The retail pharmacy giant announced Dec. 3 that it had agreed to purchase Aetna, one of the country’s largest health insurers, for about $69 billion. Because CVS of Woonsocket, Rhode Island, and Aetna Inc., of Hartford, Connecticut, do not operate in exactly the same industry, the former’s planned takeover of the latter is a so-called vertical merger, which traditionally have fared better under Washington’s scrutiny, the lawyers said.
A recent event may belie that trend, though: Last month, the U.S. Department of Justice sued AT&T to block its merger with Time Warner—the first time in at least 40 years that the agency has attempted to block a vertical merger. The government’s complaint alleges that AT&T would hinder its rivals by forcing them to pay more per year to distribute Time Warner content.
“Vertical transactions are generally considered to raise less antitrust concerns than horizontal ones, deals where the merging parties actually compete against each other, but vertical transactions can raise significant antitrust concerns, so the combination will likely prompt regulatory concern,” said Andre Barlow, an antitrust lawyer at Washington’s Doyle, Barlow & Mazard.
Chief among those reasons, Barlow said, is the sheer size of the consolidation within the health care industry, one of the most important to the U.S. economy.
Aetna serves an estimated 44.6 million subscribers, according to the company. CVS Health has 9,700 retail pharmacies and more than 1,100 walk-in medical clinics. It is one of the largest pharmacy benefits managers with nearly 90 million plan members, as well as a senior pharmacy care business serving more than 1 million patients per year, and a stand-alone Medicare Part D prescription drug plan.
“It’s logical to anticipate [close scrutiny] based on the size and importance of the industry as it relates to the U.S. economy and well-being,” said Shannon Zollo, corporate partner at Boston-based law firm Morse, Barnes-Brown & Pendleton.
At this point it is unclear whether the DOJ or U.S. Federal Trade Commission will review the deal, although Aetna has said it thinks the DOJ may handle the job. The DOJ has experience reviewing health insurance mergers like Aetna’s failed acquisition of Humana Inc. earlier this year. The FTC, meanwhile, has reviewed deals involving retail pharmacies and pharmacy benefit managers such as CVS’s acquisition of Caremark Corp. in 2006. Regulators at each agency will likely decide among themselves which one will take on this case, Barlow said.
All things being equal, Zollo added, the parties likely would prefer to interact with the FTC over the DOJ, which tends to be more political.
Regardless of which agency reviews the deal, the corporate attorneys said, its main inquiry will be the effect the transaction has on competition. This analysis, Zollo said, is informed by a number of factors, including how many players are left in the field after the deal is completed; the effect on existing customer and vendor relationships and the massive amount of integration required to consummate the deal.
Although the companies generally “play in different spaces,” Zollo said, there is some level of business overlap, namely in the area of Medicare Part D prescription drug plans, a factor the government would consider in its evaluation. In the end, the agency may accept the deal, reject it or require modifications.
“The [evaluation of] the vertical [merger] will provide the most interesting issues because when the government is analyzing this transaction, it’s going to want to understand how [the deal] is going to impact health care going forward,” Barlow said.
CVS Health was advised on legal matters by Shearman & Sterling, Dechert, and McDermott Will & Emery. Davis Polk & Wardwell is acting as Aetna’s legal adviser, according to a joint news release by the companies.
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