The U.S. Court of Appeals for the District of Columbia Circuit recently put the kibosh on the proposed mega merger between health insurance giants Anthem, Inc. and Cigna Corporation, two of the nation’s four largest insurers. The court concluded that Anthem failed to show how proposed cost efficiencies would offset the harm to competition in affected markets. (United States, et al., v. Anthem, Inc. and Cigna Corp., No. 17-5024 (D.C. Cir. 2017)).
In 2015, Anthem, the second-largest health carrier, which operates the Blue Cross Blue Shield brand in 14 states, agreed to merge with third-largest Cigna, in what would be the biggest-ever merger of health insurers. It would leave Anthem as the surviving company with a controlling share of the merged company’s stock. Within Anthem states, existing Cigna customers could remain with Cigna, but the two insurers would otherwise no longer compete in those states.
The U.S. Department of Justice and several states successfully sued in district court to block the merger on the ground it would substantially lessen competition in affected markets, in violation of the Clayton Act. On appeal, Anthem argued the merger’s efficiencies would outweigh its antiicompetitive effects by reducing the costs of medical claims through lower provider rates, thus lowering Cigna’s rates. The government plaintiffs had argued these projected savings were unverified, not specific to the merger, and would not result in true efficiencies.
The circuit court found that the district court properly enjoined the merger based on Anthem’s failure to show the kind of extraordinary efficiencies necessary to offset the stipulated
Anti-competitive effect of the merger in the 14 Anthem states; chiefly the loss of Cigna, an “innovative competitor” in a “highly concentrated” market. It also found the merger would have a “substantial” anti-competitive effect in the Richmond, Virginia, large group employer market.
“The government met its burden to demonstrate a highly concentrated post-merger market, which would be reduced from four to just three competing companies,” the court concluded.
Under the circuit court’s precedent, “any claimed efficiency must be shown to be merger specific,  it cannot be achieved by either company alone because, if [it] can, the merger’s asserted benefits can be achieved without the concomitant loss of a competitor.” FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001).
Anthem claimed the savings would be achieved through re-branding and renegotiating provider contracts, by allowing the combined company to create a new product that features both “Cigna’s customer facing programs” and Anthem’s lower rates. However, the court argued that re-branding would create only a brief, interim benefit by integrating Cigna’s product faster than Anthem could develop a comparable product of its own. “None of the medical cost savings are merger-specific because they are based on an application of rates that each of the companies has already achieved on its own.”
Under existing guidelines, projected merger efficiencies must not be vague, speculative, or unverifiable by reasonable means. “Practical business realities would undermine the execution of [Anthem’s] plan, making achievement of the savings speculative, and therefore unverifiable,” the court concluded.
The court echoed the district court’s concern over how long projected savings for Cigna customers as a result of the combined company’s bargaining power would take to be realized.
“It is widely accepted that customers value the existing Cigna product, and that Cigna is a leading innovator in collaborative patient care. That threat to innovation is anticompetitive in its own right.”
The court also expressed doubt over whether the claimed savings would actually be passed to consumers “rather than simply bolstering Anthem’s profit margin. … The merger potentially harms consumers by creating upward pricing pressure due to the loss of a competitor, and so only efficiencies that create an equivalent downward pricing pressure are sufficient to reverse the merger’s potential to harm consumers.”
The court concluded that the district court reasonably determined Anthem failed to show the kind of “extraordinary efficiencies” needed to contain likely price increases in a highly concentrated market and to mitigate the threatened loss of innovation.
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