the government’s challenge to the merger of Anthem and Cigna wrapping up last Tuesday, several things seem to be coming into focus. The government has put on a strong case that the merger will produce significant market concentration in the sale of insurance plan services to large national employers. The merging parties’ best hope relies on potential large cost savings resulting from their ability to extract price concessions from hospitals and physicians. Less clear, however, is whether those savings are either legally cognizable or sufficient to offset the harms resulting from increased market power.
At the outset of the case, Judge Amy Berman Jackson split the litigation into two phases. The first focused on the Justice Department’s claim that the merger would reduce competition in the market for national accounts. Judge Jackson paused the case for a week to determine whether she could issue an injunction barring the merger based on the evidence presented on that claim alone.
The second phase of the litigation deals with the Department of Justice’s (DoJ’s) other claim, that local competition in 35 markets would be adversely affected by the market power of the combined Anthem-Cigna entity in both the sale of insurance services and negotiations with doctors and hospitals. Although this phase has begun, the judge indicated that she might yet issue an order truncating the proceeding based on the national accounts issue if appropriate.
There was much testimony and documentary evidence about the contours of the alleged national account market. Substantial proof was adduced regarding industry practices and customer preferences supporting the government’s market definition: the sale of services to employers with a large number of employees (5,000 according to the DoJ expert and Anthem’s own documents) that operate in multiple states.
The “metes and bounds” of the market are less clear, however. The DoJ included employers with employees in as few as two states, though most operate in many more. The vast majority of these firms are self-insured, i.e. they do not purchase insurance from the large insurance companies; instead, they rely on them to negotiate network contracts with hospitals and physicians, perform administrative services, and increasingly in recent years, to provide care management and wellness programs.
Who are the players?
Thus, while industry norms and the defendants’ documents and practices seem to point strongly to the existence of a distinct market serving large employers, the question of what sellers to include in that market is less clear. Because the geographic dimensions of alleged markets and identification of relevant competitors is a critical issue in all antitrust merger cases, these factual issues are almost always sharply contested. By the government’s lights there are only four firms serving the national account market: Cigna, United, Aetna, and the Blue Cross network, of which Anthem is the largest member. Defendants assert that the Blue plans are not monolithic and compete with each other, and that many other actual and potential competitors play an important role in disciplining pricing in the market. Employers use smaller insurers to “slice” the market, i.e. they may add a regional plan like Kaiser as a complement or substitute for one of the big four in the regions that those plans serve.
In addition, defendants point out, many health systems are integrating vertically to provide insurance products and some employers directly contract with providers for some health services. However, in an unusual “question and answer session” with attorneys at the conclusion of the first phase, Judge Jackson appeared skeptical of the claim that smaller insurers and others are significant players in the national market.
The government has alleged harm in two geographic markets: the 14 states in which Anthem is located and a national market that spans the entire United States. This somewhat confusing allegation required some rather detailed investigation into the workings of the national Blue Cross network. The DoJ’s argument is that the rules governing Blue Cross Blue Shield members enable them to compete as a single entity nationwide—Blues are forbidden to compete in each others’ territory under a Blue plan label—while at the same time giving Anthem particular power in the 14 states in which it operates because the rules give it sole authority to contract with companies headquartered in those states.
The Blues’ rules (which are themselves being challenged in a private antitrust class action) further limit competition because they would constrain the ability of Cigna to compete as a non-Blue plan. To remain eligible to use the Blue Cross and Blue Shield names and symbols Anthem may not derive more than one third of its national revenues from non-Blue brands — a level that the acquisition of Cigna plans would cause it to exceed unless it “rebranded” those plans. The government’s economic expert took what he described as a conservative approach by including some 26 regional carriers in his market data calculations and found presumptively illegal levels of concentration resulting from the merger.
Finally, Anthem rested much of its case on the efficiencies that could be achieved through merger, claiming cost savings exceeding $2.4 billion, most of which would be achieved by paying lowering reimbursements to physicians and hospitals. Notably the government has conceded that reimbursement cuts would occur (though not as large as defendants claim). In fact, the government itself has alleged that Anthem will gain leverage and engage in “monopsonistic” behavior in its negotiations with providers; this is a central part of the second phase of the litigation. In opening statements to the court, Anthem derided the government’s arguments as “internally tortured.”
However, the government asserts that savings achieved through the exercise of market power are not cognizable where the cost savings are themselves the product of an antitrust violation — here the exercise of monopsony power achieved through an anticompetitive merger. In support of its claim that pricing by an Anthem-Cigna combination would be monopsonistic and not pro-competitive, it argued that the entity’s lower provider payments would not result in a greater volume of patients and could reduce the quality of care provided. In a notable ruling from the bench during the second phase of the trial, Judge Jackson rejected Anthem’s argument that the government must show that the merger will drive reimbursement levels below costs of providing services. Instead she framed the issue “at the heart of the case” as whether purported savings are outweighed by potential competitive harms.
The court was treated to extensive economic testimony about the potential variable cost savings and the relative size of net savings compared to potential losses from lost competition — including the impossible-to-quantify losses from weakened incentives to innovate. Given the intractable factual and predictive issues raised, it is no surprise that courts have been reluctant to credit projected efficiencies: no reported decision has ever allowed a merger to proceed solely on the basis of claimed efficiencies.
In this case, the court’s decision regarding efficiencies may be made easier by the stunning and long-running fractious relationship between the merging parties: at the end of the first phase of the trial counsel for Cigna declined to endorse Anthem’s post trial filing with the court; the court may doubt that promised efficiencies will be achieved if corporate cultures clash. When a couple finds themselves in counselling before the wedding, the prospects for a happy marriage are slim.
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