DC Circuit Rejects Attempt to Revive Anthem-Cigna Merger

On April 28, 2017 the United States Court of Appeals for the District of Columbia Circuit, in a split decision, upheld the District Court’s earlier ruling enjoining a merger between Anthem, Inc. (“Anthem”) and Cigna Corporation (“Cigna”) based on the merger’s anticompetitive effects.  The proposed merger was described by the Court as being “the largest in the history of the health insurance industry, between two of four national carriers.”

The appeal had been pushed mostly by Anthem with the Court noting that Cigna was a “reluctant supporter.”  Anthem did not challenge the anticompetitive effects of the increased market share created by the merger which would reduce the number of insurers in the relevant market from four to three.  Rather, Anthem argued that those anticompetitive effects would be outweighed by the efficiencies resulting by combining Cigna’s superior product with Anthem’s lower rates.

Anthem argued that the merged company would realize $2.4 billion in medical cost savings through its ability to (1) rebrand Cigna customers as Anthem to access Anthem’s existing lower rates; (2) exercise a clause in some of Anthem’s provider agreements to permit Cigna customers to obtain Anthem rates; and (3) renegotiate lower rates with providers. Anthem claimed that 98% of these cost savings would be passed through to its customers. The District Court rejected Anthem’s efficiencies defense finding each strategy cited by Anthem to obtain these efficiencies was either likely to fail in the face of business reality or could be achieved by each company without the merger.

Writing for the divided three judge panel, Judge Rodgers found the District Court did not abuse its discretion in rejecting the proposed merger.  Judge Rodgers noted that the evidence presented by Anthem did not support a conclusion that any efficiencies obtained through rebranding were merger specific because they were based on the application of rates that each of the companies had already earned on their own.  Additionally, Judge Rodgers indicated that the ability to obtain lower rates through the renegotiation of provider contracts was speculative and therefore could not outweigh the anticompetitive effects of reduced competition.

Judge Millett issued a concurring opinion which attacked Anthem’s claim of lowered costs to its consumers claiming such decreases would come at the cost of lesser services, stating “[p]aying less to get less is not an efficiency; it is evidence of the anticompetitive consequences of reducing competition and eliminating an innovative competitor in a highly concentrated market.”  Judge Millett also dismissed Anthem’s claim that the merged entity’s ability to negotiate lower rates with providers was procompetitive.  In this regard, Judge Millett indicated that “securing a product at a lower cost due to increased bargaining power is not a procompetitive efficiency when doing so ‘simply transfers income from supplier to purchaser without any resource savings.’”

Judge Kavanaugh in dissent looked at the weight of the evidence differently.  While the majority concluded that Anthem’s ability to negotiate lower rates indicated an ability for Cigna to do the same, the dissent found that Cigna’s inability to do so to date demonstrated that any ability to do so in the future would be caused solely by the merger.  Judge Kavanaugh also rejected the majority’s conclusion that the merged entity’s ability to renegotiate provider rates was speculative. Based on those determinations, Judge Kavanaugh concluded that the consumer would obtain significant procompetitive benefits in the form of lower costs which sufficiently outweighed any anticompetitive effects of decreased competition.

The fact that the Circuit Court issued a divided decision would lead one to conclude Anthem will seek further review from the United States Supreme Court.  However, the Court’s description of Cigna as a “reluctant supporter” may indicate that conflicts between the companies will prevent them from seeking further review.  Only time will tell.