In recent years, increasing pressure from employers to reduce health insurance costs has led to consolidation among managed care plans, including health maintenance organizations (HMOs), point-of-service (POS) plans, and preferred provider organizations (PPOs). The desire of managed care plans to achieve efficiencies, to offer new products and new geographic areas of coverage, and to increase their bargaining power with healthcare providers has motivated many proposed mergers.

Prior to 1999, state regulators expressed more concern about the trend towards consolidation among health insurers than either the Federal Trade Commission or the Antitrust Division of the Department of Justice. All of this changed in June 1999 when the Antitrust Division and the State of Texas brought an enforcement action against Aetna, Inc. and Prudential Healthcare. The complaint in U.S. v. Aetna, Inc. is significant because the positions taken by the Antitrust Division represent a major shift in the approach that will be taken when conducting an antitrust analysis of managed care mergers.

This article analyzes the Antitrust Division’s positions on three key issues: 1) product market definition, 2) the effectiveness of entry and expansion in disciplining the pricing of incumbent firms in a given area, and 3) the potential for monopsony power post-acquisition. The article also comments on the methodology used by the Division in reaching its conclusions on these issues, including, in particular, some new econometric techniques.

This article was published in Antitrust Report, October 1999, pp. 37–61.