Editor’s Note: Watch Health Affairs for the new issue release with a special focus on market concentration at 4 pm.

On May 12, 2017, Anthem Inc. announced that it would no longer seek to acquire Cigna Corporation, putting an end to a two-year saga that reached its climax in February when US District Court Judge Amy Berman Jackson sided with the Department of Justice (DOJ), which argued that the deal violated Section 7 of the Clayton Antitrust Act. A divided panel of the Second Circuit Court of Appeals affirmed this decision in April.

The DOJ had reason to be skeptical when Anthem and Cigna announced their intention to merge in July 2015. Anthem is the Blue Cross and Blue Shield Association licensee in 14 states and, after United Healthcare, the nation’s second-largest insurer by enrollments. Cigna is the fourth-largest insurer and does substantial business in Anthem’s territories. I am currently the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg School of Management. I had the privilege to serve as the DOJ’s economics expert in this matter. Unless otherwise indicated, the courts accepted the arguments I made at trial. My opinions do not necessarily represent the views of the DOJ.

Key Issues That Emerged During The Trial

The DOJ and the Federal Trade Commission have established Horizontal Merger Guidelines (HMGs) laying out the economic issues for merger analysis. These are the key elements in the HMGs that proved decisive at trial.

In What Markets Do The Insurers Compete?

I argued that the merger would affect two types of purchasers: “national accounts” employers and large local employers. Anthem claimed that my market definitions were confusing and lacking in rigor but did not offer its own alternative. I also claimed that the merger would reduce competition in local “upstream” markets—that is, contracting with providers—but the court largely ignored this issue.

How Would The Merger Affect Market Concentration?

Combining enrollment data subpoenaed from nearly three-dozen insurers (including preferred provider organization and health maintenance organization plans) with census data, I calculated that four insurers—United Healthcare, Aetna, Cigna, and the Blues (Blue Cross and Blue Shield Association)—controlled almost 90 percent market share. I found also high levels of market concentration in 35 local markets in Anthem territories (Note 1). I then calculated that the increase in concentration resulting from the merger would make it “presumptively anticompetitive” in these markets. Anthem quarreled with the validity of my data.

How Would The Merger Affect Premiums?

Here, the case moved away from simple measures of market structure and business stealing into complex economic models. My model predicted that total premiums in the national accounts market and in the 35 local large group markets would each increase by about $400–$500 million annually. Anthem’s model predicted a far smaller increase. The debate about whose model was best was fit for an academic seminar, and the court did not show a preference.

How Would The Merger Affect Innovation?

During the 2000s, Cigna chose a strategy of reducing costs through innovation, such as its Collaborative Accountable Care (CAC) arrangements with providers. I argued that the merger could harm Cigna’s existing innovations. Cigna’s CAC initiatives are predicated on relatively high provider payments, which allow providers to hire care coordination nurses and install information technology, while allowing Cigna to provide financial incentives for high-quality care. Anthem’s relies more on its size to obtain deep discounts from providers, which allows it to sustain a dominant presence in many markets. If Anthem reduced Cigna’s provider payments, as it proposed, the CAC initiatives may well have fallen apart.

Are Reductions In Provider Payments Efficient?

Anthem’s strongest defense was that through the merger it would reap $2.4 billion in reduced provider payments, most of which would be passed on to enrollees. I countered that Anthem’s calculations were highly flawed and that Anthem did not need to acquire Cigna to achieve a large fraction of the savings. Perhaps more importantly, Anthem had not put forth a coherent business plan for achieving the savings and the reduced payments would hinder Cigna’s CAC initiatives. Perhaps the last nail in the coffin came when Cigna executives testified about the difficulties of integrating two companies with very different business models and corporate cultures. Judge Jackson described this as “the elephant in the courtroom.”

In the wake of the court decision, Anthem and Cigna have been blaming each other for the outcome. They are arguing over who should pay the multibillion dollar breakup fee and may go to court to seek far more in damages. At the same time, both insurers may seek other partners. Simultaneous with this case, Aetna and Humana unsuccessfully sought to merge. And there are longstanding rumors that United Healthcare would like to get in on the merger act. As we put the court decisions in the rearview mirror, might we see a different arrangement of the deck chairs for these giant carriers?

Regardless of what happens to these insurers, the decision in the Anthem-Cigna case will have a big impact on other stakeholders.

Anthem-Cigna Takeaways And The Future Of Insurer Mergers

Blues For The Blues?

The Anthem-Cigna decision does nothing to shrink the Blues, which have shares in excess of 50 percent in many markets. The Blues are not out of antitrust danger. Two class-action lawsuits, representing purchasers and providers, allege that the Blue Cross Blue Shield Association’s “division of the market” rules, which assign territories to each member plan, violate the Sherman Antitrust Act.

All parties may draw on some aspects of the Anthem-Cigna decision. The decision provides a framework for defining both local and national markets. Both plaintiff classes will likely argue that the division of the market contributes to higher market concentration and assert that they have suffered financial losses as a result. Plaintiffs in the purchaser track may point to testimony that higher market concentration leads to higher premiums. Plaintiffs in the provider track may point to Anthem’s claimed $2.4 billion merger savings, which are derived from reductions in provider payments. The Blues may argue that the Blue Cross Blue Shield Association facilitates their participation in the market for national accounts, which might be even more concentrated without them.

A Win For Providers?

Now that the court has ruled, providers can exhale, but they should not breathe too easily. During trial, I testified that the exercise of monopsony power by a dominant insurer can harm consumers. I presented evidence, largely from studies of Medicare and Medicaid, that lower payments can lead to poorer patient outcomes. The District Court decision barely addressed monopsony claims, however. The Appellate Court even suggested that under different circumstances a reduction in provider payments could count as a merger efficiency.

In the future, insurers might successfully argue that when they negotiate deep discounts, they are merely “robbing Peter to pay Paul,” in which Peter is a powerful and profitable provider, and Paul is an employer or employee. This has the flavor of a “countervailing market power” argument, in which the best way to counterbalance a monopoly seller is through a monopsony buyer. This argument makes me and many other economists nervous. Economic theory fails to tell us how to strike this balance and even suggests that the two monopolies may act in their combined best interests, at the expense of consumers.

The Anthem decision kicks this can down the road.

What Does It Mean For Consumers?

If my calculations are correct, then the court decision has saved consumers hundreds of millions of dollars in annual premium increases. Most of the savings will accrue to individuals who live in the Anthem territories. But these savings are just a drop in the overall health care spending bucket. I am more excited about the implications of the decision for innovation.

In addition to its CAC initiatives, Cigna offers industry-leading wellness programs, and it is helping local systems become hubs for narrow network plans. All of these innovations have the potential to generate enormous cost savings. Anthem argued that it would bring Cigna’s innovations to a larger audience, but I remain skeptical. Anthem’s deep discounts were not compatible with CAC initiatives. Anthem can invest more in wellness without the merger, and Anthem’s accountable care organization strategy mainly involves broad networks.

The impact of the merger on future innovation is perhaps more concerning. Even as Cigna grows, it will pale in size relative to the Blues, and it will continue to have a strong incentive to innovate. Subsumed into Anthem, Cigna’s incentives to innovate would diminish, and its pipeline of innovations would slow.

Of course, we would never know what we had lost, but given Cigna’s recent track record, some of these innovations might have been game changers. Over the next few years, it will be interesting to see if Cigna continues to be an innovation leader and whether those innovations, as well as innovations by other insurers trying to keep up, help to bend the cost curve.

Note 1

Market concentration measures the overall structure of the market, taking into account the shares of all the large firms.