By Peter Reap, J.D., LL.M.
Following an expedited appeal of a federal district court injunction barring Anthem, Inc.’s proposed $54 billion acquisition of Cigna Corp, the U.S. Court of Appeals in Washington, D.C. today affirmed the issuance of that permanent injunction on two alternative and independent grounds. First, the district court did not abuse its discretion in enjoining the merger based on Anthem’s failure to show the kind of extraordinary efficiencies necessary to offset the conceded anticompetitive effect of the merger in the 14 states in which Anthem currently operates: the loss of Cigna, an innovative competitor in a highly concentrated market. Second, the district court did not abuse its discretion in enjoining the merger based on its separate and independent determination that the merger would have a substantial anticompetitive effect in the Richmond, Virginia, large group employer market (U.S. v. Anthem, Inc., April 28, 2017, Rogers, J.).
Complaint. In July 2015, Anthem, which is licensed to operate under the Blue Cross Blue Shield brand in 14 states, reached an agreement to merge with Cigna, with which Anthem competes largely in those fourteen states. In a July 2016 complaint, the Department of Justice and the States of California, Colorado, Connecticut, Georgia, Iowa, Maine, Maryland, New Hampshire, New York, Tennessee, and Virginia, and the District of Columbia challenged the merger on a number of grounds. According to the complaint, the combination of Anthem—the largest member of the Blue Cross and Blue Shield Association—and Cigna—another commercial health-insurance option—would substantially lessen competition in violation of Section 7 of the Clayton Act.
District court decision. The district court rejected Anthem and Cigna’s primary defense, that the merger’s anticompetitive effects would be outweighed by its efficiencies because the merger would yield a superior Cigna product at Anthem’s lower rates. The district court found that Anthem had failed to demonstrate that its plan was achievable and that the merger would benefit consumers as claimed in the market for the sale of medical health insurance to national accounts in the 14 Anthem states, as well as to large group employers in Richmond.
Argument on appeal. Anthem and Cigna challenged the district court’s decision and order permanently enjoining the merger on the principal ground that the court improperly declined to consider the claimed billions of dollars in medical savings. Specifically, they maintained the district court improperly rejected a consumer welfare standard—what it called "the benchmark of modern antitrust law,"— and generally abdicated its responsibility to balance likely benefits against any potential harm. According to the insurers, the merger’s efficiencies would benefit customers directly by reducing the costs of customer medical claims through lower provider rates, without harm to the providers.
Competition in the 14 Anthem states. The appeal hinged on its efficiencies defense, the appellate court said. It was undisputed that the government met its burden to demonstrate a highly concentrated post-merger market, which would be reduced from four to just three competing companies. Anthem’s expert, Mark Israel, Ph.D., quantified the medical cost savings that the combined company could achieve post-merger based on the economic theory that the combined company, with its greater volume, would be able to obtain discount rates that are no worse than either of the companies could achieve separately. Using claims data from Anthem, he calculated that the merger would generate $2.4 billion in medical cost savings through improved discount rates, 98% of which he predicted would be passed through to customers, the large national employers with which Anthem contracts.
As a preliminary matter, despite widespread acceptance of the potential benefit of efficiencies as an economic matter, it is not at all clear that they offer a viable legal defense to illegality under Section 7, the court opined. In FTC v. Procter & Gamble Co., 386 U.S. 568 (1967), the Supreme Court enjoined a merger without any consideration of evidence that the combined company could purchase advertising at a lower rate. It held that "[p]ossible economies cannot be used as a defense to illegality. Despite the dissent of Judge Kavanaugh, who claimed that Procter & Gamble could be disregarded by this court because it preceded the "modern approach" adopted in cases like United States v. General Dynamics Corp., 415 U.S. 486 (1974), Procter & Gamble remained good law, according to the majority.
Here, because Anthem failed to show that the district court clearly erred in rejecting Anthem’s purported medical cost savings as an offsetting efficiency, the appellate court noted that it would leave for another day whether efficiencies could be an ultimate defense to Section 7 illegality. Additionally, because the district court could permissibly conclude that the efficiencies defense failed, because the amount of cost saving that is both merger-specific and verifiable would be insufficient to offset the likely harm to competition, the appellate court had no occasion to decide whether the type of redistributional savings claimed here were cognizable at all under Section 7.
"New product" claim. The crux of Anthem’s argument regarding merger-specificity was the theory that the combined company will allow Anthem to create a "new product" that is "unavailable on the market today": a product that features both "Cigna’s customer-facing programs" and Anthem’s "generally lower . . . rates." The appellate court rejected this claim: "rebranding does not create a merger-specific benefit in either the short- or long-term. Perhaps Anthem could create some brief, interim benefit in the mid-term by integrating Cigna’s product faster than it could develop a comparable product of its own." But Anthem made no such showing in the lower court, the appellate court explained.
Post-merger savings. Under the Department of Justice/FTC Horizontal Merger Guidelines projected efficiencies will not be credited "if they are vague, speculative, or otherwise cannot be verified by reasonable means." Guidelines § 10. Anthem maintained that the district court clearly erred because the $2.4 billion in projected post-merger savings was verified by two independent sources.
The appellate court disagreed. Anthem planned to achieve the claimed savings through a combination of three mechanisms: rebranding, renegotiating provider contracts and exercising Anthem’s affiliate clause. The district court found that practical business realities would undermine the execution of that plan, making achievement of the savings speculative, and therefore unverifiable. The appellate court found the district court’s reasoning and weighing of the evidence persuasive.
Although renegotiation after the proposed merger would lead to a decrease in Cigna’s rates, the assumption that it would in every instance lead to the Anthem rate was farfetched, according to the appellate court. Further, the district court did not err in finding it "dubious" that Anthem would be able to offer a true Cigna-like product, or that legacy Cigna would be able to maintain the quality of its own product. Consequently, the district court did not clearly err in rejecting these alleged medical cost savings as unverifiable.
Richmond, Virginia market. Anthem fared no better in its challenge to the district court’s independent and alternative determination that the merger should be enjoined on the basis of its anticompetitive effect in the Richmond, Virginia market for the sale of health insurance to "large group" employers with more than fifty employees, the appellate court ruled.
Anthem principally challenged the district court’s reliance on a chart prepared by Dr. Dranove, the government’s expert witness, showing the merger would have an anticompetitive effect in Richmond even crediting all of Dr. Israel’s claimed efficiencies. The chart included an asterisk next to the Richmond entry signifying that "no amount of cost savings could offset employer harm due to decreased competition."
The record showed that the district court did not rely on the "asterisk" statement and explained at trial that it would not do so because it was unnecessary to finding a substantial anticompetitive effect, the appellate court determined. Leaving the asterisk statement aside, Anthem raised no real objection to the substance of the chart, only urging that Dr. Dranove’s inability to explain the asterisk was so damaging that it called into doubt the reliability of his overall analysis. Anthem’s remaining challenges amount to an ineffectual attack on the district court’s weighing of rebuttal evidence, the appellate court reasoned.
Department of Justice reaction. "We are pleased with the appellate court’s decision," said Assistant Attorney General Brent Snyder of the Justice Department’s Antitrust Division following the appellate court’s ruling. "It upholds an injunction against the merger of two of the country’s largest health insurers, which not only would have led to higher prices but also slowed innovation and harmed consumers by weakening value-based offerings aimed at lowering medical costs. "The decision confirms the district court’s conclusion that the merger would not have provided real benefits to consumers, but instead would have harmed competition in these important markets."
The case is No. 17-5024.
Attorneys: Adam T. Severt, U.S. Department of Justice, for the United States. Andrew Keith Mann (White & Case LLP) for Anthem, Inc. Andrew J. Forman (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Cigna Corp.
Companies: Anthem, Inc.; Cigna Corp.
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