Albert A. Foer - Concurrences

Albert A. FoerNicolas CharbitSonia AhmadEditors

Richard Brunell , Michael Carrier, Peter Carstensen, Cecilia (Yixi) Cheng, Harry First, Franklin Foer, Eleanor Fox, Douglas Ginsburg, Warren Grimes, John Kirkwood, John Kwoka, Robert Lande, Kexin Li, Robert Litan, Barry Lynn, Julián Peña, Christopher Sagers, Jonathan Sallet, Steve Shadowen, Maurice Stucke, Randy Stutz, Sandeep Vaheesan, Spencer Weber Waller

A Consumer Voice in the Antitrust Arena

Liber Amicorum

Electronic copy available at: https://ssrn.com/abstract=3719500

ALBERT A. FOERA Consumer Voice

in the Antitrust Arena

Liber Amicorum

Foreword by Diana MossIntroduction by Robert Lande & Randy Stutz

EditorsNicolas CharbitSonia Ahmad


221Albert A. Foer | A Consumer Voice in the Antitrust Arena - Liber Amicorum

Buyer Power TodayJOHN B. KIRKWOOD*

Seattle University School of Law

Abstract

Buyer power has long been a neglected issue in antitrust law. Thanks to Bert Foer and others, however, that has changed. In the last two decades, studies have shown that monopsony power is a widespread problem, particularly in labor markets, and challenges to anticompetitive conduct by buyers have increased sharply. Monopsony power is now on the antitrust agenda. At the same time, interest in the other form of buyer power, countervailing power, has also increased. In two high-profile merger cases, Anthem/Cigna and Aetna/Humana, the parties claimed they could save billions of dollars of medical costs by reducing their payments to hospitals, doctors, and other providers. These cases might have marked the first time that countervailing power had justified an otherwise anticompetitive merger. But the parties refused to assert that they would use their post-merger purchasing power to extract bigger discounts from providers. Instead, they would take a variety of less muscular steps. These steps were fraught with practical difficulties, however, and the savings claims were rejected. In the end, the procompetitive benefits of countervailing power were never determined.

* Professor of Law, Seattle University School of Law; American Law Institute; Executive Committee, AALS Antitrust Section; Advisor to the American Antitrust Institute and the Institute for Consumer Antitrust Studies; and former policy and evaluation official at the Federal Trade Commission.


222 Albert A. Foer | A Consumer Voice in the Antitrust Arena - Liber Amicorum

Buyer Power Today

I. Introduction

Buyer power has long been a neglected issue in antitrust law. Early in his tenure as President of the American Antitrust Institute (AAI), Bert Foer recognized this and determined to change it. For over a hundred years antitrust law had focused on the market power and anticompetitive conduct of sellers. Government and private plaintiffs challenged mergers of sellers, monopolization by sellers, and restrictive contracts involving sellers. There were far fewer cases attacking comparable conduct by buyers.1

This lower priority reflected the conventional view that both types of buyer power – monopsony power and countervailing power – seldom presented appro-priate targets for antitrust intervention.2 In theory, monopsony power is the mirror image of monopoly power.3 In principle, therefore, conduct that creates or maintains monopsony power without justification would be a proper concern of antitrust. Like monopolizing conduct, it would restrict rivalry, reduce output, and harm traders on the other side of the market. But it was widely thought that monopsony power was rare, confined to a few agricultural, labor, or natural resource markets.4

The other type of buyer power – countervailing power – is more common. It occurs when a powerful buyer faces suppliers with market power. In the monopsony model, the monopsonist faces powerless suppliers – numerous small sellers without market power. By curtailing its purchases from them, the monop-sonist causes the market price of their output to fall below the competitive level. In the countervailing power model, in contrast, a buyer purchases from suppliers with market power and, by playing them off against each other, the buyer induces at least one of them to lower its price closer to – but not below – the competitive

1 See, e.g., John B. Kirkwood, Powerful Buyers and Merger Enforcement, 92 B.U. L. REV. 1485, 1488 (2012) (“The focus of antitrust law … has remained on sellers.”); Buyer Power: The New Kid on the Block, in AM. ANTITRUST INST., THE NEXT ANTITRUST AGENDA: THE AMERICAN ANTITRUST INSTITUTE’S TRANSITION REPORT ON COMPETITION POLICY TO THE 44TH PRESIDENT 95 (Albert A. Foer ed., 2008) (“cases against buyers have been much less common than cases against sellers”); PETER C. CARSTENSEN, COMPETITION POLICY AND THE CONTROL OF BUYER POWER: A GLOBAL ISSUE (2017) (asserting that buyer power “requires much more attention from competition authorities and policy makers generally than it has received.”).

2 See Kirkwood, supra note 1, at 1493–512 (describing the basic elements of monopsony power and counter-vailing power); see also OECD, POLICY ROUNDTABLES: MONOPSONY AND BUYER POWER 2008, at 1 (2008) (referring to the two types of buyer power as monopsony power and bargaining power).

3 See Kirkwood, supra note 1, at 1515 (stating that “the monopsony model is the mirror image of the monopoly model”); see also US DEP’T OF JUSTICE & FTC, HORIZONTAL MERGER GUIDELINES §12 (2010), http://www.ftc.gov/os/2010/08/100819hmg.pdf (HORIZONTAL MERGER GUIDELINES) (adopting mirror image analysis by stating that when the agencies “evaluate whether a merger is likely to enhance market power on the buying side of the market,” they will “employ essentially the framework [they use] for evaluating whether a merger is likely to enhance market power on the selling side of the market.”)

4 See, e.g., Jonathan M. Jacobson & Gary J. Dorman, Monopsony Revisited: A Comment on Blair & Harrison, 37 ANTITRUST BULL. 151, 154 (1992) (“monopsonistic restriction of purchases below the competitive level is quite rare”); Kirkwood, supra note 1, at 1497 (noting that “the federal government has seldom challenged a merger on the ground that it would enhance monopsony power, and the cases that have been brought have all involved agricultural markets, natural resource markets, or labor markets.”).



John B. Kirkwood

level. This lower price reduces the buyer’s own marginal costs and ordinarily causes it to increase production and reduce downstream prices.

In the simple model of countervailing power, then, the exercise of countervailing power is procompetitive. It diminishes the market power of upstream suppliers and lowers downstream prices to consumers. It increases output and enhances allocative efficiency. While these benefits have long been recognized, they have played little role in antitrust enforcement. Few mergers have been allowed because the countervailing power of the merged firm’s customers would prevent the merged firm from raising prices.5 Likewise, no merger has been approved on the ground that it would enlarge the merging parties’ countervailing power and lead to lower consumer prices. Countervailing power has never been accepted as a justification for an otherwise objectionable merger.

Antitrust law has given more weight to the anticompetitive effects of counter-vailing power. For example, a powerful buyer may use its countervailing power not to demand a price cut from a supplier with market power, but to insist that the supplier increase its prices to the buyer’s rivals. This move would raise the rivals’ costs and enable the powerful buyer to exercise market power downstream, elevating prices to consumers.6 In Toys “R” Us, the Federal Trade Commission (FTC) attacked this type of exclusionary conduct by a dominant buyer.7 Public and private plaintiffs, however, have not brought many comparable cases.

Bert wanted to change this. His goal was to raise the prominence of buyer power and induce the enforcement agencies to file more cases. His method was schol-arship: he held conferences, published the proceedings, and wrote a substantial article himself. In 2004, he organized a groundbreaking symposium at AAI’s annual meeting and persuaded the Antitrust Law Journal to publish the papers.8 In 2007, he wrote a cleverly titled article in the Connecticut Law Review that laid out his approach to the issue.9 The next year, AAI produced a Transition Report on Competition Policy for the new president and dedicated a detailed chapter to buyer power.10 The same year, Bert organized a second symposium on the topic and asked the Antitrust Bulletin to publish the contributions.11

5 For the few exceptions, all more than 25 years old, see United States v. Baker Hughes Inc., 908 F.2d 981 (D.C. Cir. 1990); United States v. Archer-Daniels-Midland Co., 781 F. Supp. 1400 (S.D. Iowa 1991); United States v. Country Lake Foods, Inc., 754 F. Supp. 669 (D. Minn. 1990).

6 For the classic article, see Thomas Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals’ Costs to Create Power Over Price, 96 YALE L.J. 209 (1986).

7 See Toys “R” Us, Inc. v. Fed. Trade Comm’n, 221 F.3d 928 (7th Cir. 2000).

8 See Symposium, Buyer Power and Antitrust, 72 ANTITRUST L.J. 505 (2005) (including all the AAI papers and several other analyses of buyer power).

9 Albert A Foer, Mr. Magoo Visits Wal-Mart: Finding the Right Lens for Antitrust, 39 CONN. L. REV. 1307 (2007).

10 Buyer Power: The New Kid on the Block, in AM. ANTITRUST INST., supra note 1.

11 See Special Issue: Buyer Power in Antitrust, 53 ANTITRUST BULL. 233 (2008).



Buyer Power Today

This flurry of activity simulated interest in buyer power. Since Bert’s second symposium in 2008, scholars have written a comprehensive book12 and two major articles13 on the subject. In addition, economists have conducted a number of studies on monopsony power in labor markets, showing that it is much more widespread than was once believed.14 At the same time, public and private plaintiffs have brought a new wave of challenges to conduct that allegedly created or maintained monopsony power.15 Finally, two recent, high-profile cases caused the Department of Justice (DOJ) and the courts to consider whether counter-vailing power can justify an otherwise anticompetitive merger.16

This paper describes the status of buyer power in antitrust law today. Part II addresses monopsony power, summarizing the new empirical work, the advances in our theoretical understanding, and the increase in enforcement actions. Part III discusses countervailing power, where two recent cases appeared to present ideal vehicles for demonstrating the procompetitive benefits of countervailing power. That did not happen, as Part III explains.

II. The Prevalence of Monopsony Power

The conventional wisdom used to be that monopsony power was too rare to be an antitrust priority. But in the last two decades, scholars have mounted an assault on that view. This attack has occurred largely, though not exclusively, in the area of labor markets, where empirical studies, theoretical advances, and legal actions have shown that monopsony power is a much bigger problem than we thought.17

1. Empirical Studies

The scholars who have most thoroughly documented this development are Naidu, Posner, and Weyl. They note: “Evidence that labor markets, particularly low-wage labor markets, are monopsonistic has been accumulating over the past two decades.”18 An early and important piece of evidence came from an unexpected

12 See CARSTENSEN, supra note 1.

13 See Suresh Naidu, Eric A. Posner & E. Glen Weyl, Antitrust Remedies for Labor Market Power, 132 HARV. L. REV. 536 (2018); Kirkwood, supra note 1.

14 See infra Part II.1.

15 See infra Part II.3.

16 See infra Part III.

17 For a comprehensive survey of monopsony issues, which maintains that monopsony is at least as serious a problem as monopoly, see CARSTENSEN, supra note 1. For a review of monopsony and other issues in the food and agriculture sector, see Lina Khan & Sandeep Vaheesan, Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents, 11 HARV. L & POL’Y REV. 235, 254–56 (2017).

18 Naidu, Posner & Weyl, supra note 13, at 560. The studies highlighted in this section are taken from the Naidu article.



John B. Kirkwood

source: a study of a minimum wage increase in New Jersey. Contrary to the traditional view, Card and Krueger found that this increase had no adverse effect on employment.19 This surprising result could be explained by monopsony. If fast-food restaurants had been exercising monopsony power, earning excess margins by depressing wages below the competitive level, they could afford to pay higher wages without cutting employment. Many other economists have studied minimum wage increases, with mixed results, but two recent studies, one of a minimum wage increase in San Francisco,20 the other of increases throughout the entire country,21 also discovered no adverse employment effects. Like Card and Krueger’s work, these studies suggest that a significant degree of monopsony power is commonplace.

Analyses of labor market concentration support that conclusion. In a recent paper, Azar, Marinescu, and Steinbaum found substantial concentration in many labor markets.22 Another investigation, conducted with a different dataset at about the same time, found extremely high labor market HHIs – an average county HHI of 7,560 in the period 2002–2009.23 These results suggest that competition among employers is often limited. In many areas, employees have only a few promising choices.

Economists had traditionally assumed that the supply elasticity of labor was high. Only a small reduction in wages would be sufficient to cause a large decline in the number of people willing to work. With such a supply elasticity, even a complete monopsonist would not find it profitable to depress wages very much. In fact, however, labor supply elasticity appears to be low:

Overall, the recent evidence suggests that low labor elasticities, ranging from 1 to 5 (and possibly even lower), are surprisingly common throughout the economy. Even the residual supply of low-skill labor is relatively inelastic, in the range of 1 to 3, despite the earlier conventional wisdom that inelastic labor markets were caused by the time and cost of obtaining education and specialized training, which low-skill workers, by definition, lack.24

In sum, empirical evidence collected over the last two decades – on minimum wage increases, labor market concentration, and labor supply elasticity – has

19 See David Card & Alan B. Krueger, Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania, 84 AM. ECON. REV. 772 (1994).

20 Arindrajit Dube, Suresh Naidu & Michael Reich, The Economic Effects of a Citywide Minimum Wage, 60 INDUS. & LAB. REL. REV. 522 (2007).

21 Arindrajit Dube, T. William Lester & Michael Reich, Minimum Wage Shocks, Employment Flows, and Labor Market Frictions, 34 J. LAB. ECON. 663 (2016).

22 José Azar, Ioana Marinescu & Marshall I. Steinbaum, Labor Market Concentration (Nat’l Bureau of Econ. Research, Working Paper No. 24147, 2017).

23 Efraim Benmelech, Nittai Bergman & Hyunseob Kim, Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages? (Nat’l Bureau of Econ. Research Working Paper No. 24307, 2018).

24 Naidu, Posner & Weyl, supra note 13, at 564.



Buyer Power Today

changed our perception of the prevalence of monopsony power in labor markets. It now appears to be much more common than we thought. This development dovetails with recent advances in our understanding of competition in labor markets. It is actually more limited than the number of employers would indicate, since it is difficult for workers to shift quickly and costlessly between jobs.

2. Theoretical Advances

The obstacles to rapid and seamless job shifting are called search frictions. They are the costs and hurdles a worker faces in finding a new job that is acceptable. When search frictions are larger, employees are less likely to leave their current position even if they are dissatisfied with its wages, hours, or working conditions. As a result, they are more vulnerable to the exercise of monopsony power. An employer can reduce wages, require longer hours, or provide fewer benefits with less fear that employees will depart. Search frictions thus inhibit competition among employers. If there were no search frictions, Employer A could not depress wages or benefits below the competitive level because its employees would quickly switch to Employer B or Employer C. When search frictions are substantial, A’s employees could not easily find an acceptable substitute.

The economic literature currently identifies search frictions as a pivotal feature of labor markets and an important source of monopsony power.25 Search frictions are principally caused by limited information: an employee cannot tell whether it makes sense to move to another employer unless the employee knows what the other employer offers. But even if information were perfect, search frictions would still exist. One reason is differentiation. Employers differ from each other in many ways, including type of work, location, size, identity of other employees, office culture, and terms and conditions of employment, including compensation, hours, and benefits. These differences make it difficult to compare employers and ordinarily mean that no single employer is a complete substitute for another. As a result, labor markets are narrower and more concentrated than they would otherwise be.

A second reason is matching: in labor markets, unlike in most product markets, the preferences of both sides of a transaction must match before a transaction can occur.

In a car sale, only the buyer cares about the identify, nature, and features of the product in question – the car. The seller cares nothing about the buyer or (in most cases) what the buyer plans to do with the car. In employment, the employer cares about the

25 See Naidu, Posner & Weyl, supra note 13, at 553 (“In the literature on labor markets, … the problem of search frictions has played the central role, following the Nobel Prize – winning work of Professors Peter Diamond, Dale Mortensen, and Christopher Pissarides.”); see also ALAN MANNING, MONOPSONY IN MOTION (2003) (describing a dynamic monopsony model based on search frictions).



John B. Kirkwood

identify and characteristics of the employee and the employee cares about the identity and characteristics of the employer.26

These dual preferences make it harder for an employee to find another job that is acceptable. Not only must the new job be satisfactory to the employee, but the employee must also be satisfactory to the new employer.

In short, multiple search frictions – driven by limited information, differentiation among employers, and the need for employer and employee preferences to match – combined with the highly local nature of most labor markets, allow many employers to exercise monopsony power over their workers. They can depress wages below the competitive level without fear that their workers will promptly leave for another job.27

3. Antitrust Challenges

In the last decade, antitrust actions against buyers have increased sharply, providing further evidence of the extent of monopsony and the growing recognition of its scope. First, several recent cases have accused hospitals of colluding to suppress the wages they paid doctors and nurses.28 This collusion was sufficiently blatant that many of the lawsuits settled for significant amounts.29 Second, the DOJ sued Apple, Google, Adobe, and other tech firms for agreeing not to hire each other’s software engineers. These no-poaching agreements, a form of market division, were plainly illegal, and the defendants accepted consent orders barring the behavior.30 More recently, the DOJ settled a matter with two manufacturing firms that had allegedly maintained a no-poaching agreement for years.31 Third, recent litigation, led by the Washington state attorney general, has sought to extend this principle to no-poaching restraints imposed by a franchisor on its franchisees.32 These restraints bar one franchisee from hiring workers from another franchisee and are particularly harmful to workers. They make it impossible for an employee at one franchisee to move to another, even if the other franchisee (say another Burger King restaurant) is closer to the employee’s home, pays more, or offers better hours. The result is to enable franchisees to exert monopsony power over

26 Naidu, Posner & Weyl, supra note 13, at 555.

27 In a perfectly competitive labor market, the market wage is equal to the marginal revenue product of the marginal worker. If an employer has monopsony power, the market wage will be depressed below the marginal worker’s marginal revenue product. This disparity produces a deadweight loss and transfers wealth from workers to their employer.

28 See Naidu, Posner & Weyl, supra note 13, at 570.

29 See Y. Peter Yang, Detroit Hospital to Pay $42M to End Nurse Wage-Fixing Suit, LAW360 (Sept. 11, 2015) (noting that the total settlements with eight hospitals exceeded $90 million).

30 See Naidu, Posner & Weyl, supra note 13, at 571.

31 See Debbie Feinstein & Albert Teng, Buyer Power: Is Monopsony the New Monopoly? 33 ANTITRUST 12, 15 (Spring 2019).

32 See Rachel Adams, Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue, N.Y. TIMES (Sept. 27, 2017).



Buyer Power Today

their employees. Finally, the FTC settled a merger investigation in 2018 by requiring the divestiture of blood plasma collection centers in three cities. As Commissioner Rohit Chopra tweeted, the FTC “acted to ensure a merger in this industry will not lead to monopsony power that lowers payments for plasma donors.”33

4. Conclusion

In theory, monopsony is the mirror image of monopoly. But in practice, antitrust attention to monopsony has not paralleled antitrust interest in monopoly. Monopsony was long regarded as a minor problem, confined to three sectors – agriculture, labor, and natural resources – and not often present there. Recent scholarship has shown, however, that monopsony is much more pervasive. Carstensen has identified monopsony problems in many areas of the economy, and Naidu, Posner, and Weyl have shown that it is especially common in labor markets. Empirical studies, theoretical analysis, and enforcement actions have demonstrated its prevalence there. On the monopsony front, therefore, the news is good. The issue has become an antitrust priority, as Bert Foer wanted.

On the countervailing power front, however, the news is disappointing. Two recent health insurance mergers offered the opportunity to determine whether countervailing power could justify an otherwise anticompetitive transaction. Yet neither case reached that issue. Instead, the courts rejected the parties’ cost-savings claims on practical grounds. As a result, the procompetitive benefits of countervailing power were never determined.

Part III addresses both proposed mergers, Anthem/Cigna and Anthem/Humana, but focuses on the first because it produced two opinions and much more extensive analysis.34

III. Countervailing Power as a Justification for a Merger of Buyers

Anthem claimed that its combination with Cigna would result in billions of dollars in medical cost savings. Merged with Cigna, Anthem would be in a position to obtain significantly lower prices from hospitals, doctors, and other providers. At first glance, this appeared to be a countervailing power justification. The merger would give Anthem greater bargaining power, it would use that power to extract larger discounts from hospitals and other providers with market power, and it would pass on the resulting savings to consumers in the form of lower premiums and deductibles. As a result, even though health insurance markets would be more concentrated post-merger, and even though that would allow

33 See Feinstein & Teng, supra note 31, at 15.

34 See United States v. Anthem, Inc., 236 F. Supp. 3d 171 (D.C.D.C. 2017), aff’d, 855 F.3d 345 (D.C Cir. 2017).



John B. Kirkwood

Anthem to raise prices, Anthem’s profit maximizing strategy would be to lower them.35

This justification failed, however, largely because Anthem asserted that it would not wield greater countervailing power post-merger. It would not use the purchasing volume it would gain from the transaction to induce providers to lower their rates. Instead, it would achieve the claimed medical cost savings through a variety of less muscular steps. Those steps, however, were subject to multiple and ultimately fatal practical objections. In consequence, the case never determined whether countervailing power could justify a large horizontal merger.

The same result was reached, with much less analysis, in United States v. Aetna.36

1. Anthem/Cigna

The government – the DOJ, 11 states, and the District of Columbia – alleged that the merger of Anthem and Cigna would reduce competition in “the sale of health insurance to ‘national accounts’ – customers with more than 5,000 employees, usually spread over at least two states – within the fourteen states where Anthem operates as the Blue Cross Blue Shield licensee.”37 Judge Jackson agreed. She found that the transaction was “likely to result in higher prices … and diminish the prospects for innovation in the market.”38 The DC Circuit affirmed.39

The “centerpiece of Anthem’s defense” was the claim that the merged firm’s national account customers would save over $2 billion in medical costs because hospitals, doctors, and other health care providers would charge them less after the merger.40 These cost savings would be passed on because Anthem and Cigna almost always sell “administrative services only” (ASO) plans to national account customers. Under an ASO plan, the customer self-insures and pays providers directly. Thus, if a provider cuts its prices, the customer benefits automatically. The claimed savings were so large, moreover, that even if Anthem charged higher ASO fees post-merger, as the government contended it would, the savings would

35 In his dissent, then-Judge Kavanaugh adopted precisely this countervailing power theory. He thought the merger would be procompetitive – and would benefit the employers who obtained insurances services from Anthem and Cigna – because the “merged Anthem-Cigna would be a more powerful purchasing agent than Anthem and Cigna operating independently” and “would therefore be able to negotiate lower provider rates on behalf of its employer-customers,” and those rates “would be passed through directly to the employer-customers.” See 855 F.3d at 372.

36 See United States v. Aetna Inc., 240 F. Supp. 3d 1 (D.C.D.C. 2017).

37 236 F. Supp. 3d at 179.

38 Id. at 180.

39 See 855 F.3d 345 (D.C. Cir. 2017).

40 See 236 F. Supp. 3d at 181.



Buyer Power Today

swamp the higher fees and the total health care bills of Anthem’s customers would fall dramatically.41

Despite the simplicity and power of this justification, neither Judge Jackson nor the DC Circuit accepted it. To understand why, it is essential to focus on the methods Anthem asserted it would use to achieve the claimed savings.

A. Countervailing Power

The most obvious way of obtaining greater discounts from suppliers is to confront them with greater countervailing power. As noted, this is exactly what then-Judge Kavanaugh assumed Anthem would do.42 Normally, a large buyer exerts countervailing power by playing suppliers off against each other, threatening to remove business from those that do not improve their terms and promising to steer business to those that do. In this contest, the more business the buyer can allocate to particular suppliers, the better terms it is likely to receive.43 Because the merger of Anthem and Cigna would increase Anthem’s business, it would magnify Anthem’s countervailing power.

Anthem declared repeatedly, however, that it would not use its greater volume to extract lower rates from providers. Its CEO testified that it would not “drop the hammer” on providers “by insisting on maximum discounts across-the-board.”44 He stated that Anthem would not “seek to negotiate even greater volume-based discounts after the merger because post-merger Anthem would ‘certainly not [pay] less than what [it is] now paying as Anthem.’”45 In its calcula-tions of the cost savings it would achieve from the merger, Anthem did not attribute a single penny to the impact of its larger purchase volume.46

To be sure, one of Anthem’s experts asserted that Anthem’s post-merger volume would not help it obtain greater discounts.47 But its CEO did not take that position. He said that Anthem would not use its purchase volume to extract greater discounts after the merger. Perhaps he did not want to suggest that Anthem, already known for aggressive negotiation, would be an even bigger bully post-merger. But whatever the reason, Anthem’s plan for achieving the claimed savings did not involve

41 See 855 F.3d at 373 (Kavanaugh, J., dissenting) (“For large employers … the savings from the merger would far exceed the increased fees they would pay to Anthem-Cigna as a result of the merger.”).

42 See supra note 35.

43 See, e.g., 855 F.3d at 223 (“the more patients doctors and hospitals see from a carrier, the more leverage that carrier has to negotiate the best arrangements in the market.”) (quoting a government exhibit).

44 Id. at 360.

45 Id. at 362.

46 See id. at 242 n. 45 (“the defense calculation does not depend upon the negotiation of new rates based on the carriers’ combined volume or bulk purchasing.”).

47 See id. at 361–62 (Dr. Willig testified that Anthem is ‘already past the threshold of having enough size to do what it needs to do in terms of offering volume to providers.’”).



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countervailing power. Instead, Anthem intended to take several less forceful steps: it would invoke the “affiliate clause” in its contracts with providers; it would rebrand Cigna customers as Anthem customers; and it would renegotiate the rates that providers were charging Cigna customers.48 It was far from clear, however, that any of these steps would produce significant savings.49

B. Affiliate Clause

Anthem intended to achieve much of the asserted savings by invoking the affiliate clause in its contracts with providers. This clause required providers to grant the same rates to affiliates of Anthem as they granted to Anthem itself. Since Anthem had long received bigger discounts than Cigna, and since Cigna would become an Anthem affiliate post-merger, the affiliate clause would force providers to increase their discounts to Cigna subscribers.

But invoking the affiliate clause was fraught with problems. First, providers were likely to object strenuously. After all, Anthem was asking them to reduce their prices without providing any extra patient volume in return. One Anthem executive predicted: “In all circumstances, I would expect strong provider resistance, as they view this as an incremental discount with no corresponding incremental value (no new members).”50 Moreover, the providers could claim that the affiliate clause applied only to firms affiliated with Anthem at the time a provider signed its contract with Anthem, not to major new affiliates that Anthem acquired afterward. Another Anthem executive wrote: “I think the execution risk is high … large delivery systems … could push back hard.”51 And even if some providers did comply initially, they could renegotiate their rates – or refuse to renew their contracts – as soon as their existing contracts expired. Both Anthem and Cigna worried that invoking the affiliate clause would produce “provider abrasion.”52

Indeed, Anthem’s CEO was so concerned about provider resistance that he insisted in court that Anthem would not invoke the affiliate clause immediately. Instead, the clause would be applied – or rates would be renegotiated – as provider contracts expired.53 This would mean, however, that it would take years for Anthem to realize the claimed savings. As the CEO noted, “our contracts with

48 See id. at 359 (“Anthem plans to achieve the claimed savings through a combination of three mechanisms: rebranding, renegotiating provider contracts, and exercising Anthem’s affiliate clause.”). While renegotiating provider contracts could involve the exertion of countervailing power, there is no evidence that this was Anthem’s intent. It never said, for example, that it would steer volume away from providers that refused to lower rates.

49 See id. (“The district court found that practical business realities would undermine the execution of that plan, making achievement of the savings speculative”).

50 236 F. Supp. 3d at 243.

51 Id. at 243–44.

52 855 F.3d at 359.

53 See 236 F. Supp. 3d at 244.



Buyer Power Today

providers may span three years, and maybe in some cases five years. So a lot of these providers are not subject to renegotiated arrangements for a considerable period of time.”54

Provider resistance and delay were not the only problems with the affiliate clause. Invoking it would also run counter to Anthem’s obligations as a Blue Cross Blue Shield licensee. The court of appeals explained:

Under the “Best Efforts” clause in Anthem’s licensing agreement with the Blue Cross Blue Shield Association, 80% of Anthem’s revenue within the Anthem states must be Blue-branded, as must 66.67% of its revenue nationwide. The merger would immediately throw Anthem out of compliance and so Anthem intends to rebrand a “lion’s share” of current Cigna customers in order to count that revenue as Blue-branded. By contrast widespread exercise of the affiliate clause would remove any incentive for Cigna customers to convert to Anthem because those customers would then be receiving the Cigna product at Anthem prices.55

For this reason, several of Anthem’s witnesses conceded that instead of triggering the affiliate clause, Anthem would “rely heavily on rebranding,”56 discussed below.

In short, the affiliate clause, seemingly the easiest way to achieve substantial cost savings, was actually a crude and counterproductive tool. It would generate considerable provider resistance, cause some providers to leave Cigna’s networks, and make it more difficult for Anthem to comply with its Blue-branding obligations.

C. Rebranding

Anthem’s second strategy for attaining the claimed cost savings was to rebrand Cigna customers as Anthem customers. Rebranding would immediately provide those customers with larger discounts, since, as noted, Anthem typically obtains larger discounts from hospitals and doctors than Cigna does. But this strategy was not merger-specific. Anthem did not need to merge with Cigna in order to rebrand Cigna customers as Anthem customers. Anthem could simply persuade Cigna customers to switch to an Anthem plan.57 As a result, both the district court and the court of appeals rejected rebranding as a cognizable efficiency.58

54 Id.

55 855 F.3d at 359 (citations omitted).

56 Id. at 360.

57 See id. at 357 (“Anthem Senior Vice President Dennis Matheis … confirmed that, at least ‘[i]n the short term,’ rebranding would simply involve Anthem ‘offer[ing] Cigna customers Anthem products,’ in a manner that is ‘no different’ from Anthem ‘selling new business in the market.’”).

58 See 236 F. Suppl. 3d at 241 (“rebranding cannot be considered to be merger-specific”); 855 F.3d at 360 (“rebranding … gives rise to no merger-specific benefits”).



John B. Kirkwood

There was, however, a more complex form of rebranding that might be merger-specific. Anthem’s principal economic expert testified that the ultimate aim of the merger was to market a product that offered Cigna quality at Anthem rates.59 Cigna had distinguished itself in the marketplace by developing health plans that emphasized collaboration between patients and providers, an array of wellness programs, and steps to eliminate unnecessary care.60 Anthem claimed it could not produce plans of comparable quality on its own; while it had tried, it had repeatedly failed. If this was true,61 then the only way Anthem could achieve its ultimate goal was to acquire Cigna. But acquiring Cigna and offering Cigna-quality plans would not achieve the other prong of Anthem’s ideal outcome: offering Anthem-level rates. That would require renegotiation of Cigna’s rates.

By itself, then, rebranding could not justify Anthem’s claimed cost savings. Simple rebranding was not merger-specific, and more complex rebranding (offering Cigna’s collaborative plans at Anthem rates) could not be achieved without successfully renegotiating Cigna’s rates.

D. Renegotiation

Anthem asserted it could achieve significant savings by renegotiating Cigna’s rates. But Anthem never explained how it could successfully persuade providers to lower the prices they charged on Cigna plans. As noted, a large buyer ordinarily obtains price cuts from suppliers with market power by pitting them against each other, steering its purchase volume to the supplier or suppliers willing to offer the lowest price. But Anthem’s chief executive swore that Anthem would not use its post-merger purchase volume to extract bigger discounts from providers. Yet if Anthem was not going to use this leverage, it is hard to see how it could obtain lower prices. Why would a major hospital system agree to cut its rates when it would not lose volume if it refused?

Anthem’s product strategy made larger discounts even more unlikely. As just mentioned, Anthem’s ultimate goal was to offer Cigna-quality plans at Anthem rates. This would mean that Cigna providers would have to “continue offering the high-touch, collaborative Cigna service, with its added behavioral, wellness, and lifestyle programs.”62 Yet Anthem would also be asking them to accept

59 See 236 F. Supp. 3d at 242 (“‘In a nutshell, the key competitive benefit of the merger … is that you can combine the Cigna innovative products and wellness programs and whatever else people like about the Cigna offering … with a more effective discount structure.’”) (quoting Dr. Israel); id. (“‘That’s a product that doesn’t exist today, is Cigna’s offerings with Anthem’s discounts.’”) (quoting Dr. Israel).

60 See id. at 230 (“Cigna has relied upon innovation to compete, directing its focus on ways to improve member health and employer cost outcomes.”); id. at 183 (noting that “the collaborative model of care … is central to the Cigna brand.”).

61 The court of appeals was highly skeptical. See 855 F.3d at 415 (“the evidence offered by Anthem is woefully insufficient to show that it cannot develop better customer-facing programs.”).

62 Id. at 418–19.



Buyer Power Today

lower reimbursements. Why would they agree to provide an expensive service at lower prices? As the district court noted, “providers have been quite clear that one cannot ask them to do more but pay them less at the same time.”63

In sum, none of the mechanisms Anthem identified was likely to produce substantial, merger-specific cost savings. If Anthem actually planned to achieve those savings, it should have asserted that it would take full advantage of the purchasing power it would gain from the merger. Because Anthem was unwilling to take this position, the courts were right to reject its claim that the merger would generate large medical cost savings.

E. Cognizable Efficiency

To be sure, a full-throated countervailing power defense might not have saved Anthem. Both the district court and the court of appeals questioned whether price reductions extracted through increased bargaining leverage should count in the evaluation of a merger. Neither court felt it had to decide the issue, but Judge Jackson, who addressed the subject in some detail, offered two arguments why the savings should not be a cognizable efficiency. Both arguments were mistaken.

Judge Jackson’s first argument was that countervailing power would not reduce the merging parties’ operating costs, the ordinary source of a cognizable efficiency. As noted, Anthem and Cigna generally sell ASO plans to national accounts, not fully insured policies. Under an ASO plan, the national accounts pay the health care bills of their employees, not Anthem and Cigna. So if Anthem gained countervailing power from the merger and used that power to reduce provider rates, the national accounts would benefit, but Anthem’s own costs would not fall. Its productive efficiency would not increase.

While that is true, it does not mean that medical cost savings generated through countervailing power are not an efficiency. There are two categories of efficiency – productive efficiency and allocative efficiency – and countervailing power increases allocative efficiency. By lowering the prices of providers with market power, it reduces deadweight loss. More important, it increases consumer welfare. In an ASO plan, reductions in provider prices are automatically passed on to customers. Thus, savings generated through the exercise of countervailing power should be a cognizable efficiency. They enhance allocative efficiency and benefit consumers.

Judge Jackson’s second argument was that “the antitrust laws are designed to protect competition, and the claimed efficiencies do not arise out of, or facilitate,

63 236 F. Supp. 3d at 249.



John B. Kirkwood

competition.”64 That is also mistaken. Medical cost savings generated by counter-vailing power do arise out of competition. A large buyer exercises countervailing power by playing suppliers off against each other, forcing them to compete more intensely for the buyer’s business. It is this heightened competition that causes them to lower prices. In addition, those lower prices facilitate competition downstream. If Anthem offers provider networks with lower prices, its ASO plans become more attractive to its customers and thus more competitive. In short, the exertion of countervailing power enhances competition among both providers and ASO plans.

For these reasons, reductions in supplier prices achieved through the exercise of countervailing power should constitute a cognizable efficiency. They reduce deadweight loss and increase allocative efficiency. They also intensify competition among suppliers and between the powerful buyer and its downstream rivals. It is no surprise, therefore, that the Horizontal Merger Guidelines treat lower supply prices induced by countervailing power as a cognizable merger efficiency. The Guidelines state: “Reduction in prices paid by the merging firms not arising from the enhancement of market power can be significant in the evaluation of efficiencies from a merger.”65 In other words, when a merger results in lower supply prices and those lower prices are caused by countervailing power rather than monopsony power, the savings should be included in the efficiency calculus.

F. Monopsony

As the Horizontal Merger Guidelines make clear, reductions in supply prices caused by monopsony power should not count in the efficiency determination. On the contrary, they are a reason to condemn the merger. In Anthem the government alleged that the combination of Anthem and Cigna would create monopsony power in 35 local regions within the Anthem states.66 In these regions it would reduce “competition upstream in the market for the purchase of healthcare services from hospitals and physicians.”67 It would also diminish payments to those providers, and, if they lack market power, it may cause them to curtail the amount or quality of the care they provide, harming patients. Neither court resolved the government’s monopsony allegation, however, because both courts were satisfied that the merger would reduce competition in the ASO market. Yet the issue is relevant to the parties’ cost-savings defense, since input

64 Id. at 182.

65 HORIZONTAL MERGER GUIDELINES, supra note 3, at §12. As noted, neither the court of appeals nor the district court ultimately decided whether rate reductions induced by countervailing power are cognizable efficiencies. In the course of its discussion, however, the court of appeals referred to these rate reductions as “redistri-butional savings.” See 855 F.3d at 356. But the savings are not purely redistributional; they enhance allocative efficiency and increase competition upstream and downstream.

66 See 236 F. Supp. 3d at 179.

67 See id. (summarizing the government’s allegation).



Buyer Power Today

price reductions driven by monopsony power are not cognizable efficiencies, as the parties recognized.68

There is little in the opinions that sheds light on whether the merger would create monopsony power. Judge Jackson made one comment, however, that is significant. She stated that “the record created for this case did not begin to provide the information needed to reveal whether all providers, no matter their size, location, or financial structure, are operating at comfortable margins well above their costs, as Anthem’s expert suggested.”69 This comment focuses on a critical distinction between countervailing power and monopsony power: in order to exert countervailing power, a buyer must face suppliers with market power. If suppliers are not earning supracompetitive margins – if they are pricing competitively – then a reduction in their prices reflects monopsony power. In a subsequent article, Anthem’s principal economic expert offered evidence that many providers do have market power.70 But Anthem was unable to convince Judge Jackson of this crucial fact.

2. Aetna/Humana

The parties to the other merger also claimed substantial medical cost savings, but like Anthem and Cigna, Aetna and Humana did not spell out how they would achieve them. They said they would use a “best of the two contracts approach,” which meant that if one party’s contract with local providers contained lower reimbursement rates than the other party’s contract, the merged firm would secure the lower rates for both contracts.71 Thus, if Aetna had negotiated better rates with a local hospital system than Humana had negotiated, the merged firm would obtain the lower rates for Humana subscribers. But the parties did not explain how they would get providers to agree to those lower rates. Providers would certainly object and many might terminate their contracts.72 How would Aetna and Humana overcome that resistance? While they could use countervailing power, they did not say they would. Nor did they identify any other mechanism that would achieve their goal. Given this vagueness, the court concluded that Aetna and Humana had not shown that the claimed savings were verifiable.73

68 See 855 F.3d at 378.

69 236 F. Supp. 3d at 182.

70 See Mark A. Israel, Thomas A. Stemwedel & Ka Hei Tse, Are You Pushing Too Hard? Lower Negotiated Input Prices as a Merger Efficiency, 82 ANTITRUST L.J. 623 (2019).

71 See United States v. Aetna Inc., 240 F. Supp. 3d 1, 97 (D.C.D.C. 2017).

72 See, e.g., id. (“We’ve had one hospital come to us and say they would proactively terminate [contracts] if either plan tries to realize a better rate.”) (quoting a government exhibit).

73 See id.



John B. Kirkwood

IV. Conclusion

Antitrust law has long paid too little attention to buyer power. Thanks to Bert Foer and others, however, we now understand that monopsony is a widespread problem, particularly in labor markets. Labor markets are more concentrated than we thought, the supply elasticity of labor is surprisingly low, and workers do not easily switch between jobs because they face multiple search frictions. Each of these features makes it easier to exercise monopsony power. Moreover, recent anticompetitive conduct by buyers has highlighted the seriousness of the problem. Hospitals have colluded to suppress nurses’ salaries, tech firms have agreed not to poach each other’s software engineers, and fast-food franchisors have prevented their franchisees from hiring workers from other franchisees.

Interest in countervailing power, the other and potentially procompetitive form of buyer power, has also increased. Two recent mega-mergers, Anthem/Cigna and Aetna/Humana, focused attention on the issue, but it was never ultimately resolved. The parties claimed they would achieve billions of dollars of savings by reducing payments to hospitals, doctors, and other providers, yet they refused to say that they would accomplish this by exercising their post-merger purchasing power. Instead, they would rely on less coercive steps, which were beset with practical difficulties. In the end, the procompetitive benefits of countervailing power were never determined.


Nicolas CharbitSonia AhmadEditors

A Consumer Voice in the Antitrust Arena

Liber Amicorum

At a time of reckoning for the future of antitrust, this Liber Amicorum brings together a diverse collection of today’s leading thinkers to pay tribute to Albert Allen (Bert) Foer, founder of the American Antitrust Institute (AAI). In doing so, it illustrates the intellectual landscape of the antitrust debate, with articles that go to the heart of its goals, and others that light a path forward towards reform. Others yet delve into the pressing issues of enforcement and remedies. The variety of voices included characterize the breadth of perspectives that Bert cultivated at the AAI, from lawyers and academics to enforcers and journalists. In providing a platform for multi-disciplinary discourse through the AAI, Bert helped create the foundation on which today’s movement rests, a public citizen’s voice spotlighting competition as the basis of diversity and dynamism.

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Albert A. Foer - Concurrences