May 23, 2018

A federal judge had stern words for CVS, Aetna and the U.S. Justice Department as he scheduled a crucial hearing to consider whether a merger of the two companies is in the public interest.

Last week, U.S. District Court Judge Richard J. Leon threw out a demand that he limit his review to only a small portion of the companies' business.

The Justice Department had said that the proposed $69 billion merger would not create anti-competitive concerns as long as Aetna agrees to sell off its Medicare prescription-drug plans. Attorneys general in California, Florida, Hawaii, Mississippi and Washington joined in that opinion, and last Thursday they filed papers with the court saying they still supported it.

But outside groups, such as the American Medical Association, are saying that a merger of if the companies are allowed to mergethe country's third-largest health insurer and the second-largest pharmacy benefit manager and the largest drug-store chain, it would remove even more competition from an already concentrated marketplace — and could further inflate the cost of health care.

In its Side Effects series, The Dispatch has reported for the past year on reasons for high prescription-drug prices, including how CVS had been using its pharmacy benefit management business in ways that critics say give special benefits to its retail pharmacy chain.

Those concerns will be aired in Leon's Washington, D.C., courtroom. The judge has scheduled a hearing for June 4-6.

In his order setting the hearing, Leon rejected the argument that he was bound to consider only anti-competitive concerns raised by the Justice Department about the proposed merger. He is conducting the review pursuant to the Tunney Act, a 1974 law that requires the courts to review agreements in which the government green-lights corporate mergers. The law requires courts to take a second look to assure the deals serve the public interest and protect against monopolistic practices.

Quoting the Court of Appeals for the Washington, D.C., circuit, Leon wrote, "Courts are 'not obliged to accept (a consent decree) that, on its face and even after government explanation, appears to make a mockery of judicial power,' and 'if third parties contend that they would be positively injured by the decree, a district judge might well hesitate before assuming that the decree is appropriate.'"

The proposed merger would combine CVS Health, the seventh-largest U.S. corporation by revenue, with Aetna, the 49th largest, according to Fortune. Critics say the mega-company would use its interlocking business units to crowd out competition and raise prices.

But CVS says the combined company would do the opposite.

In court papers naming the official the company wants to testify, lawyers said Executive Vice President of Transformation Alan Lotvin has a "focus on identifying opportunities for growth and innovation to create a new health-care model that is easier to use, less expensive, and puts customers at the center of their care."

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In announcing this month that it was closing 46 under-performing stores, CVS said it wanted to devote less space to retail sales and more to medical services, such as teeth-straightening. The company also is opening up a series of Minute Clinics to treat minor injuries and ailments.

Adding Aetna to the mix "will eliminate silos in the health-care system by combining medical data and pharmacy data, and CVS expects to generate substantial health-care savings and improvements in patient outcomes by, among other things, reducing hospital admissions, improving medication adherence, improving chronic care management, and using lower-cost sites of care, where appropriate," CVS said in a court filing.

However, the company has been accused of using information gathered by one of its businesses to advantage others. In late 2017, for example, after cutting reimbursements by its pharmacy benefit manager — CVS Caremark — to independent pharmacies, CVS’s “acquisition unit” sent letters to many of those same pharmacies, saying reimbursements are low and asking whether they would be interested in selling out to CVS.

CVS told the court this month that it would maintain firewalls to protect against misusing the information it gathers.

"Strong commercial business incentives, contractual obligations, and robust compliance programs drive CVS's successful services to rivals and the protection of their competitively sensitive customer information," the company's lawyers wrote. "CVS has substantial experience maintaining firewalls to protect sensitive customer information and has extended those firewalls to cover Aetna."

However, The Dispatch in January obtained information showing that CVS Caremark was reimbursing big competitors such as Walmart far less than its own pharmacies, indicating that CVS was using information it gathered as a PBM to give an advantage to its retail operation, said Neeraj Sood, a University of Southern California researcher who will testify on behalf of the AMA at the court hearing.

Other questions have been raised about the purported "firewall" between CVS retail stores and the Caremark pharmacy benefit management company it took over several years ago. For example, CVS uses its PBM on occasion to direct customers to its own retail pharmacies, especially for specialty drugs.

Mike DeAngelis, CVS Health's senior director for corporate communications, has said, "The firewall we maintain between our retail and PBM businesses restricts the sharing of competitively sensitive information to prevent either business from gaining an unfair advantage over their competitors. It does not prevent CVS Caremark from offering clients plan design options that include our retail pharmacies as a convenient solution for filling specialty prescriptions."