Key Findings from the D.D.C. Decision Allowing the UnitedHealth/Change Healthcare Merger to Proceed
Law stated as of 22 Sep 2022
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USA (National/Federal)
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by Practical Law Antitrust
PRACTICAL LAW
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22 Sep 2022
The US District Court for the District of Columbia denied a challenge by the Department of Justice (DOJ) and Attorneys General from Minnesota and New York to block UnitedHealth Group's proposed acquisition of Change Healthcare. In the opinion, Judge Carl Nichols found that the government failed to prove that the merger would substantially lessen competition in relevant horizontal and vertical healthcare insurance claims processing markets.
According to the complaint, the merger would impact competition in three markets. The defendants did not challenge the definition of the relevant markets, which include:
The sale of first-pass claims editing solutions in the US.
The sale of commercial health insurance to national accounts in the US.
The sale of commercial health insurance to large group employers in core-based statistical areas that are also metropolitan statistical areas (cities and suburbs).
The court summarized three theories of harm on which the complaint was based, including that the acquisition would constitute an illegal:
Horizontal merger that would tend to create a monopoly in the sale of first-pass claims editing solutions in the US.
Vertical merger that, through access to rivals' data, including competitively sensitive information (CSI), would give United the ability and incentive, in the markets for national accounts and large group plans:
to use the data for its own benefit, in turn lessening competition; and
to withhold innovations and raise rivals' costs to compete.
The court held that the government failed to meet its burden on each of its theories. In particular, the court found two post-complaint actions by United to be persuasive evidence that the merger would not substantially reduce competition in the relevant markets, including:
Entering into an agreement with TPG Capital to divest Change's first-pass claims editing product (ChangeXten) to TPG.
Issuing a transaction-specific firewall policy to address the vertical competition issues that may arise as a result of the merger.
Background
This case involves two aspects of health insurance processing:
Claims editing, which is a process by which insurance companies first determine whether, and to what extent, a claim is covered by a particular health plan. Relevant to this case is first-pass claims editing, which is highly automated and involves applying certain rules to all claims received, some of which are industry standard and others that are proprietary to a particular health plan.
Electronic Data Interchange (EDI) clearinghouses, which enable the electronic transmission of claims and other information between and among payers and providers.
UnitedHealth Group (United) is a vertically integrated healthcare enterprise with two main subsidiaries: UnitedHealthcare (UHC), which is the largest US commercial health insurer, and Optum, which comprises three separate lines of business, including OptumInsight, one of two dominant firms in the market for first-pass claims editing. UHC is Optum's largest customer, but Optum also sells its services to non-UHC customers in all of its lines of business.
Change Healthcare is a healthcare technology company with three main business units: ClaimsXten, which is Change's first-pass claims editing product, Network Solutions, which provides aggregation and data services, in part through its EDI clearinghouse, and Technology Enabled Services, which provides services related to revenue, benefits administration, and healthcare consulting.
ClaimsXten is the market leader in first-pass claims editing. In addition, Change operates the largest EDI clearinghouse in the US, though which it has access to significant data, including data for which it has secondary-use rights.
Horizontal Theory: Monopolization in First-Pass Claims Editing
The government's first allegation was that the merger would tend to establish a monopoly in the first-pass claims editing market in the US. The court found sufficient evidence to support a prima facie case that the merger would (absent the proposed divestiture) substantially lessen competition, for example:
The resulting firm would control over 90% of the relevant market.
The post-merger HHI would be 8,831, an increase of 3,577.
The merger would eliminate head-to-head competition between the merging parties.
The court held, however, that the proposed divestiture would alleviate these concerns, agreeing with the defendants that the divestiture would preserve competition in the relevant market, noting that:
The divestiture is likely.
The divestiture buyer (TPG) has sufficient experience to effectively operate the divested business, including experience managing carved-out companies and in the healthcare industry.
The scope of the divestiture is sufficient to preserve competition, including substantial employee retention and evidence of plans to preserve and expand the divested business post-divestiture.
TPG is an independent buyer that will operate as an independent competitor in the first-pass claims editing market.
The purchase price was adequate.
The court held that the divestiture sufficiently alleviates competitive concerns. The court ordered the divestiture to be completed.
Vertical Theory: Data Misuse
The government alleged that United would, as a result of the merger, gain access to competitors' data through Change's EDI clearinghouse and use it for anticompetitive purposes. The court summarized this allegation as that the merger would:
Allow Optum to gain access and use rights to claims data for UHC's rivals.
Provide Optum an incentive to share these data, or insights from the data, with UHC.
Increase rival payers' fear of UHC using this data, which would chill innovation.
Reduce innovation, resulting in less competition in these markets.
The court assessed, and largely rejected, each of these allegations. Overall, however, the court determined that the allegations were based on speculation and failed to rely on real-world evidence that the merger would result in this series of events.
The court held that the government failed to meet its burden, in particular by failing to prove that:
United is likely to misuse the data as alleged.
Rival payers will innovate less as a result of the potential for data misuse.
In establishing this finding, the court noted that:
There was conceivably sufficient evidence to support the government's prima facie burden to demonstrate that Optum would acquire some additional data and secondary use rights from the merger and that could potentially enable United to do some things that it cannot do today.
There was sufficient evidence to rebut the prima facie assumption, however, for example:
United's reputational and business incentives to protect external customers' data outweigh its incentives to misuse the data;
Optum currently has access to similar data and has not shared it with UHC;
guarantees in the form of firewalls and customer contracts provide additional incentives for United to protect data and CSI; and
any incentives for United to misuse CSI to advance its own interests are outweighed by the enormous risk to Optum's overall business that could result.
There was no real-world evidence presented that suggested that rival payers are likely to reduce innovation as a result of the merger.
Any demonstrated reduction in innovation, and thus competition, was at best limited, and did not meet the burden of demonstrating that the merger would substantially lessen competition.
The court took particular note of the transaction-specific firewall policy announced by United in May 2022. The court characterized the policy as not demonstrating a change to the company's longstanding approach to information sharing, but more of a memorialization of that policy, and as a way to address specific concerns that arose as a result of the proposed merger.
Vertical Theory: Foreclosure
The DOJ's final theory rested on an allegation that, as a result of the merger, United will have the ability and incentive to raise rival payers' costs by withholding or delaying the sale of EDI-related innovations, like integrated platforms. According to the DOJ, United and Change have been competing to develop their own integrated platforms and if United were to acquire Change, United would control the development of the only integrated platform likely to be available. Importantly, the court noted that these are merely concepts, and not actual products available at this time.
Allegedly, combining these developments would give United the power to foreclose access to the eventual integrated platform by withholding or delaying sales to its payer rivals. According to the allegations, United would have an incentive to do so because upstream healthcare IT markets are not as lucrative as downstream commercial health insurance markets.
The court held, however, that the evidence supports that Optum is not likely to abandon its multi-payer strategy, noting for example:
Optum has historically marketed its products to UHC's biggest rivals.
Optum has never sold a degraded version of its products to rivals versus what it sells to UHC.
While Optum has piloted products with UHC on occasion, the purpose of that piloting is to test the product and establish pricing, not to provide a competitive edge, and is a standard market practice.
The court concluded that the government failed to meet its burden on any of its theories, and found in favor of the defendants, denying the request for injunction. In addition, the court ordered the divestiture of ClaimsXten to TPG.
The DOJ issued a brief statement, but has not yet indicated whether it intends to appeal.