U.S. Scrutinizing Aetna Proposal to Buy Prudential Unit

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The New York Times

Doctors and consumer advocates have flooded the Justice Department with evidence they say suggests that Aetna‘s plan to buy Prudential Health Care would harm competition in the health insurance industry. But Federal antitrust officials say they have found potential problems in only a few states, including Texas and New Jersey.

The plan, announced in early December, would create the nation’s biggest managed-care company, providing health benefits to 1 in 10 Americans. The Justice Department is investigating the proposed deal to see if it would reduce competition and has demanded large amounts of financial information from Aetna and Prudential, from their competitors in the insurance industry, and from doctors and hospitals around the country.

Antitrust experts said the case could set an important precedent, slowing or accelerating consolidation of the health insurance industry.

The Justice Department’s review of the deal comes as the Clinton Administration is stepping up pressure on Congress to pass legislation defining and protecting the rights of patients. Consumer groups say the campaign for patients’ rights is an empty gesture if Federal officials ignore the growing concentration of the managed-care industry.

“The Justice Department has railed against physician unionization as a threat to free-market competition,” said Jamie Court, director of Consumers for Quality Care, a consumer group based in Santa Monica, Calif. “But the Administration has failed to break up a single H.M.O. merger. If Aetna is allowed to buy Prudential Health Care, the resulting company would be in a powerful position to grind its payment rates so low that physicians could not adequately care for patients.”

Aetna announced in December that it would buy Prudential Health Care from the Prudential Insurance Company of America for $1 billion.

Paradoxically, the Government has often found it easier to challenge the conduct of doctors and hospitals in small markets than the behavior of large insurers whose nationwide operations affect far more people. In the last two years, for example, the Government has accused a network of 180 doctors in rural Mesa County, Colo., of trying to fix fees and has tried to stop the merger of two hospitals in Poplar Bluff, Mo., which has a population of 17,000.

Mark J. Horoschak, an antitrust lawyer in Charlotte, N.C., said, “At trial, it’s a lot easier for the Government to prove concentration of the health care market in small isolated communities than in a large metropolitan area, even though more people might be affected by the merger in a big metropolitan area.”

William G. Kopit, one of the nation’s leading experts on antitrust law in the health care industry, predicted that the Justice Department would allow the Aetna-Prudential deal to go through without any restrictions.

“Health care markets are local,” Mr. Kopit said. “In most markets, if you combine Aetna and Prudential, they’re not a dominant player. They don’t have market power. The ultimate test of market power is whether the companies, after a merger, could profitably and successfully raise prices above competitive levels.”

At most, Mr. Kopit said, the Justice Department might require Aetna or Prudential to sell off parts of its health care business in one or more markets. Such a divestiture, while limiting the market share of the combined corporation in some geographic areas, “would not stop the merger,” Mr. Kopit said.

Aetna executives said the Justice Department’s investigation had focused on a handful of markets, including Texas, New Jersey, Philadelphia, several counties in Florida and the metropolitan Washington area, which takes in northern Virginia and suburban Maryland.

The American Medical Association sees the Aetna-Prudential deal as a seminal case and is putting pressure on the Justice Department to use it as an occasion to clarify Federal standards for mergers in the health insurance industry.

Chris Jennings, who coordinates health policy for President Clinton, said A.M.A. officers had expressed their concerns to him at a meeting in the White House. “They think Aetna is becoming too big too quick,” Mr. Jennings said.

Antitrust lawyers said the deal was getting more scrutiny than prior mergers and acquisitions of insurers and H.M.O.’s. Experts working with Aetna said they had become somewhat frustrated with the Government’s continuing requests for more information. Joyce A. Oberdorf, a spokeswoman for Aetna, said the company was complying with all information requests and expected the transaction to close by the end of June.

In opposing the deal, doctors and consumer groups often assert that Aetna and Prudential together would have an unhealthy share of the H.M.O. market. For example, the American Medical Association says the combined company would have 41 percent of the H.M.O market in Texas, with 39 percent in Dallas and 46 percent in Houston; 38 percent in New Jersey, with 59 percent in Bergen County, N.J.; 30 percent in Atlanta, and 33 percent in Orlando, Fla.

But Federal antitrust officials said that in measuring a company’s market share, they analyzed a much broader market, including H.M.O.’s and other types of insurance like preferred-provider plans or indemnity insurance, which allows patients to choose any doctor they want.

Federal officials said they assumed that the purchasers of health insurance — employers and individual consumers — could usually choose from a wide range of insurance products and could substitute one for another. If, for example, a particular H.M.O. raises its prices, the officials said, buyers can switch to a preferred-provider plan, which offers discounts to patients using certain doctors.

Antitrust lawyers said the Government’s tendency to use a broad definition of the relevant market would help Aetna, because it meant that the resulting corporation would have a relatively modest share of most markets.

Doctors across the country have protested Aetna‘s plan to buy Prudential Health Care. Dr. Richard A. Geline, president of the Illinois State Medical Society, said Aetna was “poised to grab a stranglehold over patients and doctors.”

Dr. Jerome A. Molitor, a spokesman for the Medical Society of New Jersey, said: “The merger would limit choice and reduce competition. The quality of care would suffer.”

But Federal officials said the effect on doctors was a secondary concern for them, since the main purpose of the antitrust laws is to protect consumers.

The biggest buyers of health care in the United States are employers who provide health benefits to employees. Business groups have long advocated competition between insurers as a way to control costs and improve the quality of care. Sharon F. Canner, vice president of the National Association of Manufacturers, said the consolidation of Aetna and Prudential Health Care would mean less competition. “In the end,” Ms. Canner said, “that would hurt buyers.”

The Government is investigating a provision of Aetna‘s standard contract under which doctors must take patients from all of Aetna‘s insurance plans if the doctors take patients from any Aetna plan. Doctors say this contract clause is unusual and oppressive and forces them to take H.M.O. patients, at lower fees, if they choose to participate in other Aetna health plans that give the doctors more autonomy.

The Nevada Insurance Commissioner ruled recently that this type of requirement was an “unfair trade practice” that coerced doctors to sign contracts against their will. But Aetna says the requirement serves the patients’ interest, by guaranteeing that doctors will continue to see patients if an employer switches from one Aetna product to another.

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