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In pretrial documents, Aetna and Humana contend that the federal government’s lawsuit to block the companies’ proposed merger relies on faulty economic modeling that belies “real-world facts.”

The Department of Justice countered that the insurers had offered “no basis for concluding that consumers would benefit” from any so-called merger efficiencies.

In the last few days, lawyers for the companies and the DOJ have filed documents that outline the cases they plan to present when the trial begins Monday in the U.S. District Court in Washington, D.C.

Hartford, Conn.-based Aetna wants to buy Louisville-based Humana for $37 billion. The companies say that combined they can offer better care to more customers at a lower cost. Justice disagrees and on July 21 filed a lawsuit to stop the proposed deal because, government officials argued, it would reduce competition, lower the quality of care and raise insurance prices, especially for older Americans.

The case is important for Louisville for many reasons, as it could significantly affect Humana’s operations in Louisville, where the company employs about 12,000. Officials including the company’s co-founder have told IL that some employees likely would lose their jobs because of the merger, but that the net effect for Louisville could be positive, as Aetna has promised to maintain a “significant corporate presence” and the headquarters of its growing Medicare and Medicaid businesses here.

The insurers said in recent court filings that the merger “will generate enormous benefits for health care consumers, including millions of senior citizens.”

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Jonathan Orszag

The companies said that their expert, Jonathan Orszag, will show that the merger will result in more than $2 billion in annual efficiencies “including hundreds of millions of dollars that will flow through to consumers.” Orszag is a senior managing partner with economic consulting firm Compass Lexecon.

The Justice Department this week wrote in its pretrial memorandum that the companies have not shown that consumers would benefit from the purported efficiencies nor that any efficiencies would benefit consumers in those markets where the merger would reduce competition.

Research will show, the DOJ asserts, that if the merger were to proceed, older Americans would pay an estimated $340 million more in rebate-adjusted premiums each year and taxpayers would have to pay an additional $135 million annually through higher government payments to insurers.

The heart of the case: Original Medicare vs. Medicare Advantage

Screenshot from the Medicare website.
Screenshot from the Medicare website.

At the heart of the lawsuit lies a disagreement among the insurers and the government about government-funded insurance for older citizens.

When signing up for Medicare, elderly Americans can choose between:

  • Original Medicare, which provides insurance for stays in health care facilities — hospitals, nursing homes, hospice — and medical services:  lab tests, surgeries and wheelchairs. OM is coverage managed by the federal government. Participants have their choice of doctors, hospitals and other providers that accept Medicare.
  • Medicare Advantage, which provides the same kind of insurance, but is provided by private insurance companies such as Aetna and Humana that are approved by Medicare. Participants on most MA plans have to use doctors, hospitals and other providers that are part of the insurance company’s network — or pay more or all of the cost if they go outside the network.

The Kaiser Family Foundation has said that Aetna and Humana combined would have a Medicare Advantage market share exceeding 50 percent in 10 states and higher than 67 percent in five states. The two companies combined would have an industry-leading 4.4 million Medicare Advantage customers, or about 25 percent of the total MA enrollment of 17.6 million, according to Kaiser.

The government argues that the merger would eliminate competition between the companies, allow them to dominate the markets, and reduce the likelihood that other companies would dare to compete with the merged company. And that would reduce the quality of services offered to older Americans and increase their costs.

However, the companies contend that the government is defining the senior citizen health care market too narrowly, in that it only focuses on Medicare Advantage — not on Medicare as a whole.

Original Medicare and Medicare Advantage are the same market,  the companies assert, in part because the government, in the form of the Centers for Medicare & Medicaid Services, “regulates nearly every aspect of MA pricing … (and) MA benefit thresholds, MA plan compliance, MA plan networks and MA plan quality to ensure that private insurers provide the benefits and quality of care to which all Medicare beneficiaries are entitled.”

The companies wrote in their filing that CMS would serve as a “potent check on the post-merger entity,” which they say undermines the government’s concerns that the merger will increase prices and lower benefit quality, or both.

In addition, the companies asserted, other insurers that offer MA have entered markets where they perceive competitive opportunity, “and the evidence will show that they will continue to do so after the merger.”

The government’s lawyers this week wrote that few participants switch from Original Medicare to Medicare Advantage and back.

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Aviv Nevo

The DOJ’s expert, Aviv Nevo, “studied CMS switching data for 2014 and 2015 and found that seniors switching away from an Aetna or Humana MA plan in the relevant counties chose another MA plan more than 87 percent of the time.” Nevo is the Robert E. and Emily King Professor in Business Institutions and Professor of Marketing at Northwestern University.

And, the DOJ argued, similarities between the two markets does not mean that they are identical.

“As the Supreme Court has explained, ‘[f]or every product, substitutes exist. But a relevant market cannot meaningfully encompass [an] infinite range [of products]. The circle must be drawn to exclude any other product to which, within reasonable variations in price, only a limited number of buyers will turn,’” the DOJ wrote. “In H&R Block, for example, the court found that the relevant market was limited to digital, do-it-yourself tax preparation even though it was ‘beyond debate’ that ‘all methods of tax preparation are, to some degree, competition.’”

“MA is not reasonably interchangeable with Original Medicare or other forms of health insurance available to seniors,” the Justice Department wrote.

Divestiture

molinaThe insurers also said that if the court were to side with the Justice Department, the companies’ proposed asset sale to rival Molina Healthcare, should negate any of the merger’s anticompetitive concerns.

The insurers have said they plan to sell $117 million worth of assets to Molina, a Long Beach, Calif.-based Fortune 500 company.

“Molina will be a formidable competitor that will supplant any competition lessened (at least in the government’s eyes) by the merger,” the companies asserted.

The Justice Department disagrees, saying that such divestitures often fail and the one proposed by Aetna and Humana “is especially likely” to fail because of Molina’s poor track record.

Molina began selling Medicare Advantage plans to individuals in 2008 and sold insurance plans in 63 counties, the DOJ said. However, the company has since quit the MA business, with the exception of two small plans offered in Utah and California “that enroll a mere 424 members.”

“Seniors should not be forced to bear the risk that this ‘experiment’ will fail as well,” the government’s lawyers wrote.

The filings from the companies and the feds are replete with legal arguments and citations of other court cases, but each side is also trying to make the case with some humorous jibes: The insurers, for example, point out that the government, on the Medicare website, tells participants that they can get Medicare coverage in two ways, Original Medicare or a Medicare Advantage Plan. That means, the companies argue, that the government, by its own admission, recognizes that the two are essentially the same.

However, the DOJ counters that the insurers, in their annual reports, show results for OM and MA separately, which means they recognize that both products are distinct.

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Boris Ladwig
Boris Ladwig is a reporter with more than 20 years of experience and has won awards from multiple journalism organizations in Indiana and Kentucky for feature series, news, First Amendment/community affairs, nondeadline news, criminal justice, business and investigative reporting. As part of The (Columbus, Indiana) Republic’s staff, he also won the Kent Cooper award, the top honor given by the Associated Press Managing Editors for the best overall news writing in the state. A graduate of Indiana State University, he is a soccer aficionado (Borussia Dortmund and 1. FC Köln), singer and travel enthusiast who has visited countries on five continents. He speaks fluent German, rudimentary French and bits of Spanish, Italian, Khmer and Mandarin.