The use of efficiencies as a defense remains without a firm footing in law when a transaction has demonstrable and substantial anticompetitive effects.
In Rob Reiner's classic fantasy adventure The Princess Bride, Princess Buttercup and her true love, Westley, stand at the edge of the notoriously deadly Fire Swamp, chased there by enemies and with only that path forward. "We'll never survive," Princess Buttercup darkly intones. "Nonsense," Westley responds cheerfully, "you're only saying that because no one ever has." As recently illustrated by the unsuccessful attempt to join two of the nation's largest healthcare insurers, pursuing an efficiencies defense against anticompetitive findings regarding a healthcare merger presents every bit as daunting a task and as discouraging a track record.
In 2015, Anthem Inc. and Cigna Corporation struck an agreement to merge, seeking to capitalize on Anthem's superior rates and Cigna's superior customer support. This merger was subsequently challenged by the U.S. Department of Justice (DOJ), 11 states and the District of Columbia. U.S. District Judge Amy Berman Jackson enjoined the transaction on the grounds that the supposed efficiencies created by this arrangement could not save this unlawful creation of market power.
The U.S. Court of Appeals for the D.C. Circuit affirmed Judge Jackson, finding no clear error in her judgment of probable reduction in competition and saying that proceeding with the transaction "because of some unverifiable and non-merger-specific amount of price decreases accruing to one segment of the health care market would rewrite rather than enforce the Clayton Act." The D.C. Circuit said that it would "leave for another day whether efficiencies can be an ultimate defense against [Clayton Act] Section 7 illegality," but even assuming the viability of an efficiencies defense, it found that Anthem and Cigna still failed to prove those efficiencies trumped likely harm to competition.
In reaching this conclusion, the D.C. Circuit relied on a "helpful tool," the DOJ and the Federal Trade Commission's Horizontal Merger Guidelines. Although these Guidelines do not have the force of law, repeated reliance on them by appellate and trial courts have given them that effect in practice. The D.C. Circuit's reliance on the Guidelines' principle that "[c]ognizable efficiencies ... do not arise from anticompetitive reductions in output or service" represented one of the final nails in the coffin for Anthem and Cigna's efforts to combine.
So what should payers and providers in the healthcare arena take away from this case and the courts' use of the Horizontal Merger Guidelines? Despite the Guidelines' allowance in theory of efficiencies as a consideration in merger evaluation, a notion supported by modern currents of economic theory, the use of efficiencies as a defense remains without a firm footing in law when a transaction has demonstrable and substantial anticompetitive effects. Supreme Court guidance won't soon be forthcoming; Anthem and Cigna filed a certiorari petition but then abandoned the transaction on May 12. Although Princess Buttercup and Westley managed to survive the perils of the Fire Swamp, such a happy ending remains fiction. In real life, success using efficiencies as a defense in this context remains uncharted territory.
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