California Department of Insurance Hearing Raises Severe Doubts About CVS/Aetna Merger

For many, the California Department of Insurance hearing on June 19 might have seemed like much ado about nothing. After all it was only a single insurance commissioner in a single state. But those who hit the snooze button may have made a serious error. Insurance Commissioner Jones has already demonstrated the competition is a critical concern in his hearing and report on the Anthem/Cigna merger that gave the DOJ a roadmap for their successful challenge to the merger. California is a leader in sound insurance regulation. And the hearing gave the opportunity for health care providers and some of the leading health care experts in the country to explain why consumers will pay more for less if this deal is approved.

Here are the simple facts:

California State Insurance Commissioner Dave Jones, considered by some to be the Stephen Curry of insurance law, called a hearing on the pending acquisition of Aetna by CVS Caremark. The vertical merger would harm competition by enabling CVS Caremark' to further manipulate out-of-pocket prices consumers pay for their medication.

Industry witnesses representing CVS Caremark and Aetna assured attendees that the vertical merger would not reduce market concentration. Furthermore, they argued, it promised six-figure efficiencies savings into the pockets of consumers. All this "in about two years, largely by getting patients to stick to their medication regimens" said CVS Executive Vice President Thomas Moriarty.

A panel of academics and experts rolled their eyes.

First, horizontal acquisition is not the only way to increase concentration. The PBM, CVS Caremark, would be increasing concentration by expanding vertical market share. An academic witness at the hearing, AAI president Diana Moss expressed that, "CVS' PBM now deals with all insurers, but when it merges with Aetna, CVS would have a greater incentive to raise cost for Aetna's competitors or cut them off from PBM services completely". In other words insurance competition would suffer.

This idea was echoed by Lawton Burns, academic witness and PhD at Wharton, referring to the insurance PBM alliances. "The two companies are merging not to deliver on their lofty promises, but to defend against new [and old] competitors".

Second, CVS Caremark claims it has little incentive to harm rivals through exclusionary conduct but history tells a diametrically different story. When CVS acquired Caremark it used its PBM market power to drive consumers from rival pharmacies. Ultimately consumers suffered from higher prices, fewer choices, poorer services, and increased fraud and abuse.

Academic witness Thomas Greaney, a professor at UC Hastings, posited that "a wave of hospital-physician mergers that went unchallenged by antitrust enforcers ended up raising healthcare prices for consumers. " He reasoned that the same is "likely to happen with the CVS-Aetna deal."

Perhaps the crucial witness at the hearing was Professor Neeraj Sood of USC Sol Price School of Public Policy USC. The parties claim that is would not be in their economic interest to try to exclude either insurance company or pharmacy rivals. But looking at the margins of CVS and Aetna, Sood demonstrated that various types of foreclosure strategies would be attractive, profitable, and ultimately harm consumers.

If costs go up for consumers, Moriarty can say goodbye to his proposed efficiency savings. Patients are less like to take their medication regularly if they cannot afford it at the point of sale. The health risks that may result are dangerous for patients. Meanwhile, the costs of emergency services are shouldered by taxpayers as CVS Caremark takes a pay raise.

Dr. Barbara McAneny, president of AMA and another provider witness, added to the potential safety risks for patients. She voiced concerns that "The merger would mean Aetna members would likely be compelled to use a CVS specialty pharmacy instead of going to a hospital or doctor's office to have the drugs administered, which could harm patient safety."

Dave Jones' hearing could become a blueprint for other State Insurance Commissioners, Attorney Generals, Legislators and even the Department of Justice to pursue action on the issue of PBM vertical mergers. While California's hearing went largely unnoticed, this is an issue that affects us all and should garner closer attention. Whether we take medication or have loved ones who do, access to safe and affordable pharmaceutical drugs is essential to health and safety in the lives of many.