“I can stop the deal if it is reasonably necessary to protect New Yorkers.”
Superintendent Maria Vullo of the New York State Department of Financial Services

During a public hearing in New York City on Thursday, October 18, 2018, New York State regulators, including Superintendent Maria Vullo of the New York State Department of Financial Services (“DFS”), threatened to block CVS Health’s $69 billion merger with health insurer Aetna if (i) CVS would not agree to hold the line on rising insurance premiums for Aetna’s member population in New York State (approximately 1.1 million New Yorkers across the State); and/or (ii) CVS Health refused to submit its CVS/Caremark pharmacy benefits manager (“PBM”) business to State regulation.

As described in a widely cited New York Post article, “New York threatens to block $69B CVS-Aetna merger” by Josh Kosman (October 18, 2018), Ms. Vullo used the hearing to express DFS’s concern that CVS Health, which had to borrow $40 billion to fund the $69 billion deal, could raise insurance premiums for millions of [New York State] residents as a result of the deal. Specifically, Ms. Vullo was quoted by Mr. Kosman as stating:

I can stop the deal if it is reasonably necessary to protect New Yorkers…. In [DFS’s] view, there must be a clear enforceable commitment not to transfer the cost of paying back loans to policyholders. [Emphasis Added].

 The Antitrust Division of the United States Department of Justice

As it has been widely reported, on Wednesday, October 10, 2018, Pharmacy chain CVS Health received conditional approval from the Antitrust Division of the United States Department of Justice (the “DOJ”) for its $69 billion merger with health insurer Aetna. The condition? The deal was approved on condition that Aetna sell its reported $2.2 million Medicare Part D prescription drug plan (“PDP”) business to WellCare Health Plans prior to, or concurrent with, the close of its transaction with CVS Health.

As described by the Antitrust Division in its October 10, 2018 public announcement (“Announcement”) regarding its approval of the transaction subject to the PDP divestiture:

Aetna must divest its individual prescription drug plan business to WellCare and allow WellCare the opportunity to hire key employees who currently operate the business. Aetna must also assist WellCare in operating the business during the transition and in transferring the affected customers through a process regulated by the Centers for Medicare and Medicaid Services, an agency within the U.S. Department of Health and Human Services.

As reported in the Announcement, the DOJ concluded that if there were no divestiture of the Aetna PDP business, the anticipated consolidation in the PDP market resulting from the Aetna/CVS Health combination^[1] would, “cause anticompetitive effects, including increased prices, inferior customer service, and decreased innovation in 16 Medicare Part D regions covering 22 states.” As a result, the DOJ maintains that without the required divestiture, “the loss of competition between CVS and Aetna would result in lower-quality services and increased costs for consumers, the federal government, and ultimately, taxpayers.”

According to the DOJ and as reported in the Announcement, the required divestiture, “resolves competition concerns posed by this transaction and preserves competition in the sale of Medicare Part D prescription drug plans for individuals.” Further, according to the DOJ, “[t]he divestitures . . . . allow for the creation of an integrated pharmacy and health benefits company that has the potential to generate benefits by improving the quality and lowering the costs of the healthcare services that American consumers can obtain.”

United States of America v. CVS Health Corporation and Aetna Inc.

Simultaneous with the DOJ’s release of the Announcement, the DOJ and five state attorneys general – from California, Florida, Hawaii, Mississippi, and Washington – filed a complaint in the U.S. District Court for the District of Columbia to enjoin CVS’s proposed merger with Aetna. United States of America v. CVS Health Corporation and Aetna Inc., Civil Action No. 1:18-cv-02340. Accompanying the complaint was a proposed Final Judgement that includes the terms of the Plaintiffs’ willingness to approve the transaction, such terms including the divestiture terms described above. Although the proposed Final Judgement must still go through a 60-day comment period, it is expected that the U.S. District Court will ultimately approve the transaction.

New York State DFS and its Efforts to Regulate and Oversee PBMs in New York State

Since New York State and other states were not parties to the litigation challenging the CVS/Aetna deal, the terms of their individual approvals were/are state-specific matters. At the time of the complaint’s filing, Connecticut and New York were presenting the greatest challenges to Aetna’s and CVS Health’s efforts to obtain all requisite approvals to move forward with the merger transaction.   However, on October 17, 2018, the Connecticut Insurance Department approved the CVS Health/Aetna merger transaction subject to the same requirements set forth in the Final Settlement issued by the DOJ and the five state plaintiff group on October 10, 2018 – i.e., Aetna must complete the sale of its entire standalone PDP business to a subsidiary of WellCare Health Plans.

As a result of Connecticut’s approval action on October 17, 2018, New York State found itself on October 18, 2018 – the day the New York State DFS held its public hearing in Manhattan to discuss the transaction and to receive public input regarding the transaction (See, below) – to be the most significant hurdle standing in between Aetna and CVS Health and their mutual desire to complete their merger transaction by December 31, 2018.

A Public Hearing to be Remembered.

As reported in in the New York Post (See, above) and by Crain’s New York Business on October 19, 2018, “State considers blocking parts of CVS-Aetna merger,” in a public hearing held on October 18, 2018, Ms. Vullo said that the DFS might block CVS’s merger with Aetna’s New York unit. She called U.S. approval of the overall deal “myopic” and repeatedly asked CVS and Aetna representatives for written evidence that they would deliver on promises to lower prices.

As explained by Ms. Vullo in her opening statement, the DFS believes there are “significant risks” in the CVS/Aetna transaction because “large corporate for-profit conglomerates do not have a good history of serving the public above their shareholders” and that the benefits advocated by the transaction are just “puffery.” The DFS solution? “Regulators, including DFS, must have oversight going forward.” Currently, although DFS has regulatory authority over health plans in New York, it does not have oversight over Pharmacy Benefit Managers (“PBMs”) such as CVS Caremark. According to Ms. Vullo, PBMs are a “cog in the wheel for profit-making” that ultimately redounds to the detriment of consumers.

This is not a new position. As explained by Ms. Vullo, DFS proposed legislation for the licensing and direct supervision of PBMs two years ago. Although DFS’s efforts did not bear fruit at the time, Ms. Vullo said that the DFS will continue to advocate for the licensing of PBMs despite, what Ms. Vullo characterized as PBM opposition to “transparency and regulation.”

Finally, as reported by the New York Post in the article cited at the outset of this wrighting, “With her glasses on the tip of her nose, Ms. Vullo asked CVS lawyer Elizabeth Ferguson in a booming voice: ‘Will you vocally support the bill [granting DFS oversight over PBMs]?’ In response, Ms. Ferguson replied, ‘We would not oppose it….’.”

Ultimately, it appears that regulatory approval in New York may not come without conceding regulatory oversight of PBMs to DFS.

_{[1] Without the divestiture, it has been reported that the combined companies would have been responsible for 32% of PDP enrollment based upon 2018 enrollment data. As reported by Richard M. Scheffler in his paper, “The Impact of CVS’s Acquisition of Aetna on Medicare Part D Stand-Alone Prescription Drug Plan Market Concentration,” dated May 29, 2018, the then current data showed that five PDP sponsors accounted for 83% of PDP enrollment in 2018: CVS Health (24%, 6 million enrollees), UnitedHealth (21%, 5.3 million enrollees), Humana (20%, 4.9 million enrollees), Express Scripts (10%, 2.4 million enrollees), and Aetna (9%, 2.1 million enrollees).}