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By Meg McEvoy
Health-care companies considering future “vertical” mergers—mergers between noncompetitors—rejoiced at the June 12 federal court decision approving video content distributor AT&T’s acquisition of content producer Time Warner.
Not so fast, antitrust attorneys say. CVS-Aetna and Cigna-Express Scripts are not “pure” vertical mergers, and thus may be treated differently by antitrust enforcers.
“Note that most purported ‘vertical’ mergers in health care—such as hospital acquisition of physician practices or CVS Health acquisition of Aetna—actually have significant horizontal components,” Jack Rovner, who counsels health-care clients on antitrust issues and is the co-founder of the Health Law Consultancy in Chicago, told Bloomberg Law. “So, the AT&T case provides little guidance and no comfort for those horizontal health-care transactions.”
While AT&T-Time Warner provides a template for how a modern-day court evaluates a vertical merger challenged purely on the basis that the new company will have a bargaining advantage that could raise prices, it’s not a perfect proxy for the health-care deals being evaluated by the DOJ, attorneys said.
“There are horizontal aspects to the CVS-Aetna merger,” Tim Greaney, a professor at UC Hastings College of Law and former assistant chief in DOJ’s Antitrust Division, told Bloomberg Law. “The overlap [of the two companies] in the prescription drug plan standalone market is something that is out there.”
“There’s a lot going on in that story that wasn’t present in Time Warner-AT&T,” Greaney said.
The relationship between AT&T and Time Warner is a traditional, manufacturing-esque vertical relationship, according to Judge Richard J. Leon of the U.S. District Court for the District of Columbia, which decided case. Time Warner’s Turner subsidiary creates content that is distributed “downstream” by AT&T’s DirecTV, cable companies, and other distribution avenues, and, ultimately, to consumers.
In AT&T-Time Warner, the government’s case required only a “leverage analysis,” resting solely on showing harm that would arise from the incentives of the parties to act as a “clog on competition” and potentially raise prices. Leon’s opinion contained no analysis of geographic market concentration typical of a horizontal merger analysis.
In CVS-Aetna and Cigna-Express Scripts, the parties are not in a traditional vertical relationship, and there are elements of horizontal overlap that would have to be evaluated in a court challenge using more well-established, horizontal merger analysis principles.
One of the merging defendants’ arguments in AT&T-Time Warner was that they lacked the ability to compete with vertically integrated rivals like Netflix and Hulu, which create their own content and broadcast it on their own internet channels, leading to innovation and high-quality content. Leon spent dozens of pages elaborating on the particulars of the multichannel video distribution market, in which Time Warner and AT&T argued they had been losers.
“Defendants view the proposed merger as an essential response to  industry dynamics,” Leon wrote.
It’s less clear that the pharmacies and insurance companies could paint a similarly grim picture of their situation.
For example, a court may not view CVS-Aetna’s ability to compete in the pharmacy benefit manager market as a desirable efficiency to be achieved by the merger.
“There is a lot of economic evidence that the PBM market is not functioning very well to serve consumer interests,” Greaney said.
But Douglas C. Ross, an antitrust partner at Davis Wright Tremaine in Seattle, thinks there is some similarity between the multichannel video distribution market and the health-care and prescription drug markets that make AT&T more meaningful for health-care deals—they’re both markets that are changing rapidly. Ross is a health-care antitrust litigator, University of Washington Law School professor, and Bloomberg Law advisory board member.
“One lesson from this case that carries over into the vertical deals currently pending in health care is that, as difficult as it is to predict the future in a relatively static industry, it’s far more difficult to predict what’s going to happen when an industry is changing before our eyes,” Ross told Bloomberg Law. “It was plain to Judge Leon that cable and satellite TV are the wave of the past, not the future. Something similar may be true in the pending health-care vertical deals. The CVS-Aetna and Cigna-Express Scripts mergers seem to be at the forefront of structural changes in the health-care industry and that makes it especially hazardous to predict how these could be anticompetitive.”
Ross thinks the complexity of health-care markets makes it more difficult for antitrust enforcers to develop a theory of harm, not easier.
“The health-care deals aren’t classic vertical deals,” Ross said. “But that makes it harder to attack them.”
The decision is informative for health-care deals that are “purely vertical,” for example, in the case of a health insurer acquiring a hospital system, attorneys say.
“There are and can be purely vertical acquisitions in health care, and the AT&T decision indicates those acquisitions should readily pass antitrust scrutiny,” Rovner said. “A health insurer, such as Highmark in Pittsburgh, can acquire a hospital system (as Highmark has). There would be no horizontal overlap and, especially given the size and power of UPMC, a competing vertically integrated hospital and insurance system in the Pittsburgh area, Highmark’s acquisition of hospitals (or physicians) would not ‘foreclose’ UPMC or other health-care providers from competing for customers and accounts by Highmark withholding access either to being a Highmark in-network provider or to the hospitals Highmark acquires.” Rovner is a Bloomberg Law advisory board member.
Ross thinks the impact of the case is more far-ranging, particularly due to the lack of vertical merger precedent.
“If the agencies want to avoid reducing vertical merger law to a footnote in the antitrust textbooks, they need to be much more careful before they pick their next fight,” Ross said. “One more loss like this and vertical merger law will be rewritten.”
DOJ has several days to decide whether to appeal the AT&T-Time Warner decision.
The CVS-Aetna and Cigna-Express Scripts deals will both expire in June 2019 if not given regulators’ blessing.
The case is United States v. AT&T Inc., 2018 BL 56141, 290 F. Supp. 3d 1, D.D.C., No. 17-2511 (RJL), 2/20/18.
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