UnitedHealth Group, Minnetonka, Minn., consummated its $9.2 billion acquisition of PacifiCare Health Systems, Cypress, Calif., on Dec. 20, 2005, but not before becoming the first health insurer in nearly six years to pay the regulatory piper for its increased market clout.
Federal antitrust authorities approved the merger late last month after requiring the companies to sell off portions of their business in Arizona and Colorado, end a network-access agreement in California and eliminate a controversial provision in some provider contracts. The U.S. Justice Department filed a civil lawsuit in U.S. District Court in Washington on Dec. 20, 2005, to block the deal unless the health insurers signed a consent decree agreeing to make the required changes.
In its complaint, the Justice Department alleged that the merger of UnitedHealth and PacifiCare would violate Section 7 of the Clayton Act, which prohibits acquisitions that might reduce competition. The agency filed its complaint and the settlement simultaneously.
The government's action suggests that it may start paying as much attention to the competitive effects of consolidation in the health insurance industry as it does with consolidation in the hospital and physician sectors of the healthcare industry. Ironically, payer complaints often have led to antitrust enforcement actions against hospitals and physicians. In fact, the Federal Trade Commission's lawsuit against Evanston (Ill.) Northwestern Healthcare was based in part on pricing data submitted by UnitedHealth.
"We feel it's a good first step that the DOJ recognized there are problems with this merger," said Amy Lee, spokeswoman for the American Hospital Association. "But it doesn't go far enough to protect providers."
With the acquisition of PacifiCare complete, UnitedHealth and rival WellPoint now cover a combined 62.5 million Americans, or a full quarter of the nation's insured. The merger -- believed to be the second largest in managed-care history -- caps three years of rapid industry consolidation, punctuated by several major insurance deals, including the $16.4 billion merger of Anthem and WellPoint Health Networks and UnitedHealth's $3 billion and $4.9 billion acquisitions of Mid-Atlantic Medical Services and Oxford Health Plans, respectively. WellPoint closed Dec. 28 on its $6.5 billion acquisition of WellChoice, New York.
Despite providers' and consumer groups' mounting calls for greater oversight, the merger activity has gone nearly unchallenged by federal antitrust authorities in recent years. The last time the Justice Department placed restrictions on a health-insurance merger was in 1999, when regulators required Aetna to shed some of its operations in Texas before allowing it to acquire Prudential HealthCare for $1 billion, experts said.
"That action was a joke just like this one is a joke," said John Cusack, an antitrust attorney with Gardner, Carton & Douglas. "It's a slap on the wrist. It doesn't do anything."
Indeed, UnitedHealth said it expects the divestitures and other changes to have no material impact on its bottom line. The company expects to post operating profits of $7 billion on $70 billion in revenue next year, up from projected earnings of $5.35 billion on revenue of $45 billion in 2005.
Others, however, argue that although the enforcement action is limited in scope, it holds important implications for insurers and providers and could signal a sea change in managed-care antitrust enforcement.
"People had started to think that insurance mergers were getting an automatic greenlight," said David Balto, an antitrust attorney with Robins, Kaplan, Miller & Ciresi. But the restrictions imposed on the UnitedHealth-PacifiCare merger "show that (regulators) are going to look much more critically at even those mergers that involve relatively low levels of market concentration. Providers should be very happy."
Under the consent decree, UnitedHealth is required to sell off all of PacifiCare's small-group business in Tucson, Ariz., and shed portions of its commercial membership in both Tucson and Boulder, Colo., where it would control 33% and 30% of the markets, respectively. By comparison, Aetna was required to divest operations in Dallas and Houston where its acquisition of Prudential would have resulted in market shares of 42% and 63%, respectively. UnitedHealth must also terminate a network-access agreement it has held for the past five years with Blue Shield of California, one of PacifiCare's main competitors.
But perhaps most notable is that the consent decree prohibits the merged company from including so-called "all-products" clauses in its contracts with Tucson physicians. All-products clauses -- which require physicians to participate in an insurer's low- paying plans, such as those covering Medicare patients, as a condition of taking part in its more lucrative commercial plans -- have long been maligned by providers. Physician ire, for example, forced Aetna to voluntarily drop the clauses from all its contracts in December 2000 (Jan. 8, 2001, p. 26).
"This is a landmark action," Balto said. "It suggests that (regulators) believe all-products clauses can be used in an anticompetitive fashion ... and raises significant questions about the legality of these clauses."
Even so, doctors' reaction to the consent decree was lukewarm at best. American Medical Association Trustee Edward Langston said that, while the AMA was "encouraged that the Department of Justice is beginning to recognize our long-standing concerns," it remained disappointed by the limited scope of the enforcement action. "We continue to be very concerned about the aggressive expansion strategies of UnitedHealth and other large health insurers" on a broader, national level, he said.
William Kopit, an antitrust attorney with Epstein Becker & Green, was reticent to call the Justice Department's latest action significant. "If there is substantial overlap in local markets, their policy has always been to require divestitures. They haven't done that with other large mergers because there wasn't significant overlap," he said, pointing out that even Anthem and WellPoint, despite their size, had operated in virtually none of the same markets. "The AMA has screamed that these mergers are anticompetitive, but they just haven't been."
Kopit, however, says he expects enforcement actions by the Justice Department to become increasingly common in coming years as the managed-care market continues to consolidate. "As you get down to a very limited number of players, the likelihood of potential overlaps gets much greater," he said.