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Frederick J. Pomerantz, Esq.
(516) 297-3101


I attended the public hearing on the CVS-Aetna merger at New York's Department of Financial Services on October 18, 2018. I listened intently to the opening remarks of Superintendent Maria Vullo which, in greatest part, repeated the concerns voiced in her letter dated September 17, 2018 to her counterpart, Connecticut Insurance Commissioner Katherine Wade, in advance of the Connecticut Insurance Department's hearing on the same transaction two weeks prior.

In particular, Superintendent Vullo's opening remarks focused on the reasons for her assertion that the U.S. Department of Justice ("DOJ")'s determination non-objecting to the Federal antitrust filings by the parties to the transactions, took a "myopic" view by its failure to address the "vertical integration's" impact on the State of New York.

I also listened and took detailed notes of the comments of representatives of the public which, with one exception, decidedly negative, including representatives from the Pharmacist Society of the State of New York, the Medical Society of the State of New York, the longtime owner of an independent community pharmacy in Suffolk County, Consumers Union, Hon. Richard Gottfried, a NYS Assemblyman and Chair of the State Assembly Committee on Healthcare, the AIDS healthcare Foundation, Consumer Action, New Yorkers for Accessible Health Coverage and other organizations. Beside the representatives of the parties to the transaction in question, there was one speaker in support of the transaction, namely the Director of Government Affairs of the Business Council of New York State.

While Aetna's speaker made a brief statement regarding Aetna's commitments to "create a better experience at the local level through its health plan analytics and broad network", which was, according to the Superintendent, completely unsupported by the Plan of Operation submitted by CVS and CVS Caremark in support of the transaction ("Form A "Applicants" or "CVS")), CVS' representative (who spoke first) was challenged by the Superintendent to explain why the "public benefits" of the merger, including, among others, "expanded commitment to public health"; "healthcare innovation"; "driving down the cost of prescription drugs"; "reducing the costs of healthcare"; "greater access to healthcare in small rural communities"; "helping customers manage their medications"; "preventive counseling for pre-diabetics"; "serving as a positive force in local communities"; "better communications between physicians and pharmacists"; "combining CVS' patient data with physician medical data") could not be achieved without control of Aetna, the goal of the transaction. Apparently, the Plan of Operation submitted by Applicants as part of the "Form A" application lacked adequate specific justification for these assertions and CVS was directed to submit a more detailed plan within the five (5) business days before the record of the public hearing is closed.

Superintendent Vullo's biggest concerns remain:

1) the unfair competitive advantage Aetna will realize by its integration into CVS, in part because Aetna's New York-domiciled insurer, Aetna Life Insurance Company’s ("Aetna Life") 2017 New York insurance premium writings constituted 10% of its total direct A&H insurance written premiums in that year, while CVS Caremark is one of three pharmacy benefit management ("PBMs") organizations (whose combined business represents 70% of the pharmaceutical drug business in the United States). PBMs are completely unregulated in the state of New York, although there is a bill pending in the New York State legislature which would lay the basis for state regulation of this industry. (The bill is opposed by the Republican majority in the state Senate and will likely not emerge from committee unless the balance of power changes in the upcoming midterm elections or in future state elections).

It should be noted that CVS' representative, when pressed on the point by the Superintendent, would, or could, not commit her organization to (strongly) support the passage of the bill, regardless of the results of the upcoming state elections.

2) Even though the DOJ has, in its order conditioned its non-objection on the divestiture by Aetna of its Part D medicare prescription drug plan, the impact of such a move would only slightly decrease Part D concentration, but it does not address the "potential premium or drug price increases" that were ignored, among other vertical merger concerns.

3) Strongly noted by the Superintendent were "data privacy concerns", namely "CVS' ability to protect consumers' data and ensure that data is not shared within the post-acquisition entities in order to increase market share and profits" the possibility that "the accumulated data from across the enterprise (or portions of it" may be sold to third parties", and the significant cybersecurity concerns were the transaction to proceed.

4) The substantial effect of $40 Billion in debt that CVS is assuming to effectuate the transaction, as noted by S&P which placed CVS on "Market Watch" pending the closing of the deal, which, in the Superintendent's view, may "cause the resulting new Aetna holding company to pressure Aetna to raise premiums or take other actions that raise premiums or otherwise negatively impact consumers." In Ms. Vullo's own words (paraphrasing) "not a single penny from New York consumers may be used to reduce CVS' debt service".

The Superintendent expressed her strong preference that the transaction be consummated by year-end. However, she made no specific commitment to approve the transaction and/or timeframe to do so. She emphasized New York's ability to effectively block the deal (and/or impair its negative impact on New York consumers because Aetna Life is a New York domestic insurer and many other "foreign" affiliated insurers are licensed in New York, by virtue of DFS' powers under New York Insurance Law Article 74, its requirement that all non-domestic licensed companies must seek approval of licensing renewal annually under Section 1106 (b) (2) of the New York Insurance Law ("NYIL"), its power to reject applications to declare and pay extraordinary dividends under section 4207 of the NYIL and other remedies available under the NYIL as well as the Martin Act, Article 23-A, New York General Business Law (see, for example, NY Financial Regulator Tightens Reins on Life Insurance Sales Practices, New York Law Journal, July 18, 2018.

This gives her numerous powers to place restrictions on all those companies which would have a direct impact on the operations of all of Aetna's New York operating insurers (especially given Aetna's marketshare in New York).

Without numerous additional substantial commitments (beside those to which CVS agreed with the Connecticut Insurance Commissioner as conditions of its Order dated October 17, 2018, approving the transaction, (the "Ct. Order"), the day before the DFS hearing, a fact noted on the record by Superintendent Vullo), the Superintendent will not approve the merger in accordance with Section 1506 of the New York Insurance Law. Those commitments must either be reflected in the amended plan of operation to be furnished (in the Superintendent's words "I'll wait for that") or in a separate stipulation that also precedes approval of the deal, including without limitation the following possible commitments:

1) commitments by CVS and Aetna to a reduced timeframe for, and conforming implementation (organization-wide?) of New York's Cybersecurity Regulation;

2) commitments not to act, directly or indirectly, to cause negative financial effects on New York consumers or other foreign or domestic insurers to fund CVS' debt servicing;

3) commitment by Aetna to join New York State of Health as a participating insurer (the New York's implementing Affordable Care Act healthcare marketplace) with a view to further support for New York uninsured and underinsured individuals and families;

4) a commitment by Aetna's New York-licensed companies either a) to not increase its upstream dividends for a greater number of years than in the CT. Order or not to declare and pay any dividends whatsoever, or dividends that exceed the "extraordinary dividend threshold" under Section 4207, for a period of years.

5) not to make specific material changes in the Board of Directors or senior management or operations of Aetna's licensed and domestic insurers, other than to replace any current Board members or employees who may resign following the closing of the proposed transaction, for a defined period of years.

6) not to liquidate any of Aetna's licensed and domestic insurers, to sell any material portion of the assets of any of them, and not to merge them with any other person or persons or to make any other material change in the their business, corporate structure, management or general plan of operation without prior approval of DFS.

There may be other commitments imposed to protect New York consumers and other competing New York domestic and licensed health insurers. While it is difficult to determine, based on the tone of the Superintendent's opening or closing remarks, it is certain that all of the record of the hearing will be considered and made public in the days following October 25, 2018 (which, is, as noted, the last day to submit written testimony for and against approval of the transaction), and that New York will continue to burnish its record as one of the most pro-consumer state regulators in the nation. There will be more commentary, articles and views published in the press, the trade press and the legal press and on the websites of state regulators, such as California and Iowa which will either be holding hearings in the next week or so and/or which have expressed equally vociferous opposition to the transaction on antitrust and other grounds.

For more details, please see the CTFN news article published October 18.