(Bloomberg) — U.S. opposition to proposed mergers in the pay-TV, mobile-phone and airline industries suggests a tough battle ahead for two health insurer deals: Anthem Inc.’s takeover of Cigna Corp. and Aetna Inc.’s bid for Humana Inc.
It’s the job of antitrust officials to make sure that deals don’t harm competition, and they commonly do that by evaluating local markets for conflicts: Are enough airlines serving Minneapolis? Are enough supermarkets competing in the Northeast section of Washington? Under that model, it typically takes only a few strategic divestitures — the sale of a Minneapolis route to a competitor, for example — to get approval for the broader deal.
But antitrust enforcers with the Obama administration’s Justice Department and Federal Trade Commission have shown a willingness to change that playbook and take a wider look at competition. They have opposed a string of proposed combinations between big rivals — like the merger of American Airlines and US Airways, and Comcast Corp.’s failed deal for Time Warner Cable — when they see harm to competition nationally, not just locally.
That view is relevant to the Anthem (NYSE:ANTM) and Aetna (NYSE:AET) deals, which would eliminate two of the biggest U.S. insurers, leaving just three. The Justice Department has been investigating both deals since last year.
Bill Baer, the No. 3 official at the Justice Department and the former chief of its antitrust division, has said the deals represent a “game changer” for the industry. He told lawmakers in March that the department was examining how the tie-ups might affect competition locally and nationally.
“When the antitrust authority determines that competition takes place in a national market, that presents challenges for merging companies,” said Fiona Scott Morton, a former chief economist in the antitrust division now at Yale University’s business school. “The standard solution of offering some isolated divestitures in the worst-affected cities or states may not satisfy a regulator that is looking to see competition preserved at the national level.”
The insurers are pressing the government to focus on local competition, setting up a potential clash with the Justice Department that could lead to challenges by antitrust enforcers. The government could sue to block them or require the companies to sell portions of their business to other insurers.
“It is important to recognize that health care is fundamentally local,” Anthem’s chief executive officer, Joseph Swedish, told lawmakers last year. “Locally based, locally delivered, and locally consumed.”
Spokesmen for Anthem, Aetna and Cigna (NYSE:CI) declined to comment on how their national market positions might affect regulatory reviews of their mergers. Humana (NYSE:HUM) didn’t respond to requests for comment.
Cigna warned investors in a regulatory filing on May 6 that it may not hit its target for closing the $48 billion sale to Anthem this year, citing the “complexity of the regulatory process.”
Even where markets have traditionally been defined as local, the antitrust division in recent years has been willing to look at whether national markets could also be harmed, said Mark Ryan, a lawyer at Mayer Brown in Washington who formerly worked in the antitrust division under Baer.
“This Justice Department does not simply accept that, because in the past, in certain industries, they’ve focused on local markets that’s how all future deals should be viewed,” Ryan said. “As industries evolve, they’re willing to ask whether there is another market, a national market that we should be evaluating.”