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U.S. antitrust watchdogs turn to insurers after Halliburton win

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(Bloomberg) – Bill Baer was the ultimate Washington antitrust insider when he came to the Justice Department in 2013: At law firm Arnold & Porter LLP, he’d counseled the biggest U.S. companies, including deal machine General Electric Co., on getting mergers over the finish line.

So when Baer took over as head of the Justice Department’s antitrust division with a mandate to protect competition in the American economy, observers could have been forgiven for thinking another industry fox was taking his watch over the hen house.

But Baer is making good on a promise to protect American consumers, showing little hesitation to haul companies to court to stop mergers. This week, facing just such a legal challenge, oil-services firms Halliburton Co. and Baker Hughes Inc. dropped their $28 billion planned tie-up. Baer portrayed the deal uniting the No. 2 and No. 3 firms in the field as one of the worst he’s ever seen. It would have eliminated competition for so many products and services, he argued, that it was “unfixable.”

Health-care deals

Now, as Baer’s career advances — he’s just been named to the No. 3 position at the Justice Department — he’ll still be overseeing the antitrust watchdogs at his former division as they turn to a pair of proposed mergers that have the potential to radically reshape U.S. health care.

The department is considering the tie-ups of four of the biggest U.S. health insurers — Aetna Inc. with Humana Inc., and Anthem Inc. with Cigna Corp. — two mergers that would leave the country with only three major insurers, down from five. Judging by the department’s record under Baer’s leadership, the combinations may face hurdles in trying to convince the government to clear the transactions.

With Baer’s promotion, the antitrust division has been taken over by Renata Hesse, one of Baer’s acolytes. Hesse has helped lead the unit in its opposition to Comcast Corp.’s bid for Time Warner Cable Inc., which was abandoned by the companies, and lawsuits seeking to block the sale of GE’s appliance business to Electrolux AB, and the merger of American Airlines and US Airways. GE dropped its plans to sell the appliance unit to Electrolux during the U.S. antitrust trial. American Airlines ultimately worked out a settlement agreement allowing it to merge with US Airways.

“The Justice Department is increasingly adopting the Nancy Reagan slogan: ‘Just say no,’” said Deborah Garza, an antitrust lawyer at Covington & Burling LLP in Washington who previously worked at the division.

Declining competition

Critics say enforcers aren’t going far enough. In a report last month, the White House Council of Economic Advisers noted several signs of declining competition in the U.S., including data that the biggest firms are taking home a greater share of revenue in numerous industries. Returns on invested capital are also becoming increasingly concentrated within a small slice of the market, according to the report. 

In March, U.S. Senator Richard Blumenthal, a Democrat from Connecticut, pointed to consolidation among U.S. airlines — a market dominated by four major airlines — lamenting that America’s merger policy “simply has failed.”

Chris Sagers, a professor of antitrust law at Cleveland State University, argues the Obama administration’s antitrust record is only average. Yes, there have been big challenges, but that’s because companies are proposing aggressive deals that pose risks to competition, he said. Enforcers should be bringing more cases and lowering the threshold for going to court to stop problematic deals, he said.

“There is a lack of political will and it comes from the White House down,” Sagers said. “It runs throughout the federal government that we just don’t care about competition like we used to, and we’re just not as worried about the threat of concentrated markets and big companies as we used to be.”

Common sense approach

When investigating mergers, Baer and Hesse have emphasized a common sense approach to understanding how consumers may be harmed by the combination of two competitors. Baer has warned that he has seen some deals that are so bad for consumers they never should have made it out of the boardroom.

During his tenure, he has also raised the bar for approving asset sales that allow deals to go through, said Mark Ryan, a former Justice Department antitrust lawyer now at Mayer Brown LLP. Divestitures have to be substantial and restore competition from the beginning to win Baer’s support, he said.

“The Obama administration said at the outset the pendulum had swung too far and enforcers had become too willing to accept fixes from parties that didn’t resolve the competitive problems,” Ryan said. “I don’t think there’s any question they have done what they said they would do with respect to reinvigorating antitrust enforcement.”

Merger challenges

In Halliburton’s case, with competitive problems in 23 products and services, the companies ultimately couldn’t offer anything to satisfy the Justice Department.

“I’ve been around a while in this area of law enforcement and I’ve seen a lot of problematic mergers in my time, but I have never seen one that poses so many antitrust problems in so many markets,” Baer said at the time of the lawsuit.

With eight months to go in the administration, the antitrust division has time to add to its record of merger challenges. At the top of the list are the health-insurer deals. Humana said Wednesday that it completed a submission to the Justice Department, moving closer to a decision by the government.

The two tie-ups have been assailed by the American Hospital Association and the American Medical Association. According to an analysis by the hospital association, the Cigna takeover threatens competition in the sale of commercial insurance in more than 800 local markets. In about half of those areas, there’s no viable buyer who can step up and restore competition, the group says. Anthem counters that the association’s analysis is misleading and that concentration levels won’t increase by an “appreciable amount” from the merger, which it says will benefit consumers.

Still, in Congressional testimony in March, Baer said the insurer deals amounted to a “game changer” for the health care industry. That’s not the kind of language that signals a smooth road for the companies.


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