CVS-Aetna merger, hindered by the government shutdown

The long-awaited merger between CVS and Aetna faced another obstacle this week, with the government shutdown.

The $69 billion action is stalled until the Department of Justice (DOJ) anti-trust division responds to public comments received about the tie-up. In late December, the comments poured in after a federal judge refused to sign off on the settlement between the DOJ and CVS-Aetna and ordered the pharmacy chain and insurance giant to separate their operations for the moment.

Unless the court orders otherwise,  the DOJ will be able to work on its responses only after funding is restored and the government is back up and running.  The shutdown took a toll on CVS’ shares, which slumped 4% on Wednesday, January 09.

“CVS Health and Aetna are one company”

The issue was addressed at J.P. Morgan’s Healthcare Conference in San Francisco where officials from the two companies met with investors.

CVS and Aetna were already “one company,” CVS CEO Larry Merlo told investors.

“I want to unequivocally state that CVS Health and Aetna are one company and our transformation work is already underway,” Merlo said.  The CVS chief went on to say that “the ongoing court review will not impact the timeline for achieving the targeted synergies.”

The DOJ’s request to delay responses to public comments didn’t sit well with the judge who forestalled the companies’ integration, either. D.C. District Court Judge Richard Leon ordered the department to “roll up their sleeves” and respond to public comments by Feb. 15. Leon said “political squabbling over funding” is not enough of a reason to postpone the evaluation.

In addition to ordering the two companies to operate as separate units, Leon asked Aetna to prevent any exchange of competitive information with CVS and maintain its control over pricing, product offerings and employee compensation. Meanwhile, CVS committed to providing sworn statements each quarter. In the first sworn statement, provided last week, several executives attested to the tenets of the judge’s order that the company is operating those units separately.

In addition, Aetna sold its Medicare Part D business to a WellCare subsidiary, a requirement from the Justice Department, in order to prevent pharmacy conflict of interest.

The move did little to sway the judge, who said their complaint raises anti-competitive concerns only about “one-tenth of one percent of this $69 billion deal.”

Leon, however, might not have the authority to hold up the merger.

In a status report filed over the weekend, The Justice Department made it clear that Leon’s role is merely formal and thus limited to making sure that the settlement doesn’t violate anti-trust laws.

Legal scholars agree.

Judge Leon “has no power to rule outside of the scope of the DOJ’s objections, thus he cannot stop the balance of the business integration,” analysts at RBC Capital Markets said.

Judge Leon is not the only one questioning the CVS-Aetna deal.

The merger has met skepticism ever since its announcement in December 2017.

Some critics worried that a fusion of the country’s largest pharmacy, and Aetna, one of the largest national health insurers, would lead to a monopoly in the healthcare system.

Health experts warned that customers might be at a loss if the merger goes through, with fewer options of where they pick up their prescriptions and receive their healthcare services.

“Consumers suffer by paying more and getting less choice for the vital drugs they need,” said David Balto, a former Federal Trade Commission lawyer.

Judge Leon, a controversial figure

This is not the first time Judge Leon took a stand against the DOJ. Appointed in 2002 by former President George W. Bush, Leon has built a reputation for arguing the Department of Justice’s decisions regarding mergers between major U.S. companies.

“It seems in Judge Leon’s court, the federal government always loses,” Christopher Sagers, a law professor at Cleveland State University commented. “He is bombastic in the courtroom and in his written opinions.”

In 2011, Leon disagreed with the Obama-era Justice Department decision to allow Comcast to acquire a majority stake in NBCUniversal. Recently, he railed against the DOJ for not clearing the merger between AT&T and Time Warner.

“I can’t think of a judge who has been this opposed to the federal government,” said John Newman, Assistant Professor of law at the University of Memphis. “He really seems like he actually just doesn’t like DOJ.“

In the grand scheme of the CVS-Aetna deal, the hold-up seems insignificant. If Leon chooses to disapprove the consent decree, the case could go to the D.C. Court of Appeals.

The mega-merger had already received preliminary approval from the Department of Justice in October and officially closed the deal in November.

The goal, as officials from both companies have explained, is to simplify how consumers get access to health care and lower costs.

The merger combines CVS pharmacies with Aetna’s insurance business, which will turn CVS into a one-stop shop for over 22 million Aetna members. These patients will soon be able to walk into any of the 10,000 CVS retail pharmacies and receive care for every condition, including chronic ones.
CVS said it expects to save more than $750 million within two years of the deal closing.

On Monday, at a National Press Club luncheon in Washington D.C., Merlo announced that once CVS finalizes its acquisition of Aetna, the company will launch a five-year $100 million initiative focused on providing more healthcare resources for local communities such as food banks, free clinics and blood pressure kiosks in high-traffic spaces.