- Department of Managed Health Care can reject anticompetitive mergers after 1 January
- New review includes public hearings, more input from third parties
- State’s insurance commissioner calling to block deal on competition grounds
The massive California agency empowered by a new state law to dissaprove anticompetitve mergers involving health insurers, is working with lawmakers to study whether this authority extends to pending deals, like the proposed union of CVS [NYSE: CVS] and Aetna [NYSE: AET], according to a legslative staffer involved in the study and a spokesperson for the agency.
Beginning on 1 January 2019, the state’s Department of Managed Health Care (DMHC) will gain broad new powers to examine the impact of mergers involving health insurance plan providers and reject any that “would substantially lessen competition.”
Department officials and the office of the lawmaker who sponsored the bill are working to figure out whether the law – referred to as Assembly Bill 595 (AB 595) – applies retroactively to deals already under review, said both sources.
“The applicability of AB 595 on pending mergers is still unknown,” the staffer, who works in the office of bill sponsor California Assemblyman Jim Wood, told this news service.
If the US Department of Justice’s (DoJ) review is not complete by the end of the year, “there may be some applicability,” the staffer said.
The DMHC spokesperson noted that “the Department is reviewing the impact of AB 595 to the current health plan mergers under review, including CVS/Aetna.”
The inquiry may prove moot as recent media reports indicate that the DoJ may conditionally approve the transaction by the end of this month with the parties agreeing to divest some assets related to their overlapping Medicare Part D businesses.
Earlier this week, health insurer Cigna [NYSE:CI] announced that its acquisition of Pharmacy Benefit Manager (PBM) Express Scripts [NASDAQ:ESRX] survived DoJ review, while noting that some state insurance regulators continue to review the transaction.
DMHC – whose mission is to ensure a stable health care delivery system – has long played a role in examining the effects on California consumers of consolidation by insurers.
The new law expands that function, calling for the agency to hold public hearings and consider the input of consumer advocates and other interest groups, like unions.
“It has had jurisdiction through its general licensing power to review mergers, to a certain extent,” said John Chesley, a partner with the law firm of Ropes & Gray, which advises health care clients in M&A matters. “Indeed, there’s a history of DMHC encouraging a lot of ad hoc and special-purpose conditions on its approvals of various transactions.”
“What 595 does is it really ups the ante and gives DMHC even broader power to review and condition the approvals that it now has express authority to issue,” he said.
The addition of public hearings means that parties to health plan mergers will have to sell their deals to broader constituencies, Chesley said.
“Consumer groups or unions get to the microphone, they make some statements about conditions that need to be crafted in order to protect the public and the next thing you know, the regulator has written those into its approval,” he said. “That’s something that I think the industry on the health plan side is going to have to look at and be prepared to deal with: is a greater consumer and union voice in the conditions that are imposed on health plan mergers.”
Last month, the California Department of Insurance (CDI) announced it was strongly opposed to the deal.
“In addition to removing Aetna as an important potential competitor from the PBM marketplace, the enhanced market power of a merged CVS and Aetna will have an anticompetitive effect on both California’s PBM and health insurance
markets, as well as an anticompetitive impact on the retail pharmacy market,” Insurance Commissioner Dave Jones wrote in a 1 August letter to the US DoJ.
However, as an insurance regulator, CDI’s merger review mandate is exclusively limited to concerns of systemic risk. It does not have the authority to oppose deals for competition-related concerns.
Making it tougher to grow by acquisition might actually hinder competition in the state, said Ron Vance, managing director of the Health Care Industry Group at professional services firm Alvarez & Marsal, which advises health payers and providers undergoing strategic transformation.
“The California market is fairly consolidated already,” he said.
“The winners are the large health insurance and managed care companies that are already consolidated,” Vance continued. “I think this potentially makes it more difficult for smaller, innovative…disruptive players to get into the California marketplace through inorganic transactions.”
Aetna and CVS did not respond to emails seeking comment for this story.
by Aldrin Brown in Los Angeles