Can the AMA Block the Pending CVS-Aetna Merger?

Two health care giants, CVS Health Corporation and Aetna, are planning a merger. This deal has the potential to reshape the health care market—and, says the American Medical Association (AMA), reduce competition and hurt both physician practices and their patients. Now the California Insurance Commissioner has jumped in to support the AMA’s position.

Justice Department’s New Scrutiny of Vertical Mergers

In December, CVS Health, the nation’s largest pharmacy chain, agreed to purchase Aetna, the third largest health insurance company for $69 billion. CVS offered to purchase shares of Aetna at $207 each. The deal represents a vertical merger, where two companies do not compete, but work in similar industries, want to combine. This is different from a horizontal merger, where two companies who operate in the same space want to combine.

Until recently, vertical mergers like this did not raise alarm bells among regulators. One high profile exception to that long held custom was the Department of Justice’s (DOJ) Antitrust Division’s recent suit against AT&T in its proposed acquisition of Time Warner. While the AT&T-Time Warner deal did ultimately go through, it caused uncertainty about the factors that the Federal Trade Commission (FTC) or DOJ will use to evaluate similar cases. The only guidelines on vertical mergers were published over 20 years ago.

The CVS-Aetna merger proposal came nearly ten months after Aetna had terminated an agreement to purchase rival firm Humana for $37 billion. A federal judge blocked Aetna’s attempt to purchase Humana on antitrust grounds.

Could Insurance + Retail Pharma Violate the Clayton Act?

In the AT&T-Time Warner deal, the Department of Justice challenged the deal on the grounds that the merger would violate Section 7 of the Clayton Act, which prohibits mergers and acquisitions that substantially lessen competition.

DOJ argued that Time Warner controlled “must-have” programming without which distributors like cable television and satellite television companies would have a hard time attracting subscribers. DOJ argued that the merger would give AT&T control over such “must-have content,” enhancing the merged company’s bargaining leverage in its negotiations with competing distributors for the licensing of the Time Warner content.

When it comes to pharmaceuticals, “must-have” literally defines the product category.

AT&T and Time Warner argued that prices would not increase after the merger. Further, the lawyers argued that Time Warner’s programming is popular, but not truly indispensable.

The District Court for the District of Columbia sided with AT&T-Time Warner.

But, in the decision, the court did keep the door open to future DOJ actions against massive vertical mergers. Specifically, the court said that vertical mergers “are not invariably innocuous” and that the analysis of the merger must turn on “case-specific evidence.”

Retail Pharma + Health Insurance; What Could Go Wrong?

California Insurance Commissioner Dave Jones wrote a 15-page letter asking the DOJ to block the CVS-Aetna deal. The California Insurance Commission is the largest consumer protection agency in California. Commissioner Jones is worried that the proposed merger would reduce competition in California’s retail pharma and health insurance markets.

Jones wrote, “The proposed merger of CVS and Aetna will significantly reduce competition in the PBM [Pharmacy Benefit Manager] and Medicare Part D markets, affecting millions of health care consumers throughout the country. Applying the analysis typically used by the United States Department of Justice and the Federal Trade Commission, the merger will substantially enhance market concentration and power in these markets. A merger of this size and type, according to experts on health insurer and health care mergers, will likely lead to increased prices and decreased quality.”

Jones also expressed his concern that the CVS-Aetna merger would “eliminate Aetna as an important potential competitor in the PBM market. In the present health insurance and health care markets, it is impossible to create de novo a PBM competitor with the strength, experience, and provider relationships that Aetna has established. Loss of Aetna as a potential competitor in the PBM market is an irreplaceable loss of competition because of the extraordinary concentration of the PBM market and high barriers to entry. If there are any other entities considering entry into the PBM market, they will now have to enter the market in conjunction with a health insurer. Single entry PBMs will no longer be feasible to compete with these behemoths.”

Jones’ findings were issued following a public hearing in June where the executives of CVS and Aetna testified about the proposed merger. The hearing included testimony from expert academics in the area of health care competition, medical care providers, consumer representatives, and members of the public. Jones released his statement after he and his team conducted an in-depth analysis of the testimony, studies, and comments that he received.

American Medical Association (AMA) Slams Proposed Merger

Barbara L. McAneny, M.D., president, American Medical Association commended the California insurance commissioner’s opposition, saying “The AMA agrees with Commissioner Jones that allowing this anticompetitive merger to proceed likely would harm consumers. If left unblocked, there is every indication that the merger would raise prices, reduce choice and stifle innovation in five poorly performing markets: Medicare Part D stand-alone prescription drug plan, pharmacy benefit management services, health insurance, retail pharmacy, and specialty pharmacy.”

“Commissioner Jones extensively cited evidence presented by the AMA and prominent experts in antitrust law, economics and health policy demonstrating that there are no potential benefits of sufficient magnitude and certainty that would outweigh the anticompetitive effects of the proposed merger.”

The AMA also sent its own letter to the Justice Department, urging it to block the CVS-Aetna merger arguing:

• The merger of CVS and Aetna is a horizontal merger with anticompetitive effects in markets for the Medicare Part D Prescription Drug Plan.
• The merger would substantially lessen competition in the market for PBM services.
• The merger will cause anticipated increase in drug spending and out-of-pocket costs for patients as Aetna and CVS fortify their dominant positions in the health insurance, pharmaceutical benefit management, retail and specialty pharmacy markets that already lack competition.
• The merger will cause a reduction in competition in health insurance markets that will ultimately adversely affect patients with higher premiums and a reduction in the quality of insurance.
• The claimed health care provider efficiencies are wildly speculative.

CVS’ Response

Carolyn Castel, vice president of corporate communications for CVS Health said, “We strongly disagree with the California Insurance Commissioner’s assessment of the pending CVS Health–Aetna transaction and its potential impact on consumers in California. As the Commissioner expressly states in his letter, the California Department of Insurance “does not have direct approval authority over this proposed acquisition.”

Castel commented to OTW, “Our vision is to create a new health care model that will help consumers improve their health by focusing on prevention and primary care, simplifying their health care experience and reducing costs. We believe that competition within each of the business segments in which we operate—pharmacy benefit management, pharmacies and insurers—is fierce and will remain so.”

Castel continued, “Further, the combination of our two companies would allow us to explore new benefit designs with $0 co-pays or reduced cost-sharing, passing on additional savings to consumers, including employers. As our costs go down, consumers will see the benefits in terms of premiums that will be lower than they would be otherwise. We also intend to invest these savings into improving the quality of services we offer to consumers. Thus, these cost savings will improve our consumers’ experience in ways beyond just the cost of their premiums.”

During CVS Health’s recent second-quarter earnings call, CEO Larry Merlo announced, “When we announced the transaction last December, we contemplated a range of possibilities in limited (Medicare part D) prescription drug plan area in which both CVS and Aetna offer plans, and we determined the impact of any divestitures would not be material to the deal model.” CVS has said that it expects the Aetna transaction to close in the later part of the third quarter or early part of the fourth quarter.

What’s Next?

According to industry publisher Reorg Research, the antitrust officials at the Department of Justice are not planning to challenge the merger. The next step would be for the Department of Justice to send an official approval memorandum. Reorg reports that this memo may be forthcoming as soon as the end of this month.