United States of America v. Aetna Inc.

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, et al.,

Plaintiffs,

v. Civil Action No. 16-1494 (JDB)

AETNA INC., et al.,

Defendants.

MEMORANDUM OPINION

INTRODUCTION......................................................................................................................... 1

BACKGROUND ........................................................................................................................... 3

I. The Parties and Proposed Merger ...................................................................................... 3

II. Original Medicare and Medicare Advantage ..................................................................... 6

III. The Public Exchanges ...................................................................................................... 14

IV. Procedural History............................................................................................................ 15

LEGAL STANDARD ................................................................................................................. 18

ANALYSIS .................................................................................................................................. 20

I. Medicare Advantage ......................................................................................................... 20

A. Market Definition.......................................................................................................... 20

1. Competition Between Original Medicare and Medicare Advantage ........................ 23

2. Brown Shoe Factors & Ordinary Course of Business Documents ........................... 26

3. Defendants’ Counter Arguments .............................................................................. 37

4. Econometric Evidence .............................................................................................. 43

5. Summary ................................................................................................................... 56

B. Competitive Effects ...................................................................................................... 58

C. Government Regulation ................................................................................................ 67

D. Entry.............................................................................................................................. 75

1. Applicable Law ......................................................................................................... 76

2. Analysis..................................................................................................................... 76

(a) Likelihood of New Entry...................................................................................... 78

(b) Sufficiency of New Entry ..................................................................................... 84

(c) Timeliness of New Entry...................................................................................... 86

3. Summary ................................................................................................................... 87

E. Molina Divestiture ........................................................................................................ 88

1. Applicable Law ......................................................................................................... 88

2. Background on Molina ............................................................................................. 90

3. Whether the Divestiture Will Occur ......................................................................... 94

4. Analysis..................................................................................................................... 95

(a) Defendants’ Affirmative Arguments .................................................................... 96

(b) The Purchase Price ........................................................................................... 110

(c) Molina’s History in the Individual Medicare Advantage Market ..................... 111

(d) Expert Testimony ............................................................................................... 112

5. Summary ................................................................................................................. 113

F. Conclusion Regarding Medicare Advantage .............................................................. 113

II. The Public Exchanges ..................................................................................................... 114

A. Legal Framework ........................................................................................................ 115

1. Actual Competition Versus Potential Competition................................................. 115

2. Whether Aetna’s Reasons for Withdrawal Matter .................................................. 121

B. Analysis....................................................................................................................... 124

1. Aetna Withdrew From the Complaint Counties to Improve its Litigation Position 124

(a) Public Exchange Participation as Connected to the Merger ............................ 125

(b) Aetna’s Decision-Making Process .................................................................... 127

(c) The Florida Market President’s Reaction ......................................................... 131

(d) Aetna’s Explanation That It Made a Business Decision ................................... 132

2. Aetna Is Likely to Compete in Florida After 2017 ................................................. 137

3. The Proposed Merger Would Cause Anticompetitive Effects in Florida ............... 141

C. Conclusion .................................................................................................................. 146

III. Efficiencies ................................................................................................................. 147

CONCLUSION ......................................................................................................................... 155

INTRODUCTION

Before the Court is an antitrust challenge to the merger of Aetna Inc. and Humana Inc.,

two of the largest health insurance companies in the country. Aetna and Humana entered into a

merger agreement on July 2, 2015. They subsequently provided notification of their planned

merger to the Department of Justice as required by the Hart-Scott-Rodino Antitrust Improvements

Act of 1976, 15 U.S.C. § 18a. Following an investigation, the Department of Justice, eight states,

and the District of Columbia (collectively, the government) filed this action asserting that the

merger “may . . . substantially . . . lessen competition” in violation of section 7 of the Clayton Act,

15 U.S.C. § 18, in two distinct product lines: individual Medicare Advantage plans and individual

commercial health insurance plans offered on the public exchanges. The government identified

364 counties across 21 states where it argues that concentration in the Medicare Advantage market

would rise above the presumptively unlawful level if the merger proceeds, and 17 counties across

3 states where that would be true in the public exchange markets. Moreover, the government

argues, additional evidence indicates that the companies compete head-to-head in both markets—

competition that would be lost following the merger, to the significant detriment of consumers.

Unsurprisingly, Aetna and Humana disagree. For Medicare Advantage, they argue that the

relevant product market must include both Original Medicare (Medicare benefits offered directly

by the government) as well as Medicare Advantage (Medicare benefits offered by private

insurance entities). In this market, properly defined, Aetna and Humana argue that post-merger

concentration would not be high enough to be presumptively unlawful. Furthermore, they offer

three reasons why, even in a market limited to Medicare Advantage, the proposed merger would

not substantially lessen competition. According to defendants, the government’s regulatory

authority over Medicare Advantage, the threat of entry by new competitors, and defendants’

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proposed divestiture of a portion of their Medicare Advantage business to another insurance

company, Molina Healthcare, Inc., would combine to render any competitive harm unlikely.

In response to the government’s public exchange allegations, Aetna and Humana argue

that there is no current competition between the two companies in the 17 complaint counties,

because Aetna has decided not to compete in those counties in 2017. If there is no current

competition between them, they argue, there can be no substantial lessening of that competition

post-merger. Alternatively, they argue that even if the Court looks back to the competition

between Aetna and Humana in 2016 and predicts future competition on that basis, it is likely that

Humana’s market share in the public exchanges will be so reduced in 2017 and later years that a

merger would not increase market concentration to a presumptively unlawful level.

Additionally, Aetna and Humana argue that the efficiencies created by the merger and then

passed on to consumers would counteract any anticompetitive effects in both the Medicare

Advantage and public exchange markets.

The government responds that the relevant product market is indeed Medicare Advantage

only, and that none of these arguments is sufficient to rebut the presumption of unlawfulness based

on the levels of market concentration and the evidence that Aetna and Humana compete head-to-

head in both markets. In the public exchange context, the government contends that Aetna decided

not to compete in the 17 complaint counties in 2017 in response to this litigation in an effort to

evade judicial review of the merger. Thus, the government argues, the Court should ignore this

manipulation and instead analyze the competitive effects of the proposed merger as if Aetna

planned to continue competing in the public exchanges in all of the 17 complaint counties as it did

in 2016.

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The Court concludes that the proposed merger is likely to substantially lessen competition

in Medicare Advantage in all 364 complaint counties and in the public exchanges in the three

complaint counties in Florida. Aetna and Humana compete in a Medicare Advantage product

market that does not include Original Medicare, as both contemporary business documents and

econometric evidence confirm. In that market, which is the primary focus of this case, the merger

is presumptively unlawful—a conclusion that is strongly supported by direct evidence of head-to-

head competition as well. The companies’ rebuttal arguments are not persuasive.

In the public exchanges, the Court finds that Aetna withdrew from competing in the 17

complaint counties for 2017 specifically to evade judicial scrutiny of the merger. Although the

Court does not adopt the government’s view that this means the Court should assume that Aetna

will continue to compete everywhere it competed in 2016, the Court will give Aetna’s withdrawal

decision for 2017 little weight in predicting where Aetna will compete in later years. The Court

finds that Aetna is likely to offer plans on the exchanges only in the three complaint counties in

Florida in 2018 and beyond, and that the merger is likely to substantially lessen competition in

those counties. And as in the Medicare Advantage market, the Court concludes that defendants’

proffered efficiencies do not offset the anticompetitive effects of the merger.

BACKGROUND

I. The Parties and Proposed Merger

Aetna and Humana are large health insurance companies with national footprints. Both

offer a range of health insurance products, including the two products at issue in this litigation:

individual Medicare Advantage plans and individual insurance sold on the public exchanges. Both

are also regarded by industry participants as members of the “Big 5” health insurers, along with

competitors UnitedHealth, Anthem, and Cigna.

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Humana is “viewed as a leader in Medicare Advantage.” Tr. 1837:22–23 (Broussard). 1

In 2016, Humana was one of the two largest Medicare Advantage insurers, boasting more than 2.5

million individual Medicare Advantage members. 2 PX0551 (Nevo Report) ¶ 40. Humana’s

Medicare Advantage offerings are available to 91% of Medicare beneficiaries nationally. Tr.

253:6–7 (Cocozza). Humana’s position atop the Medicare Advantage market has been obtained

through impressive recent growth. Between 2013 and 2016, Humana added more seniors to its

individual Medicare Advantage plans than any of its rivals. PX0551 (Nevo Report) ¶ 40.

Aetna, although historically oriented more toward the sale of commercial health insurance,

has also been growing rapidly in Medicare Advantage. In the last four years, Aetna has expanded

its Medicare Advantage plans into 640 new counties; the next most aggressive entrant entered into

less than half that many. PX0551 (Nevo Report) ¶ 218 & Ex. 18. Some of Aetna’s momentum

was derived from its 2013 acquisition of Coventry Health Care, itself a significant player in

Medicare Advantage. Tr. 1330:20–1331:1 (Bertolini). Now the fourth-largest seller of individual

Medicare Advantage in the country, Aetna has plans for continued rapid growth. Today, Aetna

plans are available to approximately 50% of Medicare beneficiaries; within five years, through

continued geographic expansion, Aetna hopes to increase that figure to 70%. Tr. 1331:2–22

(Bertolini).

1

Citations to the trial transcript include the witness’s last name in parenthesis. Where exhibits are cited with

page numbers, the page number refers to the last three digits of the exhibit-stamp page number, where available. For

example, Plaintiffs’ Exhibit 100 at page 1 is cited as “PX0100-001.” If that pagination is not available, the last three

digits of the Bates-stamp number are used. Expert reports are cited by paragraph number, where available.

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Based on a measure of enrollment that excludes group Medicare Advantage plans sold to employers, the

government’s economist, Dr. Aviv Nevo, asserted that Humana was the largest individual Medicare Advantage insurer

in the country. Humana’s answer admits only to being the second-largest Medicare Advantage insurer, without any

reference to “individual” Medicare Advantage. See Humana’s Answer [ECF No. 63] ¶ 7. For present purposes, it is

not necessary to resolve this discrepancy. It is enough to observe that Humana has been a very large and successful

player in the individual Medicare Advantage market—whether or not it is technically the largest one.

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Aetna and Humana are also two of the largest insurers in the individual commercial

insurance market on the public exchanges. The exchanges, created by the Affordable Care Act,

create a marketplace where individuals who do not receive health insurance through their employer

or through a government program can purchase individual insurance plans. At the time the

complaint was filed, Aetna sold insurance on the public exchanges in 15 states and had described

itself as being “highly successful” in enrollment. See Tr. 1360:14–17 (Bertolini); PX0285 at 4.

Humana also offered plans in 15 states in 2016, and planned to continue offering insurance on the

exchanges in 11 states for 2017. See Humana Ans. [ECF No. 63] ¶ 42. The two companies

competed on the public exchanges in more than 100 counties.

On July 2, 2015, Aetna and Humana announced their merger agreement, under which

Aetna would acquire Humana for $37 billion. The firms’ respective CEOs, Mark Bertolini and

Bruce Broussard, both expressed excitement about the merger’s potential. They believe that the

merger will combine two philosophically compatible firms—both focused on providing

individualized, value-based care in local communities—into one that can more effectively

implement their shared vision for the future of healthcare. See Tr. 1399:17–1401:19 (Bertolini);

Tr. 1838:5–1840:19 (Broussard). Although the companies are enthusiastic about their merger,

they have also planned for the possibility that it will not occur. If it is not consummated by a

specified date—now February 15, 2017—then Aetna must pay Humana a $1 billion break-up fee.

The government imputes a different rationale to the Aetna-Humana transaction, seeing it

as part of “an industry-wide rush to consolidate.” Pls.’ Proposed Findings & Conclusions [ECF

No. 275] at 7. Industry participants, including Bertolini, have indeed referred to a “merger frenzy”

among health insurers in recent years. Tr. 1319:24–1320:3 (Bertolini). The “frenzy” culminated

with the announcements of this merger and another between Anthem and Cigna. That would

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combine four of the five largest health insurers into two companies. But in the run-up to those

announcements, the Big 5 insurers had explored a number of different merger possibilities: on at

least two occasions, UnitedHealth had approached Aetna about a potential acquisition, and on

other occasions Aetna had made indirect inquiries about acquiring Cigna. See Tr. 1321:8–1322:17

(Bertolini). This degree of merger-related activity, the government contends, tends to undercut

the notion that there is something particularly valuable about the Aetna-Humana transaction.

Ultimately, of course, the outcome of this case does not hinge on these competing

characterizations of the merger. Instead, as the parties recognize, the outcome here must depend

on a detailed analysis of the likely effects of the merger in the challenged markets. The best place

to begin that analysis is with a summary of the government programs central to this case: Original

Medicare, Medicare Advantage, and the public exchanges created by the ACA.

II. Original Medicare and Medicare Advantage

Individuals aged 65 or over are eligible for Medicare, through which the federal

government provides certain health insurance benefits to seniors. The core of the program is

Medicare Parts A and B. Part A covers inpatient hospital services; Part B covers doctors’ services

and outpatient care. See PX0553 (Frank Report) ¶¶ 17, 18. Together, Medicare Parts A and B are

often called “Original Medicare.” Under Original Medicare, healthcare providers are paid on a

fee-for-service basis. When a healthcare provider performs a particular service, it is paid by the

government according to a fee schedule determined by the Center for Medicare and Medicaid

Services (CMS), an office within the Department of Health and Human Services (HHS). Original

Medicare enrollees may obtain care from any healthcare provider that accepts Original Medicare

rates. Because the overwhelming majority of providers do so, seniors who enroll in Original

Medicare can effectively obtain care from any provider, anywhere in the country.

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But Original Medicare does not cover the full cost of seniors’ medical care. For example,

in 2016 Part A included a $1,288 per year inpatient hospital deductible. PX0553 (Frank Report)

¶ 17. Part B likewise comes with some out-of-pocket costs. Last year, Original Medicare enrollees

paid monthly Part B premiums of about $105. PX0553 (Frank Report) ¶ 19. They also paid a

deductible of $166 per benefit period, and a 20% coinsurance rate for most covered services.

PX0553 (Frank Report) ¶ 18. Moreover, Original Medicare does not cover the cost of the

outpatient prescription drugs prescribed by many providers and taken by many seniors. Tr. 110:4–

9 (Frank). Collectively, these premiums, deductibles, coinsurance payments, and drug prescription

payments may impose significant medical costs on an Original Medicare enrollee—but Original

Medicare places no cap on such out-of-pocket expenses. PX0553 (Frank Report) ¶ 19.

To contain those possibly significant out-of-pocket costs, many seniors purchase a

Medicare Supplement (known as “MedSupp” or “Medigap”) plan from a private insurer. 3 These

plans are regulated by state departments of insurance and sold by private insurers in a number of

standardized varieties, each denoted by a letter. Tr. 728:4–8 (Wooldridge); DX0130-83. One of

the most popular varieties, called a MedSupp Plan F, covers 100% of an Original Medicare

enrollee’s deductibles and copayments, with no out-of-pocket limit, in exchange for a monthly

premium of about $150. See DX0130-83; Tr. 671:8–10 (Wooldridge). But MedSupp plans do

not offer coverage for prescription drugs. Tr. 105:23–106:1 (Frank). To obtain prescription drug

coverage, an Original Medicare enrollee must purchase a Medicare Part D plan from a private

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Before purchasing a MedSupp plan, some seniors may be subject medical underwriting. Depending on

their answers to a health questionnaire, some seniors—like those with certain pre-existing conditions—may ultimately

be denied MedSupp coverage. Tr. 106:11–17 (Frank); Tr. 429:9–17 (Cocozza). But when a senior has “guaranteed

issue rights,” he or she cannot be subject to medical underwriting. Seniors have “guaranteed issue rights” when they

age into Medicare for the first time, if their Medicare Advantage plan recently withdrew from the market, or if they

move out of the coverage area of their Medicare Advantage plan. Tr. 430:8–22 (Cocozza); Tr. 722:13–20

(Wooldridge).

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insurer. PX0553 (Frank Report) ¶ 22. The average Part D premium is $39 per month. PX0553

(Frank Report) ¶ 22.

Rather than enrolling in Original Medicare (with or without a MedSupp or Part D plan), a

senior may choose to enroll in a Medicare Advantage plan sold by a private insurer. Under the

Medicare Advantage program, which was created in approximately its current form by the

Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108–173,

117 Stat. 2066, private insurers are paid by the government to provide health insurance to

Medicare-eligible seniors. Participating insurers enter into contracts with CMS; then, pursuant to

each contract, the insurers can offer a number of Medicare Advantage plans to seniors. The

Medicare Advantage program was intended to “[e]nrich the range of benefit choices available to

enrollees” and to “increase[e] efficiency in the overall health care system.” Final Rule,

Establishment of the Medicare Advantage Program, 70 Fed. Reg. 4,588 (Jan. 28, 2005). To

achieve those goals, Medicare Advantage harnesses “open season competition” between Medicare

Advantage plans. Id.

This competition occurs within parameters set by the federal government. By statute, all

Medicare Advantage plans must provide coverage for Medicare Parts A and B. Additionally,

unlike Original Medicare, Medicare Advantage plans must cap an enrollee’s out-of-pocket

spending at $6,700 per year. Tr. 107:12–17 (Frank). The federal government, through CMS, also

oversees the annual Medicare Advantage bid process, which is used to determine how much a

Medicare Advantage organization (MAO) will be paid by the government. The starting point for

that calculation is the CMS “benchmark.” Each April, CMS publishes a “benchmark” for every

county in the United States, based on the cost to Original Medicare of providing Part A and B

benefits to an average enrollee in that county in the prior year. PX0553 (Frank Report) ¶ 27. The

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benchmark represents the maximum amount that the government will pay an MAO to provide

Original Medicare benefits to an enrollee in a particular county. MAOs are thus paid on a capitated

basis, not on a fee-for-service basis: CMS will not pay the MAO more for seniors who consume

more healthcare services. Accordingly, the capitation payment provides MAOs with an incentive

to control their enrollees’ healthcare costs.

For each Medicare Advantage plan, the MAO submits a “bid” against the benchmark. If

an MAO bids above the benchmark, it will be paid the benchmark rate for each enrollee. Those

seniors who enroll in that plan must pay a premium equal to the difference between the bid and

the benchmark. PX0553 (Frank Report) ¶ 28. But if an MAO is confident about its ability to

control costs, and to thereby provide Part A and B benefits to its enrollees for less than Original

Medicare, it might submit a bid below the benchmark. In that case, the MAO will be paid its bid,

plus an additional amount sometimes called the “rebate.” PX0553 (Frank Report) ¶ 29. The rebate

is calculated as a percentage of the difference between the bid and the benchmark. The remainder

of the difference is retained by CMS as a benefit for taxpayers. PX0553 (Frank Report) ¶ 29. Any

rebates earned by the MAO must be used to lower out-of-pocket costs or increase benefits for the

plan’s enrollees. PX0553 (Frank Report) ¶ 30. Many MAOs use rebates to lower enrollees’ Part

B premiums, to reduce the plan’s cost sharing requirements (that is, copays, coinsurance, or

deductibles), or to add benefits that are not available through Original Medicare, such as vision,

dental, hearing, or fitness benefits (known as “silver sneakers” benefits).

The amount of an MAO’s capitation payment also depends in part on “star ratings.”

Ranging in half-star increments between one and five, star ratings are intended to be a

comprehensive measure of plan quality, reflecting factors like clinical outcomes, patient

satisfaction, and access to care. See PX0553 (Frank Report) ¶ 31; PX0551 (Nevo Report) ¶ 68 &

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n.97. CMS assigns star-ratings at the contract level; thus, all the plans under a particular contract

between CMS and an MAO will have the same star rating. Tr. 618:6–13 (Wheatley). Star ratings

directly affect the amount of an MAO’s capitation payment in two ways. First, plans with higher

star ratings bid against a higher benchmark. Plans rated with four or more stars can bid against an

amount that is 105% of the normal county benchmark. PX0553 (Frank Report) ¶ 32. Second,

higher-rated plans earn higher rebates in percentage terms. For example, a plan with 3 stars or

below receives as a rebate 50% of the difference between the bid and the benchmark; a plan with

4.5 stars receives 70% of that difference. PX0553 (Frank Report) ¶ 32. Star ratings, therefore,

attempt to reinforce the relationship between plan quality and competitive success—high quality

plans achieve high star ratings; high star ratings increase benchmarks and rebates; increased

benchmarks and increased rebates are used to make plans more attractive; and more attractive

plans translate into higher enrollment.

The Medicare Advantage plans that emerge from the CMS bidding system tend to share a

number of characteristics. The most fundamental of these is that, unlike Original Medicare,

Medicare Advantage plans tend to be managed care plans with limited provider networks. Faced

with the need to bid below the CMS benchmark, Medicare Advantage organizations, including

Aetna and Humana, strive to build networks of providers who will work with them to coordinate

patient care and control healthcare costs. 4 See Tr. 421:21–422:3 (Cocozza); Tr. 543:21–25

(Wheatley). In some cases, these relationships are rooted in value-based contracts, which pay

4

Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are both types of

limited-network plans. HMOs typically require seniors to obtain a referral from their primary care physician before

seeing a specialist. This is sometimes described as the primary care physician serving as a “gatekeeper.” With limited

exceptions, HMOs also do not reimburse seniors for care they receive outside their provider network. PPOs are usually

somewhat less restrictive. PPOs generally do not require seniors to obtain a referral before seeing a specialist and will

provide partial—but generally not full—reimbursement for care received outside the provider network.

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providers based on various measures of care quality and patient outcomes rather than on the

amount of care that they provide. Tr. 435:1–6 (Cocozza); Tr. 549:6–15 (Wheatley).

When these cost-control efforts are successful, MAOs funnel the savings back into their

plans in the form of reduced out-of-pocket costs or additional benefits. For example, in 2016, 61%

of Medicare Advantage plans included annual limits on an enrollee’s out-of-pocket spending that

were less than the statutory cap of $6,700. PX0551 (Nevo Report) ¶ 54. That same year, about

half of Medicare Advantage enrollees were in zero-premium plans, meaning that they paid no

premium other than the standard Part B premium. PX0348 at 7. On the benefits side, 89% of

Medicare Advantage plans included prescription drug benefits, which must be purchased

separately by enrollees in Original Medicare. PX 551 (Nevo Report) ¶ 55. Many Medicare

Advantage plans also offer vision, dental, hearing, or fitness benefits that are unavailable through

Original Medicare. Tr. 107:21–25 (Frank). Together, these features—limited networks,

coordinated care, out-of-pocket maximums, and supplemental benefits—drive the Medicare

Advantage value proposition.

But Medicare Advantage plans do not appeal to everyone. In fact, for as long as Medicare

Advantage has existed, a majority of seniors have selected Original Medicare (often with a

MedSupp and Part D plan) instead. Most seniors first choose during a seven-month initial election

period surrounding their 65th birthday. Those who fail to make a timely choice between the two

default into Original Medicare. Tr. 408:2–7 (Cocozza). Each year, seniors may re-evaluate their

choice during an annual enrollment period running from October 15 to December 7. During that

period, “any [Medicare] beneficiary can make a different election for the upcoming year.” Tr.

418:3–5 (Cocozza). Seniors are thus free to switch from Original Medicare to Medicare

Advantage or vice-versa, or from one Medicare Advantage plan to another. Seniors may also

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switch from Medicare Advantage to Original Medicare during another annual window, running

from January 1 to February 14. During that period, however, seniors may not switch out of

Original Medicare or between Medicare Advantage plans. DX0130-077.

Medicare Advantage plans are subject to CMS regulation applied primarily in connection

with the bid process. Each insurer must submit a bid for every Medicare Advantage plan it intends

to offer the following year. In April, along with the county benchmarks, CMS publishes two

documents: a “call letter” describing the terms of the Medicare Advantage program, and a set of

instructions about bid submission. See DX0014 (call letter); DX0349 (bid instructions). These

documents impose a number of requirements on MAOs. Some, like the limit on increases in “total

beneficiary cost,” relate directly to plan pricing. CMS will deny bids when “it determines the bid

proposes too significant an increase in cost sharing or decrease in benefits from one plan year to

the next.” DX0014-163. For plan year 2017, CMS maintained the total beneficiary cost threshold

at $32 per member per month. DX0014-165. Bids proposing increases in amounts greater than

the threshold were subject to denial. But even bids complying with the threshold were not

necessarily free from scrutiny, because “CMS reserves the right to further examine and request

changes to a plan bid even if a plan’s [total beneficiary cost] is within the required amount.”

DX0014-164. Sean Cavanaugh, the Director of the Center for Medicare, the office within CMS

that regulates Medicare Advantage, was not aware of any bids being rejected for violation of the

rules on total beneficiary costs during his tenure. Tr. 1144:12–25 (Cavanaugh); see also Tr. 453:9–

10 (Cocozza). Instead, CMS typically informs the MAO of the violation, and the MAO revises

the bid into compliance. Tr. 1146:12–20 (Cavanaugh). Even then, however, the MAO may still

be the subject of a CMS compliance notice. Tr. 1942:8–17 (Paprocki).

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Some provisions of the bid instructions relate to MAO margins. The MAO must forecast

the margin that it expects to earn on each of its plans. At the individual bid level, CMS seeks to

guarantee that bids “provide benefit value in relation to the[ir] margin level[s].” DX0349-027.

But most margin restrictions are “Aggregate-Level Requirements” that apply above the bid level.

DX0349-028. Each bid is made at the plan level; each plan is part of a contract between CMS and

the legal entity offering the plan; and most contracts cover multiple plans—perhaps as many as

fifty. See Tr. 2008:12–21 (Paprocki). Some legal entities also have multiple contracts. Tr.

2572:10–15 (Coleman). Above all these bids, contracts, and legal entities sit parent organizations,

like Aetna and Humana, which might have multiple contracts with CMS through multiple affiliated

legal entities. See Tr. 1948:2–12, 2008:10–11 (Paprocki). CMS regulation allows MAOs to

decide whether to apply the aggregate-level margin requirements at the level of the contract, the

legal entity, or the parent organization. DX0349-028; see also Tr. 2004:16–20 (Paprocki).

The bid instructions require that the aggregate margins forecasted for the coming plan year

are consistent with the actual ones from previous years. DX0349-029. And the aggregate margins

that an MAO forecasts for its Medicare Advantage business must be within 1.5% of the margins

on its overall business. DX0349-029. Aetna applies this requirement at the parent organization

level, the highest level of aggregation permitted by CMS rules. Tr. 2004:16–2005:5 (Paprocki).

Finally, outside of the bid process, CMS imposes limits on an MAO’s “medical loss ratio.”

By statute, MAOs must spend at least 85% of the revenue obtained through a particular contract

with CMS on medical services. See 42 U.S.C. § 1395w-27(e)(4); Tr. 1147:2–6 (Cavanaugh). Like

the margin rules, the medical loss ratio regulations are applied above the level of individual bids—

here, at the contract level. But unlike the margin rules, they apply retroactively to actual results

rather than prospectively to forecasts. If CMS determines that, pursuant to a particular contract in

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a particular year, an MAO spent less than 85% of its revenue on medical costs (meaning that it

kept more than 15% of its revenue as profit or to cover administrative costs), CMS can require the

MAO to refund the excess amount to beneficiaries. An MAO that remains out of compliance for

three consecutive years may be barred from enrolling new members. Tr. 1148:6–13 (Cavanaugh).

So far, however, no such penalties have been imposed. The medical loss ratio rules were

introduced to Medicare Advantage by the Affordable Care Act, and CMS is only now preparing

to release the first year of medical loss data. Tr. 1148:14–17 (Cavanaugh).

III. The Public Exchanges

The ACA created the public exchanges as online marketplaces where consumers could

purchase health insurance. Tr. 2638:24–2639:14 (Counihan); PX0553 (Frank Report) ¶ 73. (The

exchanges are sometimes referred to as “Health Insurance Exchanges,” or “HIX” in the record.

Tr. 1486:11–12 (Lynch)). Their basic structure is uncontested. The exchanges first opened in

2013 for consumers to purchase plans for the 2014 year. See Tr. 138:21–139:25 (Frank).

Individuals who do not receive health insurance through some other means—such as through their

employer or through a government program like Medicare, Medicaid, or Tricare—are required to

purchase health insurance or pay a tax, sometimes referred to as a penalty. PX0553 (Frank Report)

¶ 73. These individuals may purchase health insurance through the public exchanges (on-

exchange) or directly from an insurer or a broker (off-exchange). PX0551 (Nevo Report) ¶ 271.

Health insurers who offer plans on-exchange in a given state must offer the same plans off-

exchange in that state. Tr. 1532:15–1533:3 (Mayhew). However, health insurers may offer

products off-exchange that they do not offer on-exchange. Tr. 1533:4–10 (Mayhew). CMS, along

with each state, has oversight responsibility for the exchanges. Tr. 2587:22–2588:2 (Counihan).

14

The ACA also created certain obligations for insurers who offer plans on the exchanges.

For example, insurers may not deny coverage based on preexisting conditions, or charge a different

premium based on an individual’s perceived health status. Tr. 141:6–8 (Frank); PX0553 (Frank

Report) ¶ 73. On-exchange plans are grouped into five tiers based on the level of coverage they

provide: there are four “metal” tiers (bronze, silver, gold, and platinum) and there is one

catastrophic tier. Tr. 1674:14–19 (Nevo). The “metal” tiers are based on the percentage of total

expected healthcare spending the plan covers. Bronze plans cover 60% of expected healthcare

spending, silver plans cover 70%, gold plans 80%, and platinum plans 90%. Tr. 142:8–13 (Frank).

Individuals who purchase insurance on-exchange and who earn less than 400% of the

federal poverty level are generally eligible to receive subsidies. Tr. 143:10–18 (Frank); PX0553

(Frank Report) ¶¶ 82–83; 26 C.F.R. § 601.105, IRS Revenue Procedure 2016-24, § 2.01. These

subsidies vary by location and income level, and can take the form of both premium subsidies and

reductions in cost-sharing payments (that is, deductibles, copayments, and coinsurance). Tr.

143:10–18 (Frank); PX0553 (Frank Report) ¶¶ 82–83. The subsidies are provided as tax credits,

and are tied to the cost of the second lowest-cost silver plan in the individual’s geographic region.

Tr. 143:5–9 (Frank). Because the silver plans are the most cost-effective—given the subsidy—

approximately 70% of individuals choose silver plans. Tr. 2631:20–2632:7 (Counihan); Tr.

142:14–21 (Frank). Approximately 85% of all individuals who purchase insurance on the

exchanges receive a subsidy. Tr. 144:6–8 (Frank); Tr. 1546:24–1547:4 (Mayhew). And because

the amount of the subsidy is tied to the price of on-exchange plans, higher premiums increase the

cost both to the consumer and the taxpayer. See Tr. 140:23–141:1 (Frank).

IV. Procedural History

15

On July 21, 2016, the United States, along with Delaware, the District of Columbia,

Florida, Georgia, Illinois, Iowa, Ohio, Pennsylvania, and Virginia, filed a complaint seeking to

permanently enjoin the Aetna-Humana merger. 5 See Compl. [ECF No. 1] ¶ 69. The government

alleged that the transaction violates Section 7 of the Clayton Act, 15 U.S.C. § 18, because its effect

“may be to substantially lessen competition” in a number of markets: (1) the market for individual

Medicare Advantage plans in 364 counties across 21 states; and (2) the market for individual

insurance sold on the public exchanges in 17 counties across three states (Florida, Georgia, and

Missouri). In the government’s estimation, the merger would adversely affect 1.6 million people

in Medicare Advantage and 700,000 more in the public exchanges. See Compl. ¶¶ 10, 12.

In the weeks following the government’s complaint, the companies took steps that

introduced additional issues into the case. First, on August 2, 2016, Aetna and Humana each

entered into a separate Asset Purchase Agreement with Molina Healthcare, under which they have

agreed to sell Molina some of their Medicare Advantage plans if their merger is consummated and

if the Court believes that a divestiture is necessary to counteract the merger’s anticompetitive

effects. The proposed divestiture would transfer responsibility for approximately 290,000 seniors

from Aetna or Humana to Molina, and would include seniors in all 364 complaint counties.

Second, on August 15, 2016, Aetna announced that it no longer planned to offer plans on the public

exchanges in 11 states where it had offered plans in 2016, including those that cover all 17 counties

in the complaint. See Tr. 1360:14–16 (Bertolini); PX0133; DX0031. The motivation for—and

legal consequence of—Aetna’s decision to withdraw have been sharply disputed by the parties.

5

On the same day, the government filed a second complaint seeking to enjoin the Anthem-Cigna merger,

citing alleged anticompetitive effects in markets that are mostly different than those at issue here. See Compl., Case

No. 16-1493 [ECF No. 1]. Because the government filed the cases as related, both were initially assigned to this

judge. The Court held a joint status conference on August 4, 2016. After concluding that the cases did not raise

enough common issues to be truly related, and that the public would be better served if these complex and important

cases seeking expedited relief were assigned to different judges, the Court referred the Anthem-Cigna merger for

random reassignment. See Aug. 5, 2016, Order [ECF No. 39].

16

In the months preceding the trial, the parties exchanged millions of documents, conducted

dozens of depositions, and generally worked together in a collaborative and professional manner.

They were greatly aided in those efforts by the court-appointed Special Master, retired Judge

Richard A. Levie, who facilitated a smooth discovery process and helped make the compressed

timeline in this case feasible. In late October and early November, the parties submitted their

expert reports—sixteen in all, totaling more than a thousand pages—for the Court’s review. They

also submitted helpful pretrial briefs previewing the evidence and arguments at trial. During the

final week before trial, the Court, Judge Levie, and the parties worked to resolve any outstanding

evidentiary or confidentiality issues. A final pretrial conference was held on December 2, with

trial set to begin on December 5, 2016.

The trial began on schedule and lasted for 13 trial days. The Court received hundreds of

exhibits addressing the businesses of Aetna, Humana, and Molina; their plans for the merger and

divestiture; their dealings with CMS; and several other topics. The Court also heard testimony

from more than thirty helpful and knowledgeable witnesses, including executives and employees

from Aetna, Humana, and Molina; officials from CMS; and independent brokers. The parties also

put forward a number of distinguished experts to testify on a variety of subjects. Dr. Richard

Frank, formerly the Assistant Secretary for Planning and Evaluation at HHS, provided testimony

on the role of competition in both Medicare Advantage and the public exchanges. Dr. Gary Ford

testified about survey design and, in particular, the value of an internal survey conducted by

Humana regarding which insurance options seniors leaving Humana Medicare Advantage plans

choose. Dr. Lawton Burns testified about the Molina divestiture. Two experts, Rajiv Gohkale and

Christine Hammer, provided testimony on the efficiencies that might result from the Aetna-

Humana merger. And finally, economists Dr. Aviv Nevo and Jonathan Orszag provided

17

compelling, detailed, and—most importantly—comprehensible testimony on the probable

economic effects of the merger. The Court is appreciative of all these witnesses, and of the

attorneys who elicited their testimony.

On December 29, 2016, the parties submitted their proposed findings of fact and

conclusions of law. The following day, on December 30, the Court heard final argument over

several hours. Now, having carefully considered all of the evidence and the parties’ arguments,

the Court has reached the following conclusions.

LEGAL STANDARD

Section 7 of the Clayton Act prohibits mergers “where in any line of commerce or in any

activity affecting commerce in any section of the country, the effect of such acquisition may be

substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. § 18. Two aspects

of the statutory text are worth highlighting. First, by using the word “may,” Congress indicated

that its “concern was with probabilities, not certainties.” Brown Shoe Co. v. United States, 370

U.S. 294, 323 (1962). Hence, mergers with “probable anticompetitive effect[s]” are prohibited by

the Clayton Act. Id. The government need not prove the alleged anticompetitive effects “with

‘certainty.’” FTC v. H.J. Heinz Co., 246 F.3d 708, 719 (D.C. Cir. 2001). Second, the Clayton Act

protects “competition,” rather than any particular competitor. United States v. Baker Hughes Inc.,

908 F.2d 981, 991 n.12 (D.C. Cir. 1990). To assess a merger’s probable effect on competition, the

Court must undertake a “comprehensive inquiry” into the “future competitive conditions in a given

market.” Id. at 988.

D.C. Circuit precedent creates a burden-shifting framework to guide that inquiry, which

generally begins with defining a relevant antitrust market. Id. at 982–83; see, e.g., FTC v. Sysco

Corp., 113 F. Supp. 3d 1, 24 (D.D.C. 2015); United States v. H&R Block, Inc., 833 F. Supp. 2d

18

36, 50 (D.D.C. 2011). If the government can “show that the merger would produce a firm

controlling an undue percentage share of the relevant market, and would result in a significant

increase in the concentration of firms in that market,” that creates “a presumption that the merger

will substantially lessen competition.” Heinz, 246 F.3d at 715 (internal quotation marks and

alterations omitted). By making such a showing, the government “establish[es] a prima facie case

of anticompetitive effect.” Baker Hughes, 908 F.2d at 983.

To rebut this presumption, “defendants must produce evidence that shows that the market-

share statistics give an inaccurate account of the merger’s probable effects on competition in the

relevant market.” Heinz, 246 F.3d at 715 (internal quotation marks and alterations omitted).

“[E]vidence on a variety of factors can rebut a prima facie case.” Baker Hughes, 908 F.2d at 984.

For example, defendants may produce evidence concerning the “ease of entry into the market, the

trend of the market either toward or away from concentration,” the “continuation of active price

competition,” or “unique economic circumstances that undermine the predictive value of the

government’s statistics.” Heinz, 246 F.3d at 715 n.7 (internal quotation marks omitted); see also

Baker Hughes, 908 F.2d at 985–86 (listing additional factors that can rebut the government’s prima

facie case). But the “more compelling the prima facie case, the more evidence the defendant must

present to rebut it successfully.” Baker Hughes, 908 F.2d at 991.

“If the defendant successfully rebuts the presumption of illegality, the burden of producing

additional evidence of anticompetitive effect shifts to the government, and merges with the

ultimate burden of persuasion, which remains with the government at all times.” Heinz, 246 F.3d

at 715 (internal quotation marks and alterations omitted). The government “has the ultimate

burden of proving a Section 7 violation by a preponderance of the evidence.” H&R Block, 833 F.

Supp. 2d at 49 (internal quotation marks omitted).

19

ANALYSIS

I. Medicare Advantage

A. Market Definition

Only an “examination of [a] particular market—its structure, history and probable future—

can provide the appropriate setting for judging the probable anticompetitive effect of [a] merger.”

United States v. Gen. Dynamics Corp., 415 U.S. 486, 498 (1974) (internal quotation marks

omitted). The first question in this case is about the proper boundaries of that “particular market.”

Antitrust markets have two dimensions: product and geographic area. FTC v. Arch Coal, Inc., 329

F. Supp. 2d 109, 119 (D.D.C. 2004). The parties here agree that the relevant geographic market

is the county. 6 But they sharply dispute the boundaries of the relevant product market. Is the

market properly limited to individual Medicare Advantage plans, as the government contends? Or

are defendants correct that Original Medicare options—meaning Original Medicare paired with a

MedSupp and/or a prescription drug plan—should also be included in the market?

“The outer boundaries of a product market are determined by the reasonable

interchangeability of use or the cross-elasticity of demand between the product itself and

substitutes for it.” Brown Shoe, 370 U.S. at 325. Both aspects of the Brown Shoe test “look to

the availability of substitute commodities, i.e. whether there are other products offered to

consumers which are similar in character or use,” and “how far buyers will go to substitute one

commodity for another.” FTC v. Staples, Inc., 970 F. Supp. 1066, 1074 (D.D.C. 1997). “[T]he

mere fact that a [product] may be termed a competitor in the overall marketplace does not

necessarily require that it be included in the relevant product market for antitrust purposes.” Id. at

1075. Markets “must be drawn narrowly to exclude any other product to which, within reasonable

6

The county is the relevant geographic market because seniors may enroll only in Medicare Advantage plans

offered in the county where they live. PX0551 (Nevo Report) ¶ 88; Tr. 393:25–394:10 (Cocozza)

20

variations in price, only a limited number of buyers will turn.” Times-Picayune Publ’g Co. v.

United States, 345 U.S. 594, 612 n.31 (1953). That general rule applies even to “functionally

interchangeable” products, meaning those that can be used for the same purpose as the product at

issue. See, e.g., H&R Block, 833 F. Supp. 2d at 54–60 (excluding assisted tax preparation and do-

it-yourself tax preparation from the market for digital do-it-yourself tax preparation software, even

though all provide ways to complete a tax return); Staples, 970 F. Supp. at 1074–81 (excluding

consumable office supplies sold outside office supply superstores from the market, even though

those supplies were functionally interchangeable with office supplies sold inside the superstores).

This analytical approach guides antitrust courts in attempting to answer one “key

question”: whether particular products “are sufficiently close substitutes” such that substitution to

one could “constrain any anticompetitive . . . pricing” in the other. See H&R Block, 833 F. Supp.

2d at 54. Products that meet that threshold generally belong in the product market. Once those

products are grouped together, the “‘market can be seen as the array of producers of substitute

products that could control price if united in a hypothetical cartel or as a hypothetical monopoly.’”

FTC v. Whole Foods Market, Inc., 548 F.3d 1028, 1052 (D.C. Cir. 2008) (Kavanaugh, J.,

dissenting) (quoting 2B Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 530a, at 226

(3d ed. 2007)). That vision of the proper product market is incorporated into the “hypothetical

monopolist test” as set out in the Horizontal Merger Guidelines and applied by the courts in a

number of cases. See Fed. Trade Comm’n & U.S. Dep’t of Justice Horizontal Merger Guidelines

§ 4.1.1 (2010) 7; see also Sysco, 113 F. Supp. 3d at 33–34; H&R Block, 833 F. Supp. 2d at 51–52.

To determine whether a group of products could be an antitrust market, the hypothetical

monopolist test asks whether a hypothetical monopolist of all the products within a proposed

7

Although the Guidelines are not binding, the D.C. Circuit and other courts have looked to them for guidance

in previous merger cases. See, e.g., Heinz, 246 F.3d at 716 n. 9; Sysco, 113 F. Supp. 3d at 38.

21

market would likely impose a “small but significant and non-transitory increase in price”

(SSNIP)—typically of five or ten percent—on at least one product in the market, including one

sold by the merging firms. See Guidelines §§ 4.1.1, 4.1.2. Whether the hypothetical monopolist

can profitably impose the price increase depends, in part, on the amount of substitution outside the

proposed market. “If enough consumers are able to substitute away from the hypothetical

monopolist’s product to another product and thereby make a price increase unprofitable, then the

relevant market cannot include only the monopolist’s product and must also include the substitute

goods.” Sysco, 113 F. Supp. 3d at 33. But if substitution outside the proposed market is relatively

low, then the hypothetical monopolist would likely impose the price increase without sacrificing

a large number of sales. In that case, the price increase might be profitable, and the hypothetical

monopolist’s products would constitute the proper antitrust market. See id. at 33; Whole Foods,

548 F.3d at 1052 (Kavanaugh, J., dissenting).

The central market definition question in this case is about the nature and extent of any

competition between Original Medicare options and Medicare Advantage. Phrased in terms of the

hypothetical monopolist test, the question is whether a hypothetical monopolist of all the Medicare

Advantage plans in a particular county could profitably impose a small but significant non-

transitory increase in price on those plans—or whether substitution by seniors to Original Medicare

options would make any attempted price increase unprofitable.

In answering that question, the Court has a number of analytical tools at its disposal. The

first is provided by the Supreme Court’s decision in Brown Shoe. There, the Court explained that

the boundaries of a product market “may be determined by examining such practical indicia as

industry or public recognition of the [relevant market] as a separate economic entity, the product’s

peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices,

22

sensitivity to price changes, and specialized vendors.” Brown Shoe, 370 U.S. at 325. These

“practical indicia” can be useful “evidentiary proxies for direct proof of substitutability.” Rothery

Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986); see also H&R

Block, 833 F. Supp. 2d at 51. This makes intuitive sense: if two products have distinct

characteristics, uses, customers, and prices, it is unlikely that a large number of customers would

switch to one in response to a price increase in the other.

When applying the Brown Shoe factors here, the Court pays “close attention to the

defendants’ ordinary course of business documents.” H&R Block, 833 F. Supp. 2d at 52. All

market definition “must take into account the realities of competition.” Whole Foods, 548 F.3d at

1039 (Brown, J.). Ordinary course of business documents reveal the contours of competition from

the perspective of the parties, who have been quite successful in the sale of individual Medicare

Advantage plans and may be presumed to “‘have accurate perceptions of economic realities.’”

Whole Foods, 548 F.3d at 1045 (Tatel, J.) (quoting Rothery Storage, 792 F.2d at 218 n.4).

Finally, in addition to the practical indicia and the ordinary course of business documents,

the Court will rely on testimony from experts in the field of economics. See Sysco, 113 F. Supp.

3d at 27. As is customary in merger cases, the parties have introduced a wealth of economic

evidence through their economists, Dr. Aviv Nevo and Jonathan Orszag. Together, Nevo and

Orszag have provided testimony on subjects relevant to market definition, including the extent of

substitution between Original Medicare and Medicare Advantage, the proper methods for applying

the hypothetical monopolist test, and the relationship between market concentration and prices in

Medicare Advantage. All of this evidence will be evaluated in turn.

1. Competition Between Original Medicare and Medicare Advantage

23

The Court will begin where seniors do: with the choice between Original Medicare and

Medicare Advantage. By statute, Congress has provided that seniors can obtain Medicare benefits

either “through the original medicare fee-for-service program,” or “through enrollment in a

[Medicare Advantage] plan.” 42 U.S.C. § 1395w-21(a)(1). 8 Because Medicare Advantage plans

are required to provide coverage for Medicare Parts A and B, the government agrees that

“Medicare Advantage and Original Medicare are both ways for seniors to get their Medicare

benefits.” Tr. 15:13–15 (opening statement). It is up to the individual senior to choose—and that

same basic choice is presented no matter where seniors look. Every year, CMS sends a handbook

called “Medicare & You” to each Medicare beneficiary. Tr. 1225:20–22 (Cavanaugh). The 2017

version explains that there “are [two] main choices” for how seniors get Medicare coverage, then

proposes a number of steps to help seniors select between them. See DX0130-017. Step one

provides a binary choice between Original Medicare and Medicare Advantage. DX0130-017. The

handbook also refers seniors to an online tool called the “Medicare Plan Finder,” which can be

used to “sort plans by type” and “compare the coverage, benefits, and estimated costs” associated

with each. DX0130-016. Plan Finder can be used to search for Medicare Advantage plans and

compare them to Original Medicare. Tr. 412:13–15 (Cocozza).

Some seniors turn to independent brokers or to corporate sales agents for advice about their

healthcare options. Here, too, they are presented with the choice between Original Medicare

options and Medicare Advantage. See, e.g., Tr. 1089:5–1090:1 (Fitzgerald) (independent broker);

Tr. 2036:7–2040:5 (Kauffmann) (Humana sales manager); see also Brown Shoe, 370 U.S. at 325

(products sold by the same “vendors” may be in the same product market). Ultimately, a majority

8

Defendants contend this provision amounts to a Congressional determination, binding on this Court, “that

Original Medicare is an appropriate and adequate substitute for Medicare Advantage for every Medicare-eligible

consumer.” Defs.’ Proposed Findings & Conclusions at 103. While the Court does not take this statutory language

lightly, it does not consider the language determinative of the antitrust issues in this case.

24

of seniors choose Original Medicare (either with or without supplements). According to the

government’s economist, in 2016 only 44% of those seniors who were ineligible for eligibility-

restricted Medicare options decided to enroll in Medicare Advantage. 9 PX0551 (Nevo Report)

¶ 38 & Exs. 1, 2. The rest selected an Original Medicare option.

Original Medicare also serves as a starting point for Medicare Advantage plan design. Alan

Wheatley, Humana’s Retail Segment President with responsibility for Medicare Advantage,

explained the general plan design process. When entering a new county with a Medicare

Advantage plan, Humana knows that CMS is “going to pay [to the company] Original Medicare’s

cost,” in the form of the county-level benchmark. Tr. 561:10–13 (Wheatley). For Humana to beat

that benchmark and introduce a viable plan, it must find a way to “improve health and lower costs.”

Tr. 561:20–21 (Wheatley). Those savings can then be used “to add some additional benefits to

make [the Humana plan] attractive relative to the big competitors in that market.” Tr. 561:23–25

(Wheatley). If the resulting plan has a better value than Original Medicare, Humana is willing to

offer it in the market. Tr. 562:11–16 (Wheatley). In internal documents, Aetna and Humana

reference the imperative to maintain a Medicare Advantage value proposition that is superior to

the one offered by Original Medicare. See DX0479-002 (“[O]ur value proposition must stay

competitive with Original Medicare.”); DX0484-002 (citing an “[a]spiration” to “[a]gressively

grow membership by delivering superior value proposition vs. [Original Medicare]”); DX0514-

021 (listing the drivers of Medicare Advantage “Value Beyond Traditional Medicare”).

Together, these dynamics create a degree of competition between Medicare Advantage and

Original Medicare. Because both offer Medicare Parts A and B, the two programs are, at least to

9

Some seniors, like those with certain disabilities or chronic conditions, may be eligible for eligibility-

restricted Medicare options. Because they do not face the same choice between Original Medicare and Medicare

Advantage as the average senior, they have largely been excluded from the analysis in this case. When these seniors

are included in the analysis, the share of seniors in Original Medicare options grows larger.

25

some extent, functionally interchangeable. Every senior is given an option between the two and,

historically, a majority of seniors have selected Original Medicare. Some degree of competition

is also inherent in the CMS bid process. To be viable products, Medicare Advantage plans must

control their costs—relative to Original Medicare—enough to offer beneficiaries more benefits or

lower out-of-pocket expenses than Original Medicare does. For all these reasons, then, any

assessment of the competitive conditions facing Medicare Advantage plans must take the role of

Original Medicare into account.

None of this, however, means that Original Medicare must be included in the relevant

product market. Not every competitor—not even every competitor with a functionally

interchangeable product—must be included in the product market. See, e.g., H&R Block, 833 F.

Supp. 2d at 54 (excluding two methods of tax preparation from the product market even though it

was “beyond debate” that “all methods of tax preparation are, to some degree, in competition”).

What matters is the extent to which competition from Original Medicare options would constrain

the exercise of market power in Medicare Advantage. In a memorandum cited by the companies,

Dr. Frank, the former Assistant Secretary for Planning and Evaluation at HHS, wrote that “in

principle” Original Medicare is “in a position to ‘discipline’ competition” in Medicare Advantage.

DX0087-010. To see whether that occurs in practice, the Court looks first to Brown Shoe and

defendants’ ordinary course of business documents.

2. Brown Shoe Factors & Ordinary Course of Business Documents

Compared to basic Original Medicare, the average Medicare Advantage plan has some

distinct “characteristics and uses.” Brown Shoe, 370 U.S. at 325. Unlike Original Medicare,

which allows seniors to receive care from almost any provider, Medicare Advantage plans

typically are HMOs or PPOs that come with limited provider networks. In exchange for accepting

26

the network limitations, enrollees receive benefits that Original Medicare does not offer, such as a

cap on out-of-pocket expenses and, usually, a prescription drug benefit. They might also receive

vision, dental, hearing, or fitness benefits that would have to be purchased separately under

Original Medicare. Some seniors may decide that Original Medicare and Medicare Advantage are

not reasonable substitutes. Those who want a limit on out-of-pocket expenses, or place a high

value on supplemental benefits, would be unlikely to select Original Medicare. Those who value

network flexibility, on the other hand, might not select Medicare Advantage.

Seniors can narrow the divide between Original Medicare and Medicare Advantage by

purchasing supplemental coverage. By purchasing a MedSupp plan, for instance, a senior can

limit out-of-pocket expenses in exchange for a monthly premium. Seniors may also purchase

stand-alone coverage for prescription drugs, or for another supplemental benefit often offered by

Medicare Advantage plans. One might expect, therefore, that a purely marginal senior, trying to

decide between Original Medicare and Medicare Advantage, would routinely compare particular

Medicare Advantage plans to particular MedSupp plans within the context of a larger Medicare

market. And if there were large numbers of such seniors, one might further expect Aetna’s and

Humana’s businesses to be organized around efforts to cater to them.

But that is not what the record reveals. The weight of the evidence presented at trial

indicates “industry [and] public recognition” of a distinct market for Medicare Advantage. See

Brown Shoe, 370 U.S. at 325. Competition within that market, between Medicare Advantage

plans, is far more intense than competition with the products outside of it, like MedSupp plans.

This evidence tends to show that substitution between Medicare Advantage and Original Medicare

options is not nearly as substantial as defendants now suggest.

27

Both Aetna and Humana report individual Medicare Advantage results separately in their

annual financial reports. PX0303 at 13 (Humana reporting Medicare Advantage revenue); PX0503

at 16 (Aetna reporting Medicare Advantage membership). According to Alan Wheatley, this

separate reporting facilitates analysis by investors, who often compare one Medicare Advantage

company against another. Tr. 482:8–19 (Wheatley). As defendants argue, this method of reporting

is not determinative: just because “automakers track car sales by model does not suggest each

model belongs in a separate market.” Defs.’ Proposed Findings & Conclusions [ECF No. 274] at

122. But neither is it irrelevant, because in this case the separate reporting reflects deeper

divisions. At Aetna, more than three thousand employees work on Medicare Advantage and Part

D, while about four hundred different employees are “dedicated to the Med Supp business.” Tr.

261:9–14, 256:20–1 (Cocozza). Aetna also hosts the two businesses on separate IT platforms. Tr.

255:10–14 (Cocozza). Similar distinctions can be seen at Humana, which maintains “separate

business units” for Medicare Advantage and MedSupp. Tr. 475:19–476:13 (Wheatley). However,

executives at both companies cautioned against over-interpreting the extent to which the Medicare

Advantage and MedSupp businesses are segregated. Aetna’s dedicated MedSupp employees do

not “work in a vacuum” fully divorced from Medicare Advantage. Tr. 256:20–257:1 (Cocozza).

And various internal Humana functions, such as its service operations, might support both

businesses. Tr. 475:16–19 (Wheatley).

Fair enough. But in one important respect—pricing—defendants’ Medicare Advantage

and MedSupp businesses seem to run on very different tracks. According to the government’s

economist, if “there were significant movement of seniors between Medicare Advantage plans and

[MedSupp] plans, then firms would consider the pricing of one plan when setting pricing for the

other plan.” PX0551 (Nevo Report) ¶ 128. There is little indication that Aetna and Humana do

28

so. Quite the opposite is true. Aetna maintains separate teams of actuaries for pricing its Medicare

Advantage and MedSupp plans. Tr. 680:13–16 (Wooldridge) (MedSupp actuaries do not work on

Medicare Advantage pricing); Tr. 1995:6–18 (Paprocki) (Medicare Advantage actuaries do not

work with MedSupp actuaries). And when pricing particular MedSupp plans, Aetna does not

assess the prices of Medicare Advantage plans in the locations where the MedSupp plan will be

offered. Tr. 257:23–1 (Cocozza). This evidence is inconsistent with the claims of close

competition between Medicare Advantage and Original Medicare with MedSupp.

On the other hand, evidence of intense competition within Medicare Advantage is

abundant. When Aetna and Humana refer to their “competitors,” they are almost always referring

to other Medicare Advantage organizations—and usually to other members of the Big 5. See

Staples, 970 F. Supp. at 1079 (“In document after document, the parties refer to, discuss, and make

business decisions based upon the assumption that ‘competition’ refers to other office superstores

only.”). For example, in a March 2015 email, Cocozza compares Aetna’s Medicare Advantage

business to its “peers.” PX0007. Humana, she says, is Aetna’s “most formidable competitor,”

before addressing UnitedHealth, Cigna, and Anthem in turn. PX0007-847. There is no mention

of Original Medicare or MedSupp, which is typical. See, e.g., DX0283-003 (listing Aetna’s “top

competitors” as Humana, UnitedHealth, Cigna, and Anthem); PX0063-446 (email to Humana

CEO comparing the enrollment growth of UnitedHealth, Cigna, Aetna, Anthem, and WellCare).

To compare themselves to these competitors, defendants calculate market shares of a

Medicare Advantage market—on the national, state, and county levels. See PX0036-429 (Aetna

document calculating national “market share growth” of UnitedHealth, Humana, Aetna, Cigna,

and Anthem); PX0583-210 (Humana document dividing national “individual [Medicare

Advantage] enrollment market share” between Humana, UnitedHealth, Aetna, Cigna, Anthem,

29

and “Other”); PX0155-454 (Humana document dividing North Carolina Medicare Advantage

market share between “Major Competitor[s]” Humana, BlueCross BlueShield of North Carolina,

UnitedHealth, Aetna, Cigna, and “Other”); PX0022-603 (Humana document collecting county-

level membership data of Humana, Aetna, UnitedHealth, BlueCross BlueShield of Kansas City,

and “Others” in the Kansas City area). 10

Aetna and Humana prepare exceptionally detailed assessments of the competition between

various Medicare Advantage plans. These documents were ubiquitous at trial. For example, a

2015 email to Aetna general managers solicited specific information about the cost-sharing and

benefit structures of the plans being offered by their “true competition.” PX0057-717. A proposed

template included columns for UnitedHealth, Humana, Cigna, and “Etc.” PX0057-718–19. Two

Humana documents reflect a similar exercise. In one—a July 2015 “Competitor Analysis” of

Aetna and Cigna—Humana conducted “Market Comparisons” in 17 local markets across the

country. PX0012-355. Within each local market, it calculated Medicare Advantage market shares,

then compared the various Humana, Aetna, and Cigna plans by type, monthly premium, limit on

out-of-pocket costs, primary care physician and specialist copays, and prescription drug plans.

See, e.g., PX0012-357 (San Antonio/Corpus Christi Market Analysis). A second 2015 Humana

document contains a similar market-by-market, plan-by-plan analysis addressing 24 markets

where Humana “deteriorated” and UnitedHealth or Aetna “will likely grow” and another 15

markets where Humana “held stable” but UnitedHealth or Aetna “were aggressive.” PX0023-

628–29. Within each market, Humana compared its competitors’ individual plans on a variety of

metrics, including whether the plan had increased its premium. See, e.g., PX0023-632. Such

documents reflect clearly the scope and intensity of the competition within Medicare Advantage—

10

The place for “Other[s]” in these documents refers to other Medicare Advantage providers, not to Original

Medicare or MedSupp.

30

and, more specifically, between members of the Big 5. None of these documents focus on

competition with Original Medicare.

Defendants have identified a limited number of documents that do refer to competition

between Medicare Advantage and Original Medicare with MedSupp. Some refer to competition

only in a very general manner. A 2015 Humana presentation, for instance, observes that “[o]ur

main competitor is the traditional Medicare program. Beat them and we win big!” DX0501-003.

An Aetna strategic planning document noted as a “Key Market Trend” the “[g]rowing role of

Medicare Supplement” as an alternative to Medicare Advantage. DX0290-114. But a few

documents give off a glimmer of more concrete, localized competition between Medicare

Advantage and MedSupp. 11 A draft Medicare Advantage strategy within Humana proposes that

the firm “increasingly migrate existing members” from MedSupp to Medicare Advantage.

DX0484-002. An Aetna document about Washington state observes that increasing MedSupp

premiums might offer a “wedge opportunity” for one of Aetna’s Medicare Advantage plans.

DX0313-091. Another market-specific Humana document about Southern Ohio graphs “Market

Membership by Product” and includes both Medicare Advantage products and MedSupp.

DX0510-005. But see PX0155-454 (Humana document dividing “MAPD” market shares “By

Product Type” but not including MedSupp). Perhaps the most concrete evidence regarding

competition between Medicare Advantage and MedSupp relates to the “Med Supp killer,” a

Medicare Advantage plan designed by Aetna to compete directly for MedSupp customers.

11

Many of defendants’ documents concerning Medicare Advantage reference a “penetration rate,” which

reflects the share of Medicare-eligible seniors who select Medicare Advantage over Original Medicare in a particular

location. Usually, however, these references do not herald concrete competitive steps to be taken vis-à-vis some

specific MedSupp plan or other Original Medicare option. As a result, in the Court’s view, penetration rates are more

appropriately interpreted as a statistic used to assess the size of the Medicare Advantage market.

31

DX0035-002; Tr. 2094:9–2095:5 (Follmer). Because the plan has been unsuccessful, Aetna now

incentivizes brokers not to sell it. See Tr. 2096:18–2098:1 (Follmer).

But these documents are too few and too general to carry much weight. It is evident from

the clear majority of the documents reviewed here that Aetna and Humana spend an enormous

amount of time, money, and manpower assessing the offerings of competing Medicare Advantage

plans. They make those assessments on a market-by-market, plan-by-plan basis, focusing on

details concerning premiums, out-of-pocket costs, networks, and benefits. The passing references

in the record to competition with Original Medicare or with MedSupp do not suffice to undercut

the strong inference that must be drawn from the ordinary course of business documents—that

Aetna and Humana focus most of their competitive efforts within the market for Medicare

Advantage rather than on products outside of it, like MedSupp.

That focus makes sense, the government contends, if Medicare Advantage plans generally

attract a set of “distinct customers.” See Brown Shoe, 370 U.S. at 325. The government has

indeed introduced a good deal of evidence showing that at least some seniors have a “durable

preference” for Medicare Advantage relative to Original Medicare options. See Pls.’ Proposed

Findings & Conclusions at 38. The most persuasive of this evidence is switching data—that is,

data about how often seniors leave Medicare Advantage plans and where they go when they do.

The switching data presents a clear picture: Medicare Advantage enrollees rarely switch plans, but

when they do, they overwhelming stay within Medicare Advantage.

The switching data evidence comes from a variety of sources. Using data from 2013 and

2014, the Kaiser Family Foundation concluded that 78% of Medicare Advantage enrollees

remained with their plan during that period. Tr. 113:16–114:1 (Frank). In that same period, 11%

of Medicare Advantage enrollees voluntarily left their plan in favor of a different Medicare

32

Advantage plan; only 2% of enrollees voluntarily left Medicare Advantage for an Original

Medicare option. Tr. 114:1–8 (Frank). Of the voluntary switchers from Medicare Advantage,

therefore, more than 80% switched to a different Medicare Advantage plan. According to Frank,

this proportion has remained relatively stable, between 80 and 85%, in recent years. Tr. 115:9–16

(Frank); see also PX0554 (Frank Reply Report) Ex. 5 (presenting data for 2007 to 2014).

The pattern holds for seniors who voluntarily left their Medicare Advantage plan in

response to a premium increase. Again using 2013 and 2014 data, the Kaiser Family Foundation

concluded that 25 to 33% of Medicare Advantage enrollees left their existing plan in response to

a premium increase of $20 per month—but no more than 13% of them switched to an Original

Medicare option. PX0554 (Frank Reply Report) ¶ 32. A 2014 study commissioned by Humana

reached similar results. 12 Out of a sample of 250 seniors who disenrolled from a Humana Medicare

Advantage plan, 85% switched to a different Medicare Advantage plan. PX0015-879. Because

many seniors cited costs, including high premiums, co-pays, or deductibles, as a reason for

switching, the survey concluded that “[c]osts play a huge rule in [Medicare Advantage] members

defecting.” PX0015-853. Both Cocozza and Wheatley acknowledged that most seniors who leave

an Aetna or Humana Medicare Advantage plan switch to a different Medicare Advantage plan, not

to Original Medicare. Tr. 288:13–16 (Cocozza); Tr. 524:16–21 (Wheatley).

Switching within Medicare Advantage also dominates among seniors who must

involuntarily switch from their Medicare Advantage plans, perhaps because their existing plan was

cancelled. These seniors “overwhelmingly” return to Medicare Advantage. Tr. 116:2–6 (Frank);

see also PX0554 (Frank Reply Report) ¶ 31 (citing a paper finding that between 83 and 95% of

seniors whose Medicare Advantage plans were terminated switched to another Medicare

12

The government offered expert testimony by Dr. Gary Ford, who was retained to assess the reliability of

this Humana study. According to Ford, the study is reliable. Tr. 912:22–913:1 (Ford).

33

Advantage plan). After Humana discontinued one of its Medicare Advantage plans in the San

Antonio area, Raul Gonzalez, a local broker, helped about 200 clients obtain new coverage. Only

about 12 to 14 switched to Original Medicare plus MedSupp. Tr. 1034:24–1035:8 (Gonzalez).

“For the most part,” the others switched to an Aetna Medicare Advantage plan. Tr. 1033:1–

1035:10 (Gonzalez); see also Tr. 1077:17–1080:14 (Fitzgerald). If seniors do not select a new

plan when their existing plan is cancelled, they are defaulted back to Original Medicare. One 2015

paper cited by Frank finds that 89% of the seniors involuntarily moved to Original Medicare by

default later chose to return to Medicare Advantage. PX0554 (Frank Reply Report) ¶ 32.

Nevo analyzed switching data from several sources and arrived at similar conclusions.

First, he analyzed 2015 CMS data from the annual open-enrollment period, when any senior can

switch between any Medicare options, including between Medicare Advantage and Original

Medicare. Second, he analyzed a subset of that data, which focused only on those seniors who

had their plan cancelled in 2015. And finally, he analyzed three years’ worth of data from Aetna

and Humana—unlike the CMS open-enrollment data, this data includes information concerning

the annual “disenrollment period,” when seniors can switch from Medicare Advantage to Original

Medicare but not between Medicare Advantage plans. All else equal, including seniors who

switched from Medicare Advantage during the disenrollment period might be expected to increase

the overall share switching into Original Medicare options. But in all three instances, more than

85% of seniors who left one Medicare Advantage plan switched to another instead of to an Original

Medicare option. See Tr. 1587:20–1592:18 (Nevo); see also PX0552 (Nevo Reply Report) Ex. 7.

The switching data makes clear that there is a group of seniors with a distinct preference

for Medicare Advantage relative to Original Medicare. Testimony by the government’s broker

witnesses generally supports the same conclusion. See, e.g., Tr. 1071:11–17 (Fitzgerald) (after

34

receiving an overview of Original Medicare and Medicare Advantage, seniors begin “asking more

questions about one side or the other”). A preference for Medicare Advantage may be based on a

number of factors, including a senior’s comfort with managed care plans or desire to receive all of

his or her benefits from one source. See Pls.’ Proposed Findings & Conclusions at 37 (collecting

support for those propositions). But one important factor is cost. See Tr. 1023:24–1024:8

(Gonzalez) (questions about cost can “quickly determine” whether a senior chooses Medicare

Advantage or MedSupp). The weight of the evidence suggests that, on average, Medicare

Advantage plans have much lower out-of-pocket costs than Original Medicare plus MedSupp and

prescription drug plans. See Brown Shoe, 370 U.S. at 325 (noting that “distinct prices” may be

considered in assessing the boundaries of a market).

All Medicare Advantage plans come with a statutory limit on annual out-of-pocket

expenses and most include coverage for prescription drugs. To recreate those benefits on the

Original Medicare side, a senior would have to purchase MedSupp and prescription drug plans

from a private insurer—and would likely end up paying significantly more in monthly premiums.

The average Medicare Advantage enrollee pays $142 in monthly premiums, while the average

senior enrolled in Original Medicare plus MedSupp and a prescription drug plan pays double that

amount. PX0554 (Frank Reply Report) ¶ 26 & Ex. 4. But as the companies are correct to observe,

monthly premiums are only part of the story. A senior with MedSupp coverage will likely not

incur monthly out-of-pocket expenses in addition to his or her monthly premium. A senior in

Medicare Advantage, on the other hand, may still have to pay various cost-sharing requirements

in exchange for receiving medical care. His or her monthly out-of-pocket expenses, then, will

depend on the amount of care received, in addition to the monthly premium. Even so, Medicare

Advantage enrollees are still likely to enjoy lower out-of-pocket costs. Using national 2010 data,

35

a paper cited by Frank concluded that out-of-pocket costs for Original Medicare exceed those for

Medicare Advantage by between $130 and $167 per month. PX0553 (Frank Report) ¶ 42; see also

PX0554 (Frank Reply Report) ¶ 27.

The government does not have to prove that preferences for Medicare Advantage overlap

with any demographic indicators. But here, there is evidence suggesting that Medicare Advantage

plans tend to attract seniors with lower incomes. That trend has been observed by academics; by

defendants’ executives, competitors, and Molina; and by independent brokers. See Tr. 112:14–18

(Frank) (“[T]here’s been quite a bit of research on this, and that research generally shows that

people with lower incomes, lower levels of education, tend to join Medicare Advantage plans

disproportionately to the rest of the population”); Tr. 1341:9–16 (Bertolini) (agreeing that the

senior who chooses Medicare Advantage “tends on the average to be somewhat lower income than

the population as a whole” because of Medicare Advantage’s “total out-of-pocket costs”);

PX0011-895 (Anthem executive noting that Medicare Advantage “attracts the lower/lower-middle

income beneficiaries that can’t afford Med Supp”); Tr. 2345:5–7 (Dr. Molina) (Molina CEO

asserting that “the majority of people” in “Medicare Advantage are actually of lower income”);

Tr. 1024:20–1025:1 (Gonzalez) (broker explaining that “it’s much more difficult” for lower

income people “to go with the Medicare Supplement and pay the higher costs”). But see DX0034-

006; Tr. 715:3–7 (Wooldridge) (60% of Aetna’s MedSupp customers make less than $35,000 a

year). That lower-income seniors tend to select Medicare Advantage is circumstantial evidence

that its out-of-pocket costs tend to be lower than comparable Original Medicare options.

Based on the Brown Shoe factors and the parties’ ordinary course of business documents,

the government has made a strong evidentiary showing in support of the Medicare Advantage

product market. The switching data shows that there are some seniors with durable preferences

36

for Medicare Advantage. These seniors would be less likely than average to switch to a (often

more costly) Original Medicare option in the event of a small but significant non-transitory

increase in Medicare Advantage prices, and perhaps much less likely if they are low-income.

Given the average cost differential between Medicare Advantage and comparable Original

Medicare options, there may be room for a hypothetical monopolist of all Medicare Advantage

plans in a particular county to profitably impose such a price increase without driving large

numbers of seniors to Original Medicare. That will depend in part on the number of seniors who

sit on the margin between Medicare Advantage and Original Medicare. But the parties’ ordinary

course of business documents, viewed through the lens of Brown Shoe, suggest that there are not

as many of these seniors as one might imagine. Evidence abounds of intense, local competition

between Medicare Advantage plans. Evidence of similar competition between Medicare

Advantage plans and MedSupp is much scarcer. Collectively, the evidence tends to establish the

existence of a market for the sale of individual Medicare Advantage plans.

3. Defendants’ Counter Arguments

Aetna and Humana raise several counter arguments. They argue that the government has

oversimplified the health-insurance market and the choices that seniors make. Medicare

Advantage plans, they point out, can vary on a number of metrics, including the breadth of provider

networks, benefits provided, total out-of-pocket costs; some plans, they continue, actually have

higher estimated out-of-pocket costs or fewer benefits than a competing Original Medicare option.

See Defs.’ Proposed Findings & Conclusions at 18–19. As a result of this overlap, defendants

believe that “a Medicare Advantage plan’s closest cousins are often one or more Original Medicare

options instead of other Medicare Advantage plans. Excluding all Original Medicare options in

37

order to create an MA-only market would ignore the ample overlap between the two types of

plans.” Id. at 115–16 (internal citation omitted).

What’s more, defendants contend, the government has mischaracterized the manner in

which seniors make healthcare choices. Each chooses among the available Medicare Advantage

and Original Medicare options based on highly individualized preferences that are based on factors

such as cost, medical condition, comfort with limited provider networks, and convenience.

Preferences may change over time, and are not predetermined by demographic factors like income.

See id. at 22–28. Defendants conclude “it is [too] difficult to generalize about the kinds or types

of beneficiaries who will select one product over the other.” Id. at 123.

Taking the second contention first, the Court agrees that seniors make individualized

healthcare decisions. That does not mean, however, that all generalization is futile. Indeed Aetna

and Humana, who have a vested financial interest in accurately assessing the competitive

landscape, have not always so scrupulously avoided generalizing about seniors’ healthcare

decisions. For example, a draft presentation prepared for a Humana board retreat includes a slide

addressing “Why Consumers Select Products,” which differentiates between Medicare Advantage

and MedSupp customers. Because Original Medicare plus MedSupp is “the most expensive plan

combo,” seniors who select it are “[w]illing to pay more for a flexible network of physicians and

comprehensive coverage.” DX0514-023. Medicare Advantage, on the other hand, attracts those

seniors who want “additional health coverage, but [are] willing to sacrifice having a flexible

network to keep costs low.” DX0514-023; see also PX0045-196 (Humana sales director opining

that low Medicare Advantage penetration levels likely means that “there are higher income

eligibles in the area who are more inclined to have [MedSupp] policies versus MA plans”);

PX0025-920 (2016 Aetna presentation describing the “Typical Med Supp Customer” based on

38

income and geography); PX0021-017 (Aetna executive explaining that Medicare Advantage and

Med Supp are “apples and oranges,” that “the nature of MA and Med Supp focuses on different

areas,” and that “an area cannot be both a good Med Supp and a good MA area.”).

Aetna and Humana have also historically been willing to generalize about the costs and

benefits of Medicare Advantage compared to Original Medicare options. Internal documents

claim that Medicare Advantage provides “[b]etter benefits [and] lower cost” than Original

Medicare, either with or without supplemental coverage. See DX0480-006; see also DX0514-021

(Humana document noting that Medicare Advantage offers “[m]ore benefits & less out of pocket

payments than Original Medicare”). Humana makes similar claims. In its 2016 Presentation on

Medicare Advantage and Prescription Drug Plans, Humana notes that Medicare Advantage plans

generally “have lower out-of-pocket costs” than Original Medicare and may come with “[e]xtra

benefits.” DX0111-023; see also Tr. 2061:6–16 (Kauffman) (Humana sales manager confirming

that she shares this information during meetings with seniors).

Nor is the Court convinced that an Original Medicare option is the “closest cousin” for

many Medicare Advantage plans. If that is indeed the case, it is not reflected in the record. CMS’s

Medicare & You Handbook advises seniors to make a threshold choice between Medicare

Advantage and Original Medicare, not to choose from a continuum of intermingled Medicare

Advantage and Original Medicare options. PX0519-017. A “Decision Tree” created by Humana

presents a senior’s decision in a similar fashion. Before assessing a plan’s network, costs, or

supplemental benefits, the senior is asked to decide whether she is willing to “accept network

restrictions”; if so, she is deemed a good fit for Medicare Advantage, but if not, she is deemed a

good fit for MedSupp. DX0490-045. If Medicare Advantage plans were routinely competing with

a “closest cousin” from the Original Medicare side of the family, one would expect to find evidence

39

of that competition in the ordinary course of business documents. But for the most part, it is not

there. Aetna and Humana frequently compare their Medicare Advantage offerings to other

Medicare Advantage plans, but they rarely, if ever, compare them to particular MedSupp plans.

Seniors, it seems, do not make that comparison either. In eight years selling Medicare products,

broker Robert Fitzgerald has never compared a particular Medicare Advantage plan to a particular

MedSupp plan—at a senior’s request or otherwise. Tr. 1073:18–1074:1 (Fitzgerald).

Aetna and Humana contend that any differences that do exist between Medicare Advantage

and Original Medicare have been and will be narrowed by various legislative and regulatory

changes. They cite two of note. First, the Affordable Care Act linked Medicare Advantage

reimbursement rates to Original Medicare provider costs, resulting in a substantial reduction in

county-level benchmarks phased in over a period of six years. See Tr. 1127:13–1128:20

(Cavanaugh). These reductions, defendants contend, have reduced “the reimbursements MAOs

receive from CMS, decreasing their revenues, and increasing competition between Original

Medicare and Medicare Advantage plans.” Defs.’ Proposed Findings & Conclusions at 20.

The companies also believe that Accountable Care Organizations, or ACOs, will bring

Original Medicare and Medicare Advantage closer. ACOs, which were created by the Affordable

Care Act, are groups of providers who join together in an attempt to coordinate care, control costs,

and improve health outcomes; those that succeed in holding down costs may be paid a financial

bonus by CMS. PX0554 (Frank Reply Report) ¶ 42. By responding to these incentives and

providing value-based care within Original Medicare, defendants argue, ACOs will help convert

Original Medicare from a fee-for-service model into one more like Medicare Advantage. In fact,

defendants say, this conversion is already underway. See Tr. 1174:16–1175:2 (Cavanaugh)

(discussing efforts to move Original Medicare away from fee-for-service payment model).

40

But these policy changes have little impact on the market definition analysis in this case.

The Court does not doubt that the benchmark reductions made the basic Medicare Advantage value

proposition of lower costs and additional benefits somewhat more difficult to deliver. See

DX0508-033 (slide deck for Humana Board of Directors Meeting observing that “Benchmark

Reductions are reducing MA Value Add” and that “MA Value Add drives Penetration Rate”). But

because these reductions will be fully phased in by the end of 2017, see Tr. 1128:21–24

(Cavanaugh), their impact has largely already been felt. Moreover, MAOs have largely succeeded

in maintaining the Medicare Advantage value proposition by controlling costs, bidding below the

benchmarks, and offering supplemental benefits not provided by Original Medicare. See PX0551

(Nevo Report) ¶ 67; Tr. 1130:3–12 (Cavanaugh). Thus, the differences between Medicare

Advantage and Original Medicare options have been preserved.

The argument concerning ACOs is also unpersuasive. The market definition analysis

“focuses solely on demand substitution factors,” Heinz, 246 F.3d at 718 (internal quotation marks

omitted)—i.e., “customers’ ability and willingness to substitute away from one product to another

in response to a price increase” or “reduction in product quality or service,” Guidelines § 4. It is

not clear what impact the advent of ACOs would have on the extent of this substitution. As an

initial matter, it is the provider, not the senior, who decides whether to participate in an ACO;

seniors are often “passively attributed” to them, sometimes even without their knowledge. PX0554

(Frank Reply Report) ¶ 46. Hence, there is no choice by the senior customer to use an ACO. And

for the most part, ACOs do not diminish the essential differences between Medicare Advantage

and Original Medicare. Perhaps a senior who has been attributed to an ACO would receive some

of the care coordination ordinarily associated with Medicare Advantage. But unlike Medicare

Advantage enrollees, Original Medicare enrollees assigned to ACOs are not penalized for seeking

41

care outside the network. Tr. 133:22–134:5 (Frank). Nor would they receive additional coverage

or cost reductions for participating in the ACO. PX0554 (Frank Reply Report) ¶ 44. Ultimately,

then, ACOs have almost “nothing to do with a comparison of the benefits of traditional Medicare

or Medicare Advantage.” Tr. 1132:3–6 (Cavanaugh). And as a result, they also have little to do

with defining the product market in this case.

The companies’ third argument, though, fares better. Aetna and Humana argue that an

exclusive focus on the behavior of switch-outs—those seniors who have already enrolled in a

Medicare Advantage plan—is “misguided.” Every day, approximately 10,000 seniors “age in”

and become eligible for Medicare, and are thus presented with the choice between Original

Medicare options and Medicare Advantage. 13 Aetna and Humana argue that Medicare Advantage

organizations must compete for these age-ins, in addition to seniors already enrolled in Medicare

Advantage or Original Medicare options.

The companies argue that the parties’ recent Medicare Advantage enrollment data makes

this clear. In 2015 only 45% of Aetna’s and Humana’s Medicare enrollees switched from a

different MAO; the remaining 55% enrolled either as they aged into Medicare (21%) or switched

from an Original Medicare option (34%). Tr. 3044:7–20 (Orszag). Focusing just on the behavior

of seniors who have already selected a Medicare Advantage plan is like standing outside a Ford

dealership and asking those who emerge with Ford keys “What do you think about Fords?” Tr.

3646:15–18 (closing argument). That survey would reveal that some drivers have a preference for

Fords, but it would also obscure the broader competitive picture. Here, defendants insist, the

broader competitive picture shows that a hypothetical monopolist of all Medicare Advantage plans

13

Seniors who are still employed when they turn 65 may not have to make an individualized choice between

Medicare Advantage and Original Medicare. Instead, they may be offered a group plan by their employer, which falls

on one side of the line or the other. See Tr. 116:18–24 (Frank) (describing employer-provided MedSupp plans that

wrap around Original Medicare); Tr. 1119:14 – 20 (Cavanaugh) (describing group Medicare Advantage plans).

42

could not impose a price increase. If it tried, some Medicare Advantage enrollees may remain

within the market; but the age-ins would turn to Original Medicare options in sufficient numbers

to make the price increase untenable. See Tr. 48:21–49:13 (opening statement).

In the Court’s view, Aetna and Humana understate the importance of the switching data,

which indicates not only that some seniors opt for Medicare Advantage, but that those seniors stick

with it in the face of price increases or plan exits. Their argument implies that age-ins are as a

group somehow closer to the margin between Medicare Advantage and Original Medicare options

than seniors who have already made an initial selection. But there is little evidentiary support for

that contention. Despite the unrelenting torrent of age-ins, Aetna and Humana focus their

competitive efforts primarily within the Medicare Advantage market. Still, the companies’ basic

point is well-taken: the market definition analysis in this case must rest on a complete assessment

of the demand for individual Medicare Advantage. For that assessment, the Court now turns to

the economists.

4. Econometric Evidence

The government’s economist, Dr. Aviv Nevo, analyzed whether the proposed market for

the sale of individual Medicare Advantage plans would satisfy the hypothetical monopolist test.

As set out in the Horizontal Merger Guidelines, that test asks whether

a hypothetical profit-maximizing firm, not subject to price

regulation, that was the only present and future seller of those

products (“hypothetical monopolist”) likely would impose at least a

small but significant and non-transitory increase in price (“SSNIP”)

on at least one product in the market, including at least one product

sold by one of the merging firms.

Guidelines § 4.1.1. If so, the candidate market may be the relevant product market. See Sysco,

113 F. Supp. 3d at 33–34; H&R Block, 833 F. Supp. 2d at 51–52. Because Medicare Advantage

43

passed under all formulations of his hypothetical monopolist tests, Nevo concluded that individual

Medicare Advantage plans constitute a relevant product market. Tr. 1610:16–21 (Nevo).

Nevo’s analysis began with his demand model, which provides several key inputs for his

hypothetical monopolist test. Nevo used 2011 to 2016 CMS data on Medicare Advantage plan

enrollment, premiums, and characteristics. PX0551 (Nevo Report) ¶¶ 152–53. The CMS data

thus reflects the choices made by millions of seniors—including age-ins, those who chose Original

Medicare options, and those who chose Medicare Advantage. Tr. 1603:6–21, 1604:9–15 (Nevo).

Like other economists who have studied demand for Medicare Advantage products, Nevo used a

“nested logit model.” See PX0551 (Nevo Report) ¶ 150. Nested logit models are appropriate

“where some consumers may prefer a group, or ‘nest,’ of choices to the other choices” available

to them. PX0551 (Nevo Report) ¶ 148. Applied here, the nested logit model can be used to test

whether, and to what degree, a senior might prefer “a Medicare Advantage plan because it is a

Medicare Advantage plan.” PX0051 (Nevo Report) ¶¶ 147, 148.

The model incorporates a “nesting parameter” that reflects the presence and strength of any

such preference. PX0551 (Nevo Report) ¶¶ 148, 149. The nesting parameter can vary from zero

to one, although any positive nesting parameter indicates that some seniors “have a distinct

preference for [Medicare Advantage] plans as a group.” Tr. 1602:4–9 (Nevo). Nevo’s nested logit

model yielded a nesting parameter of .65, indicating that many seniors do have a distinct preference

for Medicare Advantage compared to other coverage options. Tr. 1602:4–9, 1602:25–1603:5

(Nevo). Nevo’s work is in line with the academic literature, which has consistently estimated

positive nesting parameters when studying demand for Medicare Advantage. See PX0551 (Nevo

Report) ¶ 150 & Ex. 9 (reporting that earlier studies’ “preferred nesting parameter estimate[s]”

ranged between 0.32 and 0.84, “with all but one being greater than 0.50”).

44

The size of the nesting parameter has implications when examining measures of consumer

substitution. The nesting parameter can be used to calculate an “aggregate diversion ratio” for a

particular product, which applied here, “represents the share of seniors who would respond to a

price increase on their current Medicare Advantage plan by choosing another Medicare Advantage

plan.” PX0551 (Nevo Report) ¶ 164. The higher the nesting parameter, the higher the aggregate

diversion ratio; and the higher the aggregate diversion ratio, “the more closely Medicare

Advantage plans compete with each other rather than with other coverage options.” PX0551

(Nevo Report) ¶ 165. Using his nesting parameter of .65, Nevo calculated an aggregate diversion

ratio of 70%—that is, 70% of seniors leaving a Medicare Advantage plan in response to a price

increase would switch to a different Medicare Advantage plan. Tr. 1605:1–3 (Nevo). As a check

on his analysis, Nevo compared his aggregate diversion ratio to the switching data summarized

above. Because that data generally shows that more than 80% of seniors leaving one Medicare

Advantage plan switch to another, Nevo believes that his estimated aggregate diversion ratio is

actually conservative. Tr. 1604:16–16:05:12 (Nevo); PX0552 (Nevo Reply Report) ¶ 57 & Ex. 7.

Armed with his demand estimates, Nevo turned to the hypothetical monopolist test. In

deciding whether to impose a price increase, the hypothetical monopolist is trying to balance two

effects. On the one hand, the price increase will likely drive away some consumers, thereby

costing the monopolist a number of sales and the associated profit; but on the other hand, the

monopolist will make higher profits on sales it retains, so that whether the price increase would be

profitable depends on the relative sizes of those effects. Tr. 1608:24– 1609:6 (Nevo). To simulate

those effects, an economist needs measures relating to the number of customers who would leave

the hypothetical monopolist’s product in response to the price increase (elasticities), the number

who would remain within the market rather than leave it (the aggregate diversion ratio), and the

45

profit associated with each sale (margins). See PX0551 (Nevo Report) ¶ 177; see also Tr.

1611:15–21 (Nevo). Nevo’s elasticities were derived from his nested logit model. His margins

were computed using those elasticities and what Nevo has described as a “standard model of

competition.” See PX0551 (Nevo Report) ¶ 177; Tr. 1611:22–1612:1 (Nevo).

Nevo ran two versions of the hypothetical monopolist test. The first asked whether a

hypothetical monopolist of all the Medicare Advantage plans in a particular county could increase

profits by imposing a SSNIP on at least one Aetna or Humana plan. Tr. 1611:2–4 (Nevo); see also

Guidelines § 4.1.3 (describing this inquiry as a “[c]ritical loss analysis”). Using his demand

estimates, Nevo concluded that the hypothetical monopolist could impose a SSNIP of five or ten

percent on at least one Aetna or Humana Medicare Advantage plan in all 364 complaint counties.

Tr. 1612:6–15 (Nevo); see also PX0551 (Nevo Report) ¶ 178 & Ex. 12. Nevo’s second version of

the hypothetical monopolist test was based on a “merger simulation.” Tr. 1615:9–15 (Nevo).

There, instead of raising prices only on one plan, the hypothetical monopolist is permitted to

simultaneously raise prices on all of the Medicare Advantage plans being offered in a particular

county. The test then asks whether the monopolist, empowered to set a profit-maximizing price

for every Medicare Advantage plan, would increase the price of at least one plan by a SSNIP. Tr.

1614:21–1615:8 (Nevo); see also PX0551 (Nevo Report) ¶ 181. Again, using his demand

estimates, Nevo concluded that the candidate market passed the hypothetical monopolist test. In

all 364 complaint counties, the hypothetical monopolist would impose a SSNIP on at least one

Aetna or Humana plan. Tr. 1618:5–8 (Nevo); see also PX0551 (Nevo Report) ¶ 187 & Ex. 14.

Under his tests, Nevo concluded that individual Medicare Advantage plans constitute a relevant

product market. 14 Tr. 1619:8–9 (Nevo).

14

Before embarking on his economic analysis, Nevo reviewed much of the relevant evidence in this case,

including the parties’ ordinary course of business documents and the switching data. It is not necessary to summarize

46

Aetna and Humana, relying largely on their economist, Jonathan Orszag, attempt to

undermine Nevo’s analysis in various ways. They first lodge technical criticisms of Nevo’s

econometric methods. Like Nevo, Orszag used a nested logit model to assess demand for Medicare

Advantage products. And like Nevo’s, Orszag’s model predicted positive nesting parameters. But

his nesting parameters were lower than Nevo’s, ranging from .23 to .35. Tr. 3145:16–19 (Orszag);

DX0419 (Orszag Report) ¶ 94. The comparatively lower nesting parameters, in turn, translate into

comparatively lower aggregate diversion ratios. Whereas Nevo found that, in response to a price

increase in Medicare Advantage, the aggregate diversion to other Medicare Advantage plans

would be 70%, Orszag estimates it at only 49%. Tr. 3142:2–6 (Orszag). He attributes these

differences primarily to differences between the models’ instrumental variables, an econometric

tool used to disentangle correlation from causation. Tr. 3157:8–11 (Orszag). Digging into the

models yet further, Orszag offered a number of reasons why, in his view, Nevo’s method for

constructing instrumental variables lacked “a good intuition” and thus distorted his results. Tr.

3165:13–14 (Orszag); see generally Tr. 3157:8–3167:11 (Orszag).

Orszag also opines that certain of the inputs and assumptions undergirding Nevo’s analysis

are inconsistent with how the market operates in practice. In particular, Orszag criticizes Nevo for

basing his calculations on an average economic margin of 24%, even though medical-loss

regulations require MAOs to spend 85% of the revenue associated with a particular contract on

medical care (thus leaving a maximum of 15% for administrative costs and profit). 15 Tr. 3177:5–

Nevo’s conclusions regarding that evidence. It will suffice to note that Nevo believes that evidence also points to the

existence of a market for individual Medicare Advantage plans. See Tr. 1618:13–1619:9 (Nevo).

15

The parties agree that “margin” is a somewhat fraught concept, which can vary depending on the context.

As explained by several witnesses, there are important differences between economic margins, underwriting margins,

and profit margins, so one must be careful about drawing quick comparisons between “margin” figures. Aware of

that danger here, Orszag has not simply compared Nevo’s “economic margin” estimates to the “margin” cap in the

medical loss regulations and decided that Nevo’s margins are too high. Instead, he has constructed an argument that

the medical loss regulations imply a cap on economic margins of 15%. See Tr. 3186:2–16 (Orszag).

47

17 (Orszag). Orszag further faults Nevo for assuming in his merger simulation that the

hypothetical monopolist would set prices at the county-level, despite the fact that Medicare

Advantage organizations typically set a plan-level price that applies in all the various counties

where the plan is offered. See Tr. 3168:11–3169:20 (Orszag); see also Tr. 1723:9–16 (Nevo)

(acknowledging that Medicare Advantage organizations “offer plans at a service area level”).

When these flaws are assessed together, Orszag contends, the whole of Nevo’s economic

analysis is fatally undermined: both versions of his hypothetical monopolist test—critical loss

analysis and merger simulation—rely on erroneously high diversion ratios and margins which,

once incorporated, bias his results toward the adoption of a Medicare Advantage only market. The

version using the merger simulation is doubly flawed, Orszag believes, because it also incorporates

unrealistic assumptions about the manner in which MAOs set plan prices. Tr. 3186:17–3187:13

(Orszag). Aetna and Humana therefore assert that Nevo’s conclusions regarding market definition

are faulty and they urge the Court to disregard them.

In his rebuttal testimony, Nevo has offered defenses of his instrumental variables, his

margin figures, and the assumptions in his merger simulation. Fortunately, however, the Court

does not need to referee to resolution this econometric battle of the experts. By performing much

of his analysis using Orszag’s estimates, in addition to his own, Nevo has largely insulated his

work from defendants’ critiques. 16 Specifically, Nevo performed his first hypothetical monopolist

test, the critical loss analysis, using estimates derived from eight different specifications of

Orszag’s demand model. Tr. 3503:3–9 (Nevo); see also PX0552 (Nevo Reply Report) ¶ 38. These

estimates included Orszag’s elasticities, the margins implied from those elasticities, and diversion

16

Nevo also performed his critical loss analysis using estimates derived from the academic paper that found

the lowest nesting parameter. The Medicare Advantage product market also passed these iterations of the hypothetical

monopolist test. See PX0551 (Nevo Report) ¶ 180 & n.251.

48

ratios derived from Orszag’s nesting parameters. See Tr. 3598:19–3599:3 (Nevo); see also

PX0552 (Nevo Reply Report) Note to Ex. 2. No matter which set of estimates Nevo used, and no

matter whether he imposed a SSNIP of 5% or 10%, the candidate market—Medicare Advantage—

passed the hypothetical monopolist test for the majority—and usually for the overwhelming

majority—of the complaint counties. See PX0552 (Nevo Reply Report) ¶ 39 & Ex. 2. That was

true even for those iterations of the test where Nevo used economic margin figures below the 15%

ceiling that Orszag believes is implied by regulation. Tr. 3509:11–24 (Nevo).

Nevo likewise performed his second hypothetical monopolist test, which relies on his

merger simulation, using estimates derived from the eight specifications of Orszag’s model. Once

again, the Medicare Advantage only market passed the hypothetical monopolist test in the

overwhelming majority of the complaint counties. Tr. 3503:16–20 (Nevo); PX0552 (Nevo Reply

Report) ¶¶ 40–41 & Ex. 3. Thus, it seems that Nevo’s analysis is largely unaffected by defendants’

technical critiques. The companies have not really attempted to argue otherwise, either in their

proposed findings and conclusions or during their closing arguments. See Defs.’ Proposed

Findings & Conclusions at 120–21; Tr. 3762:8–3763:7 (post-trial argument). As a result, the Court

is comfortable moving past these criticisms and focusing instead on defendants’ other arguments. 17

Again relying on Orszag, Aetna and Humana next argue that Nevo has misapplied the

Horizontal Merger Guidelines when performing his hypothetical monopolist test. The crux of

Orszag’s argument is that, in response to a price increase on a particular Medicare Advantage plan,

there are likely to be Original Medicare options that enjoy greater diversion than the plan’s most

17

It is true that, when Nevo uses Orszag’s estimates, a small number of complaint counties do not pass the

hypothetical monopolist test with a Medicare Advantage market. If these iterations of Nevo’s tests were the only

market definition evidence in the record, the Court might conclude that the government had not proven a valid market

with respect to those counties. But these iterations of the test are not the only evidence in the record. The ordinary

course of business documents and Brown Shoe factors point strongly to the existence of a Medicare Advantage market.

So do Nevo’s preferred iterations of the hypothetical monopolist test, which are all the more persuasive given that

their results are generally unchanged by the use of Orszag’s estimates.

49

distant Medicare Advantage substitute. Applying what he calls the “circle principle,” which he

derives from “Example 6” of the Guidelines, Orszag argues that any such Original Medicare

options must be included in the product market. By ignoring the circle principle, defendants assert,

Nevo has defined an overly narrow and conceptually flawed product market.

To assess this argument, the Court turns first to the language of the Guidelines:

Groups of products may satisfy the hypothetical monopolist test

without including the full range of substitutes from which customers

choose. The hypothetical monopolist test may [therefore] identify a

group of products as a relevant market even if customers would

substitute significantly to products outside that group in response to

a price increase.

Guidelines § 4.1.1. In Example 5, the Guidelines provide an illustration of that principle. There,

they posit a candidate market containing two products, A and B. In response to a price increase

on either, two-thirds of the lost sales are diverted to products outside the market. Nonetheless,

based on the margin assumptions included in the example, “economic analysis shows that a

hypothetical profit-maximizing monopolist controlling Products A and B would raise both of their

prices by ten percent.” Id. Under these circumstances, the Guidelines conclude, a market of

Products A and B satisfies the hypothetical monopolist test, even though “customers would

substitute significantly to products outside that group in response to a price increase.” Id.

Broadly speaking, Example 5 is helpful for the government, since it means that a Medicare

Advantage only market may satisfy the hypothetical monopolist test despite fairly significant

diversion to Original Medicare options. But the Guidelines continue with language on which

defendants rely:

When applying the hypothetical monopolist test to define a market

around a product offered by one of the merging firms, if the market

includes a second product, the Agencies will normally also include

a third product if that third product is a closer substitute for the first

product than is the second product. The third product is a closer

50

substitute if, in response to a SSNIP on the first product, greater

revenues are diverted to the third product than to the second product.

Id. This “circle principle” is then illustrated in Example 6:

Example 6: In Example 5, suppose that half of the unit sales lost by

Product A when it raises its price are diverted to Product C, which

[like Products A and B] also has a price of $100, while one-third are

diverted to Product B. Product C is a closer substitute for Product

A than is Product B. Thus Product C will normally be included in

the relevant market, even though Products A and B together satisfy

the hypothetical monopolist test.

Defendants have made two attempts to identify an Original Medicare “Product C” that

must intrude into the proposed Medicare Advantage only market. Both are grounded upon an

analysis of diversion ratios. First, Orszag treated Aetna’s or Humana’s Medicare Advantage

products as Product A and all Original Medicare options—that is, all the possible combinations of

Original Medicare plus the various MedSupp and prescription drug plans—as Product C. Using

the estimates from his own demand model, and applying the “circle principle,” he concluded that

all Original Medicare options must be included in the market. See Tr. 3068:11–3069:10 (Orszag).

If all Aetna Medicare Advantage plans are Product A, there is 23% diversion to Humana plans,

49% diversion to all Medicare Advantage plans (including Humana’s), and 51% diversion to

Original Medicare options. DX0418 (Orszag Reply Report) ¶ 53 & Table II-4. And if all Humana

Medicare Advantage plans are Product A, there is 16% diversion to Aetna plans, 44% diversion to

all Medicare Advantage plans (including Aetna’s), and 56% diversion to Original Medicare

options. DX0418 (Orszag Reply Report) ¶ 53 & Table II-4. Original Medicare options, then, must

be included in the market—even if one uses all other Medicare Advantage products as the

operative Product B. Tr. 3068:11–18, 3069:7–10 (Orszag).

The Court finds this application of the “circle principle” unpersuasive. In effect, Orszag

has taken all the sales escaping the government’s proposed market, relabeled them as “Product C,”

51

and then asserted that, under that new moniker, they must be included in the product market. But

as Example 5 makes clear, a market may satisfy the hypothetical monopolist test, and thus be

considered as a proper antitrust product market, “even if customers would substitute significantly

to products outside that group in response to a price increase.” Guidelines § 4.1.1. Endorsing

Orszag’s first application of Example 6 would create an exception that completely swallows that

rule. 18 In Example 5, two-thirds of diversion escapes the market. Here, even using Orszag’s lower

diversion ratios, only slightly more than half does. That diversion fits squarely within Example 5,

and Orszag’s first purported application of the “circle principle” will be rejected.

So too will Orszag’s second proposed application, although for different reasons. Rather

than treating all Original Medicare options collectively as one Product C, Orszag’s second

application posits that each possible combination of Original Medicare, MedSupp, and Part D

plans might constitute its own product. Neither Orszag nor Nevo calculated diversion ratios

between every Medicare Advantage plan and every conceivable individual Original Medicare

option. 19 Tr. 3070:7–13 (Orszag); Tr. 3567:5–20 (Nevo). But Orszag thinks it likely that some

individual Original Medicare “Product Cs” are closer substitutes for some Medicare Advantage

plans than their most distant Medicare Advantage competitors. His reasoning is as follows.

Enrollment data reveals that there is basically no diversion between some sets of Medicare

Advantage plans. The data also reveals that diversion from Aetna or Humana Medicare Advantage

plans to Original Medicare as a whole is substantial—slightly more than 50% using Orszag’s

estimates. He reasons that “by definition,” then, there must be some Original Medicare “products”

that enjoy more diversion from Aetna and Humana Medicare Advantage plans than their most

18

It would also require (somewhat counter-intuitively) grouping together as one product all the possible

combinations of Original Medicare, MedSupp, and Part D plans.

19

There is some indication in the record that, given the compressed schedule in this case (adopted largely at

the companies’ request), CMS could not timely provide the data necessary to perform those calculations.

52

distant Medicare Advantage substitutes. Pursuant to the circle principle, Orszag concludes, any

such products must be included in the market. Tr. 3070:25–3072:24 (Orszag).

The problem with this more nuanced argument, however, is that it is almost entirely

speculative. Orszag has not identified an Original Medicare product of the kind that he describes

above, although Nevo has not proved that one does not exist. Defendants imply, but stop short of

explicitly arguing, that this gap in the factual record should fall on the government as the party

with the ultimate burden. When asked at closing arguments whether, in order to prove its candidate

market was a valid product market, the government needed to “calculate a diversion ratio for every

product that has a potential to be in the market,” counsel for defendants was somewhat non-

committal. See Tr. 3764:1–11 (post-trial argument). Regardless, defendants plainly believe that

the lack of a complete set of diversion ratios undermines the government’s ability to carry its

burden on market definition.

The Court disagrees. If taken to its logical conclusion, defendants’ position implies a

purely econometric approach to market definition, requiring the government to calculate individual

diversion ratios for all the products potentially in the market, rank them from highest to lowest,

and, at some point, draw a line between those products that fall within the market and those

products that fall outside. But that technical approach is not taken by the cases. Econometric

evidence can be powerful evidence, but it is not the only evidence that courts consider in defining

the relevant market. Indeed, the cases relied upon by both parties here have considered the Brown

Shoe factors and ordinary course of business documents, in addition to econometric evidence,

before reaching conclusions about the proper market definition. In this case, the government has

marshalled a wide array of qualitative evidence. Most of it points to the existence of a Medicare

Advantage only market. And none of it suggests frequent, close competition between Medicare

53

Advantage plans and particular Original Medicare “Product Cs.” That evidence cannot now be

disregarded, simply because the government has not undertaken a particular bit of economic

analysis. The qualitative evidence in this case is still persuasive—and largely supports the

conclusion that the relevant product market is Medicare Advantage plans alone.

Nor does the possible existence of a specific Original Medicare “Product C” require the

Court to disregard the government’s econometric evidence. The Guidelines make clear that the

hypothetical monopolist test does not aim to identify a “single relevant market.” See Guidelines

§ 4.1.1. Rather, the test “ensures that markets are not defined too narrowly” and, in so doing,

identifies a market that will “illuminate the evaluation of competitive effects.” Id. Within these

parameters, the government “may evaluate a merger in any relevant market satisfying the

[hypothetical monopolist] test,” and will “usually do so in the smallest” market that qualifies. Id.;

see also Sysco, 113 F. Supp. 3d at 26 (adopting this “narrowest market” principle) (citing Arch

Coal, 329 F. Supp. 2d at 120); see also H&R Block, 833 F. Supp. 2d at 59 (same).

The government has operated within those parameters here. Based on the qualitative

evidence, it has (properly, in the Court’s view) identified individual Medicare Advantage plans as

a candidate product market in which to evaluate the merger’s competitive effects. Through

multiple applications of the hypothetical monopolist test, the government’s expert determined that

a hypothetical monopolist in that market could impose a SSNIP on at least one plan sold by Aetna

or Humana. Admittedly, those tests would be even more persuasive if they conclusively foreclosed

the existence of an Original Medicare “Product C.” But that does not mean that they are of no

persuasive value. Like the rest of the government’s evidence, the hypothetical monopolist tests

tend to establish the existence of a market for the sale of individual Medicare Advantage plans

alone. The Court will not disregard that evidence, and risk broadening the market in violation of

54

the narrowest market principle, simply because one of the Guidelines’ examples says that a

hypothetical Product C, if it exists at all, should “normally” be included. That is especially true

here, where there is no showing whatsoever that such a Product C exists. Even if there are a limited

number of as yet unidentified Product Cs that might be included in the market, moreover,

defendants have not explained why that should suffice to bring in all Original Medicare options.

Defendants’ final economic argument is based on quantitative analysis by Orszag, rather

than on a critique of Nevo. Orszag’s economic analysis focused on the relationship between

competition and prices in Medicare Advantage. To study that relationship, he used a regression

that employed various measures of concentration and plan price. See DX0419 (Orszag Report)

¶ 108. Orszag’s regression identified no statistically significant relationship between the two. 20

DX0419 (Orszag Report) ¶ 108 & Table II-6. He believes that this analysis answers the same

question as the various hypothetical monopolist tests run by Nevo. When real-world MAOs face

decreases in competition, defendants contend, they do not increase prices. Therefore, Nevo’s

abstract models notwithstanding, the government’s proposed market “does not pass the

hypothetical monopolist test when you use a real-world test.” Tr. 3062:20–23 (Orszag).

But defendants cannot so easily lay claim to the “real world.” To assess the relationship

between Medicare Advantage competition and prices, Orszag himself used a model—and that

model is not impervious to econometric critique. One persuasive criticism has been levied by

Nevo. 21 Using what he calls “plan fixed effects,” Orszag’s model focuses exclusively on the

changes to the prices of particular plans over time. Tr. 3191:3–8 (Orszag). The problem with that

20

Orszag also finds no correlation between concentration and MAO margins. Although the companies refer

to this conclusion several times in multiple sections of their brief, they have not persuasively explained its relevance.

In the Court’s view, the important part of Orszag’s analysis concerns the relationship between concentration and price.

21

The government also argues that Orszag’s regression is not a proper hypothetical monopolist test because

it incorporates “supply side” factors like the effects of entry and the existence of regulation. Because the Court finds

the government’s econometric critique to be persuasive, it need not address this argument.

55

approach, according to Nevo, is that it misses an important competitive dynamic: Medicare

Advantage organizations sometimes introduce new plans or segment existing ones in response to

competition, rather than adjusting price. Tr. 3513:5–23 (Nevo). The government has cited a

number of documents where defendants contemplate segmenting plans in order to “target one or

more counties” for a “different premium/cost-share” than the other counties currently covered by

the plan. See PX0379-689 (Aetna “Bid Segmentation Concept Brief”); PX0035-808 (Humana

document recommending segmenting a plan “to increase premium where competition allows”).

When Nevo removes the “plan fixed effects” in order to account for that dynamic, he finds

a statistically significant relationship between Medicare Advantage premiums and concentration

in a particular county; as concentration increases, so do average premiums. PX0552 (Nevo Reply

Report) ¶ 68 & Ex. 9; see also Tr. 3512:13–3513:9 (Nevo) (explaining his adjustments to Orszag’s

model). In that respect, Nevo’s adjusted regression is consistent with the academic literature,

which has generally concluded that decreased competition decreases the extent to which Medicare

Advantage organizations pass benchmark increases through to beneficiaries as lower costs or

better benefits. Tr. 129:14–130:18 (Frank); see also PX0553 (Frank Report) ¶¶ 58–63 (citing

studies); PX0552 (Nevo Reply Report) ¶ 64 (same). The companies have presented the Orszag

regression as powerful evidence regarding the incentives of the hypothetical monopolist that fully

rebut the results of Nevo’s hypothetical monopolist tests. But in light of Nevo’s critique and the

academic literature, the Court concludes that Orszag’s regression cannot bear that weight. On

balance, then, the expert case too tilts clearly toward the government.

5. Summary

Considering the evidence collectively, the Court concludes that the government has

established the existence of a product market including the sale of individual Medicare Advantage

56

plans but excluding Original Medicare options. Original Medicare and Medicare Advantage are

functionally interchangeable as ways for a senior to receive basic health benefits. And, in some

sense, Medicare Advantage plans compete with Original Medicare. As a prerequisite to offering

a plan, an MAO must sufficiently differentiate it from Original Medicare.

But most MAOs do that successfully, and create products different from Original Medicare

in a number of important respects: they have a limited network, cap out-of-pocket spending,

coordinate care, and generally offer supplemental benefits like prescription drug coverage. These

differences limit the extent to which one is reasonably interchangeable with the other, although

seniors can make Medicare Advantage and Original Medicare into closer substitutes by purchasing

a MedSupp or prescription drug plan. In many cases, these options will be offered to the senior

by the same vendor at the same time.

That does not necessarily mean, however, that they all belong in the same product market.

The evidence tends to show the opposite. The Brown Shoe factors generally point toward the

existence of a Medicare Advantage market. And the ordinary course of business documents make

plain that, rather than focusing their efforts on competition with Original Medicare, Aetna and

Humana focus on competition with other Medicare Advantage organizations. To do so, they

compile impressive amounts of local, plan-specific competitive intelligence about Medicare

Advantage offerings in markets across the country. MedSupp plans rarely, if ever, figure into that

assessment. Aetna’s and Humana’s focus on competition within Medicare Advantage, along with

seniors’ observed strong tendency to switch from one Medicare Advantage plan to another when

faced with a plan cancellation or price increase, make it unlikely that competition from Original

Medicare options will suffice to discipline Medicare Advantage pricing.

57

The econometric analysis supports the same conclusion. Although the Court does not (and

does not need to) adopt his analysis in every detail, Professor Nevo has performed a battery of

tests that all point to the same conclusion: the sale of individual Medicare Advantage plans satisfies

the hypothetical monopolist test and thus is a relevant product market. That result generally holds

up whether Nevo uses a critical loss analysis or a merger simulation, and whether he uses his own

estimates, Orzsag’s, or those from the academic literature.

Ultimately, Aetna’s and Humana’s litigation position implies that competition between

Medicare Advantage organizations is not needed to discipline Medicare Advantage plan prices or

quality. Even in the 70 counties where the merged firm would be the only Medicare Advantage

organization post-merger, the companies believe there is no competition problem. But the

evidence in this case suggests otherwise. Based on careful consideration of all that evidence, the

Court concludes that the proper markets for evaluating the merger are those for individual

Medicare Advantage plans in the 364 complaint counties.

B. Competitive Effects

To establish its prima facie case, the government next attempts to show that the merger

would “lead to undue concentration in the market” for individual Medicare Advantage plans in all

364 complaint counties. See Baker Hughes, 908 F.2d at 982. Market concentration, which “is a

function of the number of firms in a market and their respective market shares,” is often measured

using the Herfindahl–Hirschmann Index, or HHI. See Arch Coal, 329 F. Supp. 2d at 123–24. The

HHI “is calculated by summing the squares of the individual firms’ market shares, and thus gives

proportionately greater weight to the larger market shares.” Guidelines § 5.3. “Sufficiently large

HHI figures establish the [government’s] prima facie case that a merger is anti-competitive.”

Heinz, 246 F.3d at 716. Under the Guidelines, a market is “highly concentrated” if it has an HHI

58

over 2,500. Guidelines § 5.3. If a merger would produce a highly concentrated market and

“involve an increase in the HHI of more than 200 points,” then it “will be presumed to be likely to

enhance market power.” Id. Courts have adopted these thresholds in determining whether a

merger is presumptively unlawful. See Heinz, 246 F.3d at 716 (applying a prior version of the

Guidelines); FTC v. Staples, Inc., Civ. Action No. 15-2115 (EGS), 2016 WL 2899222, at *18

(D.D.C. May 17, 2016) (Staples II) (applying the current version of the Guidelines); Sysco, 113 F.

Supp. 3d at 52–53 (same).

There is no suspense about the outcome of this HHI analysis here: the Aetna-Humana

merger easily surpasses the Guidelines’ concentration thresholds in all 364 of the complaint

counties. PX0551 (Nevo Report) ¶ 196; Tr. 1622:17–20 (Nevo). Indeed, in more than 75% of the

counties, the post-merger HHI would be greater than 5,000, and in more than 70% of the counties,

the merger would cause an HHI increase of more than 1,000 points. PX0551 (Nevo Report) ¶ 196.

And in 70 counties where Aetna and Humana are the only MAOs currently in the market, the post-

merger HHI would reflect a merger to monopoly. PX0551 (Nevo Report) ¶ 195; Tr. 1622:21–

1623:2 (Nevo). Based on these compelling concentration figures, the government has established

its prima facie case. Defendants do not attempt to argue otherwise. Tr. 3774:21–3775:4 (closing

argument). Thus, the government is entitled to a presumption that the merger would substantially

lessen competition in the sale of individual Medicare Advantage plans in all 364 complaint

counties.

The government, however, has not rested on that presumption. Instead, it has introduced

evidence tending to show that the merger would substantially lessen competition. “Mergers that

eliminate head-to-head competition between close competitors often result in a lessening of

competition.” Staples II, 2016 WL 2899222, at *20; see also Sysco, 113 F. Supp. 3d at 61 (same)

59

(collecting cases); Guidelines § 6 (“The elimination of competition between two firms that results

from their merger may alone constitute a substantial lessening of competition.”). That can be true

even where the merging parties are not the only, or the two largest, competitors in the market. See

Sysco, 113 F. Supp. 3d at 62 (citing Heinz, 246 F.3d at 717–19; H&R Block, 833 F. Supp. 2d at

83–84). Mergers between close competitors might have unilateral anticompetitive effects if “the

acquiring firm will have the incentive to raise prices or reduce quality after the acquisition,

independent of competitive responses from other firms.” H&R Block, 833 F. Supp. 2d at 81.

Anticompetitive effects are more likely still when “the merger would result in the elimination of a

particularly aggressive competitor in a highly concentrated market.” Staples, 970 F. Supp. at 1083.

Aetna is just such a “particularly aggressive” Medicare Advantage competitor. Following

its acquisition of Coventry in 2013, Aetna became the fourth largest Medicare Advantage insurer

in the country. DX0290-113. And in the intervening years it has continued to aggressively expand

its Medicare Advantage footprint, targeting many new counties for expansion each year. Tr.

1330:2–19 (Bertolini). Between 2013 and 2016, Aetna expanded into 640 new counties—more

than twice as many as the next most prolific entrant. PX0551 (Nevo Report) ¶ 218 & Ex. 18.

When Aetna enters a new market, it generally does so with a focus on building a high value

provider network and offering zero-premium plans. PX0036-427 (Aetna 2016 “Medicare Deep

Dive Overview” noting a commitment to “[g]rowing [high value networks] to help sustain $0

premiums”); see also Tr. 346:6–347:3 (Cocozza). Aetna considers its zero-premium plans as “a

cornerstone in most markets to drive growth.” PX0046-324; see also Tr. 354:21–355:2 (Cocozza)

(over 50% of Aetna enrollees are in zero-premium plans); Tr. 347:4–25 (Cocozza) (Aetna’s zero-

premium PPO, since being introduced in 2014, has contributed to market-share growth in a number

of local markets). Even without the Humana merger, Aetna intends to continue expanding its

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geographic footprint and maintain its focus on building value-based networks. PX0036-427

(Aetna 2016 “Medicare Deep Dive Overview” setting forward-looking targets).

Aetna’s expansion has put it on a collision course with Humana. In 2011 Aetna and

Humana competed in Medicare Advantage in just 79 counties, but by 2016, they competed in 675.

PX0551 (Nevo Report) ¶¶ 219–20 & Ex. 19; Tr. 1582:13–15 (Nevo) (Aetna and Humana

collectively boast more than 59% of the 1.7 million Medicare Advantage enrollees in the complaint

counties). That growing overlap is not merely geographical. It is also philosophical. At trial,

Bertolini and Broussard discussed their shared outlook on the future of healthcare. See Tr. 1837:1–

15 (Broussard) (“[Mark and I] almost finished each other’s sentences.”) Like Aetna, Humana has

employed a strategy to “build networks around value-based arrangements.” Tr. 327:14–15

(Cocozza); see also Tr. 2106:13–18 (Follmer) (acknowledging that, in Georgia, Humana has

“value-based contracts with providers that are more advanced than other Medicare Advantage

plans”). In a 2015 email, Cocozza touches on both these areas of overlap when assessing the

nature of the competition between Aetna and Humana: “[Humana] was #1 in growth and is our

most formidable competitor. We compete with them everywhere and they have momentum. They

continue to lead in terms of aggressive pursuit of strategic provider relationships and are willing

to deploy capital in many forms to secure preferred standing and exclusivity.” PX0007-847.

The parties disagree about whether significant head-to-head competition is reflected in the

econometric data. According to defendants, the data reveals that the head-to-head competition

between Aetna and Humana is not special. For support, they rely on two regressions performed

by Orszag. The first, already discussed above, purports to find no general relationship between

competition and plan price in Medicare Advantage. Tr. 3087:10–24 (Orszag); DX0419 (Orszag

Report) ¶¶ 117–18 & Table II-6. The second, which focuses specifically on head-to-head

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competition between Aetna and Humana, concludes that the presence of one defendant in a county

has no statistically significant impact on the prices charged by the other. Tr. 3090:1–20 (Orszag);

DX0419 (Orszag Report) ¶¶ 121–24 & Tables II-7 & II-8.

By focusing solely on changes in the price of a particular plan, however, both these

regressions are susceptible to the same critique: namely, that they will fail to discern changes to

competition that result from the introduction of new plans or the segmentation of old ones.

PX0552 (Nevo Reply Report) ¶ 75. In the Court’s view, that limits the persuasive value of

Orszag’s regressions. Moreover, when Nevo performs a similar regression focused instead on

changes in market share, he finds evidence of substantial head-to-head competition between Aetna

and Humana. Specifically, Nevo concludes that Aetna’s presence in a particular county depresses

Humana’s market share by 9.4 percentage points—more than twice the effect associated with other

insurers. PX0552 (Nevo Reply Report) ¶¶ 76–77 & Ex. 11; Tr. 3520–3521:3 (Nevo). Switching

data also reveals close (and increasing) head-to-head competition between Aetna and Humana. In

2014, Aetna Medicare Advantage products ranked as the ninth most popular option among seniors

switching from Humana; in 2016, they ranked second. PX0551 (Nevo Report) ¶ 222. Thus, even

if Orszag’s analysis was air-tight, Nevo’s (largely uncontroverted) analysis suggests that there is

substantial competition between Aetna and Humana.

Given Nevo’s analysis, it is not surprising to find significant evidence of head-to-head

competition between Aetna and Humana throughout the country. See, e.g., PX0023-628–29 (2015

Humana document comparing Aetna, United, and Humana plans in 15 markets where “Humana

held stable” and United or Aetna was “aggressive”); PX0027-229 (Aetna document calling

Humana “our primary MA competitor”); PX0397-647 (“Humana will be [Aetna’s] most serious

threat [in Georgia] in the near future.”); PX0455-601 (“Today, Humana (~50k mbrs.) and Aetna

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(~34k mbrs) dominate the Kansas City Market.”); PX0050-116 (Humana email referring to “[o]ur

#1 NC Competitor Aetna”). They compete on multiple dimensions of Medicare Advantage plan

design, including network and cost. For example, in anticipation of the upcoming 2015 annual

enrollment period, Aetna compared its provider network to Humana’s in Alabama and

recommended “some network fortification.” PX0394-862; see also PX0013-344. If one company

fails to keep pace, the competitive consequences can be significant. In Georgia, for instance,

Humana and United had the misfortune of raising premiums on their PPO plans in the same year

as Aetna introduced its zero premium PPO. Tr. 2101:2–21 (Follmer). As a result, Aetna enjoyed

a “bonanza.” PX0393-185.

This head-to-head competition benefits seniors who shop for Medicare Advantage plans in

the form of broader networks and lower costs. Two illustrations will suffice. The first relates to

Aetna’s 2014 introduction of its zero-premium PPO in Raleigh (Wake County), North Carolina.

At that time, Humana was selling an LPPO, a regional PPO, and an HMO in Wake County. Unlike

Aetna’s PPO, Humana’s PPOs had premiums of $53 and $81 respectively. Tr. 770:2–4, 773:10–

16 (Farley). Humana’s HMO had no premium, but that plan was built on a “coordinated care type

of model,” which provided “less access to various hospitals and doctors.” Tr. 770:7–19 (Farley).

Duke University Hospital was among those hospitals outside the Humana HMO’s network in

Wake County. Tr. 773:17–19 (Farley). Aetna’s zero-premium PPO wedged between these various

Humana offerings by combining a zero-premium price with a broader PPO network encompassing

all the major hospital systems in Wake County, including Duke. See Tr. 773:20–23 (Farley).

Upon learning of Aetna’s plan, one impressed Humana marketing employee remarked “Wow. A

$0 premium on a PPO plan.” PX0024-129.

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By late 2015, Aetna’s PPO was “dominating in [W]ake County.” PX0038-804. Humana’s

HMO, on the other hand, “[was] not selling.” PX0038-804. Part of Aetna’s success lay in its

ability to exploit the Humana HMO’s limited provider network. PX0295-285; Tr. 779:2–15

(Farley). An Aetna employee in Wake County even emailed all the brokers in the area to say that

Humana would not be continuing its affiliation with Duke in the coming year, predicting that the

change would “help you boost all of your sales with the Aetna Product.” PX0050-119. Although

the email was not accurate (Duke still accepted Humana’s PPO products), it is indicative of the

competition between the companies. In response to the pressure from Aetna, Humana began

actively recruiting new providers in order to expand its HMO network. PX0352-884; Tr. 819:5–

20 (Farley).

Another example comes from San Antonio, where Aetna and Humana offer competing

HMO plans. For its 2016 bid, Aetna decided to improve the value proposition on its San Antonio

HMO in order to “compete with United and Humana HMOs.” PX0039-711. In the ensuing annual

enrollment period, broker Raul Gonzalez moved a number of his clients out of Humana’s HMO

and into Aetna’s. Tr. 1040:11–20 (Gonzalez). He said that, “[f]or a lot of people, it was an easy

transition”: while both plans had similar networks, the Aetna plan had a specialty co-pay that was

$15 dollars lower. Tr. 1040:23–1042:2 (Gonzalez). For the following year, Humana dropped its

specialty copay by $15 to match Aetna’s. Tr. 1042:3–9 (Gonzalez). 22

Together, this evidence suggests that there is significant head-to-head competition between

Aetna and Humana, that it drives improvements to plan cost and quality, and that—if the merger

were consummated—that competition would be lost, with some resulting deterioration in the

22

Aetna and Humana note that they each compete with a number of other Medicare Advantage organizations

in Raleigh and San Antonio, not only with one another. True enough. But that does not change the fact that these

markets would be highly concentrated post-merger, nor does it directly rebut the government’s evidence that direct

competition between them has previously driven plan improvements.

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Medicare Advantage products offered. To predict the likely competitive effects of the proposed

merger in a more quantitative manner, the government relies on a second merger simulation by

Nevo. This merger simulation assumes that all Aetna and Humana Medicare Advantage plans are

owned by one firm, which will set prices on each “in order to maximize total profits across all their

plans within each county.” PX0551 (Nevo Report) ¶¶ 208–09. The merged firm’s pricing

behavior depends in part on seniors’ demand for various Medicare Advantage plans and Original

Medicare options (modeled using the elasticities and aggregate diversion ratios derived from

Nevo’s nested logit model). PX0551 (Nevo Report) ¶¶ 207–08. Pricing behavior also depends on

inputs regarding plan cost and profit margin. PX0551 (Nevo Report) ¶ 208. When Nevo performs

his merger simulation using his own estimates, he predicts substantial annual competitive harm as

a result of the merger: premiums in the complaint counties would increase by 60%, seniors would

pay $360 million more in rebate-adjusted premiums, and taxpayers would pay an additional $140

million in the form of higher payments from CMS to insurers. Tr. 1630:3–8, 1631:16–21 (Nevo).

In sum, Nevo’s preferred version of the merger simulation predicts $500 million per year in

combined anticompetitive harm to seniors and taxpayers. 23 Tr. 1631:21–1632:1 (Nevo).

Aetna and Humana again object to Nevo’s newest merger simulation. Relying on Orszag,

the companies argue that Nevo’s model has “debilitating flaws,” because it assumes that Medicare

Advantage plans are priced at the county level, uses margin figures not consistent with observed

margins, and predicts premium increases that are unreasonably high. See Defs.’ Proposed

Findings & Conclusions at 51–52; see also id. at 120–21; Tr. 3175:5–11 (Orszag). Defending his

merger simulation on rebuttal, Nevo sounded a somewhat humbler note about its probative value.

23

When Nevo performs this merger simulation using estimates derived from Orszag’s nested logit model, he

likewise predicts premium increases. All eight merger simulations predict premium increases of at least 9%. PX0552

(Nevo Reply Report) ¶ 84 & Ex. 12; Tr. 1630:9–17 (Nevo).

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The merger simulation, he explained, is not meant as an “exact prediction model for pricing” at a

county-by-county level. Tr. 3517:22 (Nevo). Instead, it aims to assess whether, and to what extent,

the merged firm would have an incentive to raise prices after the merger. Tr. 3517:24–25 (Nevo).

When interpreting the results, therefore, the focus should not be on “the exact number[s],” but

rather on the “direction” of the changes. Tr. 3518:18–20 (Nevo). And here, Nevo concludes, all

iterations of the merger simulation point toward a price increase following the merger.

Although the merger simulation is “an imprecise tool,” it “nonetheless has some probative

value in predicting the likelihood of a potential price increase after the merger.” H&R Block, 833

F. Supp. 2d at 88; see also Sysco, 113 F. Supp. 3d at 67. Based on a comprehensive assessment

of demand, and in its various iterations that include utilizing Orszag’s demand estimates, Nevo’s

merger simulation predicts that the merged firm would have the incentive and ability to increase

quality-adjusted premiums in the complaint counties. The Court considers the merger simulation

as econometric evidence in support of that limited proposition, in part because its results are

consistent with the other evidence regarding the likely competitive effects of the proposed merger.

As reflected by the HHI scores, the merger would create 364 (very) highly concentrated markets,

including 70 county-level monopolies, and hence must be presumed to substantially lessen

competition. The merger would also extinguish the competitive fire generated by Aetna’s rapid

expansion—through value-based networks and aggressively priced plans—into Humana’s

Medicare Advantage territory. The observed competition between these Big 5 insurers is intense,

encompasses various dimensions of plan design, and has greatly benefitted seniors. Freed from

that competition, the merged firm may have an incentive to raise premiums—or, perhaps, to relent

from lowering them and improving plan quality. The results of Nevo’s merger simulation, then,

provide additional support for that inference.

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Based on its market concentration figures, the government has established a prima facie

case and is entitled to a presumption that the Aetna-Humana merger would substantially lessen

competition in the market for individual Medicare Advantage plans in all 364 complaint counties.

It is not a stretch to call the government’s prima facie case based on the HHI analysis under the

Guidelines an overwhelming one, given how high the concentration figures are. The government

has also introduced additional evidence supporting that presumption that could be used to carry its

ultimate burden of persuasion, if Aetna and Humana are successful in rebutting the presumption.

The Court turns next to Aetna’s and Humana’s rebuttal arguments.

C. Government Regulation

Aetna’s and Humana’s first attempt to rebut the presumption of anti-competitive effects

focuses on the role played by CMS, and the federal government more generally, in regulating

competition in Medicare Advantage. The companies do not contend that this system of federal

regulation confers implied immunity from the antitrust laws. See Tr. 3725:20–23 (post-trial

argument). It is unlikely that they could succeed in doing so, because “[i]mplied antitrust

immunity is not favored, and can be justified only by a convincing showing of clear repugnancy

between the antitrust laws and the regulatory system.” Nat’l Gerimedical Hosp. & Gerontology

Ctr. v. Blue Cross of Kanas City, 452 U.S. 378, 388 (1981) (internal quotation marks omitted).

There is no indication of such “repugnancy” here.

Nonetheless, the government’s regulation of Medicare Advantage remains relevant.

“Antitrust analysis must always be attuned to the particular structure and circumstances of the

industry at issue.” Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S.

398, 411 (2004); see also Brown Shoe, 370 U.S. at 321–22. “Part of that attention to economic

context is an awareness of the significance of regulation.” Trinko, 540 U.S. at 411. “One factor

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of particular importance is the existence of a regulatory structure designed to deter and remedy

anticompetitive harm.” Id. at 412. Where such a structure exists, the likelihood of anticompetitive

harm may be “significantly diminish[ed].” Id. (internal quotation marks omitted) (quoting

Concord v. Boston Edison Co., 915 F.2d 17, 25 (1st Cir. 1990) (Breyer, J.)).

Aetna and Humana assert that federal regulation of Medicare Advantage leaves “no

opening for the anticompetitive effects that the Government posits.” Defs.’ Proposed Findings &

Conclusions at 129. The Court disagrees. Based on the evidence presented, the Court concludes

that CMS regulation was not “designed to deter and remedy anticompetitive harm.” See Trinko,

540 U.S. at 412. And because it is unlikely to do so here, its existence does not suggest that the

government’s “prima facie case inaccurately predicts the [merger’s] probable effect on future

competition.” Baker Hughes, 908 F.2d at 991.

Many of the CMS rules and regulations at issue here are applied through the annual bid

process. In June, a Medicare Advantage organization must submit a separate “bid” to CMS for

each plan that they wish to offer in the following year. Tr. 1178:11–17 (Cavanaugh); Tr. 1910:22–

1911:2 (Paprocki). Putting together a bid is an arduous task. Each bid must include detailed

estimates of the plan’s revenue requirement, cost structure (including both medical and

administrative costs), and margin projections, backed up by extensive data and calculations. Tr.

1910:1–6, 1935:24–1936:2, 1958:8–15 (Paprocki). Every bid must also be certified by an actuary.

Tr. 1952:21–25 (Paprocki). Each year, CMS produces two lengthy documents—a “call letter,”

describing the terms of the Medicare Advantage program, and a set of instructions about bid

submission—that together contain many of the applicable CMS rules and regulations. See

DX0014 (call letter); DX0349 (bid instructions). Once the bids have been submitted, CMS, in

collaboration with outside actuaries it retains, reviews the bids to ensure that they comply with all

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these requirements. Tr. 1178:20–23 (Cavanaugh); Tr. 1959:1–2 (Paprocki). That process,

sometimes called the “desk review,” usually lasts from about mid-June until the end of July. Tr.

1959:14–17 (Paprocki). Non-compliant bids will not be approved. Tr. 2554:12–14 (Coleman).

When the desk review uncovers a problem with a bid, CMS will typically reach out to the

MAO and explain its concerns. Tr. 1143:13–16 (Cavanaugh); Tr. 1991:22–1992:2 (Paprocki).

Sometimes, the MAO has simply made a mistake, in which case it will correct the bid. 2

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