There has been a lot of talk in academic and policy circles recently about the failure of antitrust law to put the brakes on a decades-long merger wave that has consolidated industry after industry into a handful of dominant players, in the process deterring innovation and entrepreneurship, slowing economic growth, and widening the income gap between the rich and everyone else. Even pro-market conservatives not known for their regulatory zeal acknowledge there is a problem.
Two new books artfully marshal the arguments and the evidence: “The Myth of Capitalism,” by Jonathan Tepper, an economist and former hedge fund trader; and “The Curse of Bigness,” by Tim Wu, a professor at Columbia Law School in New York and adviser to the Obama administration.
Both authors lay out how, over the past 40 years, judges and regulators, in a vain search for more objective and scientific criteria, have taken a ridiculously cramped view of the antitrust law. Too many cases are reduced to a highly technical econometric quarrel about whether prices will rise or fall rather than a more full — if somewhat more subjective analysis — of whether competition is likely to be reduced. This mistakenly narrow “consumer welfare” approach is so woven into the case law and the habits of judges and regulators that only a revision to the law itself, both authors conclude, can restore the competitiveness of a postindustrial economy.
I was recently reminded of this timidity when I visited the Justice Department’s antitrust chief and his staff to hear why they decided not to block the merger of CVS — which through acquisition has become the nation’s largest retail pharmacy and pharmacy benefit manager for insurers — with the country’s third-largest health insurer, Aetna. Weeks earlier, they had also given the green light to a similar merger between Express Scripts, a pharmacy benefit manager, and Cigna, an insurer.
These are what are known as “vertical” mergers — mergers between companies and their suppliers or their customers — as opposed to mergers between firms that compete head to head doing the same thing. The reason vertical mergers are at the front line of competition policy is very simple: The government has already allowed so many horizontal mergers, meaning a lot of industries are dominated by two or three firms, that even the most brazen corporate lawyers know they can’t defend further consolidation of direct competitors. Unless corporate executives are willing to do something risky and hard like actually improving their products and services, the only way for them to deliver double-digit earnings growth year after year is to merge with a customer or supplier.
(Mergers also tend to be bonanzas for the executives who negotiate them. The severance package for Aetna chief executive Mark Bertolini is valued at half a billion dollars.)
Anyone who doubts that the CVS-Aetna merger would reduce competition in markets only has to read the record compiled by David Jones, the California insurance commissioner, at an open hearing last summer during which an impressive array of economists and lawyers came to the same conclusions that anyone who pays for drugs and insurance would:
●The markets for health insurance and pharmacy services are already so concentrated, so uncompetitive and so lacking in price transparency that any cost savings that might flow from the merger would be captured by shareholders in the form of higher profits, not customers in the form of lower prices.
●A combined CVS-Aetna would have the incentive and the power to steer millions of Aetna’s customers away from independent pharmacies and doctors offices to CVS through price incentives or by excluding competitors from the company’s networks.
●CVS, as a pharmacy benefit manager, would have the incentive and power to raise costs for other insurance companies that it serves, driving some from the marketplace.
●The merger, along with that of the Cigna-Express Scripts merger, would make it harder for any firm to enter the insurance or pharmacy markets without entering both at the same time, reducing the possibility of future competition.
These experts did not have to rely on theoretical economic models and assumptions to support their conclusions. It turns out that, when it comes to anti-competitive behavior, CVS already has a long rap sheet.
As a pharmacy benefit manager for a number of insurance companies, including Aetna, CVS often requires consumers to buy drugs for chronic conditions from its mail-order pharmacy, or makes it more expensive not to do so.
Along with other pharmacy benefit managers (PBMs), CVS has also reduced reimbursement rates to retail pharmacies for generic drugs to levels lower than what it costs the pharmacists to buy the drugs from wholesalers. Recently, one retailer — Walmart, no less! — refused to accept CVS’s pricing and pulled out of CVS’s retail network. (It later rejoined it.)
Until the practice was outlawed last year, CVS’s standard contract used to contain gag clauses that pharmacists widely interpreted as preventing them from telling consumers that they could save money by paying for many generic drugs out of their own pockets rather than putting them through their insurance plans, which sometimes requires an even larger co-pay.
According to one study by researchers at the University of Southern California, consumer co-pays exceeded what insurers paid for drugs in one-quarter of all prescriptions.
Indeed, the pricing of drugs had become so opaque, and the backlash against PBMs so loud, that even the normally pro-business Trump administration proposed recently to outlaw what it called the “kickbacks” that PBMs demand from drug companies for steering consumers to their drugs. The government concluded that the payments had led to higher list prices for drugs and, contrary to the claims of PBMs and insurers, had not been fully passed along to consumers in the form of lower insurance premiums. (Other managers do the same.)
Surely, consumers in the Washington region are all too familiar with CVS’s anti-competitive behavior, having watched for years as the company bought up virtually every neighborhood pharmacy with the intent of shutting most of them down. Those that refused to sell out often found that a CVS would open on the next block.
One of the more creative arguments made by CVS and Aetna to justify their merger is that Aetna could steer its customers to an expanded network of walk-in medical clinics in CVS stores for treatment of minor conditions, substituting for more expensive visits to doctors offices or hospital emergency rooms.
The companies estimate cost savings of “hundreds of millions of dollars a year,” although they declined to tell the California commissioner how much of those savings will translate into premium reductions.
To any of its regular customers, the idea that we would eagerly walk past the aisles full of Christmas lights, Froot Loops and mascara at the local CVS to get urgent medical care from an understaffed team of nurse practitioners paid CVS wages, well, that borders on ludicrous.
As Lawton Burns, director of the Wharton Center for Health Management and Economics at the University of Pennsylvania, has told the California insurance commissioner, pharmacy-based clinics result in inferior, fragmented care that doesn’t save money. They don’t even reduce emergency-room visits.
When I put these concerns to Makan Delrahim, the assistant attorney general for antitrust, and his staff, they said they had all been considered and dismissed.
Instead, the government accepted CVS’s argument that it would not have any incentive to engage in anti-competitive practices and would realize operating efficiencies from the merger that would be passed on to consumers — the same tired and discredited argument used to defend every mega-merger for the past 30 years. And if it turns out CVS-Aetna does engage in such anti-competitive practices, Delrahim and his staff assured that they could file an anti-monopolization suit against the company under the Sherman Act. The last time that was done was during the Clinton administration.
In recent weeks, however, Delrahim has been forced to explain his decision to a higher authority. It turned out there was one small area where Aetna and CVS competed directly: offering drug coverage plans under Medicare. Aetna agreed to the government’s demand that it sell its unit to another firm. Under a law known as the Tunney Act, a federal judge must rule that the settlement is “in the public interest.”
Normally, that’s a pro forma process. But in this case, Judge Richard J. Leon of the U.S. District Court for the District of Columbia has expressed concern that the government had not sufficiently explored the potential competitive harm from the “vertical” merger of a leading insurer with a dominant pharmacy.
When government lawyers explained to Leon that he could not consider issues outside the narrow scope of the proposed settlement — the market for Medicare drug plans — the judge barked back that he had no intention of acting as a “rubber stamp” for the government. He set a deadline of Feb. 15 for the government to file its response to a broad range of objections to the merger filed by community pharmacists, the American Medical Association and the American Antitrust Institute.
Such a review is just what Congress intended when it passed the Tunney Act — to provide some judicial oversight of antitrust regulators to ensure they don’t cave to political pressure from business interests.
The Justice Department, however, has long considered the Tunney Act an unconstitutional intrusion into the prerogatives of the executive branch to decide how to enforce the law. If Leon moves to block the merger, the matter is likely to make its way to the Supreme Court, where the addition of two Trump appointees will make the court even less sympathetic to aggressive enforcement of the antitrust law than it has been in recent years.
All of which makes it more imperative than ever that Democrats who have taken control of the House of Representatives begin the process of updating and strengthening the antitrust statutes.
Rather than just bellyaching about the rise in corporate economic and political power, here’s a golden opportunity to actually do something about it. For if they fail to rise to the challenge — if mergers like CVS-Aetna continue to get the green light — then our uniquely entrepreneurial form of capitalism will soon give way to the kind of cozy corporate capitalism that has been common in Europe and Asia.