Recent CVS-Aetna Merger Hearings Signal Challenges Ahead

June 12, 2019 - The $69-billion merger of CVS Health and Aetna isn’t a done deal despite having received the blessing of federal officials and the two companies moving to integrate their businesses.

Senior United States District Judge Richard Leon hinted at his disapproval of the merger last December and more recently moved to call witnesses to discuss the impact of the merger on healthcare costs and spending during two-day Tunney Act hearings.

Leon's consent decree is the final approval in the way of the merger. "These decrees are normally fast and painless. This one was neither,” noted Robert Teitelman of Barron’s.

“The judge’s continuing irritation with the Justice Department was obvious at the hearing, yet it is unclear whether Leon can or will unwind the entire deal, the settlement, or do nothing—or what an inevitable appeal would involve,” he continued.

The tone and tenor of Leon’s remarks have proved unsettling to those supportive of the CVS-Aetna merger. On Monday, Josh Kosman of the New York Post quoted an anonymous source who expected an unfavorable ruling.

“I think Leon rules against us. If he rejects the settlement, we would have to figure out the next steps,” the source stated.

While that decision wouldn't void the deal, it would necessitate a legal battle between the companies and the federal government as well as between the executive and judiciary branches of the federal government.

“A rejection by Leon would likely set the stage for an appeal by DOJ, which has recommended that the deal be approved,” Kosman reported. “Failing that, the DOJ could theoretically present a new settlement, although experts say that could be difficult, as the deal’s current concession to sell Aetna’s Medicare Part D individual prescription drug plans to WellCare Health Plans addresses the only significant overlap between the businesses.”

To receive DoJ approval, Aetna divested itself of its Medicare Part D (i.e., prescription drug) health plans to WellCare Health Plans for $107 million (with CVS remaining WellCare’s pharmacy benefit manager). Last week, one of Aetna’s leading competitors Humana squashed rumors that it would acquire Centene, following the latter’s own acquisition of WellCare. Should Leon reject the CVS-Aetna merger, it is unclear what impact it will have on these related transactions.

“There is, in fact, no case law on killing the entire deal, as opposed to altering, or blocking, the consent decree. So no one knows whether Leon can or will unwind the entire transaction, or what an inevitable appeal would involve,” Teitelman noted.

Pricing is at the heart of the matter and the crux of Leon’s opposition to the merger (via Barron’s):

The more significant issue is whether the deal might raise prices, thus harming the public interest. Leon said the question "is whether or not the pharmaceuticals will be [offered] at a lower price and whether they're going to be more readily accessible." CVS argued that little would change in the leverage of its current PBM, after the deal closed. Leon scoffed at that, arguing that Aetna's 21 million customers give CVS—already one of three PBMs that control 70% of the market—great leverage.

According to multiple reports, Leon openly questioned whether Aetna's divestiture was significant enough to counter CVS's control over the PBM market.

If Leon rejects the merger, it would be the first instance since 1974 when the Tunney Act empowered judges to do so.

“The fundamental weakness in the Tunney Act is it does not require the merging parties to wait for judicial approval to consummate their deal,” former Senate Judiciary Committee member Seth Bloom told the Post.

And the hearings process is not over yet. Leon called for another hearing on July 17 and warned lawyers not to schedule their summer breaks.

Also pending is the standoff between Leon and DoJ. The judge was quick to reject the notion that he would rubber-stamp the deal because the current administration found no fault with it. According to Teitelman, the last judge to render an unfavorable consent decree got tossed from the case.

While the situation continues to play out, CVS and Aetna have indicated their intention to operate as a single company and progress with their ambitious goals of improving healthcare at the community level.