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DOJ Requires Fix in UnitedHealth’s Acquisition of PacifiCare

Doyle, Barlow & Mazard PLLC

On December 20, 2005, the Department of Justice’s (“DOJ”) Antitrust Division entered into a settlement agreement with UnitedHealth to resolve the DOJ’s antitrust concerns related to UnitedHealth’s acquisition of PacifiCare.  The settlement agreement covered three geographic markets:  Tucson, Arizona; Boulder, Colorado; and California.

Tucson, Arizona

The DOJ was concerned that UnitedHealth and PacifiCare were among the principal competitors in the market for the sale of commercial health insurance to small-group employers in Tucson, Arizona.  Besides UnitedHealth and PacifiCare, there were few other substantial competitors.  Many small-group employers had only one, or in some cases two, additional competitive options in Tucson, Arizona.  Indeed, UnitedHealth and PacifiCare were the second and third largest sellers of commercial health insurance to small-group employers in Tucson.  UnitedHealth had an approximate 16% share of the small-group employer commercial health insurance lives in Tucson; PacifiCare’s market share was approximately 17 percent.  The combined share would have been approximately 33%, which was roughly equal to the market share of the largest commercial health insurer in Tucson, Arizona.

Furthermore, the Antitrust Division found that the market was highly concentrated.  The Herfindahl-Hirschman Index (“HHI”), which is commonly employed in merger analysis, would have been greater than 2,500, and the change in the HHI resulting from the deal would be in excess of 500.  The Antitrust Division also found that the shares of other competitors were smaller than the shares of the top three firms.  UnitedHealth and PacifiCare were consistently competitive bidders to retain and obtain small-group employer business.  The Antitrust Division found that PacifiCare was a particularly aggressive, low-price competitor in the small-group employer market in Tucson.  Accordingly, the Antitrust Division believed the deal was anticompetitive and entered into a settlement agreement that required divestitures and prohibitions to resolve the concerns.

The Antitrust Division required UnitedHealth to identify and divest commercial health insurance contracts covering at least 54,517 members who reside or work in the Tucson metropolitan statistical area (“MSA”).  This number was the total number of commercially insured members in Tucson that PacifiCare reported as of June 30, 2005.  The Division allowed UnitedHealth to have some discretion in determining what contracts to include in the divestiture package, but it required contracts covering at least 7,581 members covered by contracts with small-group employers, which was the number of Tucson-resident members covered under such small-group contracts that PacifiCare reported as of June 30.  The divestiture required UnitedHealth to divest enough small-group contracts to leave it with approximately the same market share of the small-group market, and the same number of commercially insured lives, that it had before acquiring PacifiCare.

The Antitrust Division also prohibited UnitedHealth from requiring any physician practicing in the Tucson MSA, as a condition for participating in any of UnitedHealth’s networks for its commercial health insurance products, to agree to participate in UnitedHealth’s network for any Medicare health insurance product.  Similarly, UnitedHealth was prohibited from requiring Tucson physicians, as a condition for participating in any of its Medicare plans, to participate in any of its commercial health insurance plans.  The prohibition against using this type of contractual requirement, commonly referred to as an “all-products” clause, was included in the settlement agreement because a substantial percentage of PacifiCare’s overall membership in Tucson was enrolled in its Medicare HMO plan marketed under the name Secure Horizons.  Many physicians in Tucson derived a substantial percentage of their revenue from patients enrolled in this plan.  This prohibition is relevant to the competitive effects in the market for the purchase of physician services because in calculating the percentage of a physician’s revenue represented by UnitedHealth and PacifiCare, a physician’s total revenue was taken into account, including all commercial health plans, government programs such as Medicare and Medicaid, and private MA and Medicare HMO plans such as Secure Horizons.  Without this prohibition, UnitedHealth might have been able to use an all-products clause to force doctors in Tucson to participate in both its commercial and Medicare plans.  Had it done so, UnitedHealth might have accounted for a much larger share of the total payments for many physician practices in Tucson.  The prohibition against using such an “all-products” clause ensured that Tucson-area doctors remained free to choose whether to participate in UnitedHealth’s networks for its commercial plans, its networks for its Medicare plans, or both.

Boulder, Colorado

In Boulder, the DOJ required UnitedHealth to divest either the 6,066 members residing in the Boulder MSA who were covered under PacifiCare’s current HMO contract with the University of Colorado, or an equivalent number of Boulder-area members covered under other contracts.  Unlike its Tucson membership, PacifiCare’s membership in the Boulder MSA was concentrated in a smaller number of very large contracts.  Its HMO contract with the University of Colorado was its largest contract in Boulder; the 6,066 members residing in Boulder who were covered under that contract accounted for nearly 1/2 of PacifiCare’s total commercial membership in Boulder.  Thus, PacifiCare’s bargaining position in its negotiations with Boulder-area doctors would have been very different had it not had this HMO contract.  Without the contract, PacifiCare’s membership in Boulder would have been less and United’s acquisition of that membership would not have generated the same level of concern.  A prohibition against UnitedHealth using an all-products clause in Boulder was unnecessary because PacifiCare’s SecureHorizons enrollment in Boulder constituted a smaller percentage of its overall membership in Boulder compared to Tucson.

The Antitrust Division found that United’s acquisition of PacifiCare would have given it control over both a large share of revenue of a substantial number of physicians in Tucson and Boulder meaning that the acquisition would give United the ability to depress physician reimbursement rates in Tucson and Boulder, likely leading to a reduction in quantity or degradation in the quality of physician services.


The DOJ had competitive concerns regarding the sale of commercial health Insurance and the purchase of health care provider services throughout the state of California.  United’s California membership consisted of employees of large, national or regional employers that self-funded their health benefit plans and used United only for administrative services.  While United did not actively sell health insurance in California, it rented the provider networks of CareTrust Networks, a wholly-owned subsidiary of Blue Shield of California (“Blue Shield”), to serve its California-based commercial members.  Blue Shield and PacifiCare competed against each other throughout the state.  The DOJ alleged that PacifiCare competed with Blue Shield in the sale of commercial health insurance to groups of all sizes.  Similarly, PacifiCare competed with Blue Shield to acquire health care provider services, from both physicians and hospitals, in MSAs throughout the state.

The DOJ alleged that the acquisition resulted in unilateral and coordinated effects throughout California.  The DOJ was concerned that United and Blue Shield would have access to highly sensitive competitive information about the other company, which would have increased each company’s ability to coordinate prices charged for commercial health insurance and prices paid to health care providers.

To resolve these concerns in California, the DOJ required United to stop exchanging information with CareTrust Networks.  United was prohibited from communicating with CareTrust about new product introductions, negotiations over rates or other terms with physicians, or the development of any new provider networks.  To minimize disruptions to customer member services, the DOJ required United to discontinue renting the CareTrust provider network entirely effective one year after entry of the Final Judgment for customers existing before the transaction was completed.

Lessons Learned

First, the DOJ departed from past precedent in Aetna/Prudential where the Division defined PPOs and HMOs as separate and distinct relevant product markets.  Here, the Antitrust Division defined the sale of commercial health insurance plans to small group employers as a relevant product market.  Second, the Antitrust Division continues to consider monopsony issues and take action when necessary.  In the Aetna/Prudential merger in 1999, an increase in market share from 26 percent to 42 percent prompted the DOJ to address monopsony concerns and here, even though the combined firm would have relatively low shares (30 percent in one market and 35 percent in another) the DOJ supported a challenge under the monopsony theory.  Third, the DOJ indicated a willingness to take action against a health plan merger under a coordinated effects theory.  Normally, the DOJ analyzes health plan mergers under a unilateral effects theory especially when the merging firms are close competitors.  In this case, however, the DOJ uncovered facts with respect to United’s relationship with Blue Shield in California that required a remedy.

Andre Barlow
(202) 589-1838

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