Archives For structural presumption

I just posted a new ICLE white paper, co-authored with former ICLE Associate Director, Ben Sperry:

When Past Is Not Prologue: The Weakness of the Economic Evidence Against Health Insurance Mergers.

Yesterday the hearing in the DOJ’s challenge to stop the Aetna-Humana merger got underway, and last week phase 1 of the Cigna-Anthem merger trial came to a close.

The DOJ’s challenge in both cases is fundamentally rooted in a timeworn structural analysis: More consolidation in the market (where “the market” is a hotly-contested issue, of course) means less competition and higher premiums for consumers.

Following the traditional structural playbook, the DOJ argues that the Aetna-Humana merger (to pick one) would result in presumptively anticompetitive levels of concentration, and that neither new entry not divestiture would suffice to introduce sufficient competition. It does not (in its pretrial brief, at least) consider other market dynamics (including especially the complex and evolving regulatory environment) that would constrain the firm’s ability to charge supracompetitive prices.

Aetna & Humana, for their part, contend that things are a bit more complicated than the government suggests, that the government defines the relevant market incorrectly, and that

the evidence will show that there is no correlation between the number of [Medicare Advantage organizations] in a county (or their shares) and Medicare Advantage pricing—a fundamental fact that the Government’s theories of harm cannot overcome.

The trial will, of course, feature expert economic evidence from both sides. But until we see that evidence, or read the inevitable papers derived from it, we are stuck evaluating the basic outlines of the economic arguments based on the existing literature.

A host of antitrust commentators, politicians, and other interested parties have determined that the literature condemns the mergers, based largely on a small set of papers purporting to demonstrate that an increase of premiums, without corresponding benefit, inexorably follows health insurance “consolidation.” In fact, virtually all of these critics base their claims on a 2012 case study of a 1999 merger (between Aetna and Prudential) by economists Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan, Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry, as well as associated testimony by Prof. Dafny, along with a small number of other papers by her (and a couple others).

Our paper challenges these claims. As we summarize:

This white paper counsels extreme caution in the use of past statistical studies of the purported effects of health insurance company mergers to infer that today’s proposed mergers—between Aetna/Humana and Anthem/Cigna—will likely have similar effects. Focusing on one influential study—Paying a Premium on Your Premium…—as a jumping off point, we highlight some of the many reasons that past is not prologue.

In short: extrapolated, long-term, cumulative, average effects drawn from 17-year-old data may grab headlines, but they really don’t tell us much of anything about the likely effects of a particular merger today, or about the effects of increased concentration in any particular product or geographic market.

While our analysis doesn’t necessarily undermine the paper’s limited, historical conclusions, it does counsel extreme caution for inferring the study’s applicability to today’s proposed mergers.

By way of reference, Dafny, et al. found average premium price increases from the 1999 Aetna/Prudential merger of only 0.25 percent per year for two years following the merger in the geographic markets they studied. “Health Insurance Mergers May Lead to 0.25 Percent Price Increases!” isn’t quite as compelling a claim as what critics have been saying, but it’s arguably more accurate (and more relevant) than the 7 percent price increase purportedly based on the paper that merger critics like to throw around.

Moreover, different markets and a changed regulatory environment alone aren’t the only things suggesting that past is not prologue. When we delve into the paper more closely we find even more significant limitations on the paper’s support for the claims made in its name, and its relevance to the current proposed mergers.

The full paper is available here.

The FTC recently required divestitures in two merger investigations (here and here), based largely on the majority’s conclusion that

[when] a proposed merger significantly increases concentration in an already highly concentrated market, a presumption of competitive harm is justified under both the Guidelines and well-established case law.” (Emphasis added).

Commissioner Wright dissented in both matters (here and here), contending that

[the majority’s] reliance upon such shorthand structural presumptions untethered from empirical evidence subsidize a shift away from the more rigorous and reliable economic tools embraced by the Merger Guidelines in favor of convenient but obsolete and less reliable economic analysis.

Josh has the better argument, of course. In both cases the majority relied upon its structural presumption rather than actual economic evidence to make out its case. But as Josh notes in his dissent in In the Matter of ZF Friedrichshafen and TRW Automotive (quoting his 2013 dissent in In the Matter of Fidelity National Financial, Inc. and Lender Processing Services):

there is no basis in modern economics to conclude with any modicum of reliability that increased concentration—without more—will increase post-merger incentives to coordinate. Thus, the Merger Guidelines require the federal antitrust agencies to develop additional evidence that supports the theory of coordination and, in particular, an inference that the merger increases incentives to coordinate.

Or as he points out in his dissent in In the Matter of Holcim Ltd. and Lafarge S.A.

The unifying theme of the unilateral effects analysis contemplated by the Merger Guidelines is that a particularized showing that post-merger competitive constraints are weakened or eliminated by the merger is superior to relying solely upon inferences of competitive effects drawn from changes in market structure.

It is unobjectionable (and uninteresting) that increased concentration may, all else equal, make coordination easier, or enhance unilateral effects in the case of merger to monopoly. There are even cases (as in generic pharmaceutical markets) where rigorous, targeted research exists, sufficient to support a presumption that a reduction in the number of firms would likely lessen competition. But generally (as in these cases), absent actual evidence, market shares might be helpful as an initial screen (and may suggest greater need for a thorough investigation), but they are not analytically probative in themselves. As Josh notes in his TRW dissent:

The relevant question is not whether the number of firms matters but how much it matters.

The majority in these cases asserts that it did find evidence sufficient to support its conclusions, but — and this is where the rubber meets the road — the question remains whether its limited evidentiary claims are sufficient, particularly given analyses that repeatedly come back to the structural presumption. As Josh says in his Holcim dissent:

it is my view that the investigation failed to adduce particularized evidence to elevate the anticipated likelihood of competitive effects from “possible” to “likely” under any of these theories. Without this necessary evidence, the only remaining factual basis upon which the Commission rests its decision is the fact that the merger will reduce the number of competitors from four to three or three to two. This is simply not enough evidence to support a reason to believe the proposed transaction will violate the Clayton Act in these Relevant Markets.

Looking at the majority’s statements, I see a few references to the kinds of market characteristics that could indicate competitive concerns — but very little actual analysis of whether these characteristics are sufficient to meet the Clayton Act standard in these particular markets. The question is — how much analysis is enough? I agree with Josh that the answer must be “more than is offered here,” but it’s an important question to explore more deeply.

Presumably that’s exactly what the ABA’s upcoming program will do, and I highly recommend interested readers attend or listen in. The program details are below.

The Use of Structural Presumptions in Merger Analysis

June 26, 2015, 12:00 PM – 1:15 PM ET

Moderator:

  • Brendan Coffman, Wilson Sonsini Goodrich & Rosati LLP

Speakers:

  • Angela Diveley, Office of Commissioner Joshua D. Wright, Federal Trade Commission
  • Abbott (Tad) Lipsky, Latham & Watkins LLP
  • Janusz Ordover, Compass Lexecon
  • Henry Su, Office of Chairwoman Edith Ramirez, Federal Trade Commission

In-person location:

Latham & Watkins
555 11th Street,NW
Ste 1000
Washington, DC 20004

Register here.