The answer on health insurance mergers – just say no

This week a hearing by the Antitrust Subcommittee of the Senate Judiciary Committee will assess the state of antitrust enforcement.  One of the toughest questions the antitrust cops must address is what to do with the two mega-health insurance mergers – Anthem’s acquisition of Cigna and Aetna’s acquisition of Humana.  Although the Justice Department’s general approach is to approve mergers with cut and paste remedies, research has demonstrated that the typical divestitures won’t work here and do not meet the legal obligation to fully restore competition.

We are in the midst of a merger addiction that is supported, through inadequate action, by our antitrust enforcement agencies.  But the law on mergers is clear – a merger should not force consumers to suffer some harm in higher prices, lower quality, or diminished service.  Period.  If remedies cannot solve the problem, as in these mergers, the right answer for the Department of Justice is to just say no.

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For many years, the antitrust agencies have applied a relatively light-handed approach to merger review.  They have repeatedly allowed mergers to proceed subject simply to a modest divestiture of assets in the hopes that those assets, in the hands of a new party, can restore competition.  Professor John Kwoka studied over 60 merger remedies in a variety of industries and found that they often fail, causing consumers to suffer from higher prices, less choice, and diminished service.

A perfect example of a failed remedy is the airline industry. Anyone who suffers from the higher air fares and increasingly third world service must severely question whether the Justice Department’s remedies in approving the United-Continental and American-USAir mergers did any good.  Clearly consumers are suffering.

In the case of the mega-health insurance mergers, the parties have suggested that competitive concerns from these mergers can be resolved by divesting a number of covered lives.  DOJ has used that remedy in the past but the report card on the remedies is a failing grade.  The divestitures in the Aetna-Prudential merger did not stop price increases of roughly 7 percent in 139 separate geographic markets.  And, the remedy in the United Sierra merger did not stop premium increases of over 12 percent in Nevada. 

Examining the Humana/Arcadian merger divestitures made to protect Medicare Advantage beneficiaries also reveals failures.  A study issued this week by the Center for American Progress found these divestitures largely failed and resulted in higher premiums.   A study by the Capitol Forum shows that the modest divestitures of 12,700 Medicare Advantage subscribers in 51 fifty counties in Louisiana, Arizona, Texas, Oklahoma, and Arkansas resulted in acquiring companies later leaving the market in many instances. There were three separate buyers, but two of the acquiring companies barely survived their infancy and ultimately left the market.  The remaining buyer was already in the market, so it’s hard to tell how much that divestiture actually benefitted competition. 

In some respects, it should not be surprising that spinning off subscribers is a weak remedy - it is not a hard and durable asset.  Nothing prevents the merging firms from knocking on the door of the consumers who have been spun off and asking “don’t you want to come home?”  That’s why it’s so hard for new entrants to effectively compete even with a robust divestiture.  The acquiring firms in the Humana/Arcadian divestiture lost 25 percent of the acquired subscribers within just a few months of closing.

In the Humana/Arcadian merger, divestitures failed to restore competition and the resulting markets now possess substantially fewer Medicare Advantage plans, leading to less consumer choice and higher prices. The potential divestitures in the current health insurance mergers will be astronomical in comparison.  The Aetna/Humana transaction alone has over 400 overlapping markets and will impact several hundred thousand beneficiaries.  If past divestitures couldn’t solve the competitive problems in these “Mayberry” sized communities, how could we envision that they would provide an adequate cure in markets involving hundreds of thousands of beneficiaries.  For this and other reasons, the leading antitrust think-tank American Antitrust Institute opposed the two mergers, noting that using the divestiture remedy for these mergers would be “ineffective” and “impractical.” 

The DOJ took the gamble divestitures would solve competitive problems in past health insurance mergers and lost the bet.  They should not repeat the same mistake.   They should just say no and block these mergers.

Balto is an anti-trust attorney based in Washington D.C. He served as policy director at the Federal Trade Commission and as an attorney in the Justice Department’s antitrust division.

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