Can Anthem Spin Dissent Into a Win on Cigna Merger Appeal?

[caption id="attachment_35327" align="aligncenter” width="377"][Image “Photographer: William Thomas Cain. Bloomberg News.” (src=https://bol.bna.com/wp-content/uploads/2016/11/m12124-e1479740581844.jpg)]Photographer: William Thomas Cain. Bloomberg News.[/caption]

By Eleanor Tyler, Bloomberg BNA

Anthem Inc.'s argument that its proposed mega-merger with Cigna Inc. would drive down prices and benefit customers met with some success before a federal appeals court, despite the 2-1 decision to block the tie-up.

The U.S. Court of Appeals for the District of Columbia’s April 28 decision in U.S. v. Anthem Inc. agreed with a district court holding that the proposed merger has the potential to harm competition. Each of the three panel judges wrote a different opinion on how the case should be analyzed, however, signaling unresolved legal questions. And one judge bought Anthem’s argument that the merger brings unique economic benefits for consumers.

Those differing voices could impact how the parties proceed and how the Justice Department could litigate cases to block future mergers.

Two issues in particular stand out, according to antitrust attorneys watching the case. First, the Justice Department’s narrow approach to defining national markets impacted by mergers is proving successful. Second, the “efficiencies defense” to a merger challenge—arguing that a deal brings specific consumer and business benefits that won’t come any other way—is still viable.

“A judge has embraced the efficiencies defense. That’s new,” said Goodwin Procter LLP partner Andrea Murino, referring to the dissenting opinion by Judge Brett M. Kavanaugh. It’s a small step, but it may be “a road map to getting traction for the same argument” in future merger cases, she told Bloomberg BNA.

The DOJ can take comfort in the idea that its approach to narrow market definition was successful, said Scott Wagner, a partner at Bilzen Sumberg in Miami. Based on a string of court successes for the DOJ that address merger threats in narrow, nationwide markets, Wagner told Bloomberg BNA that lawyers advising merging clients likely “are giving very different advice” about these issues than they were a few years ago.

Judge Judith W. Rogers, writing for the court, said that the district court did not abuse its discretion in concluding that the merger would harm competition. Judge Patricia A. Millett concurred, writing that reduced provider rates wouldn’t counter the anticompetitive effects of the merger. She focused on how large national companies buying insurance from the combined Anthem-Cigna would lose choice and quality, even if lower provider rates panned out.

In dissent, Kavanaugh said he would have overturned the district court’s injunction against the deal because customers would directly benefit from lower provider rates that Anthem-Cigna could impose.

To Kavanaugh, the key is that large employers pay providers directly for their employees’ health care. “A high pass-through rate is practically guaranteed” because “employers pay health care providers for the health care services provided to employees.”

The only question “should be whether the savings to employers from lower provider rates would exceed the increased fees employers would pay to Anthem-Cigna for the insurance services.” Kavanaugh saw no evidence that fees would eat up the whole savings.

Kavanaugh’s opinion is important because it shows that the merging parties’ economic arguments, which were “wholly dismissed by the DOJ” and lost in the district court, resonated with at least one judge. That means there is a way to explain the savings from a potential merger that can be persuasive, Murino said.

There is a lack of clear guidance on how courts should think about the efficiencies defense, she added. Better information about how the DOJ and FTC evaluate claims of economic benefits before they sue to block a merger would help courts and merger parties understand the analysis. Even though the defense is narrow and always “challenging,” a thoughtful advocate could use Kavanaugh’s opinion to defend mergers in other industries, despite its focus on the specifics of health insurance contracts with big employers.

Kavanaugh’s opinion shows that “reasonable minds can differ” about the efficiencies argument, Wagner agreed. That in itself could be important given how little support there has been in federal courts for such a defense.

Douglas Ross, a partner at Davis Wright Tremaine LLP, agreed with the court majority that this “wasn’t the case in which a claim of efficiencies made sense.” But he welcomed the possibility that an efficiencies argument might win the day in a future case.

Anthem and Cigna might want to at least try their luck seeking a full-panel review of the appeal, Murino added. There may be other judges on the D.C. Circuit who agree with Kavanaugh about the potential economic benefits of the deal. While Anthem’s further chances on the appeal aren’t tremendous, they aren’t zero, she said.

A petition to the Supreme Court would be a hard sell, but Murino and Wagner both said a successful bid for certioriari could have tremendous impact because the high court has not weighed in on a merger case in decades.

Even if Anthem does continue the appeal, the court’s April 28 opinion is “probably the end of the line,” Wagner said.

But the opinion gives yet another example of the DOJ succeeding in challenging a merger using a narrow definition of the markets that will be impacted, Wagner noted.

Wagner places the case in a growing line of mergers challenged by the government arguing that a big merger would negatively impact a narrow market of “large national accounts” that only have a few suppliers. In each of the government’s successful lawsuits to block Staples Inc. from acquiring Office Depot Inc., Sysco Corp. from acquiring US Foods Holding Corp. and Electrolux AB from buying General Electric Co.'s household goods business, U.S. regulators argued that a narrow group of large customers would be hurt by the merger.

The points now line up to a trend, Wagner said, and merging parties need to take note of it. The focus on large, national customers of merging parties, instead of fractured regional markets, seems to be one that the government “is adopting more often and one they can win on,” he said.