March 11, 2016
Anthem/Cigna; Aetna/Humana: Ongoing DOJ Physician Interviews Focus on
Buyer Power Issues; Capitol Forum Analysis Shows Monopsony Enforcement
Risk
Audio highlights are available here for Policymakers and here for Industry Stakeholders.
Investigation Update
According to multiple sources, DOJ staff is conducting ongoing interviews with physicians in Anthem/Cigna
overlap markets, ranging from doctors in solo practices to those in large medical groups. Interviews have focused
on the deal’s potential impact on reimbursement rates, contract terms, and patient quality of care, with DOJ staff
in particular querying physicians regarding issues related to care denial, patient access limitations, and networks.
These interviews, although wide-ranging, are broadly focused on Anthem’s potential post-merger exercise of
monopsony power in the market for purchase of physician services.
The Antitrust Division takes monopsony concerns in provider markets extremely seriously, and has enforced on
monopsony theories in two prior merger actions. And a Capitol Forum analysis indicates that Anthem, by
acquiring Cigna, would account for a share of aggregate provider revenue in many overlap markets well in excess
of shares that have driven DOJ enforcement in prior health plan mergers. Specifically, post-merger Anthem
would, according to estimates, account for a 40%+ share of provider revenue in 7 markets; a 35%+ share in 16
additional markets, and a 30%+ share in an additional 19 markets.
Physician switching costs, as well as potential price discrimination, add to concern surrounding post-merger
exercise of monopsony power, and drive real enforcement risk—either through targeted divestitures or, to the
extent monopsony concerns are viewed as so broad in scope as to prove unfixable, a full-stop DOJ challenge.
In-depth Examination of Health Care Monopsony Issues
Monopsony power in markets for purchase of health care provider services—physicians argue deals will
drive quantity, quality effects. Through the proposed acquisitions, both Aetna and Anthem will increase their
medical memberships substantially—a development that will, by strengthening the payers’ bargaining leverage in
provider negotiations, ultimately enable both firms to drive reimbursement rates to physicians and hospitals
lower.
Buyers, of course, are legally permitted to make acquisitions that would have the effect of lowering their input
costs. However, when a merger positions a buyer to depress input prices below competitive levels, it involves the
creation of monopsony power—a violation of Clayton Act Section 7. According to deal opponents, at least some
large insurers already exercise monopsony power over smaller providers. “What we’re hearing from many of our
practices around the country is that there are payers coming to them offering them rates below even their costs,”
says Wanda Filer, president of the American Academy of Family Physicians.
The exercise of monopsony power may have the impact of reducing quantity of output, degrading quality of
output, or both. In the health care context, although monopsony rates are relatively unlikely to depress physician
output in the very short-term, in the medium to long-run, physicians may exit (or choose not to enter) the market
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in response to sub-competitive reimbursement. “If these family practices are unable to make ends meet that’s
problem for that community—if the message gets out to students that’s a problem for workforce,” Filer explains.
Although driving output to sub-competitive levels is the most common effect of monopsony, physicians groups
have heavily emphasized a second potential monopsony effect of the proposed Anthem/Cigna and Aetna/Humana
mergers—a reduction in quality of physician services, and concomitant degradation in patient quality of care. To
the extent reimbursement rates fall below competitive levels, physicians are incented to replace lost revenue
through increased patient volume. When physicians spend less time with patients, however, worse patient health
outcomes, for example, missed ailments or diagnoses, are very likely to follow. And aside from physician access
issues, doctors groups contend that monopsony payment rates would leave physicians unable to invest in
equipment, training, and hiring—all investments that would, in the long-term, be expected to improve patient
quality of care.
Given the nature of potential harm, physicians’ arguments regarding patient care quality and access may prove
uniquely compelling, from both enforcement and political perspectives. “Because we’re dealing with health care
access, and not buying a sink or a car it makes it even more problematic—these are often times life or death
decisions,” notes Matthew Katz, the Connecticut State Medical Society’s executive vice president.
Anthem/Cigna estimated provider revenue shares in at least 42 markets raise potential monopsony
concerns. In the health care context, DOJ has enforced on monopsony theories at relatively low buy-side shares.
In challenging UnitedHealth/PacifiCare (2005), for example, DOJ alleged that UnitedHealth would be positioned
to exercise monopsony power with a revenue share in excess of 35% in Tucson and 30% in Boulder, “for a
substantial number of physicians”—a qualifier indicating that post-merger United’s MSA-wide revenue shares
would likely have been even lower than 35% or 30%.
Although DOJ’s Aetna/Prudential (1999) complaint does not identify provider revenue shares, in the output
market, post-merger Aetna would have enrolled 63% of HMO/HMO-POS members in Houston, and 42% in
Dallas. However, because physicians generate revenue from both non-HMO commercial plans as well as
government payers, Aetna’s post-merger revenue share of physicians’ services likely fell substantially below
these numbers. In fact, in a in a 2009 journal article, Bates White LLC economist Cory Capps suggested that
Aetna’s post-merger buy-side patient share may have been as low as 25% in Houston, and 15% in Dallas.
According to a Capitol Forum analysis, in a substantial number of geographic markets, a combined
Anthem/Cigna would account for provider revenue shares above those that have driven monopsony enforcement
in past health plan mergers. Unsurprisingly, markets with greatest buy-side concentration are located in Anthem
Blue states, and include MSAs in Connecticut, Georgia, Indiana, Maine, New Hampshire, and Virginia. As the
table below demonstrates, post-merger Anthem would, according to these estimates, account for a 40%+ share of
provider revenue in seven MSAs and, in an additional 16 markets, a 35%+ provider revenue share.
Markets
MSA
Indianapolis
Dalton
State
IN
GA
Commercial Market HHI
Commercial Share
Estimate
Provider Revenue
Share Estimate
Pre-Merger Post-Merger
3,299
5,716
3,340
5,924
AVG
71.6
73.9
ANTH/CIG
46.1%
43.2%
2
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Rochester
Terre Haute
Manchester
Richmond
Lafayette
Anderson
Hartford
New Haven
Waterbury
Kokomo
Bridgeport
Nashua
Danbury
Bangor
Lynchburg
Fort Wayne
Danville
Portsmouth
Michigan City
Lewiston
Norwich
NH
IN
NH
VA
IN
IN
CT
CT
CT
IN
CT
NH-MA
CT
ME
VA
IN
VA
NH-ME
IN
ME
CT-RI
2,808
5,436
2,683
3,514
2,780
4,803
2,426
3,139
3,108
3,764
2,442
2,384
2,355
2,884
4,484
3,595
7,177
2,733
4,064
3,234
3,121
4,354
7,047
4,215
5,241
4,762
6,073
3,783
4,440
4,403
5,191
3,723
3,640
3,591
4,427
5,436
4,762
7,724
3,940
5,135
4,597
3,921
59.2
66.0
57.9
63.1
64.6
60.6
55.8
55.7
55.6
60.4
54.3
53.8
53.5
60.1
54.8
56.1
54.1
54.1
55.5
58.0
48.7
43.1%
42.6%
42.2%
42.1%
41.6%
39.0%
39.0%
39.0%
38.9%
38.9%
38.0%
37.8%
37.4%
36.7%
36.5%
36.1%
36.1%
36.1%
35.8%
35.4%
35.2%
In an additional 19 markets, the combined firm would account for a 30% aggregate provider revenue share,
including Gary, IN (34.9%), Evansville IN-KY (34.6%), Winchester VA-WV (34.4%). Elkhart-Goshen, IN
(33.9%), Roanoke, VA (33.6%), Blacksburg-Christiansburg-Radford, VA ,(33.6%), Harrisonburg, VA (33.0%),
Hinesville-Fort Stewart, GA (32.6%), Fort Collins-Loveland, CO (32.3%), Grand Junction, CO (32.2%),
Columbus, GA-AL (31.7%), Bowling Green, KY (31.6%), Albany, GA (31.5%), Portland-South Portland, ME
(31.4%), Valdosta, GA (31.3%), Owensboro, KY (31.0%), Savannah, GA (30.4%), Warner Robins, GA (30.4%),
and Greeley, CO (30.3%). And in 22 additional markets, post-merger Anthem would account for a 25%+ share of
provider revenue.
The provider revenue analysis utilizes American Medical Association estimates of combined Anthem/Cigna
MSA-level HHI, and merger-driven change in HHI, in combined HMO+PPO+POS markets—effectively, all
commercial insurance. Using HHI numbers, we calculated all-commercial market share estimates, which were
then weighted to account for the fact that providers generate revenue from non-commercial payers, primarily
Medicare and Medicaid. Finally, in order to more accurately project aggregate revenue shares, the numbers were
weighted to reflect the fact that Medicare and Medicaid reimburse providers at sub-commercial rates.
Note that, in the analysis, payer category is not weighted by consumption. So, for example, although Medicare
patients typically consume health care services at an above average rate, the provider revenue share estimates
assume that in Indiana, where Medicare covers 15% of residents, Medicare patients account for 15% of Indiana
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provider services rendered. At the same time, uninsured patients, who account for 11% of Indiana residents,
consume provider (and, specially, physician) services at a below average rate, but are assumed to account for 11%
of provider services rendered.
Notably, the combined Aetna/Humana would have relatively lower shares—in only two markets, Rockford,
Illinois (25.8%) and Springfield, Ohio (25.5%), would the combined firm account for a 25%+ share of aggregate
provider revenue. That said, the analysis likely marginally understates Aetna/Humana’s provider revenue shares,
given that, in many overlap markets, Aetna/Humana account for some percentage of provider Medicare payments.
However, because about 70% of Medicare business is traditional Medicare—even in a market in which
Aetna/Humana enrolled 33% of Medicare Advantage members, the firm would account for just 10% of Medicare
payments. So, for example, in Illinois, where 14% of the population is covered by Medicare, about 4.2% of the
population is enrolled in a Medicare Advantage plan, and, assuming a 33% state-wide share, just 1.4% in an
Aetna or Humana MA plan.
Aggregate shares may understate potential monopsony effects—switching costs; substitutability of
government payers. In addition to aggregate revenue shares, two important input market characteristics may
drive heightened monopsony concerns in the health care provider context. The first involves physician switching
costs, or, put differently, a physician’s costs to replace lost patients.
In the event a managed care organization terminates a physician contract, the physician may be able to replace a
small percentage of lost patients with negligible disruption, by filling from a patient backlog, or short-term timeshifting. Above a certain threshold, however, because a physician cannot replace a substantial number of patients
immediately, the physician will face the prospect of real, and irreplaceable, lost income. This is a function of that
fact that physicians’ time cannot be stored—if a physician spends weeks or months operating below capacity, that
income is lost forever.
Furthermore, because lost patients cannot be replaced immediately, a physician’s cost to replace, for example,
40% of their practice’s patients may be more than double the cost of replacing 20% of patients—put differently, a
physician’s lost income may increase more than proportionally with the number of patients they must replace. In
fact, this argument was a key driver of the Division’s 1999 Aetna/Prudential challenge, explains Georgetown
University economics professor Marius Schwartz, who served as the Antitrust Division’s Economics Director of
Enforcement at the time the complaint was filed.
“The key idea was that it gets progressively harder—if you have to replace twice as many patients it costs you
more than twice than if you had to replace half the patients,” says Schwartz. This is, notes Schwartz, a function of
the fact that physicians typically incur a delay in replacing patients—"if you have to replace more patients you
have to wait a longer time until you do the full replacement because patients don't all arrive on the same day—
they arrive over time," Schwartz explains.
In addition to the timing issue, commercial payers’ potential monopsony power is strengthened by the fact that
Medicare and Medicaid patients do not represent, from a revenue perspective, a full substitute for commerciallyinsured patients. “You’re not replacing equivalents—you’re replacing patients where you get payments at a much
higher amount with patients where reimbursement is significantly less,” says Neil Kirschner, a Senior Associate
of Health Policy and Regulatory Affairs at the American College of Physicians.
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Given relatively lower government reimbursement rates, a physician would need to attract, for example, multiple
Medicaid patients in order to replace revenue from a single lost commercially insured patient—a prospect that
makes patient replacement even more difficult. And, when measured by lost variable profits, arguably the more
relevant metric when measuring potential monopsony power, the government/commercial patient replacement
ratio increases even further.
Aggregate shares may understate potential monopsony effects—price discrimination. The fact that some
providers are relatively more dependent on a certain payer’s patients, and commercial payers’ resulting ability to
price discriminate in provider contract negotiations, may also enhance potential exercise of monopsony power.
For example, a combined Anthem/Cigna would account for a roughly 42.2% aggregate provider revenue share in
the Manchester, New Hampshire MSA. This share, however, will vary by individual practice—post-merger
Anthem may, for example, account for 32.2% of one provider’s revenues, but 52.2% of another’s. This varying
provider dependence provides a mechanism for price discrimination, through which Anthem may target
dependent providers for lower rates.
Potential price discrimination likewise played an important role in the Division’s 1999 Aetna/Prudential
challenge. “If the insurer perceives that a particular physician group is more vulnerable post-merger, it may be
able to impose lower reimbursement rates than if it has to do it market-wide” says Schwartz. “The unit of analysis
was more granular—you don’t just look at all the physicians in Houston—you have to look at it more practice-bypractice.”
Of course, aggregate market-wide market shares are nonetheless important in monopsony analysis, as they affect
a provider’s potential replacement rate—higher Anthem market-wide shares mean the pool of non-Anthem
replacement patients is much smaller, and the task of replacing lost patients more difficult. At the same time,
however, the potential for price discrimination means that MSA-wide aggregate market shares almost certainly
understate Anthem’s ability to depress reimbursement rates to at least some targeted physicians.
Arguments against buyer power—new demand; PPOs. In the face of these switching costs and price
discrimination arguments, Anthem will contend that, for a number of reasons, its Cigna acquisition will not
actually create or enhance monopsony power. Although these arguments run the gamut, many rely on changes in
the health plan marketplace since DOJ’s prior monopsony enforcement actions—especially changes wrought by
the ACA.
A first involves the argument that switching costs, or costs to replace patients, are overstated, given the ACAdriven coverage expansion and accompanying new demand for health care services. This new demand, coupled
with a short-term Medicaid fee bump that states including Indiana and Connecticut have implemented, could
mean that physicians’ cost to replace commercially-insured patients may have decreased. In addition, the ACA’s
Medical Loss Ratio requirements may, to some extent, limit insurers’ expected gain from the exercise of
monopsony power.
Although not directly ACA-related, the relative growth of PPO and POS plans, through which insurers offer
members some coverage for out of network provider services, may enable a physician to capture revenue from
existing patients even if they exit a payer’s network. Physicians may also re-capture lost patient revenue by
excluding third-party payers altogether through, for example, direct primary care or concierge practices. As a
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result, even if a managed care organization terminates a physician contract, the physician is unlikely to actually
lose 100% of the payer’s patients (or revenues) in question.
Existing provider market power may limit hospital services monopsony concerns. Recent marketplace
developments aside, Anthem’s increased post-merger enrollment, and bargaining leverage, would almost
certainly lead to lower reimbursement rates for many physicians, physicians groups, and hospitals. An additional
key argument for the parties, however, is that, for many providers, this outcome is unlikely to actually reflect the
exercise of monopsony power.
This argument rests on the fact that, in order to exercise monopsony power, a buyer must depress rates, or input
prices, below competitive levels. “In the true monopsony model, the suppliers are competitive, they’re just
making a competitive rate of return and where you have a dominant buyer facing them, you can have a variety of
adverse consequences,” explains John Kirkwood, a professor of law at Seattle University, and author of a number
of widely-cited law review articles on monopsony power. By contrast, notes Kirkwood, when suppliers already
enjoy some degree of market power, an increase in buyer leverage may simply bring a supplier’s prices closer to a
competitive level—an outcome that represents countervailing, rather than monopsony, power.
Especially given aggressive consolidation over the last two decades, many hospital systems today almost certainly
enjoy some degree of market power. And even some specialty practices, to a lesser extent, may benefit from
supracompetitive rates, given their scarcity relative to primary care physicians. To the extent Anthem is
positioned to depress hospital and specialty reimbursement rates, then, it may simply push rates closer to
competitive levels—an outcome that would not, in and of itself, represent the exercise of monopsony power.
DOJ typically skeptical of countervailing power arguments. The parties’ countervailing power argument is
especially important, given that if Anthem realizes increased provider discounts post-merger, the firm’s selfinsured customers, who pay claims directly, will therefore benefit directly. In fact, the expectation that Anthem
will exercise countervailing power in negotiations with dominant hospital systems post-merger is a primary
reason that many large self-insured customers view the firm’s Cigna acquisition as a neutral, or even positive,
development. At the same time, however, ASO is only one health plan segment, and Anthem’s fully-insured
customers are relatively less likely (and, if the empirical evidence is predictive, very unlikely) to benefit from
pass-through provider discounts.
That said, antitrust enforcers are generally skeptical of countervailing power justifications. And in fact, in
November 13 remarks to a health care industry conference at Yale University, Antitrust Division chief Bill Baer
sounded a skeptical note on such arguments, emphasizing that “[c]ourts have long rejected the notion that
‘countervailing market power’ justifies anticompetitive mergers or agreements....[c]onsumers do not benefit when
sellers – or buyers – merge simply to gain bargaining leverage.”
In short, Anthem’s ability to exert countervailing power in the purchase of hospital services, even with some
consumer pass-through, is unlikely to outweigh the possibility that post-merger Anthem could exercise
monopsony power in markets for the sale of, for example, primary care physician services. “Family practitioners
run at lower margins than certain specialties, particularly if they’re in solo or small group practice, so trying to
accommodate lower reimbursement is going to be very difficult for them,” explains Mike Jurgensen, the Medical
Society of Virginia’s Senior Vice President of Health Policy and Planning. “They don’t have any leverage now,
they’d have even less later.”
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Parties pitch countervailing power; scale as accelerating ACA reforms. Even to the extent DOJ concludes
that countervailing power is not a pro-competitive justification for either merger, the parties publicly argue that
consolidation will actually accelerate the implementation of ACA-driven political and public policy goals—
specifically, delivery system reform through value-based payment models.
Value-based reimbursement, of course, is nearly universally recognized as a more cost-efficient, and ultimately
outcome-improving, delivery system than traditional fee for service, and its implementation is viewed as
something of a legacy issue for the Obama Administration. And countervailing power over dominant providers,
coupled with enhanced scale, argue the parties, will speed the shift to value-based reimbursement provider
contracts.
A related point involves the argument that, due to ACA-driven changes to reimbursement models, concerns
around monopsony power have become less relevant. Through various mechanisms, including Accountable Care
Organizations, the ACA incents payers and providers to work collaboratively, sharing both risk and profit margin.
Given the incentives for partnership, the argument goes, the new system is much less adversarial, and a payer has
no business incentive to drive reimbursement rates below competitive levels—as providers will instead simply
opt to collaborate with other payers.
Deal opponents, however, argue that increased insurer buyer power would actually impair the ACA’s goals by,
for example, preventing physicians from investing in practice transformations, including electronic medical
records and care coordinators, that the ACA encourages. And, of course, given new ACA-created demand, a
situation in which medium or long-run supply of primary physician services declined, would lead to access and
wait time issues the ACA’s architects would certainly hope to avoid.
In short, given pushback not just from the American Hospital Association and American Medical Association, but
also national primary care groups, state-level medical associations and individual physicians, arguments around
monopsony power as less relevant in a post-ACA world ring somewhat hollow. “I suppose there’s a kernel of
truth in there, in that the Affordable Care Act does try to incent new payment systems but if you look at who’s
opposing these mergers, it looks like the upstream providers don’t buy the argument,” concludes Kirkwood.
Issue Snapshot
Outlook: Market Consensus of 48% is Reasonable
Reasons for Challenge/Collapse
Most Compelling Narrative
In 10 of 14 overlap states, the combined
Anthem/Cigna would enroll 50%+ of ASO members.
ASO plans sold to self-insured employers are likely a
properly defined product market, and any deal to
create a firm with a 50%+ share in any properly
defined product market is likely to draw an agency
challenge. Problematically, the ASO overlap, for a
number of reasons, does not appear amenable to a
divestiture solution. In addition, the transaction
appears to raise real, and wide-ranging, monopsony
Reasons for Merger Clearance
Most Compelling Narrative
In the sale of ASO plans to self-funded employers,
whether national accounts or single-site large groups,
Anthem will face continued competition from United and
Aetna, as well as, in some locations, strong regional
players. Furthermore, due to growth in unbundling and
private health insurance exchanges, the sale of ASO
plans to self-funded employers may not constitute a
properly defined relevant product market. Regardless,
runner-up bid data may demonstrate that Anthem and
Cigna do not compete particularly closely self-funded
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issues in markets across the country. Especially given
significant DOJ and political scrutiny around health
insurer consolidation, these harms to competition
could be sufficient to draw a full-stop DOJ challenge.
business employers, who, importantly, are oftentimes
sophisticated, powerful buyers. And brokers and
customers in Anthem/Cigna overlap states generally
view the deal as competitively neutral at worst, and in
some instances, actually likely to drive lower prices and
broader access.
Competitive Analysis
-Self-insured employers are unlikely to view fully
insured plans, private exchanges, or unbundling as
plausible alternatives to contracting with Anthem or
Cigna. Put differently, there may be a properly
defined market for sale of ASO plans to self-insured
employers, in which the Anthem/Cigna deal would
increase concentration significantly, and position
Anthem with a 50%+ share in 10 of 14 overlap
states.
Competitive Analysis
-Self-funded employers may be positioned to defeat a
price increase through a number of means, including
unbundling (using an independent TPA for
administration) or implementing a multi-carrier private
exchange.
-Harm in the market for ASO plans sold to selfinsured employers appears difficult to remedy
through behavioral or structural fixes.
-Post-merger Anthem would account for an
estimated 35%+ aggregate provider revenue share in
at least 23 MSAs—a post-merger share sure to drive
monopsony concerns—especially given switching
cost and price discrimination issues.
-Although monopsony issues may be addressable
through targeted structural remedies, the potentially
broad scope of harm leads to the prospect that DOJ
could opt for a full-stop challenge instead.
-Even in non-overlap states, given Anthem’s
membership in the BCBSA and BlueCard program,
it is not clear that Anthem is incented to use the
Cigna brand to aggressively compete head to head
with non-Anthem Blues. Put differently, the deal
could lead to diminished competitive intensity even
in non-overlap markets, or even strengthen nonAnthem Blues’ dominant positions in certain
markets.
Political and Other Factors
-Health insurance mergers have traditionally faced a
very high level of DOJ scrutiny, and post-ACA, this
-Runner up bid data may show that Anthem and Cigna,
given their different competitive strengths, are unlikely
to be self-funded employers’ first and second choice
ASO plans, rendering post-merger unilateral effects
relatively less likely.
-The combined firm’s share of ASO lives in overlap
markets notwithstanding, customers and large group
brokers largely view the deal as likely to drive neutral,
or even favorable, pricing effects.
-Despite the BCBSA rules, Anthem may show that the
Cigna acquisition would drive a competitively neutral,
or pro-competitive outcome in the firms’ 36 non-overlap
states.
-The deal may broaden access, or, perhaps more
importantly, drive system-wide health care costs
lower—especially to the extent the merger can
accelerate the transition to value-based reimbursement
models. To the extent the parties can convincingly win
this argument, monopsony concerns may fall by the
wayside.
Political and Other Factors
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scrutiny is likely to increase even further. DOJ
leadership has frequently warned against any insurer
consolidation that would threaten the ACA’s goals.
-The deal faces significant interest group opposition,
with the politically powerful American Medical
Association and American Hospital Association the
deal’s most vocal critics. National provider groups,
and state-level medical associations, as well as the
American Antitrust Institute and Center for
American Progress have expressed opposition to the
deal as well.
-State-level insurance commissioner review (the
deal requires approval in 26 states) represents an
additional layer of risk.
-Democratic presidential front-runner Hillary
Clinton has expressed “serious concerns” about the
Anthem/Cigna deal—a statement that provides
additional political cover for a challenge, and is sure
to embolden political and consumer opponents.
Timeline
-July 24, 2015—deal announcement.
-September 28, 2015—both parties receive DOJ second requests.
-The parties certified compliance with DOJ’s second requests in early February.
-The parties expect the deal to close in H2 2016.
-The merger agreement sets an outside date of January 31, 2017, although either party may extend this date to
April 30, 2017 if the only outstanding condition to close involves receipt of governmental/regulatory clearances.
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