In February, the Department of Justice (DOJ) filed suit to block the $13.8 billion acquisition of Change Healthcare (a leading data clearinghouse for insurance claims) by UnitedHealth (the largest health insurer in the United States), arguing that the deal would allow UnitedHealth access to the data of its rival health insurers via Change, and that innovation would also be slowed, as the combined entity would have an incentive to slow the delivery of new tools for insurance claim processing.
On September 19, however, D.C. District Court Judge Carl J. Nichols rejected the DOJ’s request.
While Judge Nichols is allowing the transaction to proceed, he did order Change Healthcare to divest itself of its ClaimsXten unit, which provides technology to help insurers process claims — ClaimsXten was the only unit the judge found to directly overlap with UnitedHealth.
Judge Nichols seemed unconcerned about any potential anticompetitive effects of the vertical nature of the deal. He wrote in his opinion that brand reputation and the existence of pre-existing structural protections, such as firewalls that have been erected and customer contracts requiring data protection, made it clear that UnitedHealth was unlikely “to misuse the data in the ways the government contends.”
The judge also wrote that the government had failed to provide evidence that the transaction would result in rival players innovating less, or that the combined entity would obstruct its rivals’ access to key inputs.
Because vertical mergers (mergers between companies along the supply chain) often result in more competitive entities and do not pose the same anticompetitive threat as mergers between direct competitors, challenges to them by antitrust enforcement agencies have historically been rare. Often, if there is perceived to be a danger that an agency may object to a vertical merger, the merging parties have been able to negotiate behavioral remedies with the government, such as firewalls, to alleviate potential concerns.
Vertical M&A is particularly common in the healthcare space because it allows firms to streamline production and/or distribution and improve patient quality of care — the latter result being ostensibly what the government is after.
For instance, the DOJ approved two major healthcare mergers in 2018: the 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,” and health insurer Cigna acquired pharmacy benefit manager Express Scripts.
The UnitedHealth-Change Healthcare suit is likely a reflection of the Biden administration’s attempt to be tougher on anticompetitive moves by big companies, particularly in the healthcare space — it was the DOJ’s first challenge of a primarily vertical merger since 2016.
Judge Nichols’ decision to allow the merger is a blow to the present administration’s efforts and suggests that the presence of firewalls and an active antitrust compliance program are likely to be enough to address purely vertical concerns arising from M&A in the future.
However, it appears the DOJ is not giving up just yet. Jonathan Kanter, the head of the DOJ Antitrust Division, indicated that the agency may in fact appeal the decision, saying the department was “reviewing the opinion closely to evaluate next steps.”
