DOJ's Case Against AT&T-Time Warner Deal Could Impact Health Care Mergers

Legal experts say if challenge succeeds, regulators would have a strong case to block deals such as CVS-Aetna
Thomas Moriarty, executive vice president and general counsel at CVS Health, (left) and Thomas Sabatino, executive vice president and general counsel at Aetna, testify during a House Judiciary Subcommittee hearing on the proposed merger of CVS Health and Aetna on Feb. 27, 2018. (Photo by Drew Angerer/Getty Images)
March 22, 2018 at 2:09 pm UTC

As oral arguments in the Justice Department’s lawsuit to stop the $85 billion merger between AT&T Inc. and Time Warner Inc. began Thursday, legal experts are closely watching the case for clues to the regulators’ possible approach to recently announced deals between health insurers and drug benefit companies.

Though the outcome of the lawsuit will have no direct connection to pending health industry mergers, some experts say that if the DOJ successfully challenges the AT&T-Time Warner deal, it would give antitrust regulators a strong legal foundation upon which to build a case for blocking proposed acquisitions in the health care realm -- such as drugstore chain CVS Health Corp.’s $69 billion deal for health insurer Aetna Inc., which was announced Dec. 3.

The DOJ has stood in the way of big health care mergers in the past -- most recently in 2016 when it sued to block consolidation among four of the nation’s five largest health insurers -- but it was usually when one company was trying to buy a direct rival in the same industry, known as a horizontal merger.

Vertical mergers, in which the entities occupy different segments of a supply chain and don’t directly compete with each other, as in the CVS-Aetna deal, have typically received less scrutiny from antitrust regulators.

“The federal agencies have not litigated a vertical merger case in roughly 40 years,” William Kovacic, a law professor at George Washington University and a Federal Trade Commission member from 2006 to 2011, said by email Tuesday. But if the DOJ prevails in the AT&T-Time Warner case, “the government will have a more confident basis for challenging other vertical deals in the future,” he said.

In the AT&T-Time Warner case, regulators contend that the combination of the two companies would hinder competition, putting rival media companies at an unfair disadvantage and leading to higher costs for cable customers. AT&T and Time Warner argue that the merger would make them more competitive with tech giants such as Netflix Inc., while benefiting consumers.

The dynamics of AT&T’s merger with Time Warner are similar to CVS’ bid for Aetna, which it hopes to finalize in the second half of this year, and Cigna Inc.’s agreement to buy Express Scripts Holding Co., announced March 8, in a deal valued at $67 billion. Express Scripts is one of the largest pharmacy benefit managers, which negotiate drug prices with manufacturers on behalf of insurers and other payers. CVS also has a large pharmacy benefit manager unit.

Proponents of the health care deals argue that because the companies operate in different sectors of the health care industry, the mergers would not result in diminished competition. CVS and Aetna tout their merger as an ambitious effort to remake the consumer health care experience using CVS’ pharmacy and MinuteClinic walk-in centers and Aetna’s provider network.

And CVS, Aetna, Cigna and Express Scripts all contend that their mergers would lead to a more competitive market and reduce costs for consumers.

But skeptics say it is possible that a combined pharmacy benefit manager and health insurer could charge rival insurers higher prices or refuse to do business with other insurers at all, which would have the effect of lowering competition and raising costs for consumers. The mergers would also remake the pharmacy and drug benefit business, as the three largest players -- Express Scripts, CVS and UnitedHealth Group Inc.’s Optum Inc. -- would all be tied to a health insurer.

There are concerns that “CVS could enter into an exclusive relationship with Aetna and so it would not deal with any other insurers,” Michael Carrier, an antitrust expert and law professor at Rutgers University, said in a Monday phone interview. “If you wanted to go to CVS, you wouldn’t have a choice of the insurer that would be taken at CVS.”

The recent spate of health care-related vertical mergers, announced amid speculation that Amazon.com Inc. is considering a move into the prescription drug business, comes about a year after the DOJ successfully blocked the mergers between Aetna and Humana Inc. and also Anthem Inc. and Cigna. In those challenges, initiated during the Obama administration, the DOJ argued that the health insurance mergers would lead to higher insurance prices, reduced competition and poorer service.

While those were horizontal rather than vertical mergers, David Balto, an antitrust lawyer who is critical of the pharmacy benefit manager industry, said there is a good chance regulators will get involved in the CVS-Aetna and Cigna-Express Scripts deals for the same reasons.

“These mergers would significantly threaten the ability of smaller insurance companies to effectively compete in the market,” Balto, who served as an advisory attorney at the Federal Trade Commission from 1992 to 2001 and in the DOJ’s antitrust division from 1983 to 1987, said in an interview Tuesday.

At a Feb. 27 House Judiciary subcommittee hearing, CVS Executive Vice President Thomas Moriarty dismissed concerns that a combined CVS-Aetna company would hurt rival insurers. He said CVS already does business with Aetna, and profits from that relationship only make up 11-12 percent of CVS' revenue.

So far, the DOJ has not tried to block any of the recently announced mergers in the health care industry, although it did ask for more information regarding the CVS-Aetna deal, the two companies disclosed in a Feb. 1 securities filing. CVS spokeswoman Carolyn Castel said the merger continues to progress as planned.

Aetna, Cigna, Express Scripts and the DOJ all declined to comment for this story.

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Jon Reid
Research Editor

Jon Reid previously worked at Morning Consult as a research editor for domestic and world politics.

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