On May 12, 2017, Anthem Inc. announced that it had terminated its merger agreement with Cigna Corporation, a deal that would have united the second and third largest sellers of health insurance to large companies in the country. Anthem’s termination of the merger came two weeks to the day after the U.S. Court of Appeals for the D.C. Circuit rejected Anthem’s appeal of an injunction blocking the merger issued by a U.S. District Court earlier this year. Anthem terminated the merger one week after filing a petition for a writ of certiorari with the U.S. Supreme Court that sought guidance on the viability of the “efficiencies defense” under antitrust law.
Anthem and Cigna initially entered into a merger agreement in July, 2015 that was subsequently challenged on antitrust grounds by the Department of Justice, eleven states, and the District of Columbia. The government alleged that the merger would violate Section 7 of the Clayton Act (15 U.S.C. §18) by substantially lessening competition in the insurance markets for (i) national accounts (i.e., insurance purchased by employers with 5000+ employees), and (ii) large group employers (those with 50+ employees) in various geographic areas throughout the country.
In February 2017 a U.S. District Court for the District of Columbia agreed, holding that the government met its burden to demonstrate that the merger “is likely to have a substantial effect on competition in what is already a highly concentrated market.” The court determined that the merger was likely to result in higher prices, and would have anticompetitive effects, including by eliminating “vigorous competition” between Anthem and Cigna, reducing the number of national health insurers, and diminishing innovation within the health insurance market. The court also concluded that Anthem’s claimed efficiencies were not merger-specific or verifiable, and further that the merger would have anticompetitive effects on the insurance market in Richmond, Virginia for large group employers.
Following that decision, Anthem filed an expedited appeal with the D.C. Circuit, arguing that the district court failed to properly consider the merger’s claimed efficiencies. Anthem pointed to expert testimony alleging the merger would produce $2.4 billion in medical cost savings, 98 percent of which would be passed along to customers (according to Anthem’s expert). Anthem also explained that the merger would enable Cigna customers to have access to Anthem’s lower provider rates, and allow Anthem to offer a new (merger-specific) insurance product that combined Cigna’s innovative customer-engagement programs with Anthem’s more favorable provider rates.
A divided D.C. Circuit panel affirmed the lower court ruling in a 2-1 decision, finding that the district court had not abused its discretion when concluding that Anthem failed to demonstrate the kind of “extraordinary efficiencies” necessary to constrain likely price increases in the highly concentrated market for national accounts, or to mitigate the threatened loss of innovation for which Cigna is known. The D.C. Circuit further held that it was not an abuse of discretion to find that the merger would have anticompetitive effects on the large group employer market in Richmond, Virginia, where Anthem and Cigna are one another’s strongest competitors with a combined market share ranging from 64 percent to 78 percent.
Ultimately, the majority opinion concluded “this is not a close case,” and Circuit Judge Millett issued a concurrence to “underscore the foundational problems that pervade Anthem’s and the dissenting opinion’s insistence that any reduction in provider rates, standing alone, excuses an anticompetitive merger.” As Judge Millet’s concurrence indicates, however, Circuit Judge Kavanaugh issued a dissent in which he argued that the majority failed to properly analyze the merger because of the “critical feature of the case,” which is that employers in the national accounts market actually self-insure, but contract with health insurers to negotiate provider rates. Consequently, according to the dissent, any savings negotiated by insurers go directly to customers in the national accounts market, and the traditional horizontal merger analysis employed by the majority was improper. Judge Kavanaugh stated that the record “overwhelmingly demonstrates” that a combined Anthem-Cigna would be able to obtain lower provider rates, and found that Anthem’s claimed savings were merger-specific “by definition.” Judge Kavanaugh also offered a broader analysis of horizontal merger challenges under Section 7 of the Clayton Act, and reiterated that a merger’s efficiencies and consumer benefits must be taken into account as part of such challenges.
Following the D.C. Circuit’s decision, on May 5, 2017 Anthem filed a petition for a writ of certiorari with the U.S. Supreme Court, requesting review on the questions of whether and how courts should weigh efficiencies as part of an analysis under Section 7 of the Clayton Act. Anthem argued that the majority in this case foreclosed consideration of its efficiencies defense, a position at odds with recent decisions in other Circuit Courts of Appeal and the dissent in this case. The legitimacy of the efficiencies defense has been a prominent feature in almost all significant antitrust cases brought by the government against health care mergers in recent years. Unfortunately, Anthem’s subsequent termination of the Cigna acquisition likely forecloses the possibility of Supreme Court review, in which case health care organizations will need to find a more appropriate vehicle to obtain definitive guidance on the viability of the efficiencies defense.