District Court Blocks Aetna-Humana Merger | Practical Law

District Court Blocks Aetna-Humana Merger | Practical Law

On January 23, 2017, the US District Court for the District of Columbia enjoined the proposed merger between health insurers Aetna Inc. and Humana Inc. on antitrust grounds, finding likely competitive harm in the markets for Medicare Advantage plans and commercial health insurance plans offered on the Affordable Care Act (ACA) public exchanges. This Legal Update provides an overview of the opinion's findings on issues including product market definition, the role of government regulation in the relevant markets, and the sufficiency of the parties' proposed divestiture.

District Court Blocks Aetna-Humana Merger

Practical Law Legal Update w-005-5195 (Approx. 5 pages)

District Court Blocks Aetna-Humana Merger

by Practical Law Antitrust
Published on 24 Jan 2017 • USA (National/Federal)
On January 23, 2017, the US District Court for the District of Columbia enjoined the proposed merger between health insurers Aetna Inc. and Humana Inc. on antitrust grounds, finding likely competitive harm in the markets for Medicare Advantage plans and commercial health insurance plans offered on the Affordable Care Act (ACA) public exchanges. This Legal Update provides an overview of the opinion's findings on issues including product market definition, the role of government regulation in the relevant markets, and the sufficiency of the parties' proposed divestiture.
The US District Court for the District of Columbia enjoined the proposed merger between health insurers Aetna Inc. and Humana Inc., finding that the Department of Justice (DOJ) largely proved its case that the merger would harm consumers in the markets for:
  • Individual Medicare Advantage (MA) plans in 364 counties located in 21 states.
  • Individual commercial health insurance plans offered on the Affordable Care Act (ACA) public exchanges in three counties in Florida. The court also found that Aetna withdrew from the public exchanges in the 17 markets included in the complaint in order to improve its litigation position, rather than for independent business reasons.
The trial lasted 13 days, including the testimony of over 30 witnesses, including seven experts.
If Aetna chooses not to appeal the decision and the merger agreement with Humana is therefore terminated, Aetna will be obligated to pay Humana a reverse break-up fee of $1 billion. For a summary of the merger agreement, see What's Market, Aetna Inc./Humana Inc. Merger Agreement Summary.
The DOJ is also currently challenging the proposed merger between Anthem, Inc. and Cigna Corp. in separate litigation.

The Medicare Advantage Market

MA plans are sold by private insurers paid by the government to provide insurance to Medicare-eligible seniors. The features of these plans include:
  • The insurers are paid on a capitated basis, rather than fee-for-service, giving them an incentive to control enrollees' healthcare costs. Insurers tend to control costs in MA plans by offering narrower provider networks.
  • Health insurers submit bids to the Center for Medicaid and Medicare Services (CMS) against a CMS benchmark. Insurers obtain rebates for bids submitted below the benchmark, some of which are passed on to enrollees in the form of reduced costs or added benefits.
  • Enrollees in MA plans are typically seniors who want lower out-of-pocket costs than traditional Medicare offers. Many MA enrollees are low-income.

Medicare Advantage Market Definition

A key issue before the court in assessing the DOJ's alleged MA market was the extent to which MA plans compete with traditional Medicare and so-called MedSupp plans, which help cover out-of-pocket costs not covered by traditional Medicare. The court focused on the fact that traditional Medicare in conjunction with MedSupp plans, though competing to an extent against MA plans, does not constrain their pricing. Therefore, the court found that MA plans alone constituted a relevant product market.
In finding that traditional Medicare and MedSupp plans do not constrain the pricing of MA plans, the court relied on:
  • The Brown Shoe factors, including industry and public recognition of MA plans as a distinct market from MedSupp plans through evidence such as:
    • separate reporting of MA and MedSupp results in annual financial reports;
    • separate IT platforms for MA and MedSupp business lines;
    • independent pricing, including separate teams of actuaries for MA and MedSupp plans; and
    • detailed market share tracking of MA markets.
  • Ordinary course documents showing more intense competition within Medicare Advantage than with traditional Medicare and MedSupp plans.
  • Switching data showing that MA enrollees rarely switch plans and stay within MA when they do.
  • Econometric evidence offered by the government's expert, including diversion ratios and the hypothetical monopolist test outcome. The court also noted that case law required consideration of qualitative evidence in addition to econometrics, most of which pointed to an MA-only market.
The parties agreed that the relevant geographic market was limited to counties.

Medicare Advantage Competitive Effects

The court found that the DOJ established a prima facie case of likely competitive harm in the MA market because the proposed merger significantly exceeds the Merger Guidelines' concentration thresholds to show presumptive competitive harm in all 364 of the counties identified by the DOJ. The court also relied on the DOJ's evidence of significant head-to-head competition between Aetna and Humana, including:
  • Evidence of aggressive growth by Aetna in counties where Humana offered MA plans.
  • Ordinary course documents showing references to each other as the top or strongest competitors.
  • Similar outlooks on the nature of the healthcare market, which made them especially close competitors.
  • Examples of Aetna or Humana improving their plan offerings in response to competition from the other in specific markets.
  • A merger simulation by the DOJ's expert.
The court rejected the defendants' rebuttal relying on:
  • Government regulation. The court found that CMS regulations could not or would not prevent the merged company from raising prices or lowering the quality of the MA plans. Instead, the court accepted that CMS regulations provide only the outer boundaries of competition between MA insurers.
  • Entry. The court held that entry will not be timely, likely, or sufficient to counteract the likely anticompetitive effects in the MA market. The court relied primarily on the experts' testimony evaluating previous entry in similar markets to conclude that entry was likely to occur in, at most, 13.3% of the affected counties.
  • Divestiture. The defendants argued that a planned divestiture to a small Medicaid-focused health insurer, Molina Healthcare, would resolve any competitive issues. The court found that Molina would not be able to replace the competition lost from the merger, including due to Molina's:
    • Inexperience with managing PPO plans.
    • Inability to build adequate provider networks in time.
    • Lack of internal capacity, including IT infrastructure and personnel with relevant expertise.
    • History of unsuccessful attempts to enter the MA market.

The Public Exchanges Market

The government also challenged the merger in the market for individual commercial health insurance sold on the public exchanges created by the ACA in 17 counties. The parties agreed on both the product and geographic market definitions. The principal issue in this market related to Aetna's decision to withdraw from these 17 markets in August 2016. Aetna subsequently argued that the merger could not harm markets in which it no longer competed.
The court found that Aetna intentionally withdrew from the 17 markets in order to avoid judicial scrutiny during the antitrust trial. The court concluded that the merger was likely to harm competition in three of the 17 counties where Aetna was likely to compete in the future because its participation in the exchanges had been profitable before it withdrew. The court rejected arguments that this analysis involved a judicially untested antitrust theory known as actual potential competition. Instead, the court noted that it was following established judicial precedent that applies standard antitrust analysis even where competitors are marginally in the market, or have one foot in and one foot out.
The court found that the proposed merger would significantly exceed the Merger Guidelines thresholds for presumptive harm in the three markets and that the DOJ presented additional evidence of close, head-to-head competition. The court was not persuaded by the defendants' arguments that:
  • Humana is a weakened firm. The court noted that the weakened firm defense is rarely accepted and requires a showing that Humana faced a significant threat of failure or had no procompetitive means to resolve its weakened position.
  • The public exchange market is too volatile to assess. The court found that market concentration measures were nonetheless appropriate and that the defendants were not able to point to cases or evidence showing otherwise.

Efficiencies

The court rejected the defendants' efficiencies claims in both markets. Among other things, the court found that:
  • Out-of-market efficiencies were not relevant because the anticompetitive effects in the challenged markets were likely to be substantial.
  • A significant share of the claimed efficiencies was likely to be retained by the merged firm rather than passed on to consumers.