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CVS-Aetna Will (Probably) Survive New York State Friction: Corporate Lawyers

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Although New York state regulators have threatened to block CVS Health’s proposed acquisition of Aetna Inc. over concerns about price hikes for consumers, it’s unlikely that the deal will be derailed, corporate lawyers interviewed said. But the lawyers added that, given the worries New York has, the deal is probably not a done deal just yet.

“In my general experience, when something is approved at the federal level, it’s highly unlikely that it doesn’t ultimately get approved at the state level,” said Shannon Zollo, a partner in Boston-based Nutter McClennen & Fish’s corporate and transactions department and chair of the firm’s mergers and acquisitions practice group. “But I wouldn’t be surprised if the states require some additional concessions in order to approve the deal.”

During a public hearing earlier this month, New York State Department of Financial Services superintendent Maria Vullo expressed concerns that CVS, which had to borrow $40 billion to fund the proposed $69 billion acquisition, could raise insurance premiums for millions of residents.

(Related: Dear Connecticut: CVS Can’t Afford Aetna. Sincerely, New York)

“New York Insurance Law provides that I, as the superintendent, shall disapprove an acquisition if I determine that such action is reasonably necessary to protect the interests of the people of this state,” Vullo said, according to a written version of the statement she made at the hearing.

Despite an August plea from California to block the deal, the U.S. Department of Justice announced earlier this month that it will approve the Woonsocket, Rhode Island-based retail pharmacy giant’s purchase of Hartford, Connecticut-based Aetna, assuming the latter divests its Medicare Part D prescription drug plan for businesses and individuals. Connecticut regulators also approved the deal earlier this month, but New York remains wary and the only apparent roadblock to the merger.

While each state has the authority to investigate and ultimately reject such deals, the extent to which they do so varies, Zollo said. For example, it’s not surprising, he added, that California, Connecticut and New York—all of which have “massive amounts of commerce and a history of significant M&As—want to analyze these types of deals as they relate to their states and their populations.”

In addition to her concern about potential premium rate increases, Vullo also expressed worry about increased pharmaceutical costs; data privacy issues; community support; and CVS’s ability to do business statewide, “in a manner that serves New York’s communities fairly and equitably, including those communities most in need of access to affordable health care services.”

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She added that statutory factors for the agency to consider when making its determination include the financial condition of both parties, the source of funds for the acquisition, whether it is likely to harm or prejudice stakeholders and whether the acquisition will harm competition.

“There’s a whole list of factors, but if you really step back and look at these state reviews, the decision and analysis really come under a public policy perspective,” Zollo said. “What those agencies are saying is, ‘Does this merger increase competition, decrease it or keep it neutral, and how does that [determination] impact the typical consumer that uses the product or services that the combined company will offer? How does this affect the citizens of our state in terms of jobs, prices, competition?’”

Andre Barlow, an antitrust lawyer at Washington, D.C.’s Doyle, Barlow & Mazard, agreed that while an outright rejection of the deal is improbable, “it is more likely that the New York Department of Financial Services will negotiate some conditions that would remedy any concerns and allow the deal to proceed.”  

Although this deal is a so-called vertical merger, there is some level of business overlap, namely in various prescription drug plans. This has created concerns that the consolidation of existing pharmacy benefit managers with insurers would make it increasingly difficult for new, independent companies to enter the pharmacy benefit management market. But such worries could be addressed, Barlow said in an email, by remedies designed to regulate future behavior. 

“With these types of conditions, the [agency] would have the ability to regulate the parties’ post-merger conduct in a way that could protect independent and community pharmacies and allow consumers greater access to the pharmacists of their choice,” he wrote.

On Thursday, the Department of Financial Services’ official record, including public comments, of the proposed merger was closed and fully submitted for the agency’s determination—a process that, given all the likely negotiating needed to agree on possible concessions, still could take months, Zollo said.

— Read Justice Department Blesses CVS-Aetna Dealon ThinkAdvisor.

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