Will CVS Health Deal to Buy Aetna Hold Up to Antitrust Scrutiny?

By Anna Wilde Mathews Features Dow Jones Newswires

CVS Health Corp.'s planned acquisition of Aetna Inc. will face tough antitrust scrutiny, but the limited overlap between the companies' businesses should help bolster their case for the deal, experts said.

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The $69 billion acquisition would involve CVS's drugstores, some including retail clinics, and its massive pharmacy-benefit-management business. Aetna is the third-biggest U.S. health insurer, selling plans to employers as well as offering Medicare and Medicaid coverage, among other types. The two companies have some areas of direct competition, particularly in the sale of drug plans to Medicare beneficiaries.

Antitrust suits against "vertical" deals, struck between firms that are more complementary than direct competitors, are rare, said Tim Greaney, a professor at University of California Hastings College of the Law. Such challenges "are hard cases to win."

Still, "there are so many aspects of the health-care system that would be affected," said Mr. Greaney. "It will get a really close look."

CVS and Aetna said they were confident that their deal would pass antitrust muster. "We see this transaction as being complementary in terms of the value that can be created for consumers and payers," said CVS Chief Executive Officer Larry J. Merlo.

Aetna Chief Executive Mark T. Bertolini said: "We've done our homework on antitrust issues."

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The Justice Department recently sued to challenge the high-profile deal that would combine AT&T Inc. and Time Warner Inc., which was seen as a vertical combination. The government argued in its suit that uniting AT&T's video-distribution strength with Time Warner's popular cable channels would give one company too much control of the media landscape, which it said would lead to higher prices and dampen innovation. The companies have said their deal passes antitrust muster and that the challenge breaks from decades of precedent.

The Justice Department's new antitrust chief also has said he doesn't favor approving mergers based on corporate commitments to refrain from particular conduct, an antitrust remedy that has been common in vertical deals. In the case of AT&T, he told the company it would have to sell off assets instead.

Mr. Bertolini said the companies had examined the AT&T challenge and believed that combination "has very different issues from what we're talking about." He also said the companies would do what was needed to secure antitrust approval.

Mr. Greaney and other experts said it isn't yet clear if the Justice Department, which typically does federal antitrust reviews of managed-care mergers, would handle the CVS-Aetna combination. The Federal Trade Commission generally oversees antitrust issues involving the pharmacy business.

The CVS deal's structure is a contrast to Aetna's last attempted combination, a $34 billion takeover of Humana Inc. that foundered earlier this year after a successful antitrust challenge by the Justice Department. In that case, the two insurers were direct rivals, and a federal judge agreed with antitrust enforcers' contention that merging them would reduce competition in a key line of business, Medicare insurance plans.

Another ambitious deal to merge two big insurers -- the $48 billion proposed acquisition of Cigna Corp. by Anthem Inc. -- also went down earlier this year after losing a similar antitrust challenge by the Justice Department. In that case, the main focus was on the risk of reduced competition for serving large employers that insure their workers.

"I don't think the acquisition will encounter any of the troubles Anthem-Cigna or Aetna-Humana did," said Barak Richman, a Duke University law professor. Though both CVS and Aetna are large players, it is far from clear that either one could create a "stranglehold or bottleneck that squeezes out other entrants" in any of their businesses, he said. The deal "would not make for an easy legal challenge."

Aetna already uses CVS to handle its pharmacy benefits, meaning that the acquisition won't directly increase CVS's volume and market clout as a PBM. Indeed, CVS's separate deal to contract with No. 2 health insurer Anthem, which is launching its own PBM, will be a far bigger boost to CVS's pharmacy-benefits market share, assuming Anthem moves forward with the arrangement when CVS owns a competitor.

One area where CVS and Aetna do compete directly is in Medicare drug plans. CVS is the biggest provider of these so-called Part D plans, with about 5.5 million members, according to figures compiled by analysts at Wells Fargo. Aetna ranks fifth, with around 2.1 million enrollees. Antitrust enforcers "will look at anything and everything where there's overlap," said Martin Gaynor, a professor at Carnegie Mellon University.

But analysts said that even if the Justice Department requires divestitures related to the Part D business, that isn't likely to be a major impediment to the deal, since stand-alone Medicare drug plans aren't generally a major source of profits.

--Sharon Terlep contributed to this article.

Write to Anna Wilde Mathews at anna.mathews@wsj.com

(END) Dow Jones Newswires

December 03, 2017 18:42 ET (23:42 GMT)