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The Source Executive Editor Jaime King on ‘The Week in Health Law’ Podcast

The most recent episode of The Week in Health Law podcast features The Source’s own Professor Jaime King! The episode, titled “Competition, Coordination, and Complexity,” covers price transparency issues, provider competit

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Academic Articles & Reports Roundup: May 2017

Summer is finally here! In this Roundup of articles from the past month, we cover four articles published in May. The topics this month include 1) the effect of market concentration on hospital prices; 2) links between cost and quality; 3) pharmaceutical market competition; and 4) all-payer rate set

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Update: D.C. Circuit Court of Appeals Upholds Decision Blocking Anthem-Cigna Merger

On April 28, the District of Columbia Circuit Court of Appeals issued its decision upholding an order blocking the proposed merger of health insurers Anthem and Cigna.

In the 2-1 decision, the Circuit Court ultimately agreed with the District Court’s decision that Anthem did not show the “extraordinary efficiencies necessary to offset the conceded anticompetitive effects of the merger.” Anthem has now filed a Petition for Certiorari with the United States Supreme Court. Below, we summarize the Circuit Court decision that Anthem is asking the Supreme Court to reconsider, and highlight the most interesting and significant aspects of the case. 

 

  1. Legal Status of the “Efficiencies Defense”

The issue on appeal was whether Anthem demonstrated that the merger would create efficiencies that offset the anticompetitive harms of the merger. The Circuit Court’s discussion of the legal question about the breadth of the “efficiencies defense” is perhaps the most interesting and significant part of the decision.

Several circuit courts, including the D.C. Circuit, have held that evidence of verifiable, merger-specific efficiencies can rebut a presumption that a merger is unlawful. However, courts have not settled the question of whether efficiencies can provide a total defense to a merger that otherwise violates Section 7. The most recent Supreme Court case that touched on the issue was FTC v. Proctor & Gamble Co., 386 U.S. 568 (1967). There, the Supreme Court blocked a merger under Section 7 without considering whether efficiencies would provide a viable defense. The Court stated that “[p]ossible economies cannot be used as a defense to illegality.” Justice Harlan disagreed in his concurrence, stating that the he “accept[ed] the idea that economies could be used to defend a merger.” The majority opinion here declined to answer whether the efficiencies defense is available for mergers that violate Section 7. Instead, the Circuit Court assumed that efficiencies could provide a total defense, but found that Anthem failed to show the evidence needed for that defense to prevail.

 

  1. Discussion of Medical Cost Savings Efficiencies Anthem Presented

The D.C. Circuit found the evidence of medical cost savings offered by Anthem to be neither merger-specific nor sufficiently verifiable to offset the likely competitive harms of the merger. The Circuit Court agreed on both of those points.

Merger Specific?

Anthem argued that the merger would allow the company to sell a product that combined the best of Anthem and Cigna. The product would have Cigna’s wellness programs and customer-facing features, but with Anthem’s provider rates. The district court found that neither the product or lower rates were merger specific efficiencies. The Circuit Court agreed that the product was not merger specific, but concluded that the merger would generate cost savings. As to the product, the Circuit Court said that Anthem is at fault for its inability to create a product like Cigna’s. The Circuit Court believed nothing inherently stopped Anthem from creating a product like Cigna’s. The Court suggested if Anthem tried harder or properly realigned its goals, it could realistically offer a Cigna-like product on its own.

The Circuit Court did conclude that the district court erred in finding that the merger cost savings Anthem put forth were not merger specific. The district court had found that the provider rates used in Anthem’s evidence had already been secured independently by each insurer. The Circuit Court pointed out that even the government conceded that only by merging could the existing Cigna product be sold at Anthem’s lower rates, secured by Anthem’s volume-based discounts. This error was, however, ultimately harmless because even if the medical cost savings were merger specific, the Court still found them not sufficiently verifiable.

Verifiable?

The Circuit Court agreed with the District Court that intervening business factors were likely to interfere with Anthem’s plan to secure medical cost savings. The Circuit Court mainly focused on verifiability problems with two parts of Anthem’s plan to generate merger cost savings – invoking an affiliate clause in Anthem’s provider contracts and renegotiating provider rates.

If Anthem invokes widespread use of its affiliate clause, it would undermine its own contractual “Best Efforts” obligations. Under its “Best Efforts” clause, 80% of Anthem’s revenue must derive from Blue-branded plans. Merging with Cigna would immediately put Anthem in violation of that clause. And if Anthem invokes the affiliate clause, it would reduce any incentive for Cigna customers to move to Anthem branded products because Cigna plans would get the same provider rates as Anthem plans. In addition, once provider contracts expire and the affiliate clauses no longer are in play, providers could aggressively renegotiate rates. While Anthem’s volume gives it significant bargaining power, large hospital networks also have significant negotiating leverage. Anthem’s should not assume that it would secure lower provider rates in renegotiations. Finally, the Circuit Court questioned whether Anthem would pass any medical cost savings to consumers. The evidence at trial, including Anthem’s own internal documents, sufficiently undermined Anthem’s claim that it would pass 98% of the savings to consumers.

In short, Anthem did not convince the Circuit Court that the merger would produce the promised savings for consumers. As the majority opinion stated, “[i]f merging companies could defeat a Clayton Act challenge merely by offering expert testimony of fantastical cost savings, Section 7 would be dead letter.” After providing its analysis of Anthem’s efficiencies, the majority opinion explained the problems it found in the Dissent’s argument. One interesting critique raised was that the dissent assumed that prices are the sole focus of antitrust analysis, which ignores the fact that “lower prices . . . may be transitory” because in highly concentrated markets “companies have a greater ability to retain for themselves input savings rather than pass them on to consumers.”

We will continue to keep you posted about the status of the Petition for Certiorari with the United States Supreme Court. If the Supreme Court takes up the case, it will be the first antitrust case heard by the nation’s highest court in more than 40 years.


 

Past Source Blog Updates on the Circuit Court case: 

Anthem and Cigna’s appeal of a district court decision blocking the insurers’ proposed merger is now fully briefed before District of Columbia Circuit Court of Appeal. Below, we highlight some of the key take-aways from the parties’ and amicus briefs. A link to all of these briefs is provided at the end of this post. You can also listen to a recording of the oral arguments in the case, which the D.C. Circuit heard on March 24th, here.

In its brief, Anthem argues that the district court should have considered the purported medical cost savings when considering the procompetitive effects of the merger. Anthem argues that these savings outweigh the anticompetitive harms the government alleges. The points that Anthem raises in support of this argument are as follows:

  • The District Court improperly rejected a “consumer welfare standard”;
  • The merger will lower provider rates, which will in turn benefit consumers by reducing the cost of consumer medical claims;
  • The District Court “contradicted its own product definition,” which led it to dismiss valid efficiencies;
  • The District Court improperly concluded that any medical cost savings here are not merger-specific efficiencies;
  • Anthem had multiple sources to verify the alleged medical cost savings;
  • The merger will not harm providers;
  • The District Court ignored savings the merger would generate in Richmond, Virginia

The United States and state parties respond in their brief that the evidence in the record overwhelmingly demonstrates that the merger would increase prices for consumers and stifle progress on value-based payment reforms aimed at lowering overall healthcare spending. Anthem’s reply brief argues that in fact, Anthem has more value-based contracts than Cigna. Cigna has deferred to Anthem’s arguments in the case. As you may recall, Cigna wants to end the merger, and in separate litigation the two insurers are accusing each other of breaching their merger contract.

There have also been several amicus briefs filed in the case. The American Hospital Association, a hospital organization that represents thousands of providers, argues in its brief that the merger will be a “significant blow” to hospitals’ goal of generating medical cost savings through value-based payment reforms.  The hospital association says that reducing the number of big insurers in the market from four to three will stifle innovation aimed at reducing overall healthcare costs. The brief also emphasizes the unlikeliness that the merger will end in Anthem adopting the value-based payment programs Cigna has developed, given the contentious relationship between the two insures.

Below, we have accumulated all the party briefs, as well as the amicus briefs in the case. We will keep you updated on the case as it progresses!

Party briefs:

Amicus briefs (all in support of the United States and state governments):

Oral Argument recording (3/24/17)

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Academic Articles & Reports Roundup: April 2017

Happy May! This month’s Roundup includes articles about 1) prescription drug competition and generic delay; 2) the “Big Insurance” merger cases; and 3) the effect of the ACA’s risk adjustment and reinsurance programs. In addition to the articles highlighted below, be sure to check out our re

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How People Find and Use Price Information: Public Agenda’s Price Transparency Survey

A recently published Public Agenda report by David Schleifer, Rebecca Silliman, and Chloe Rinehart provides a wealth of new information about how Americans are seeking out and using information about health care prices. One key finding

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Three Things to Know About the Competitive Health Insurance Reform Act

On March 22nd, House Resolution 372, known as the Competitive Health Insurance Reform Act, passed in the House by a vote of 416 to 7. The bill repeals antitrust exemptions for health insurers created by the Continue Reading

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