Borrow my notes from Aetna-Humana trial

DOJ, Aetna, Humana Opening Arguments

December 5, 2016

U.S. District Court for District of Columbia

Judge John Bates

DOJ Opening Argument, Craig Conrath:

DOJ presented its case on behalf of seniors who would be harmed by the effects of this merger. Seniors, lower income people, and disabled populations would be most affected by price increases in the Medicare Advantage (“MA”) market. Antitrust analysis is straightforward. The merger is presumptively illegal and cannot be overcome through divestitures or tactical maneuvering. Opening argument has four parts:

1. Medicare Advantage

2. Market Definition

3. Competitive Effects

4. Proposed Remedy

Medicare Advantage

A merger between Aetna and Humana would combine two of the leading MA insurers -- the largest and the fastest-growing. Medicare Advantage is the relevant market, as it is a distinct product from Original Medicare (“OM”). MA differs from OM on price, quality, scope of services, and chance of massive, unexpected medical bills.

Reasonable interchangeability is different from functional changeability. Antitrust cases are decided on reasonable interchangeability defined by cross-price elasticity of demand. Functional interchangeability gives the false impression that consumers see all products as equal if they serve the same function -- such as quenching thirst with milk or orange juice. But that does not mean they belong in the same product market.

Competition among these businesses is meaningful and benefits consumers. Seniors choose a Medicare or MA plan that works for them, but Medicare and MA have vast differences. The availability of multiple choices does not mean that every option is a competitive constraint. (Coca-Cola, H&R Block)

2 main types of evidence for market definition:

1. Practical indicia from Brown Shoe. MA includes more coverage that is an important feature for many seniors. MA is less expensive but has a limited network (that’s the tradeoff). Its characteristics and usage are different from OM.

2. Differences are recognized by both companies. Company memo describes MA and OM as “apples and oranges.” They calculate separate market shares, profits, and losses. They run on different platforms, with different teams and leaders. Their business models are different. Competitive energy is focused on other MA insurers.

Seniors do not see MA and OM as being reasonably interchangeable. 85% of seniors who “switched” stayed with MA based on Aetna and Humana data. 86.5% who were involuntarily switched stayed with MA. 87.3% who switched stayed within MA based on CMS data. Econometric evidence supports MA as the relevant product market.

Over 1.6 million seniors are enrolled in Medicare Advantage in the 364 complaint counties. Over 970,000 use Aetna or Humana MA plans. Merger is presumptively unlawful in all 364 counties. Aetna and Humana are close competitors, according to their own memos.

Annual harm is estimated at $500 million -- about $360 of that to seniors, the rest to the taxpayers.

The proposed divestiture to Molina would not remedy this harm. Aetna and Humana are not selling the assets that are necessary to compete effectively and thrive on its own -- provider contracts, infrastructure, brand name, broker network, employees, value-based contracts with providers, or physical locations. Molina has a record of failure in MA. Molina is a trivial participant in individual MA with only 424 members (to Humana’s 2.5 mil+ and Aetna’s 700,000+). The risks associated with this proposed divestiture would fall on seniors. Molina is like a dog chasing a car.

Public exchanges:

Aetna and Humana are close competitors on the public exchanges. The merger is presumptively unlawful in all 17 counties.

Aetna’s withdrawal from the exchanges should not be credited. The timeline shows that it was a tactical maneuver intended to thwart antitrust scrutiny. Aetna left the exchanges in a way that would allow them to re-enter as soon as 2018.

This merger is not about providing better insurance products to consumers. Despite efficiency claims touted by Aetna before its merger with Coventry, prices went up relative to other insurers as a result of that deal. This merger is about responding to the merger frenzy of 2015, not wanting to be the last one standing and getting acquired by someone else.

Aetna Opening Argument, John M. Majoris:

Two primary issues -- question lies in whether government can prove substantial lessening of competition in Medicare Advantage markets and ACA exchanges. DOJ is focused on theory and assumptions, while Aetna’s case uses data to show robust competition.

Medicare: DOJ is trying to fit a multi-dimensional market into a basic model with no regard to fit.

Only 3% of Aetna’s medical members are enrolled in MA. The merger encompasses more than what is at issue in this case. Aetna and Humana are complementary businesses that would come together to create a more balanced business. The government challenges slices of the merger but benefits are wider-reaching. The merger would also help both companies transition to value-based care.

The benefit to seniors aged 65 and older is not Medicare Advantage, but Medicare. Part A: payment for hospitalization. Part B: Doctor visits and outpatient care. Various features and choices around the 4 C’s: Convenience, choice, conditions, and cost. Network coverage is also a consideration.

⅔ of seniors use OM and ⅓ use MA, and that is consistent over time.

10,000 seniors age into Medicare daily! 2 points where seniors make choices: when they turn 65 and during “election periods” usually October 15 - December 7. Insurers grow business by getting those 10,000 to sign up for their MA plans. However, companies cannot differentiate between these groups and have to make the same offerings to both.

The geographic market is at issue in the case but the market definition will be more important.

Merger guidelines: need to look at the whole market. Apply the “common sense test” and you will see that seniors decided where to get Medicare benefits, not what a relevant antitrust market is. They look at both OM and MA.

What the government says: CMS, part of HHS, regulates Medicare. Handbook says seniors have a “choice between Medicare and Medicare Advantage.” That is the product market.

Industry participants say: CMS, the largest participant in this market, says OM is a public program that competes with MA and can discipline the market. OM is major competition to any MA plan and cannot be pushed out of the market. CMS is keenly aware of what the market constitutes. Regulatory conduct leaves MA looking a lot more like OM.

Expert testimony: some models are agreed upon by both sides. The defendants will use real market data. They find that there is no correlation between margins and competition in the market for Medicare or Medicare Advantage. Plaintiffs use theory, not real data. According to their model, margins should be 24%. They are actually 11%. CMS caps at 15%. At least 85% has to go toward MLR -- medical loss ratio. Hypothetical monopolist test is useless if it relies on bad information.

When OM is in the same product market, the presumption of illegality does not hold. Also evidence will show the competitive structure of the market creates ease of entry. Entry is common, widespread, has occurred in the past and will occur in the future. Each complaint county as several well-positioned competitors.

Government has powerful levers of offset competitive harm. During the bid process, they have the ability to regulate what the plan will be, regulate the margins, and ensure quality. All MA orgs must comply with CMS standards. Market forces will take care of competition but CMS will be there too.

Molina: Divestiture yields no change from current concentration levels. 240,000 MA beneficiaries will be divested to Molina. There will be an asset purchase agreement, service agreement, and seamless uninterrupted coverage for plan beneficiaries. Molina is a Fortune 500 company, the nation’s 10th largest insurer. They have 424 individual MA enrollees but 100,000 in all Medicare programs.

Exchanges:

No overlap in the market because Aetna las left those counties and that choice is irreversible. The decision to leave exchanges was motivated entirely by losses, like all the other insurers who pulled out. Humana’s losses were worse than Aetna’s. The court needs to put the ACA competition case aside because the decision to leave was permanent.

$2.3 billion in efficiencies

Humana Statement:

How it views transaction: Proud of MA business and innovation. Humana wants to be fully equipped to continue to innovate in a competitive environment with an increasing thicket of regulations. Humana evaluated candidates for combination to satisfy business and competitive concerns. The MA slice of the market was not the rationale for this merger.

As seniors age, they need more, MA loses them to OM, and then they die. “Erosion.” More business before 65 means they can be ushered into MA. This will apply to the accelerating number of Boomers aging into Medicare.

Humana needs to effectively engage providers by moving to a value-based care model. Doctors and hospitals are not built to “create wellness.” Humana and Aetna will be better at persuading providers to enhance wellness, innovate together, and bring costs down.

Competition in MA is local. Molina will be taking over large number of counties and stepping into the shoes of either Aetna or Humana. Molina is undertaking a substantial process for transition, including with providers. Aetna and Humana will provide services for Molina through 2017 or longer.

Role of CMS:

1. Funds OM as competitor, sets reimbursements to MA. There has been a steady decline in reimbursements for MA since ACA -- innovate to reduce costs. MA and OM now closer.

2. Regulator

3. More substantial than protecting plan beneficiaries. CMS regulates every slice of bids.

4. CMS will say it has less regulatory power than it does. It has virtually unbridled discretion to reject any big. The whole system is set up that way.

Premiums are no higher in “monopoly” markets due to CMS presence. There is no way of explaining the phenomenon other than OM when prices are the same at very different concentration levels.

Provider insurers are setting up substantial operations and are incentivized by CMS. These plans are 58% of new entry. 64% of Medicare-eligible persons have access to these plans.

This is a dynamic market and the government is looking backwards.

Law360: The U.S. is represented by Craig William Conrath, Eric Mahr, Patricia L. Sindel, Peter Joseph Mucchetti, David Altschuler, Ryan Danks and Chris Wilson of the U.S. Department of Justice. Aetna is represented by John M. Majoras, Michael R. Shumaker, Geoffrey S. Irwin, Christopher N. Thatch, Thomas Demitrack and Paula W. Render of Jones Day. Humana is represented by Kent A. Gardiner and Shari Ross Lahlou of Crowell & Moring LLP, and Richard G. Parker, Edward D. Hassi, Katrina M. Robson, Kenneth R. O’Rourke and Jeffrey J. Fowler of O'Melveny & Myers LLP.