Insurer Merger Saga Ends Without Guidance on Efficiency Claims
By Lisl J. Dunlop, Partner, Antitrust and Competition | Shoshana S. Speiser, Associate, Litigation
Prior to calling off its nearly two-year fight to acquire competing insurer Cigna last week, Anthem urged the Supreme Court of the United States to hear its appeal from the lower courts’ rejections of its claims of significant efficiencies from the deal. Efficiency arguments are a mainstay of many healthcare merger defenses, appearing frequently in provider merger cases, as well as the recent insurance cases. Since the federal courts have been fairly hostile to the ability of efficiencies claims to overcome the presumptive anticompetitive effects generated by significant concentration, direction from the Supreme Court on this issue would have had important ramifications for how transactions are defended and the likelihood of getting tough deals through the agencies and the courts.
As we reported in a “Health Update” article earlier this year, the Antitrust Division of the Department of Justice successfully sought injunctions in the D.C. District Court blocking two proposed health insurer mergers: Aetna/Humana and Anthem/Cigna. While Aetna and Humana abandoned their transaction shortly after the district court decision, leaving Humana with a $1 billion termination fee, Anthem continued fighting in pursuit of its transaction. Despite initial attempts by Cigna to terminate the transaction (and claim the $1.85 billion breakup fee and $13 billion in damages), Anthem appealed the decision to the D.C. Court of Appeals and released statements regarding its hope for a change of tune from the DOJ with the new administration.
The appeal to the D.C. Court of Appeals focused on the district court’s treatment of Anthem’s claims that the transaction would lead to significant efficiencies in the form of $2.4 billion in reduced costs of consumer medical claims through lower provider rates, much of which would immediately accrue to self-insured employers who retained Anthem to provide administrative services. Last month, in a split decision the court of appeals ruled against Anthem.
The majority of the court of appeals held that Anthem had failed to show the requisite “extraordinary efficiencies necessary to offset the conceded anticompetitive effect” of losing Cigna as a competitor. Despite acknowledging the widespread acceptance of the potential benefits of efficiencies and some circuit court decisions to the contrary, the majority opined that efficiencies cannot serve as a defense to an anticompetitive merger. The majority went further and held that, even assuming the availability of an efficiencies defense, Anthem’s purported savings were not merger-specific or were unsupported by the evidence.
But Anthem did win over one judge. In a dissenting opinion, Judge Kavanagh argued in favor of a modern economic approach in which the inquiry does not end with the determination of increased market share and concentration. Instead, courts must consider efficiencies and consumer benefits together with anticompetitive effects. As a result, the dissent found that even though the merger would likely result in some fee increases and not all of the projected savings would be realized by customers, the transaction would still yield savings in an order of magnitude greater than the projected fee increases.
Notably, the dissent focused on the DOJ’s concession that the merged entity would be able to obtain lower provider rates and the DOJ expert’s failure to calculate savings. The dissent also found that the efficiencies were merger-specific (because they would flow directly from Anthem’s increased bargaining leverage stemming from the merger) and adequately verified (by Anthem’s expert and integration planning team, healthcare providers and an independent consulting firm).
Interestingly, the dissent also found that those same reduced provider rates that Anthem claimed as an efficiency could also support an argument against the merger if Anthem was able to push provider rates below competitive levels, and would have remanded the case back to the district court for consideration of that issue.
Anthem Urges the Supreme Court to Resolve the Circuit Split
In its petition for certiorari to the Supreme Court, Anthem urged the Supreme Court to step in to resolve the circuit split between decisions foreclosing consideration of efficiencies relying on “outdated 1960s antitrust law[,]”1 and those recognizing efficiencies in merger analysis. Anthem argued that the district court and majority of the court of appeals had applied a disproportionately high burden of proof on Anthem and had failed to quantify the portion of efficiencies they rejected and weigh the remainder against the anticompetitive price increases to recognize that the transaction would benefit consumers. Anthem also highlighted the Supreme Court’s focus in other areas of antitrust jurisprudence on the purpose of the antitrust laws as protecting consumer welfare rather than competitors, the limited number of cases that provide the Supreme Court with an opportunity to review merger antitrust questions, and rising healthcare costs.
Although chances were slim that the Supreme Court would take up the appeal (particularly since it has not reviewed a merger challenge in over 40 years), the antitrust bar was watching closely to see whether this could have provided clarity on the standards for assessing merger efficiencies. Alas, this is not to be, as Anthem called off the transaction after a loss in Delaware court over Cigna’s attempted termination of the merger agreement. For now, parties to transactions resulting in high concentration levels must accept that efficiency claims will be subject to a stringent level of proof as well as some skepticism by regulators and the courts.
1These decisions include the Third Circuit’s decision in Penn State Hershey and the Ninth Circuit’s decision in St. Luke’s.
back to top