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United States v. Aetna Inc.

United States District Court, District of Columbia

January 23, 2017

UNITED STATES OF AMERICA, et al., Plaintiffs,
v.
AETNA INC., et al., Defendants.

          MEMORANDUM OPINION

          JOHN D. BATES UNITED STATES DISTRICT JUDGE.

         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' 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.

         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.

         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).

         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 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.

         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 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 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 & 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 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 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).

         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 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).

         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

         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.

         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 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 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).

         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 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 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, 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

         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 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 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 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.

         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 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, 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- 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. 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 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 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 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, 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 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 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 ...


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