Judge adds new hurdle to CVS-Aetna merger

A federal judge could throw a wrench into the mega-merger between health giants CVS and Aetna. 

U.S. District Court Judge Richard Leon in Washington said this week he is considering delaying the $70 billion merger, and keeping the companies separate until he has a chance to weigh in. 

The move is unprecedented, as the companies were already in the process of integrating after their deal formally closed last week.

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The Justice Department approved the merger in October under the condition that the companies sell Aetna’s Medicare drug business to preserve competition, and every state has also signed off on the merger.

It’s not clear whether Leon, a George W. Bush appointee, can legally stop the merger. He ordered a hearing for Dec. 18 and told the companies to present arguments by Dec. 14 to convince him why they should be allowed to proceed.

“At this stage, I am less convinced of the sufficiency of the government’s negotiated remedy than the government is,” Leon wrote in the order.

A spokesman said CVS and Aetna are no longer two separate entities and is focused on their merger.

“CVS Health and Aetna are one company, and our focus is on transforming the consumer health experience,” the spokesman said.

Leon during the hearing said he was concerned that the Department of Justice (DOJ) hadn’t adequately addressed the potential competitive harms raised by the merger, according to reports. 

He cited opposition from groups including the American Medical Association (AMA), which urged federal regulators to block the deal because of anticompetitive concerns.

According to the AMA, the merger “would likely substantially lessen competition in many health care markets, to the detriment of patients.”

The deal between one of the country’s largest insurers and one of the largest pharmacy benefit managers was a year in the making. The companies have touted the merger, saying it will usher in a new era of reduced costs to patients.

Leon is no stranger to major antitrust cases. In June, he issued an opinion blasting the government’s challenge to the AT&T merger with Time Warner and allowed the $85 billion deal to proceed. That ruling is currently being appealed by the government.

Antitrust experts said it’s unheard of for a federal judge to force companies to make substantial changes to a merger, even if the judge has some authority to question a federal settlement.

Federal courts have to oversee DOJ approvals under a law called the Tunney Act. The courts must decide whether the proposed settlement is in the public interest and not the result of a backroom deal. Up until now, the court reviews have been perfunctory, and mergers have been approved.

“We’re in a wonderful, uncharted land,” said David Balto, an attorney who works with consumer groups to fight large health-care mergers. “You haven’t ever had a judge say, ‘you can’t consummate this merger until you resolve the issues.’ ”

James Tierney, a former Justice Department antitrust lawyer now practicing with the law firm Orrick, said only the DOJ has the power to block the merger. 

Since the agency approved the merger, Tierney said Leon can only decide if the proposed settlement addresses the harms the government identified.

“It is not the proper function of the court to make enforcement decisions. The court is free to review actions, but they can’t order the executive branch to take action it doesn’t want to take,” Tierney said.

Leon’s questioning though is being hailed by critics of the deal and could open the door for more scrutiny of major health-care mergers.

In Congress, Democrats have raised the alarm over the merger since it was announced. 

Earlier this year, Rep. Jerrold Nadler (D-N.Y.), the likely incoming chairman of the House Judiciary Committee, called on antitrust officials to closely scrutinize the CVS-Aetna merger. 

“The health-care sector is already highly concentrated, and there remains a concern that dominant firms — including a post-merger CVS-Aetna — would have the ability and the incentive to exclude competitors or to diminish competition,” Nadler said at a hearing on the merger earlier this year. 

And with Democrats taking control of the House in January, they are likely to draw more attention to what they see as an increasing number of anticompetitive health-care mergers

For now, all eyes are on Leon.

The Justice Department in a status report Sunday said Leon’s role was limited to making sure the final settlement fixed the specific antitrust violations that spurred an initial government lawsuit.

The DOJ also said Leon already signed a preliminary order that effectively allowed the companies to move forward on their merger.

Tierney said Leon seems to have been caught off guard that the companies already closed the deal “and is apparently having second thoughts.” 

Leon reportedly told lawyers for the companies last week he wouldn’t be a “rubber stamp” for the settlement.

Balto said Leon’s move could be the start of a new level of scrutiny over mergers.

“The time of DOJ asking for a rubber stamp is a bygone era disappearing,” Balto said. “We will see more courts doing this.”