Separating product markets is harder than applying "common sense"

December 7, 2016

 

We have been looking back at recent antitrust cases for clues about how to contextualize the health insurance mergers of Aetna and Humana and Anthem and Cigna. When reading about the case of Whole Foods-Wild Oats, it’s hard not to notice similarities to Aetna around the market definition.

 

Whole Foods and Wild Oats merged in 2007 but the combined company was ordered to divest a share of stores after a long legal battle with the FTC. Like with Aetna, the battle in that case was largely fought over market definition. The government argued that the two health food stores occupied a market they dubbed “premium natural and organic supermarkets” or “PNOSs,” separate from ordinary supermarkets.

 

Cross-shopping between the two types of stores did not automatically signal one shared product market, the court found. Antitrust laws have a higher standard of establishing the relevant market, such as cross-price elasticity of demand, and careful comparisons of product characteristics established by the case of Brown Shoe. The U.S. in the Whole Foods case effectively showed that, while some consumers may be drawn away from ordinary supermarkets for the features offered by PNOSs, they are not in one market.

 

The first part of the Aetna case revolves around Medicare and Medicare Advantage, and whether the two constitute separate markets. Like supermarkets, Medicare and Medicare Advantage are venues in which to buy other products. Original Medicare (consisting of Parts A and B) allows enrollees to buy one product, a simple reimbursement plan from the government, without restricted networks of providers but with major fiduciary flaws. Medicare Advantage, also known as Medicare Part C, is a managed plan modeled after employer-sponsored insurance. It is more of a one-stop shopping experience that offers more coverage and less risk. However, Medicare Advantage uses restricted networks whereas Original Medicare enrollees can see any provider without a referral.

 

In opening argument on Monday, Aetna attorney John Majoras made statements that would contradict precedent in Whole Foods. He referenced multiple resources, including those from CMS, which discuss the options seniors have available to them when they turn 65 and qualify for Medicare. These resources often put Original Medicare and Medicare Advantage side-by-side. He then suggested a “common sense test” to determine whether or not the two types of Medicare were in the same product market. Part of this “test” was to look at how consumers approach their decision about which to buy, Original Medicare or Medicare Advantage. But complicated matters like health care antitrust cannot be easily solved with common sense, but instead rely on rigorous inspection.

 

The government, in contrast, sought to distinguish between choices and substitutes in its opening argument, using an analogy from another antitrust case; just because coke, milk, orange juice, and water all quench thirst, that does not mean they are in the same product market. (Both sides can play the common sense game.)

 

Judge John Bates is open about his level of thoughtfulness and grounding in case law. He began the trial by ruling on a preliminary matter, citing many cases in real time to explain his reasoning. He will certainly be looking to cases like Whole Foods to determine whether the evidence shows two distinct product markets.

 

Visit Antitrust Law Blog to read more about the Whole Foods-Wild Oats case.

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