Vertical Mergers: A Road Map for Success in Healthcare Consolidation

Health Highlights

Over the last month, the Department of Justice Antitrust Division (DOJ) cleared Cigna Corp.’s $67 billion acquisition of Express Scripts Holding Co. with no conditions and CVS Health Corp.’s $69 billion merger with Aetna Inc. with the divestiture of Aetna’s Part D prescription drug plan business. In contrast to prior mergers proposed among the major health insurers—including Anthem, Inc.’s proposed acquisition of Cigna Corp. and Aetna’s proposed acquisition of Humana—both of these transactions were principally vertical mergers.

As the recent clearances reflect, large transactions can survive antitrust scrutiny—even in a concentrated industry, such as healthcare—if the transaction combines entities at different levels of the supply chain. Vertical mergers are generally held to promote efficiencies and will be approved where they do not increase barriers to entry, create customer foreclosure or lead to anticompetitive information exchanges. Further, where competitive issues arise and can be remedied structurally, the deal will likely still be cleared. When competitive issues cannot be remedied or can only be remedied with conduct remedies, however, a deal likely will be challenged.

The DOJ’s Closing Statement on Cigna/Express Scripts

On September 17, 2018, the DOJ terminated the Hart-Scott-Rodino (HSR) waiting period for the merger between Cigna, one of the largest health insurers in the United States, and Express Scripts, the largest pharmacy benefits manager (PBM), without imposing any conditions and issued a closing statement discussing its conclusions. The DOJ’s investigation examined whether the merger would (1) substantially lessen competition in the sale of PBM services, or (2) raise the cost of PBM services to Cigna’s insurer rivals.

Despite some horizontal overlap in the parties’ PBM business, the DOJ found this to be unproblematic. Cigna’s national PBM business is small, and the market still includes two additional large PBMs and several smaller ones. The DOJ also concluded that Cigna’s current PBM provider, United Healthcare’s Optum subsidiary, would now be free to compete for other customers and that the merger was unlikely to enable Cigna to increase costs to its insurer rivals due to competition from other PBMs. The DOJ’s clearance followed that of 16 states, with some states’ reviews still pending.

The DOJ’s Consent Decree With Aetna/CVS

On October 10, 2018, the DOJ and five states filed district court papers that would permit the merger of Aetna, the third-largest insurer, and CVS, the largest retail pharmacy chain, on the condition that they divest Aetna’s Medicare Part D prescription drug plan business nationwide. That business will be divested to WellCare Health Plans, Inc., an entity that the DOJ describes as an experienced health insurer focused on government-sponsored health plans.

Absent the divestiture, the DOJ and five state attorneys general would have challenged the transaction because of their concerns that the combination of Aetna and CVS’s Medicare Part D individual prescription drug plans could potentially lead to increased prices, inferior customer service and decreased innovation in that market. These concerns relate to the horizontal aspects of the transaction—the overlap between Aetna’s and CVS’s respective Part D plans. The papers were silent on other aspects of the transaction, but it is clear that the DOJ and the states did not have competitive concerns about the vertical integration of Aetna’s insurance business with CVS’s retail pharmacy operations.

Horizontal vs. Vertical Mergers

Horizontal mergers, such as Anthem’s proposed acquisition of Cigna, are between firms that operate in the same market and therefore eliminate a competitor. As we previously reported, in the Anthem-Cigna transaction, the DOJ alleged that the two insurers were just two of four national carriers offering broad medical provider networks and account capabilities needed to serve typical national accounts. The court rejected the parties’ arguments regarding alternatives, potential new entrants and efficiencies. Therefore, it blocked the merger.

Vertical mergers, on the other hand, do not alter the concentration in any relevant market and are therefore less likely to generate competitive concerns. Rather, vertical mergers involve complements, which are typically viewed as generating efficiencies, including cost reductions, when combined. Accordingly, parties operating in concentrated markets and seeking to maximize efficiencies are looking further upstream and downstream for merger opportunities.

While Cigna/Anthem and Aetna/Humana competed as insurers offering national health plans, Cigna/Express Scripts and Aetna/CVS operate at different levels of the supply chain, offering complementary products and, apart from the PBM aspects of Cigna/Express Scripts and Part D plans of Aetna and CVS, do not compete head-to-head. Despite the prominence of the parties in their respective markets, the DOJ found that the vertical integrations did not pose competitive concerns.

Vertical Merger Review

Generally speaking, vertical mergers clear antitrust regulatory hurdles, but in some cases, they can raise competitive concerns and, on rare occasions, are challenged. The agencies have typically relied on several theories of harm, including that the merger would increase barriers to entry, create input or customer foreclosure, or lead to anticompetitive information exchanges.

Recently, vertical merger review has taken on a higher profile. Over the past year, the DOJ has reviewed several other high-profile vertical mergers. The Federal Trade Commission (FTC) cleared the Amazon-Whole Foods transaction, while the DOJ challenged the AT&T-Time Warner merger but lost at the district court level. Some horizontal transactions also have included vertical aspects. For example, as a condition to approving Bayer’s acquisition of Monsanto, the DOJ required the parties to divest several assets, in part to resolve its vertical concerns.

Additionally, depending on their size and the agency’s concerns, vertical mergers that are cleared may involve costly investigations. As part of its review of both the Cigna/Express Scripts and Aetna/CVS transactions, the DOJ issued “second requests for information,” extending the initial 30-day HSR review period. The number of topics and custodians at issue in a second request can impose a time-and-cost burden and delay the parties’ ability to close their transaction. The second request in Cigna/Express Scripts, for example, led to the production of over 2 million documents and a six-month investigation.

Makan Delrahim, the head of the DOJ, has indicated the Division’s intent to reduce the second request burden, but we can expect in-depth investigations in significant matters to continue.


Despite the DOJ’s recent litigation against the AT&T-Time Warner merger, the recent success of Cigna/Express Scripts and Aetna/CVS in clearing antitrust hurdles demonstrates that even large vertical mergers are far more likely than horizontal mergers to survive antitrust scrutiny. Healthcare companies likely will continue to look for vertical transactions, such as integration of health plans with doctors or doctors with other healthcare service providers. When considering a vertical transaction, it is important to consider whether the transaction:

  • Includes any horizontal overlap;
  • Generates potential input or customer foreclosure;
  • Creates barriers to entry; or
  • Might lead to anticompetitive information exchanges.

Parties should evaluate these issues early in the process and determine whether potential antitrust red flags can be remedied through limited divestitures.



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