Aetna-CVS merger to go back before judge; 5 states support approval

HBJ File Photo Aetna's Hartford headquarters.

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By Zachary F. Vasile | Journal Inquirer

Hearings in the contentious and closely-watched merger case that could uphold or sink CVS Health’s $69 billion takeover of Hartford insurer Aetna will reconvene next week, with attorneys representing five states expected to testify alongside government advisors in favor of the deal.

According to federal court filings, lawyers from California, Florida, Hawaii, Mississippi, and Washington will appear before U.S. District Judge Richard J. Leon in Washington, D.C., on Wednesday to defend a Justice Department-brokered settlement as an “effective and appropriate remedy” for potentially anti-competitive effects stemming from the tie-up.

The five states had participated in the department’s initial investigation of the CVS-Aetna combination last year and in October signed off on a consent decree that allowed the two companies to integrate, provided Aetna sold off its standalone Medicare Part D prescription drug business to avoid anti-trust violations.

With that agreement now in limbo and a new investigation headed by Leon dragging on longer than most industry insiders had ever expected, the states filed a petition last month to address the judge and defend their oversight work.

As co-plaintiffs with a substantial role in enforcing the Justice Department’s settlement, the attorneys wrote, state regulators carefully studied relevant evidence and testimony, and that review determined that a divestiture of Aetna’s Medicare Part D business — the one sector where the companies competed — was sufficient to avoid harmful horizontal market concentration.

The consent decree, authored by the Justice Department’s Anti-Trust Division, allowed Rhode Island-based CVS and Aetna to close their industry-altering deal last November. Within days, however, Leon intervened, citing the rarely exercised power of the federal judiciary to scrutinize mergers and acquisitions enumerated in the 1974 Tunney Act.

At his first hearing presiding over the case, Leon sent ripples through Wall Street by complaining that CVS and Aetna were treating him as nothing more than a “rubber stamp” on their union and chided the Justice Department for, in his view, abandoning its responsibility to the American public and siding too readily with the nation’s largest retail pharmacy company.

He estimated that the federal government’s divestiture arrangement addressed “about one-tenth of 1 percent” of the potential drawbacks associated with the combination and announced his own probe, which is now entering its eighth month.

While Leon has since softened his stance — even commending CVS for its due diligence throughout the merger — some commentators remain unconvinced of the deal’s chances, and publications such as Barron’s and the New York Post have cited anonymous but consistent sources alleging that Leon is preparing to derail the consolidation.

Because the Tunney Act has been so rarely invoked, it is not clear if Leon has the authority to completely block the CVS-Aetna merger. But analysts agree that, no matter what power Leon may or may not have, an unfavorable ruling will almost certainly cause significant problems, since the two businesses have already started integrating their operations.

Aetna in December completed the sale of its Medicare Part D division to Florida-based WellCare Health Plans. Critics of the Justice Department’s settlement, including Leon and the American Medical Association, have claimed that WellCare is too small to take on the 2.2 million former Aetna customers associated with the transfer and cannot meaningfully compete with Caremark, CVS’s pharmacy benefit manager.

Last month, Leon heard testimony on the potential consequences of the merger from experts put forward by CVS and the American Medical Association, which entered the proceedings as a non-party “friend of the court.” The judged blocked a competing motion from the Justice Department to testify at that same series of hearings, noting that the pro-combination standpoint would already be well represented by counsel for CVS.

Leon has not said how long he plans to hear testimony before handing down a final ruling. At almost every stage of his review, industry observers have predicted that the probe will wrap up within a month, but each time, the judge has extended his inquiry and scheduled new sessions.

CVS and Aetna first announced plans to unite in December 2017. In a bid to win over regulators in Connecticut, CVS executives promised to keep Aetna headquartered in Hartford for at least the next 10 years and maintain current staffing levels for the next four years.