Antitrust & Competition — US Department of Justice
Anthony W. Swisher, a Partner in the Washington, DC office of Squire Patton Boggs (US) LLP.
One of the principles underlying merger analysis has always been that mergers provide value to society. Historically, this idea has seen practical expression in a degree of humility on the part of the antitrust enforcement agencies, and a reluctance to intervene too hastily in a deal, lest they disrupt the benefits that might flow from it. Another practical expression of the recognition of merger-specific benefits is the availability of the efficiencies defense. Under the Horizontal Merger Guidelines, the Department of Justice’s Antitrust Division and the Federal Trade Commission will consider the degree to which a deal will permit the merging parties to obtain efficiencies that would not be available to them individually.
Despite this history, we live in an era of particular skepticism of the benefits of mergers generally, and of the efficiencies defense specifically. Previously here at the WLF Legal Pulse, I have commented that antitrust enforcement decisions could benefit from an increased recognition of the benefits that mergers can offer, and that challenging mergers in their entirety that might be susceptible to a divestiture remedy unnecessarily deprives the public of these merger-specific benefits. But skepticism of the benefits and efficiencies of mergers is not limited to the previous Antitrust Division leadership. Recent decisions by the Ninth Circuit and the Third Circuit in FTC hospital merger cases have left many wondering whether an efficiencies defense can ever save a potentially problematic merger. The Ninth Circuit in St. Alphonsus v. St. Luke’s noted that “[t]he Supreme Court has never expressly approved an efficiencies defense,” and that no appellate decision has ever found that a “§ 7 defendant has rebutted a prima facie case with an efficiencies defense.” Noting judicial skepticism of the efficiencies defense, the Third Circuit in FTC v. Penn State Hershey Medical Center questioned whether such a defense “even exists.”
It is in this context that the Antitrust Division brought its most recent horizontal merger challenge: its successful suit to block the proposed health plan merger between Anthem and Cigna. This was a case in which efficiencies played a pivotal role, and continue to be the central focus on appeal.
In a trial that began in November of last year, the Division argued principally that the proposed merger of the two health insurance firms would result in a substantial lessening of competition for large, “national accounts” customers. The Division did not limit its challenge to the 14 states where the parties overlapped, but alleged nationwide harm by virtue of Anthem’s membership in the Blue Cross and Blue Shield Association. After a lengthy bench trial, Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia found in favor of DOJ on many, but not all, of their claims, and enjoined the merger.
Anthem and Cigna appealed Judge Jackson’s order. Although the parties contested DOJ’s competitive harm theories, they focused a significant portion of their appeal on their efficiencies defense. The parties argued that the transaction would create substantial efficiencies that would benefit employers and consumers, the magnitude of which would swamp any potential anticompetitive effects. The parties argued that Cigna is a particularly sophisticated health plan in the areas of value-based billing and care coordination. These practices are encouraged by the Affordable Care Act, and many have argued that their increased use can reduce healthcare costs while improving health outcomes. Anthem, by contrast, is best known for obtaining low reimbursement rates from the providers with which it contracts. The parties claimed that the merger would allow them to offer the best of both worlds, combining Cigna’s innovation with Anthem’s low reimbursement rates to create a new product that neither firm was able to offer on its own. Some have referred to the parties’ efficiencies claims as “a Cigna product at an Anthem price.”
Both at trial and on appeal the Antitrust Division was critical of the parties’ efficiencies claims. DOJ argued that rather than adopt Cigna’s innovative practices, Anthem would undermine them. It argued that healthcare providers would be less willing to collaborate on value-based billing arrangements if they were subjected to aggressive reimbursement cuts by Anthem. In its appeal brief, DOJ characterized Anthem’s cost-savings efficiencies as “speculative” and “unverifiable.” It questioned the merger specificity of the claimed efficiencies, noting that nothing would prevent Anthem from improving its product on its own, or prevent Cigna from taking a tougher line at the provider negotiating table. DOJ even questioned whether lower reimbursement rates could be considered a cognizable efficiency at all. Characterizing the parties’ anticipated cost savings as merely “pecuniary,” DOJ argued that they would not flow from a more efficient operation, but merely from a wealth transfer from providers to the parties. “Allowing an otherwise anticompetitive merger because it makes some better off at the expense of others makes little sense … .”
On March 24, 2017, the DC Circuit heard oral arguments on the defendants’ appeal, which again focused on the merging parties’ efficiencies defense. The court has not given any indication on when it might rule on the appeal.
Whatever the merits of their position, the parties in Anthem/Cigna had the misfortune of attempting a merger that was heavily dependent upon a successful efficiencies defense at a time when judicial and enforcement receptivity to such a defense was decidedly tepid. Certainly, DOJ’s challenge was predicated on the unique facts of the merger as a whole, and their view was corroborated by the district court. But the broader context in which DOJ’s challenge took place was one of skepticism of merger benefits generally, and the efficiencies defense specifically.
So what of the future? Are we in a world where enforcers and courts will continue to express skepticism of the efficiencies that can flow from a merger? On the judicial front, the picture is unclear. Decisions like those in St. Luke’s and Penn State Hershey suggest an uphill battle for merging parties. But at this year’s ABA Antitrust Section Spring Meeting, Judge Sullivan of the US District Court for the District of Columbia stated that, in his court, efficiencies will continue to be an important factor. The DC Circuit will have an opportunity to add its views on the subject when it decides the Anthem/Cigna case. Regardless of the outcome of that case, however, we are unlikely to see a sea-change in judicial attitudes towards efficiencies in the near future.
The near-term outlook for merging parties appearing in front of the Antitrust Division might be more optimistic, however. The previous Antitrust Division leadership took such a sharply negative tone in criticizing merger benefits that it seems plausible that the incoming Division leadership may revert to a position more in line with historical norms and espouse a more balanced approach. One area where parties could benefit from such an approach would be the recognition of efficiencies in a different market from the one in which the deal raises competitive concerns. Large, complex mergers often promise benefits across a wide array of relevant markets, even if they potentially raise competition concerns in only a few. A greater respect for transaction benefits generally could lead to increased efforts to rely less on full-stop merger challenges, and more on targeted divestitures that address competition concerns while leaving these other efficiencies in place. The approach of the incoming administration remains to be seen, but there is hope that an appropriate respect for the beneficial potential of mergers may lead to an enforcement perspective that allows for continued vigorous enforcement alongside the realization of procompetitive efficiencies.