Court Rejects Vertical Merger Challenge Brought by DOJ
On Monday, September 19, 2022, D.C. District Court Judge Carl J. Nichols rejected the Department of Justice’s (“DOJ”) request to block UnitedHealth’s $13.8 billion acquisition of Change Healthcare. UnitedHealth is the largest health insurer in the United States, while Change Healthcare is a leading data clearinghouse for insurance claims. The DOJ initially filed suit to block the acquisition in February, contending that the acquisition would give UnitedHealth access to its rival health insurers’ data through Change, and that the combined entity would have an incentive to slow delivery of new insurance claim processing tools.
In order for the transaction to proceed, Judge Nichols ordered divestiture of Change Healthcare’s ClaimsXten unit that provides technology to help insurers process claims. ClaimsXten was the only unit found to have had a direct overlap with UnitedHealth, and the divestiture was initially requested by the transacting parties as a way to alleviate DOJ concern that the combined firm would have a large (94%) market share.
Judge Nichols’ 58-page opinion indicated little concern that the vertical aspects of the deal would have anticompetitive effects. Brand reputation and the existence of pre-existing structural protections, such as firewalls and customer contracts requiring data protection, indicated that UnitedHealth was unlikely “to misuse the data in the ways the Government contends.” Additionally, the government provided no evidence “that rival payers will innovate less as a result” of the transaction and that the combined entity would seek to foreclose rivals’ access to key inputs.
Vertical merger challenges by antitrust enforcement agencies have historically been rare. Vertical mergers (i.e. mergers between companies along the supply chain) often generate procompetitive efficiencies and do not pose the same anticompetitive threat as mergers between direct competitors. Often the merging parties are able to negotiate behavioral remedies with the government, such as firewalls, to alleviate any potential concern.
Vertical mergers and acquisitions are common in the healthcare space as they can allow firms, among other things, to streamline production and/or distribution and improve the quality of healthcare for patients. For instance, in 2018, drugstore chain operator CVS Health acquired health insurer Aetna to combine “the strengths and capabilities” of the companies and “improve the consumer health care experience.” The DOJ gave the acquisition a green light after Aetna agreed to divest its standalone Medicare Part D prescription drug plans. Also in 2018, the DOJ approved health insurer Cigna’s acquisition of pharmacy benefit manager Express Scripts.
This lawsuit was the first primarily vertical merger challenge by the DOJ since 2016. Several commentators considered the suit a reflection of the Biden Administration’s attempt to take a tougher anticompetitive stance against big companies, particularly in the healthcare space. The decision is a blow against such efforts and suggests that the presence of firewalls and an active antitrust compliance program are likely to be sufficient to address purely vertical concerns arising from mergers and acquisitions in the future. Head of the DOJ Antitrust Division Jonathan Kanter signaled that the agency may appeal the decision, stating the department was “reviewing the opinion closely to evaluate next steps.” Documents pertaining to the suit can be found here: https://www.justice.gov/atr/case/us-et-al-v-unitedhealth-group-inc-and-change-healthcare-inc.