Federal regulators will scrutinize the proposed $34 billion merger between Aetna and Humana “very, very carefully” to make sure any benefits to company shareholders do not come at the expense of consumers, according to the Justice Department’s antitrust chief.
William Baer, assistant attorney general for the DoJ’s Antitrust Division, told a U.S. Senate subcommittee that the proposed health care mergers — Anthem also wants to buy Cigna — have the potential to transform the industry.
Shareholders of Aetna and Humana have approved the deal, and the companies have received the go-ahead from at least 10 of 20 states in which they operate. However, the deal also has to be approved by federal antitrust regulators who want to make sure industry consolidation does not substantially lessen competition.
In the two-hour hearing of the Subcommittee on Antitrust, Competition Policy and Consumer Rights, federal lawmakers and antitrust regulators last Thursday voiced concerns about the swelling wave of merger activity in industries ranging from software to hard liquor.
The committee’s ranking member said she fears the government’s traditional approach to preserving competition, which entails requiring companies to sell parts of their business to competitors, has not worked.
Another member had a tougher message: The nation’s approach to preserving competition has failed and must be reformed.
Baer said the department faces considerable challenges because global merger and acquisition volume has reached record levels in number, size and complexity.
From fiscal year 2014 to fiscal 2015, the number of proposed mergers valued at more than $1 billion nearly doubled to 280. The number of deals worth more than $10 billion more than doubled to 67.
During the recession, a lot of companies kept their capital on the sidelines, but now that the economy is improving, they are again investing, Baer said. And many are investing big.
The nation’s antitrust watchdogs, the DoJ and the Federal Trade Commission, have increasingly objected to proposed mergers: In 2013, the DoJ challenged 15 deals. Last year, it filed suit in 20, including in AB Electrolux’ proposed acquisition of General Electric’s Louisville-based appliance division.
The DoJ and the FTC, which filed 17 suits last year, try to stop mergers when their analysis shows the deals would increase prices, lower quality or reduce innovation.
Health care mergers under fire
Sen. Chuck Grassley, R-Iowa, said that since the passage of the Affordable Care Act, he has received lots of complaints from his constituents about higher insurance deductibles and co-pays. Grassley asked Baer how the DoJ would analyze the proposed mergers in the health care industry.
Baer said the DoJ is investigating various aspects of the mergers, including how they would affect:
- cost and availability of care for consumers
- costs to local, state and nationwide employers
- competition in local, statewide and national markets
“These are transformational mergers in a number of markets, including Medicare Advantage and commercial insurance,” Baer said.
The number of large national health insurance providers would shrink from five to three.
“That’s a game changer that demands merger law enforcement officials to scrutinize very, very carefully to make sure we aren’t making a mistake in which shareholders benefit and the consumers pay the cost,” Baer said.
He also said the Aetna-Humana and Cigna-Anthem proposals would be judged together on how they affect the industry as a whole.
“Whenever you have two major transactions in an already concentrated industry occurring roughly at the same time, one needs to look at the interaction between the two transactions and look down the road,” Baer said. “It also affects one’s view of whether or not one or both transactions are really fixable, because it could be a game changer.”
Sen. Richard Blumenthal, D-Conn., said that antitrust regulators’ traditional attempts to preserve competition during mergers has not worked, especially in health care.
“In 2012, Humana made divestitures to three separate buyers — Cigna, WellCare and Vantage Health — in order to acquire Arcadian Management Services, and only one of the three buyers, Vantage, has managed to remain viable,” he said. “Both Cigna and WellCare exited over 50 percent of the divested markets within three years of the merger.”
“There are lessons to be learned here … about the effects of consolidation but also the futility and the failure of divestiture as a remedy,” Blumenthal told Baer. “There are lessons to be learned here that I hope will prompt greater vigilance and vigor in your use of enforcement authority.”
Aetna and Humana have said they believe the merged company would deliver better health care at lower prices.
New antitrust concerns
Committee members and antitrust regulators also discussed new challenges they are facing to preserve competition, both because of emerging online industries and more interwoven ownership structures of some public companies.
Sen. Amy Klobuchar, D-Minn., the committee’s ranking member, said she wonders what Baer thought of situations such as Canadian Pacific’s proposal to acquire Norfolk Southern. Canadian Pacific wants to put its shares in a trust, have the CEO resign, then join Norfolk Southern and become that company’s CEO, the senator said.
Baer said the DoJ worries about “situations where parties propose to merge and then accomplish much of the merger prior to the antitrust review.
“That strikes me as letting the fox into the chicken coop, subject to an investigation later of why there are so many feathers lying around.”
Blumenthal said that antitrust regulators need to take a more aggressive stance on preventing consolidation in the airline industry, in which four larger carriers control 80 percent of the market.
He said passengers see daily evidence of tighter capacity, rising fares and more ancillary fees.
And, he said, the ownership of the airlines is providing little incentive for competitive behavior: Between 2013 and 2015, the seven shareholders who controlled 60 percent of United Airlines also controlled about 25 percent of Delta Airlines, Southwest Airlines and Jet Blue Airways.
When United decides how much to compete against the three others, it has to make a judgment as to whether to harm its own shareholders who also own Delta, Southwest and JetBlue, Blumenthal said.
Baer said antitrust regulators have never before encountered such a joint ownership situation.
“It is an issue we are looking at … in more than one industry,” he said.
In general, Baer said he agreed with Blumenthal that people who own a sizable number of shares in two competing companies have little incentive to make one company stand out over the other.
The committee also discussed consolidation in for-profit colleges and universities, the banking industry and online travel agencies.
Both the DoJ and FTC are requesting additional resources for fiscal 2017 so that their enforcement actions can continue to match the spike in merger activity. President Barack Obama has requested that Congress increase the DoJ’s Antitrust Division budget by $16 million, or about 10 percent, to $180 million.
Blumenthal said that given continued consolidation in industry after industry, the nation must rethink its antitrust approach.
“Consumers have been hit by a tsunami of consolidation, with the same economic effects as a natural disaster tsunami has on people who are in its way,” said Blumenthal, a former attorney general.
“The merger policy of our nation has simply failed,” he said.
Klobuchar, meanwhile, suggested the consolidation in some industries has reached a level of saturation.
“We often talk about firms being too big to fail,” she said. “A question for modern antitrust enforcement is whether some mergers are too big to fix.”