Is the settlement agreement CVS reached with the U.S. Department of Justice over its acquisition of insurance giant Aetna in the public interest?
We're getting closer to finding out.
Despite the fact that the companies are already operating largely as one after a DOJ sign-off late last year, the deal still has not received a final stamp of approval from Judge Richard Leon of the U.S. District Court for the District of Columbia.
Beginning Tuesday, Leon will hear three days of testimony, including from witnesses opposing the settlement agreement, testifying for friends of the court including the American Medical Association, the AIDS Healthcare Foundation, U.S. PIRG and Consumer Action. There are also witnesses testifying for CVS and the government.
Here are four key questions to consider ahead of what promises to be an unusual hearing.
1. What's the scope of Leon's review?
The judge is tasked with reviewing the settlement under the Tunney Act, which gives courts the power to review DOJ decisions. That law gives Leon significant discretion to determine if the settlement is in the public interest.
Leon has been skeptical of the CVS-Aetna deal struck with DOJ. He previously said the settlement addresses only "about one-tenth of 1%" of the mega-merger.
But how far his review can go is in question.
CVS says the judge can't go beyond the issues raised in DOJ's initial complaint, which raised concerns about the merger's anticompetitive effects on the Medicare Part D prescription drug market. DOJ and CVS settled the case after the drugstore giant agreed to sell off Aetna's Part D business to rival WellCare.
CVS and DOJ asked Leon to block the testimony as outside of the bounds of the limited review before him, but Leon refused. And, more recently, Leon turned down the government's request to permit cross-examination of the witnesses and offer rebuttal evidence.
According to the AMA, DOJ's argument that there should be no concern that CVS could harm competition in the Part D market is far too simplistic. In its opposition to the proposed settlement, AMA said its experts concluded the merger would likely injure consumers by raising prices, lowering quality, reducing choice and stifling innovation in five markets: PDP, PBM services, health insurance, retail pharmacy and specialty pharmacy.
Only after hearing testimony from witnesses will Leon be able to determine whether the proposed consent judgment for the CVS-Aetna merger is "a reasonably adequate remedy for the harm alleged in the complaint," AMA said.
Third party groups interested in the outcome have urged the judge to go beyond the merger's effects on the Medicare Part D market and look into whether the merger is harmful to competition more generally.
"That's a very interesting legal issue about his authority to go beyond the complaint," David Balto, an antitrust attorney and former FTC official told Healthcare Dive. Balto represents U.S. PIRG and Consumer Action, groups advocating stricter scrutiny of the merger.
2. What could Leon do?
If Leon views the transaction as problematic, he can dissolve the settlement, James J. Kovacs, an antitrust attorney with Constantine Cannon, told Healthcare Dive.
Although Leon's "role is not to 'require something more' than the proposed settlement, one could imagine that any order finding against the proposed settlement could indicate other competitive concerns outside the overlap of the Medicare Part D assets," Kovacs said.
"He can raise issues which present competitive concerns and ultimately reject the settlement agreement," Balto said.
And if the judge does reject the settlement, it's almost certain the government will appeal and likely prevail on appeal, healthcare antitrust attorney James Burns of Akerman told Healthcare Dive.
But it's far from certain Leon will wind up rejecting the settlement.
"I think Leon will listen to the evidence very carefully, express some concern about the issues they raise, but ultimately rule that the settlement stands," Burns said.
3. Why is the hearing unusual?
The hearing in Leon's court room is the first time witness testimony will be taken in Tunney Act proceedings, antitrust experts say.
"As this has never been done before, this could be a test case for the effectiveness of live testimony in Tunney Act proceedings," Kovacs said.
The AMA has called economics expert Neeraj Sood; Diana Moss, president of the American Antitrust Institute, is testifying for U.S. PIRG and Consumer Action; and Michael Wohlfeiler, chief medical officer of the AIDS Healthcare Foundation will appear on behalf of that group.
Sood is expected to tell the court the divestiture of Aetna's PDP business will not increase the number of firms competing in the PDP market, and therefore will not address the anticompetitive effects of the CVS-Aetna merger, according to papers AMA submitted to the court.
Similarly, Moss is expected to testify to the merger's potential to enhance the incentive of CVS-Aetna to exclude rivals and facilitate anticompetitive coordination among health insurers served by PBM CVS-Caremark.
Wohlfeiler will testify as to how increasing consolidation in the health care industry has negatively affected healthcare providers such as AHF that offer specialty services to vulnerable populations, and will testify to his concerns that the CVS-Aetna deal will harm specialty providers and their patients.
CVS has called Alan Lotvin, its executive vice president of transformation; Terri Swanson, who has served as vice president for Aetna Medicare Part D products (the United States has also listed her as a witness); and Lawrence Wu, a healthcare economics expert who is president of global economic consulting firm NERA. All three are expected to testify about the potential benefits of the merger, including to consumers, health plans and market efficiencies.
4. Why do these proceedings matter?
As is standard, the companies have promised significant savings from the deal. "Over the near term, the transaction is expected to generate more than $750 million in annually recurring cost savings in addition to more than $1 billion in savings from the elimination of double marginalization, resulting in significant customer benefits," CVS said in court papers.
But the extended time the judicial review of the deal is taking and the uncertainty surrounding the final outcome leaves the CVS-Aetna deal in an odd posture.
"They won't be allowed to integrate both companies until the judge signs off on it," Brian Tanquilut, an analyst with Jefferies, told Healthcare Dive.
"[It's] unlikely the judge reverses the deal, but, at the same time, it's also a delay in the integration process," he said.
And, given continued pressure from industry participants and consumers, businesses could face more scrutiny of proposed settlements they reach with the government on their M&A deals, Kovacs said. "That pressure, particularly in consolidated healthcare markets, may lead more judges to scrutinize settlement proposals," he said.