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DOJ Consent Order Resolves Antitrust Concerns for United - PacifiCare Transaction

Jan.06.2006

by Robyn Whipple Diaz and Arthur Lerner

The Department of Justice (“DOJ”) Antitrust Division has entered into a consent agreement with UnitedHealth Group and Pacificare to resolve concerns that the acquisition of Pacificare by United would lessen competition in parts of Arizona and Colorado and in California. The DOJ action marks only the second time that federal antitrust authorities have taken enforcement action on a managed care acquisition. The announcement came one day after California's Department of Managed Health Care and Department of Insurance approved the proposed transaction, subject to some affirmative commitments by the parties.

DOJ alleges, in the complaint released in connection with the settlement, that United and PacifiCare are the “second and third largest sellers of commercial health insurance to small-group employers in Tucson”. DOJ claims that the Tucson area is a relevant geographic market, and that the sale of commercial health insurance to small-group employers is a relevant product market because “self-funding is not a viable option for most small employers.” DOJ alleges that the acquisition would, absent a remedy, eliminate direct competition between United and PacifiCare in the sale of commercial health insurance to small group employers in Tucson and, given the level of concentration and other market factors, lessen competition substantially. DOJ specifically claims that Pacificare had been an “aggressive low-price competitor” in the small employer market in Tucson.

The complaint also contends that the proposed merger would eliminate direct competition between United and PacifiCare in the purchase of physician services in Tucson and in the Boulder, Colorado area. Because there “are no purchasers to whom physicians can sell their services other than individual patients or the commercial and governmental health insurers that purchase physician services”, DOJ contends that the purchase of physician services is a relevant product market.

The complaint contends that the combined companies will account for more than 35% of the patient revenues in Tucson, and 30% in Boulder, for a substantial number of physicians and that the market for the purchase of physician services is highly concentrated in those markets. The complaint contends that it is difficult for physicians to reject a plan's proposed price terms in those circumstances. According to the complaint, combining the United business with the PacifiCare commercial health insurance enrollment and Medicare managed care enrollees in the Tucson area, and Pacificare's Boulder enrollment, particularly under the commercial HMO contract covering the employees of the University of Colorado at Boulder, might “enable United to pay lower [than competitive market] rates for physician services in Tucson and Boulder” as a result of increased buying power. If such price reductions result, DOJ contends, it “would likely lead to a reduction in quantity or degradation in quality of physician services provided to patients in these areas.”

To remedy these competition issues, a proposed consent decree agreed to by United and Pacificare would require the divestiture of small employer customer contracts accounting for at least 54,517 members in Tucson, the amount of PacifiCare's small group commercial health insurance enrollment in the Tucson area. To remedy the competition problem in Boulder, the proposed consent order requires that the University of Colorado at Boulder account be divested, i.e., transferred to another competitor. The order would bar United and Pacificare from ‘ reacquir[ing]” any of the divested contracts, but would not affect their ability to “bid or offer to provide health care coverage or services” to the customers who hold those contracts. Thus, United/Pacificare could, after spinning them off, compete to get back the same accounts it is required to divest.

In addition, the complaint claims that the continuation of a network access agreement between United and Blue Shield of California would “substantially reduce competition in the markets for the purchase of health care provider services and for the sale of commercial health insurance” in California. United currently rents the provider network of CareTrust Networks, a wholly owned subsidiary of Blue Shield of California. That arrangement provides United with access to certain Blue Shield information about provider discounts, and permits the two companies to confer about new product developments in California. PacifiCare and Blue Shield of California are currently competitors, and DOJ alleged that after United's acquisition of PacifiCare's business in California, United will compete with Blue Shield of California.

According to DOJ, the continuation of the network access agreement would give United and Blue Shield of California “opportunities and incentives to coordinate their competitive activities.” Thus, the proposed consent decree would require United to terminate the rental agreement with Blue Shield of California within one year. T he proposed consent decree also prohibits United from continuing to exchange information with Blue Shield regarding provider negotiations and new product developments.

The complaint is available at http://www.crowell.com/pdf/ManagedCare/United-Pacificare-Complaint.pdf and the proposed final consent judgment at http://www.crowell.com/pdf/ManagedCare/United-Pacificare-Judgment.pdf. The proposed order will be published in the Federal Register. Written comments may be submitted during a 60-day comment period.

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