The Trump administration’s new stance on healthcare mega-mergers may derail the CVS-Aetna union.
While CVS Health and Aetna, Inc. agreed to merge earlier this month, the deal still awaits the approval of the federal government. Since the proposed $67.5 billion merger could transform healthcare in the United States, it’s not surprising that federal regulators aren’t rushing to scrutinize the transaction to ensure its compliance with antitrust law.
The the Department of Justice (DOJ) has prohibited similar deals in recent years. In 2016, it blocked a proposed merger between Aetna and insurer Humana, arguing that the combined entity would limit competition in the healthcare marketplace. The DOJ used the same argument to scuttle a merger between health insurers Anthem and Cigna.
The CVS-Aetna deal presents some marked differences from those proposed insurer mergers, distinctions that could pave the way for final federal approval. The Trump administration’s stance regarding mega-mergers, however, could derail the union.
President Trump signaled his disregard for mega-mergers in October, when he signed an executive order aiming to “re-inject competition in the healthcare markets” by limiting “excessive consolidation.” The administration’s perspective casts doubt over whether the DOJ would greenlight a “vertical” merger such as the proposed deal between CVS and Aetna.
Vertical mergers that bring together two companies from distinct segments of a business have historically been viewed more favorably by the DOJ than unions between giants in the same industry. In the case of CVS and Aetna the two firms operate on different rungs of the healthcare supply chain: Aetna as an insurer and CVS as a pharmacy retailer.
The DOJ’s recent decision to prohibit a similar deal between AT&T and Time Warner, however, suggests that it may undertake a more thorough review of the CVS-Aetna merger. Makan Delrahim, DOJ’s new Assistant Attorney General for antitrust issues, has publicly criticized vertical deals based on what he termed “behavioral restrictions.” If Delrahim’s views represent the DOJ’s priorities, it would likely approve the merger only if Aetna and CVS agreed to preserve consumer choice by not demanding that Aetna members use CVS pharmacies.
“Events of the past three weeks suggest that Makan (Delrahim) might sue to challenge this deal,” Chris Sagers, Professor at Cleveland-Marshall College of Law, told Reuters.
The DOJ may view the CVS-Aetna as a defensive tactic by CVS to stave off competition from Amazon’s efforts to enter healthcare. In the past, it has ruled against mergers made purely to stymie competition, such as Staples’ attempt to purchase OfficeDepot in 2015.
Yet the U.S. healthcare marketplace exhibits a more competitive playing field even with a CVS-Aetna union. Economist.com notes that CVS covers only about a quarter of the pharmacy and PBM markets, while Aetna owns 6% of the healthcare insurance sector. With the potential addition of Amazon, the marketplace for healthcare should offer more than enough competition to satisfy regulators.
Nevertheless, regulators will closely evaluate the proposed merger’s potential effects on competition within the healthcare industry. “The [evaluation of] the vertical [merger] will provide the most interesting issues because when the government is analyzing this transaction, it’s going to want to understand how [the deal] is going to impact healthcare going forward,” Andre Barlow, a partner and antitrust lawyer at Washington’s Doyle, Barlow & Mazard law firm, told ThinkAdvisor.
Which Agency Will Review Deal?
Whether the CVS-Aetna deal gets approved may hinge on which federal agency reviews it. Instead of the DOJ, the merger may fall under the purview of the Federal Trade Commission (FTC), which has reviewed retail deals in the past, including CVS’s acquisition of Caremark Corp. over a decade ago. Barlow said that regulators from each agency will decide who gets the case.
Given that history and the DOJ’s recent decision on the AT&T and Time Warner merger, attorney Matthew Cantor, a partner with law firm Constantine Cannon, told CNN Money that CVS and Aetna would prefer that the FTC handle the deal.
Other legal experts said that regardless of which agency decides the merger’s fate, its critics will have to convince regulators that a CVS-Aetna merger will be harmful to consumers, an argument that might be hard to prove. In a story for Reuters, Fiona Schaeffer, a partner and lawyer with the law firm Milbank, Tweed, Hadley and McCloy, termed a CVS-Aetna merger “eminently approvable” by either agency for that reason.
Michael Newshel, an analyst at Evercore ISI, agreed that the deal will ultimately be approved by either agency. He told the Chicago Tribune, however, that Aetna may need to divest all or part of its Medicare drug-benefits offerings, which overlaps with a similar CVS plan. The deal, he said, “would definitely be scrutinized, but ultimately we still see a path for it to get through.”