```

[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]

COMPETITION IN THE PHARMACEUTICAL SUPPLY CHAIN: THE PROPOSED MERGER OF 
                          CVS HEALTH AND AETNA

=======================================================================

                                HEARING

                              BEFORE THE
                              
                             SUBCOMMITTEE ON
                            REGULATORY REFORM,
                      COMMERCIAL AND ANTITRUST LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 27, 2018

                               __________

                           Serial No. 115-28

                               __________

         Printed for the use of the Committee on the Judiciary
         
         
 
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      Available via the World Wide Web: http://judiciary.house.gov
                       
                       
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                       COMMITTEE ON THE JUDICIARY

                              ----------                              
                   
                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JERROLD NADLER, New York
    Wisconsin                        ZOE LOFGREN, California
LAMAR SMITH, Texas                   SHEILA JACKSON LEE, Texas
STEVE CHABOT, Ohio                   STEVE COHEN, Tennessee
DARRELL E. ISSA, California          HENRY C. ``HANK'' JOHNSON, Jr., 
STEVE KING, Iowa                         Georgia
LOUIE GOHMERT, Texas                 THEODORE E. DEUTCH, Florida
JIM JORDAN, Ohio                     LUIS V. GUTIRREZ, Illinois
TED POE, Texas                       KAREN BASS, California
TOM MARINO, Pennsylvania             CEDRIC L. RICHMOND, Louisiana
TREY GOWDY, South Carolina           HAKEEM S. JEFFRIES, New York
RAUL LABRADOR, Idaho                 DAVID CICILLINE, Rhode Island
BLAKE FARENTHOLD, Texas              ERIC SWALWELL, California
DOUG COLLINS, Georgia                TED LIEU, California
RON DeSANTIS, Florida                JAMIE RASKIN, Maryland
KEN BUCK, Colorado                   PRAMILA JAYAPAL, Washington
JOHN RATCLIFFE, Texas                BRAD SCHNEIDER, Illinois
MARTHA ROBY, Alabama                 VALDEZ VENITA ``VAL'' DEMINGS, 
MATT GAETZ, Florida                      Florida
MIKE JOHNSON, Louisiana
ANDY BIGGS, Arizona
JOHN RUTHERFORD, Florida
KAREN HANDEL, Florida

          Shelley Husband, Chief of Staff and General Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel

                                 ------                                

    Subcommittee on Regulatory Reform, Commercial and Antitrust Law

                   Tom Marino, Pennsylvania, Chairman
                 BLAKE FARENTHOLD, Texas, Vice-Chairman

DARRELL E. ISSA, California          DAVID CICILLINE, Rhode Island
DOUG COLLINS, Georgia                HENRY C. ``HANK'' JOHNSON, Jr., 
KEN BUCK, Colorado                       Georgia
JOHN RATCLIFFE, Texas                ERIC SWALWELL, California
MATT GAETZ, Florida                  BRAD SCHNEIDER, Illinois
KAREN HANDEL, Florida                VALDEZ VENITA ``VAL'' DEMINGS, 
                                         Florida

                                
                               
                               
                               
                               
                               
                               CONTENTS
                               
                               
                           FEBRUARY 27, 2018

                           OPENING STATEMENTS                    PAGE

    The Honorable Tom Marino, Pennsylvania, Chairman, 
Subcommittee on Regulatory Reform, Commercial and Antitrust 
Law, Committee on the Judiciary.....................................1 
    The Honorable David Cicilline, Rhode Island, Ranking 
Member, Subcommittee on Regulatory Reform, Commercial and 
Antitrust Law, Committee on the Judiciary...........................2
    The Honorable Jerrold Nadler, New York, Ranking Member, 
Committee on the Judiciary..........................................5

                               WITNESSES

    Mr. Thomas M. Moriarty., Executive Vice President, 
Chief Policy and External Affairs Officer, General Counsel, CVS 
Health Oral Statement...............................................7
    Mr. Thomas J. Sabatino, Jr., Executive Vice President, 
General Counsel, Aetna, Inc.
    Oral Statement..................................................8
    Dr. Craig Garthwaite, PhD., Director, Health Enterprise 
Management Program, Kellogg School of Management, Northwestern 
University Oral Statement..........................................22
    Dr. Lawrence Wu, PhD., President, NERA Economic Consulting 
Oral Statement.....................................................24
    Mr. George Slover, Senior Policy Counsel, Consumer Union 
Oral Statement.....................................................26
    Mr. Geoffrey A. Manne, Executive Director, International Center
    for Law and Economics
Oral Statement.....................................................27

              ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

    Statements submitted by the Honorable Tom Marino, 
Pennsylvania, Chairman, Subcommittee on Regulatory Reform, 
Commercial and Antitrust Law, Committee on the Judiciary. These 
materials are available at the Committee and can be accessed on 
the Committee Repository at: 

   https://docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-
   JU05-20180227-SD003.pdf 
   
Statement submitted by the Honorable Bob Goodlatte, Virginia, 
Chairman, Committee on the Judiciary. This material is 
available at the Committee and can be accessed on the Committee 
Repository at:

  https://docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-
  JU05-MState-G000289-20180227.pdf 
  
  OPENING STATEMENTS PAGE
    The Honorable Tom Marino, Pennsylvania, Chairman, 
Subcommittee on Regulatory Reform, Commercial and Antitrust 
Law, Committee on the Judiciary....0
    The Honorable David Cicilline, Rhode Island, Ranking 
Member, Subcommittee on Regulatory Reform, Commercial and 
Antitrust Law, Committee on the Judiciary......0
    The Honorable Jerrold Nadler, New York, Ranking Member, 
Committee on the Judiciary.........................0

 
        THE PHARMACEUTICAL SUPPLY CHAIN: THE PROPOSED MERGER OF
                          CVS HEALTH AND AETNA

                      Tuesday, February 27, 2018
                      
                      House of Representatives
                      
                     Committee on the Judiciary
                   Subcommittee on Regulatory Reform, 
                   
                       Commercial and Antitrust Law
                       
                            Washington, D.C.
                            
    The Subcommittee met, pursuant to call, at 1:30 p.m., in 
Room 2141, Rayburn House Office Building, Hon. Tom Marino 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Marino, Goodlatte, Farenthold, 
Issa, Collins, Buck, Ratcliffe, Gaetz, Handel, Cicilline, 
Nadler, Johnson of Georgia, Swalwell, Schneider, and Demings.
    Staff Present: Dan Huff, Counsel; Andrea Woodard, Clerk; 
and Slade Bond, Minority Counsel.
    Mr. Marino. The Subcommittee on Regulatory Reform, 
Commercial and Antitrust Law will come to order. Without 
objection, the Chair is authorized to declare recess of the 
committee at any time. We welcome everyone to todays 
hearing on Competition in the Pharmaceutical Supply Chain: The 
Proposed Merger of CVS Health and Aetna. And I now recognize 
myself for my opening statement.
    Welcome to this hearing on the proposed merger of CVS 
Health and Aetna. I am interested in how this merger would help 
deliver consumer value, particularly in regard to drug prices. 
Prescription drug expenditures are nearly 20 percent of the 
healthcare costs and they are rising. In fact, prescription 
spending is growing faster than any other part of the 
healthcare system. Four of the top 10 prescription drugs in the 
United States have increased in price by more than 100 percent 
since 2011. President Trump has made lowering drug costs a 
priority.
    This administrations recently released budget 
includes initiatives, such as caps on copays. Here in Congress, 
we have been hard at work as well. I, along with the Ranking 
Member Congressman Cicilline, introduced the Creating and 
Restoring Equal Access to Equivalent Samples (CREATES) Act 
earlier this term. This bipartisan legislation targets abusive 
delay tactics that are being used to block the market entry of 
affordable generic drugs.

    Specifically, the legislation ensures that pharmaceutical 
companies provide generic manufacturers access to samples 
needed to perform comparisons required for FDA approval. In 
helping generics get to market faster, the Congressional Budget 
Office estimates the bill would save government insurance 
programs alone $3.8 billion. The American people should not 
need to wait for this bill. I urge my colleagues to join me and 
Ranking Member Cicilline in making it a priority to pass the 
CREATES Act this year.
    Another factor influencing healthcare costs is market 
consolidation. Such concerns may be lessened in the context of 
a vertical merger. As Judge Bork has explained, as a general 
matter, vertical mergers [may cut sales and distribution costs, 
facilitate the flow of information [and] create economies of 
scale in management.] The proposed CVS Health and Aetna merger 
is a vertical merger. It is my hope that it presents an 
opportunity for cost savings. Uniting a provider and an insurer 
to create an alignment of incentives as well as valuable data-
sharing opportunities that can pay dividends in the long run.
    For example, the integrated post-merger entity could run a 
pilot program offering zero copays on preventive medicines such 
as cholesterol drugs. It could track the data to test the 
hypothesis that the lost copay revenue is more than made up for 
by reduced hospitalizations.
    Proven concepts could then be rolled out across the 
healthcare delivery network. Of course, we also have to be 
sensitive to potential concerns. Vertical mergers can create 
anticompetitive problems such as foreclosure.
    Consider an integrated health insurer-pharmacy benefits 
manager(PBM) pharmacy. The integrated entity must offer less 
competitive terms for its PBMs and pharmacies services to 
competing insurance companies. Competition should deter such 
discrimination, but the healthcare industry is increasingly 
consolidated.
    Accordingly, I think it would be helpful for the 
Subcommittee to hear what assurances the parties can give that 
the proposed CVS/Aetna entity will not favor Aetna over its 
insurance business competitors in CVS PBM contracts.
    In short, there are important considerations on all sides. 
It is the task of this Subcommittee to conduct a thorough 
examination. To that end, we have assembled a distinguished 
panel of witnesses. And I look forward to hearing from each of 
them.
    The Chair now recognizes the Ranking Member of the 
Subcommittee on Regulatory Reform, Commercial and Antitrust 
Law, the Congressman from Rhode Island, Mr. Cicilline for his 
opening statement.
    Mr. Cicilline. Thank you, Mr. Chairman, and thank you for 
calling todays hearing on the impact of CVS 
Healths proposed acquisition of Aetna on the 
pharmaceutical supply chain. The high cost of healthcare is 
squeezing the budgets of American families. We need a 
competitive healthcare system that delivers lower prices, more 
access to improved quality of care, and better outcomes for 
patients. That starts with tackling the sky-rocketing price of 
prescription drugs, one of the main drivers of high healthcare 
costs.

    Today, Americans pay more for prescription drugs than 
people in any other country. Over the past decade, prescription 
drug costs have sky-rocketed by 200 percent, resulting in 
higher insurance premiums, larger hospital bills, and billions 
of taxpayer dollars that are unnecessarily going into the 
pockets of the largest prescription drug companies. This out of 
control spending, primarily for brand-name drugs, accounts for 
nearly a quarter of all healthcare costs and 19 percent of 
Medicares spending.
    And for many Americans, including, for example, cancer 
survivors and people with multiple sclerosis, who have good 
health insurance, drug prices just are not outrageous, they are 
life-threatening for people are skipping doses and cutting 
pills, because they cannot afford their medications. To quote 
David Mitchell, [People are angry and they are hurting, and 
they do not understand how this could be happening to them in 
the United States of America.] Mr. Mitchell founded Patients 
for Affordable Drugs, an independent, nonprofit organization 
dedicated to lowering the price of prescription drugs--and I 
agree very much with his statement.
    We must end this moral outrage that is bankrupting American 
families, particularly those that are most vulnerable. And the 
first step on the path to fixing this life-threatening problem 
is creating timely and effective generic drug competition.
    The Federal Trade Commission reports that generic drugs can 
reduce the price of branded drugs by more than 85 percent. 
While the presence of just one generic competitor can decrease 
subscription drug pricing by 20 to 30 percent. That is why, as 
Chairman Marino mentioned, he and I proposed have H.R. 2212, 
the CREATES Act, a targeted solution to reducing drug prices 
through generic competition.
    It is also why I am skeptical of claims that the pharmacy 
benefit managers, or PBMs, that should negotiate for lower drug 
costs on behalf of health insurance payers and employees, are 
the cause of high-drug costs. To the contrary, there is 
evidence that PBMs reduce costs and improve patient outcomes, 
while retail pharmacies save consumers and health insurers 
billions of dollars by automatically substituting generic drugs 
for branded drugsavailable, as Professor Robin Feldman and 
other leading researchers have noted. I strongly support promoting 
competition in every market, including within pharmaceutical supply 
chain, albeit that it is critical that consumers ultimately are seeing 
benefits from lower drug prices.
    But make no mistake: simply demonizing PBMs and retail 
pharmacies of the drug supply chain is a distraction from the 
leading cause of high drug prices. These include: the lack of 
competition in the manufacturing of prescription drugs, 
regulatory abuse by branded drug companies to delay generic 
competitors, and barriers to generic competition--such as pay-
for-delay settlements--that keep drug prices at artificially 
high, monopoly levels.
    Addressing these issues head-on is a precondition for 
lowering the cost of prescription drugs. CVS Healths 
proposed acquisition of Aetna occurs within this backdrop and 
emits ways of consolidation of fair markets. Last year, in a 
very different merger proposal, the district court for the 
District of Columbia blocked Aetnas attempt to acquire 
Humana, a rival health insurer, concluding that the transaction 
was [presumptuously unlawful, a conclusion that is strongly 
supported by direct evidence of head-to-head competition, as 
well.] As the Justice Department noted in response to this 
decision, blocking that merger will save consumers and 
taxpayers up to $500 million per year and results in more 
generous benefits at lower prices.

    There appear to be significant differences between CVS 
Healths proposed acquisition of Aetna and prior 
attempted mergers that would have contributed to the collapse 
of competition in health insurance markets. And I want to take 
a moment here to thank the CVS team who have provided really 
important information data to me on this proposed transaction.
    And with this in mind, I look forward to hearing from our 
distinguished witnesses on this subject. It is incredibly 
important that working Americans understand how the proposed 
transaction will affect their access to care, their 
prescription drug costs, and the health insurance premiums, and 
whether we can do more to promote competition to lower prices 
in the drug supply chain. With that, I thank Chairman Marino 
for calling todays hearing and yield back the balance 
of my time.
    Mr. Marino. Thank you, Mr. Cicilline. Without objection, 
other Members opening statements will be made part of 
the record.
    Chairman Goodlattes written statement is available 
at the Committee or on the Committee Repository at:https://
docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-JU05-
MState-G000289-20180227.pdf
    And I will begin by swearing in our witnesses before 
introducing them. Would you please rise? Please raise your 
right hand. Do you swear that the testimony you are about to 
give to this committee is the truth, the whole truth, and 
nothing but the truth so help you God?
    Let the record reflect that the witnesses have 
affirmatively said yes and please take your seat.
    The Ranking Member, Mr. Cicilline, is going to introduce 
Mr. Moriarty of CVS because he is from his home State.
    Mr. Cicilline. Thank you, Mr. Chairman for the opportunity 
to introduce our esteemed witness from CVS health; a 
constituent company that is headquartered in my district and 
employs 6,792 hard-working Rhode Islanders. As one of Rhode 
Islands leading job-creators, CVS is an incredible 
corporate citizen. From providing access to healthcare for 
underserved populations, to pharmacy school scholarship 
programs to support talented students, CVS actions 
continue to make Rhode Island, and, indeed, this country a 
better place.
    CVS also continues to lead the way in promoting public 
health and wellness in pharmacies. I was very proud to stand on 
the House floor to applaud CVS Healths decision to 
stop selling cigarettes and other tobacco products in its more 
than 7,600 stores across the United States. And I hope other 
pharmacies will soon follow their example.
    Our country faces tremendous challenges in creating an 
equitable and affordable healthcare system, and CVS Health has 
helped countless Rhode Islanders and people across the Nation 
better manage their health and improve access to affordable 
prescription drugs.
    It is my pleasure to introduce Mr. Thomas Moriarty, the 
executive vice president, chief policy and external affairs 
officer, and general counsel for CVS Health, a position he has 
held since March of 2017. In this role, Tom leads the 
companys external affairs programs including the 
policy, government, and public affairs, corporate 
communications, and legal and regulatory teams.
    He received his law degree from the University of Virginia 
School of Law and his undergraduate degree from Lafayette 
College. We thank him for appearing before our community today. 
And thank you, Mr. Chairman, for the opportunity to make that 
introduction. And with that, I yield back.
    Mr. Marino. Thomas J. Sabatino, Jr. is Aetnas 
executive vice president and general counsel, the chief legal 
officer of the company with worldwide responsibilities for 
leading its legal operations. Mr. Sabatino has received 
numerous rewards from his peers including inside counsels, 
Transformative Leader Award in 2012, the National 
BarAssociation Gertrude E. Rush Award in 2013, and the Equal Justice 
Works Scales of Justice Award in 2014. In addition, the Womens 
In-House Counsel Leadership Institute created the Sabatino Advocacy 
Award in his honor in 2016.
    Now the Ranking Member of the full Judiciary Committee, Mr. 
Nadler of New York, will make his opening statement.
    Mr. Nadler. Thank you, Mr. Chairman. Mr. Chairman, while I 
do not prejudge the merits of the proposed merger of CVS Health 
and Aetna, healthcare is an incredibly complex industry and we 
must consider carefully the potential impact of this 
transaction on competition and, ultimately, on consumers.
    CVS Health is one of the Nations two largest 
retail pharmacy chains with more than 9,700 retail pharmacy 
locations and 1,100 walk-in health clinics. It is also one of 
the two largest pharmacy benefit managers or PBMs. PBMs are 
entities that are responsible for administering prescription 
drug benefits through negotiations and contracts with drug 
manufacturers, health insurers, healthcare providers, and 
pharmacies and they represent a crucial part of the process by 
which prescription drugs are provided to consumers.
    Aetna, meanwhile, is the Nations third largest 
health insurance company, which had previously pursued a merger 
with Humana, the fourth largest health insurer, until the 
Department of Justice filed suit to challenge that merger. 
Proponents of this merger make a number of arguments in its 
favor centering on the potential for efficiencies, enhanced 
consumer services, and lower drug prices if the merger were to 
be approved.
    Additionally, some contend that a vertical merger, that is 
a merger between companies that operate at different stages or 
levels of a given industry supply chain such as a proposed CVS-
Aetna merger, raises few, if any, competition concerns compared 
to a merger between two direct competitors. Some other noted 
antitrust thinkers, however, are skeptical of this view, a 
skepticism I generally share.
    Moreover, I note that even the Trump 
Administrations Department of Justice recently filed a 
lawsuit challenging the AT&T/Time Warner transaction; another 
vertical transaction, although it remains to be seen whether 
that lawsuit represents any sort of longer-term philosophical 
shift in antitrust enforcement. With this background in mind, I 
hope that our discussion can focus on two points about the 
impact on consumers of the transaction that is before us.
    To begin with, the healthcare sector is already highly 
concentrated, and there remains a concern that dominant firms, 
including a post-merger CVS-Aetna, would have the ability and 
the incentive to exclude competitors or to diminish 
competition, an issue that I would like all of our witnesses to 
address today.
    In November 2015, this Subcommittee held a hearing on the 
state of competition in the pharmacy benefit manager and 
pharmacy markets. We learned then that most studies show that 
just three companies, including CVS, control 80 percent of the 
PBM market. Additionally, the largest PBMs also owned the 
largest retail pharmacy chains and concerns were expressed at 
the 2015 hearing that these firms have the incentive and the 
ability to leverage their dominance in the PBM marketplace to 
steer business to their pharmacies; a concern exacerbated by 
fact that it is difficult for the public to know whether any 
cost savings were ultimately being passed on to consumers.
    Similarly, this Subcommittee previously examined the health 
insurance market when it held a hearing on the proposed Aetna/
Humana and Anthem/Cigna mergers in September 2015. During that 
hearing we learned that in American Medical Association study 
concluded that health insurance markets in seven out of 10 
metropolitan statistical areas were highly concentrated. It 
found that in almost 40 percent of the metropolitan areas 
studied, one health insurer controlled more than 50 percent of 
the market, as was the case in 14 States, raising concerns 
about excessive concentration among health insurers.
    The basic concern expressed that these earlier hearings 
remains today. Namely, that in such concentrated markets, the 
dominant firm has the ability and the incentive to use its 
dominance to exclude potential competitors or to diminish 
competition, even in markets where the firm being acquired is 
not a direct competitor of the acquiring firm.
    Another question that I hope the witnesses will address is 
why a merger is necessary at all to accomplish the goals of 
greater efficiency, lower costs for consumers, and more 
innovation in healthcare delivery that the merger reportedly 
will offer.
    Where we can avoid concentrating economic power in one 
firm, particularly, when the potential harm to consumers 
outweighs the potential consumer benefits, we should do so. 
This merger may very well turn out to yield the benefits that 
its proponents claim. Nevertheless, antitrust enforcers and our 
witnesses should closely examine the overarching questions that 
I pose as they review the significant transaction.
    I thank the Chairman for holding this timely hearing and I 
look forward, very much, to hearing from our witnesses. I thank 
you, I yield back.
    Mr. Marino. Thank you, Mr. Nadler. Each of the 
witness written statement will be entered into the 
record in its entirety, and I ask that each of you summarize 
your statement in five minutes or less, and to help you do 
that, stay within that timing, there are lights in front of 
you. You have been here before. When a light turns yellow, that 
means that you have one-minute left; when it is red, your time 
has run out. And if you go over that, we have a little leeway, 
but I will be polite and diplomatically pick up the gavel.
    Mr. Moriarty, please.

    STATEMENTS OF THOMAS MORIARTY, EXECUTIVE VICE PRESIDENT, 
CHIEF POLICY AND EXTERNAL AFFAIRS OFFICER, GENERAL COUNSEL, CVS 
HEALTH; AND THOMAS SABATINO, JR., EXECUTIVE VICE PRESIDENT, 
GENERAL COUNSEL, AETNA, INC.

                      STATEMENT OF THOMAS MORIARTY

    Mr. Moriarty. Chairman Marino, Ranking Member Cicilline, 
Ranking Member Nadler, and Members of the Subcommittee, thank 
you for having me here today to discuss CVS Healths 
proposed combination with Aetna. My name is Tom Moriarty and I 
am executive vice president, chief policy and external affairs 
officer, and general counsel for CVS Health.
    Most of you know us as a local pharmacy in your community, 
but we are really more than that. We are the front door to a 
path to better health. We have long been at the forefront of 
putting our patients health first and improving the 
public health of our communities. Over the past few years, we 
have taken bold steps to define us as a company. We have 
removed tobacco from our stores. We have been promoting 
healthier snack options, and we have been waging a multifront 
fight against the opioid epidemic.
    Our proposed combination with Aetna is a natural extension 
of these commitments. We will put consumers at the center of 
healthcare to ensure that they can access convenient, high 
quality, more affordable care where they are when they need it.
    Our health system, in many ways, is a work in progress. It 
was built for a different time, for a different consumer with 
different needs. It is fragmented, complex, burdensome for 
consumers and providers, and it is unsustainably expensive. It 
faces huge demographic and chronic care challenges. And too 
often, the tug of war between entities with conflicting 
incentives means that the patient is not always being looked at 
holistically with the goal of preventing disease and improving 
his or her health.
    Our vision is to create a new, open healthcare model that 
will help consumers improve their health and simplify their 
healthcare experience. And I would like to highlight three ways 
this transaction does that.
    First, we will put consumers at the center of their care. 
Consumers are looking for more value, greater convenience, and 
help in making healthier choices in their everyday lives. This 
new model will provide consumers the information and resources 
they need to better manage their own health and access care in 
more convenient community settings at an affordable price.
    Second, we will focus on prevention and primary care. The 
combination of our companies will give us and physicians a 
holistic view of a patients health. On average, your 
constituents see their pharmacists much more often than they 
see their doctor. In fact, many see multiple specialists, but 
only see one pharmacist. We are going to build on that point of 
continuity by having pharmacists engage patients early and 
often to help prevent and manage illness more effectively.
    And, finally, we will find ways to address the rising costs 
of healthcare. Aging populations and the rise of chronic 
diseases such as diabetes and heart disease are two of the 
biggest trends threatening to bankrupt our system. 
Unfortunately, we simply do not provide enough assistance for 
physicians and their patients who are coping with a chronic 
illness. We know that things like patients not taking their 
medicines as prescribed, excessive administrative complexity, 
and unnecessary emergency room visits cost the healthcare 
system billions and billions of dollars, needlessly, each and 
every year.
    We believe that this transaction, through better pharmacy 
care and coordination with primary care professionals, can make 
a significant dent in reducing healthcare costs. Put simply, to 
make real progress on behalf of consumers and the healthcare 
system, we have to break the current log jam. There is not a 
one-size-fits-all solution to these issues, and you should be 
suspicious of those who suggest there is.
    But we do know, healthcare can only improve if consumers 
are connected to support from pharmacists and providers who 
live in their communities and understand their personal 
experiences. Healthcare, like politics, is very local.
    For us, the combination with Aetna is the next step in our 
companys long-running commitment to the health of all 
Americans. We do not see it as more of the same, but, rather, 
as a bold innovation that will reshape how healthcare is 
accessed and delivered starting first by putting the patient at 
the center of all that we do.
    And with that, Mr. Chairman, I look forward to taking your 
questions.
    Mr. Moriartys written statement is available at 
the Committee or on the Committee Repository at:https://
docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-JU05-
Wstate-MoriartyT-20180227.pdf Mr. Marino. Thank you, Mr. 
Moriarty. Mr. Sabatino?

            STATEMENT OF THOMAS SABATINO, JR.

    Mr. Sabatino. Mr. Chairman, Chairman Marino, Ranking Member 
Nadler, Ranking Member Cicilline, and the other Members of the 
subcommittee, thank you for giving me the opportunity to 
testify today about our efforts to improve the consumer health 
experience. Aetna serves 22.2 million medical members through 
our commercial Medicare and Medicaid products. And our nearly 
50,000 employees are committed to helping our members achieve 
their best possible health. The acquisition by CVS is the next 
step in that journey to put consumers at the center of their 
care. And I am pleased to be here today to describe how we are 
going to do that.
    Todays healthcare system is designed to fix people 
when they are broken, not keep them healthy throughout their 
lives. For decades, the system has focused on delivering new, 
clinical capabilities. But, research now shows that 60 percent 
of the factors impacting premature death have nothing to do 
with the care that people receive in a doctors office 
or in a hospital, or with their genetics.
    The current system has taken a very narrow perspective of 
health that largely ignores the social, environmental factors 
that play a critical role in overall well-being. Aetna is 
joining with CVS Health to fortify the healthcare system. 
Together, we will work to create a value-based system that 
aligns with the goals of the physician payment reform passed by 
Congress 2 years ago, commonly known as MACRA.
    We want to reward healthcare providers based on patient 
outcomes instead of a greater volume of services and work with 
our members to improve the social and environmental factors 
impacting their health. We will develop the system by focusing 
on the consumer; making healthcare simpler and easier to use. 
Our new company will learn about our members 
individual health goals and connect them to the tools, 
information, and resources they need to achieve a lifetime of 
wellbeing.
    This is not something Aetna can achieve on its own. To 
fulfill our shared vision for a value-based and consumer-
focused experience, we need to have a significant presence in 
the communities where our members live. That is why our 
combination with CVS is so compelling. We plan to combine CVS 
Healths extensive retail footprint with 
Aetnas health plans, analytical capabilities, and our 
extensive network of medical professionals.
    Together, we will create a new, consumer service modelin 
the local community that enables us to learn about the health needs and 
ambitions of our members. We will then connect our members to relevant 
resources, including healthcare providers or community organizations, 
that can improve the social and environmental factors affecting health.
    We understand the important relationships that consumers 
have with their physicians and other healthcare providers. Our 
new company will not replace this valuable relationship. 
Instead, we will work closely with local providers to help 
consumers achieve their personal care plans. For example, 
providers could encourage members to make regular visits to 
their local CVS store to get advice on fitness, on nutrition, 
on managing their medications.
    We could also perform routine tests and share those results 
electronically with the members primary care 
physician. I want to remind the committee that this is a 
vertical transaction, with no significant overlap in our 
existing businesses. The vast majority of CVS Healths 
revenues come from retail pharmacy and pharmacy management.
    Aetna, on the other hand, is focused on health insurance 
and does not have a retail footprint in any of the communities 
we serve. It is also important to note that Aetna and other 
insurance companies are among the most highly regulated 
stakeholders within the healthcare sector. For example, in the 
bulk of our business, we are required to pay rebates to our 
customers if the proportion of premium revenues spent on 
clinical services and quality improvement is less than 85 
percent. The remaining funds go towards all of our costs of 
doing business, including our investments in innovative 
healthcare solutions.
    So, in conclusion, the Aetna and CVS health transaction 
brings together two innovative businesses in a sector that 
needs to change. The new company will offer a local experience 
that is simpler to use and build around consumers. Our value-
based model will help consumers receive higher quality, more 
affordable care, while also addressing the social and 
environmental factors that impact their health.
    Thank you again for the opportunity to testify, and I look 
forward to addressing any questions you have.
    Mr. Sabatinos written statement is available at 
the Committee or on the Committee Repository at:https://
docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-JU05-
Wstate-SabatinoT-20180227.pdf
    Mr. Marino. Thank you, Mr. Sabatino. We will now begin with 
the Members 5 minutes of questioning. And I will 
recognize myself to begin the questioning. Mr. Moriarty, you 
mentioned in your opening statement the opioid epidemic, could 
you please tell me what you plan to do to help bring this 
epidemic to its knees and what the lateral merger would do, 
overall.
    Mr. Moriarty. Mr. Chairman, there is no question the opioid 
epidemic touches everywhere across this country. Over the last 
several years, I have traveled around to all the communities 
that we serve in our current operations. We have begun a very 
large initiative where we are placing drug disposal units in 
each of our pharmacies; 750 across the country.
    Each time we go into these pharmacies I talk to the local 
police chiefs as to what they are dealing with. And one, in 
particular, in Wilmington, North Carolina, the night before 
that we actually did the drug disposal event, there were two 
overdoses just one block from our pharmacy. So, there is no 
question it touches everywhere. It knows no economic, social, 
or other bounds.
    What we have been doing as a company, and we will continue 
to do and leverage through the combination with Aetna, is we 
have been able to put into a plan design that actually limits 
the amount of a first fill for an opioid-naove patient to 7 
days. Working with physicians directly, consistent with the 
recommendations for the Centers for Disease Control to limit 
the availability of those first fills as they go out the door.
    We have made substantial investments in counseling with 
school kids, both at middle schools and high schools, having 
our pharmacists go back into the communities to educate them on 
the danger of just simply one bad choice. All those efforts 
will continue, and as we are better able to integrate the data 
with Aetna, we can work much more directly with the prescribing 
physicians to get our practices to change those practices to 
educate the physicians about the dangers of over-prescribing 
and really get at this.
    This is a multifaceted problem. It will not go away 
quickly, and it is going to take multiple-pronged solutions to 
get at it.
    Mr. Marino. Thank you. Mr. Sabatino, would you like to 
respond?
    Mr. Sabatino. Sure, I would add just a couple of things. 
First of all, I will echo what Mr. Moriarty said about the 7-
day prescription that we will only pay for 7 days for the 
initial prescription, as well. So, we are in concert with that.
    A couple of other things I would note that Aetna has done. 
We have identified the high-prescribing physicians and going 
after them. And, first of all, trying to educate them as to the 
fact that they are high-prescriber physicians; sometimes they 
are not fully aware of it. Understanding who they are. In some 
cases, for example, if you are an oncologist that may be 
appropriate. But, in other situations, it is not appropriate. 
And we will stop paying high-prescribing physicians when we 
think there is abuse. And we will work through that.
    The other thing we are doing, for example, believe it or 
not, dentists have a high number of high-prescribing dentists 
in that network. So, when we identify that, we are trying to 
find ways to get non-opioid pain medication to patients that 
need it following, say, oral surgeries or something like that. 
So, we are trying to work with our enormous network of medical 
professionals to get at those issues.
    Mr. Marino. I am a former State and Federal prosecutor and 
what you two just said, I do not think I can hear anything 
better during this hearing. Thank you so much for what you have 
said, and I hope you really put that into effect.
    Mr. Sabatino, I represent a rural district in Northeast 
Pennsylvania that has many independent pharmacies. What affect, 
if any will this merger have on independent pharmacies for my 
constituents?
    Mr. Sabatino. Mr. Chairman, we believe that it will not 
impact independent pharmacies. Aetna now contracts with 65,000 
pharmacists around the country to satisfy our network. We will 
have an open system that continues to provide for that. For us 
to be competitive, we need to provide the breadth of coverage 
for all of our members to be able to access healthcare. And so, 
we do not believe that it will impact the individual 
pharmacists in any significant way.
    Mr. Marino. Mr. Moriarty, would you like to respond to 
that?
    Mr. Moriarty. I would, sir. And I think, actually, it 
offers us a real opportunity to sort of change and further 
evolve the role of the pharmacists, both in rural communities 
and other areas. Eighty percent of the issues associated with 
healthcare costs today are behavioral in nature. That contact, 
that point of reference, that point of engagement that 
pharmacists have is real. Pharmacists are one of the most 
trusted professionals in the healthcare community.
    We can, and we should, look to much more of a value-
oriented system that rewards pharmacists for that activity, as 
opposed to just simply for dispensing. And, many Members of 
this Committee, have supported efforts to bring provider status 
into Medicare to acknowledge the significant role that 
pharmacists can play in lowering total healthcare costs by 
beyond just simply prescribing, but working directly with 
patients. And we applaud the Members who support that. And we 
need to continue to make that happen.
    Mr. Marino. I think pharmacists are one of the most 
important tools that we have to address this opioid epidemic. 
Not the only tool, I mean, we have to talk about physicians; we 
have to talk about manufacturers, distributors, education, the 
whole nine yards. But, I am very pleased with what you have to 
say, and my time has run out. And I yield to the Ranking Member 
of the Subcommittee, Mr. Cicilline from Rhode Island.
    Mr. Cicilline. Thank you, Mr. Chairman. Thank you again to 
our witnesses. First, I would like to ask the witnesses, and we 
will begin with Mr. Moriarty, I think everyone recognizes that 
access to preventative care is really essential in terms of a 
restructuring of our healthcare delivery system.
    I wonder if you would just speak a little bit on what this 
transaction might mean in terms of--and Mr. Sabatino, as well--
what it might mean in terms of access to preventative care; how 
it may be enhanced by this proposed merger.
    Mr. Moriarty. Certainly, sir. I think, you know, just high 
level, statistically, 62 million Americans do not have access 
to adequate primary care. We have our MinuteClinic business, we 
know that 50 percent of folks who visit MinuteClinics do not 
have a primary care physician. Oneof the things that we do, is 
we go into the primary care community in which we are placing a 
MinuteClinic and ask if they are taking referrals; doctors are taking 
referrals, and if they are, we put them on a list. So, if a patient 
comes into MinuteClinic says I do not have a primary care physician, we 
emphasize the need to have one, and actually connect them with that 
primary care physician.
    The other thing we know is, primary care, a lot of times, 
is being sought out when it is not available in regular 
business hours; 50 percent of the visits at MinuteClinic are 
nights and weekends when core primary care is not available. 
The ability to extend out and have available primary care at 
off-hours, at times when it may not otherwise be available, 
that is clearly something we can build out even more so with 
Aetna. And we, once we develop those solutions, can make them 
available more broadly into the marketplace as Aetna actually 
implements those with other providers outside of CVS.
    Mr. Cicilline. And, I take it, Mr. Moriarty, that the model 
provides some of the efficiencies and cost savings that are 
worked out in that relationship to be passed on to the 
consumer?
    Mr. Moriarty. Absolutely, because if you look, Congressman, 
roughly one-third of emergency room visits are unnecessary; the 
emergency room visit for that individual, who has to pay out of 
pocket for it, is huge. The average MinuteClinic visit is 
roughly 75 to $80 versus 600 to $800 for the patient.
    Mr. Cicilline. Thank you. Mr. Sabatino?
    Mr. Sabatino. Yes, and I would agree with my colleague, and 
just add a couple of additional points. From Aetnas 
perspective, the exciting aspect of this combination is that we 
have a small presence in the community but working with CVS we 
will now have a much larger presence. The social and 
environmental determents of health are impacting health in ways 
that we are just beginning to understand. And so, we need to 
get to the local communities and interact with the individuals. 
And we can do that best through the doorway that CVS provides.
    We also need to go beyond that; and we will go beyond that 
by going to the home. And so, we have a pilot program with 
Meals on Wheels, where we have trained Meals on Wheels 
volunteers, when they go in the home, to look for other 
determents of issues. Like, do they have food in the 
refrigerator, is the heat on, and those sorts of things, so 
they can report them back and we can then have an intervention 
to make sure people stay healthy. As Mr. Moriarty mentioned, 
keeping people healthy is the best way to save the healthcare 
system money and to make people happier and have a longer life.
    Mr. Cicilline. Thank you. And, Mr. Moriarty, some have 
raised concerns that if this transaction is approved, it may 
increase the incentives and ability of CVS to foreclose rivals 
or steer consumers such as Aetna enrollees to CVS pharmacies, 
and you and I spoke about that. Maybe you could explain how 
that will be operationalized or prevented.
    Mr. Moriarty. Sure, so a few points, Congressman, on that. 
First off, if you look Aetna today, because we are the service 
provider to Aetna, represents roughly 11 to 12 percent of 
CVS revenue. The other 89/88 percent sits with other 
health plans; other employer groups, et cetera. If we sought in 
any way to foreclose, availability to all the services and 
creations that we are going to make here as part of this to the 
rest of the market, we would have so much more to lose then we 
would to gain in that regard.
    The other thing I can give you is one very tangible example 
in Medicare Part D. CVS has their own Part D Plan SilverScript. 
We have innovative, we have invested very heavily in that, and 
we have provided great member satisfaction for that. But at the 
same time, we are the service provider to some 43 other Part D 
plans run by other health plans.
    And we have made available all of the innovation and 
SilverScript to those plans and 83 of the plans that we service 
outside of SilverScript have a four or five star rating, which 
are the highest ratings CMS will give to a health plan 
associated with quality of service, adherence, member 
satisfaction, and the like.
    So if you look at just simply the SilverScript example as 
one and then others across our business, the risk of 
foreclosure, we feel really does not exist and in fact the 
economic interest would argue very strongly that it simply 
cannot happen.
    Mr. Cicilline. Thank you. With that, I yield back Mr. 
Chairman.
    Mr. Marino. The Chair recognizes Congressman Issa, from 
California.
    Mr. Issa. Thank you, Mr. Chairman. Mr. Moriarty, beforehand 
I walked up to you before this started and said, [How is this 
trust going to work?] And I did so because clearly this is a 
vertical integration.
    But what I find interesting and I just want to go through 
it quickly and then ask a couple of questions is, it is a 
pretty inaccurate vertical integration. You are buying a 
convenience store with a pharmacy hooked to it. Your 11 percent 
relationship between CVS and Aetna is certainly not all the ore 
of the northeast, or the central area being brought up for a 
given group of steel mills.
    So, the synergies are pretty imperfect in the sensethat 
these are not, you know, 88 percent, and you are bringing it together. 
And it reminds me of the United Airlines buying the Weston hotels. And 
everyone was doing it for a while. It was called synergies.
    Now, it is your companys decision and your 
stockholders decision about whether this is a good 
decision or not. But would it not be fair to say that this is 
at least an experiment in whether or not you can use the 
synergies in a way that not only give you efficiencies with 
this 11 or 12 percent, but then can turn into novel ideas to 
work with other groups?
    Mr. Moriarty. It is a transaction, Congressman, that we 
feel is based on some known facts in terms of our own 
experience to date. So, for example, we know that transitions 
in care from a hospital to home, and the lack of the proper 
coordination of pharmacy associated with that is one of the 
single biggest indicators of readmissions back into the 
hospital.
    Roughly 70 percent of all readmissions is associated with 
essentially bad pharmacy management in that. We have a business 
that has home infusion, so it is infusions and therapies are 
moved from hospital, where they cost roughly $340,000 a year, 
to a lower cost home settings.
    We have been able to work on those transitions, make sure 
the medications are correct, and we have reduced 
hospitalizations by some 24 percent in that instance. So, that 
gives us a value proposition that we think that we can scale 
with Aetna, create an even more marketable product, and sell 
more broadly beyond simply Aetna and to other health plans and 
other providers.
    Mr. Issa. Now, a question for you is if Aetna were to 
decide that you were going to be their exclusive vendor in 
every through put servicer in every possible area where CVS has 
the infrastructure to do so, then what portion would you get 
that you are not currently getting from Aetna? Just ballpark 
number: I am sure the figure has been run.
    Mr. Moriarty. You know, I do not know it off hand. But I 
think it would be a very small percentage. And the risk of loss 
of so much other business would greatly outweigh any smaller 
benefit that comes --
    Mr. Issa. Well, Mr. Sabatino? If Walmart came to you the 
day after this merger and said, [You know what, we are going to 
set up our little mini-urgent care centers to meet or exceed 
what they are doing over there at CVS,] and Walgreens did the 
same thing, Rite Aid, you know, a list of names. After the 
merger what would be your position if in fact they had the same 
value proposition at additional storefronts? How would that be 
affected by this integration?
    Mr. Sabatino. Well, I think we would have to look at any 
opportunity that we have to lower the cost of healthcare. We 
service people around the country, and we need to find every 
opportunity. We intend to have an open system that allows all 
to participate in it. Because the ultimate goal is to find the 
ways to get our members to find the right healthcare. And so, 
the system needs to be open. It will not work otherwise. And we 
will not be able to compete effectively against the other 
manage care organizations.
    Mr. Issa. Now, I am going to act as though there are no 
insurers here for a moment and go back to Mr. Moriarty. In a 
perfect world, would CVS become the household word for the 
principal alternative, to emergency room? The place the people 
who do not have a primary care physician that they can just 
call in a concierges type way that will see them. 
Would you envision that that is your goal? Is to be the go to 
so that never again does somebody run to the emergency room, 
because they do not know where else to go?
    Mr. Moriarty. Well, the foundational elements of not only 
MinuteClinic, but what we have done with primary care 
providers, as well as the health systems is that it is not 
replacement. It is a compliment. We cannot address every 
condition in a MinuteClinic that needs to be addressed in the 
emergency room. What we can do is do it --
    Mr. Issa. But tens of thousands of flu cases you could?
    Mr. Moriarty. Well, those acuity issues --
    Mr. Issa. Yes.
    Mr. Moriarty. Yes, we certainly can.
    Mr. Issa. And finally, Kaiser, decades ago, integrated much 
more than most insurance companies do today. Could one of you 
contrast your proposal to theirs since it obviously did not 
disrupt the market?
    Mr. Moriarty. I will start, and Mr. Sabatino can add to it. 
But I think more than anything, what is being built out here is 
going to be an open source model. It will be made available not 
just to Aetna members, but other health plan members, as well 
as, to other pharmacies across - there are some 70,000 
pharmacies in this country. CVS has 9,700, which is a lot. But 
it represents a very small percentage of all that. The coverage 
that is needed to cover all of America sits with those other 
pharmacies. That has to be addressed as part of this as well.
    Mr. Sabatino. And I would add that I think, obviously, the 
Kaiser system is a closed system. Our system is an open system 
and will remain open. And I think it demonstrates the fact that 
our healthcare system is complex. And we need different models, 
in different places, in order to attack the issues that we are 
trying to address.
    So I think there is a place for a Kaiser system in 
theenvironment in which Kaiser operates. And there is the place in the 
other systems like ours with CVS in order to address this issue.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Marino. The Chair recognizes Congressman Nadler, the 
Ranking Member with the full Committee from New York.
    Mr. Nadler. Thank you, Mr. Chairman. Mr. Moriarty, in your 
written statement, you argue that the proposed transaction will 
benefit consumers and lower healthcare costs through greater 
deployment of community-based care via the CVS healths 
MinuteClinic services, and you talked about that. Will these 
efficiencies achieved by the transaction be passed on to 
consumers in the form of lower prices for healthcare services 
or prescription drugs? And how do we know that?
    Mr. Moriarty. Well, the answer is yes, sir. And the way it 
will be, is as we can lower the total cost of care it will be 
reflected--and Mr. Sabatino can comment on this better, he is 
more the expert--ultimately in lower premiums. What we can do 
as well, whether it is MinuteClinic or what we do today in our 
core pharmacy business, is the better use and better efficient 
use of generics over branded pharmaceutical products. Lower 
copays associated with that.
    At CVS as an employer, in our plan design we saw the impact 
of higher cost drugs on our employees. We saw utilization of in 
key categories of diabetes, cardiovascular, the utilization, 
use of those by our employees go down. We decided to do, 
implement a plan design of zero copay associated with generics, 
but also branded products in those key categories like diabetes 
and otherwise, because we know that the use of pharmacy 
adherence to pharmacy is critical to longer term healthcare.
    And what we have seen as a result of that, is actually 
better utilization on our employee base and a healthier 
population as a result. And that gives us a lot of comfort and 
a lot of instruction as we go forward working with Aetna as we 
put this combination together.
    Mr. Nadler. I am not sure I understood your answer. You 
have done a lot of nice things. But how do those lead to the 
conclusion that the efficiencies achieved by the transaction 
would be passed on to the consumers?
    Mr. Moriarty. It, ultimately, in the sense of what the 
consumer will pay can be reflected either in the form of a 
lower premium for the insurance that they are buying or, 
ultimately, for what they are paying at the pharmacy counter.
    Mr. Nadler. And how do we know that it would be?
    Mr. Moriarty. I am sorry, sir?
    Mr. Nadler. You said, [can be.] How do we know that it 
would be?
    Mr. Moriarty. Well, that is what we will deliver as part of 
this. If we can lower cost, maybe Mr. Sabatino can comment on 
how the model works?
    Mr. Sabatino. Yes.
    Mr. Nadler. I have got questions for him. So, let me travel 
on to that. I will ask this of Mr. Sabatino, Mr. Moriarty may 
also want to comment. Professor Lamar Daphne, a leading 
healthcare economist recently argued that in the absence of 
this transaction, Aetna could have been a potential entrant in 
some business segments in which CVS currently operates such as 
entering the market for pharmacy benefit management. How would 
you respond to that?
    Mr. Sabatino. Thank you for the question. We have gone 
through an analysis. We went through analysis several years ago 
looking at how we would have our PPM services, for example. 
Should we create our own PPM company or do other things? In the 
course of that we looked at all options and we came to the 
conclusion that the best solution for us, given our skill sets, 
was to contract with CVS for those PPM services because they 
were an efficient and effective provider of those services.
    In the meantime, we focused on the things we can do more 
effectively around managing medical costs and driving down the 
total cost of care. And, in terms of the drug issue, just to 
address that very quickly, you know, we have a shared goal in 
keeping drug costs down. We benefit our members by keeping our 
costs down. Those are passed on in premium reductions and 
increasing benefits for the members. That is how we operate our 
business. When we are able to save costs, they get passed on, 
and we are able to lower the cost of care.
    Mr. Nadler. Okay, and Mr. Slover is going to testify on the 
second panel, argues in his written testimony that there is a 
horizontal dimension of the proposed transaction which is that 
Aetna would essentially, [get its own in-house PBM,] and 
outcome it could also achieve is a potential competitor in the 
PBM market. How do you respond to concerns that the proposed 
transaction harms potential competition in the PPM market?
    Mr. Moriarty. I can start and then Sabatino can add to it. 
Congressman, no player is leaving the field here. In the sense 
of there is no PBM competition. We are the service provider 
today for Aetna from a pharmacy benefit management prospective. 
And so, there will be no consolidation at the PBM level. There 
is a ripe competition today. We have anywhere from eight to 15 
substantial players in the PBM market. We see a robust, 
competitive environment in that regard. So, I do not see how 
this combination impacts competition in the PBM space.
    Mr. Nadler. Thank you. In the 17 seconds I have left, let 
me ask for a brief answer to one final question. This is for 
Mr. Sabatino. What assurances can you give this transaction is 
approved that CVS will not provide favorable treatment to Aetna 
over rival insurance companies? Maybe it should be Mr. 
Moriarty, whoever.
    Mr. Sabatino. Because we need to stay competitive. We have 
a very competitive market place. We have other competitors in 
this space that are also looking to manage their costs down and 
we will have to do that in order to be a viable player in this 
industry.
    Mr. Nadler. Thank you, my time has expired. So, I yield 
back.
    Mr. Marino. The Chair now recognizes Congresswoman Handel 
from Georgia.
    Mrs. Handel. Thank you, Mr. Chairman, and thank you both 
for being here today. For Mr. Moriarty, could you give us just 
a more detailed example or detailed vision of what sort of the 
post-merger MinuteClinics are going to look like with the 
expanded services that you will offer there?
    Mr. Moriarty. Certainly, Congresswoman. I think if you look 
what we will be looking at doing is expanding the scope of 
services, consistent and better complimenting the primary care 
within the communities we serve. So, there will be gaps, 
potentially in primary care, in certain communities that do not 
exist elsewhere. We can actually modify the services provided 
at MinuteClinic to help fill those gaps. We will have much 
better coordination and further investments and coordination 
with those primary care physicians.
    So, for example, we have made a very significant investment 
in Epic which is an electronic medical record system that will 
allow each of the visits that folks seen at MinuteClinic to go 
back to their primary care physician or to the health system in 
which that patient is associated. So, we avoid fragmentation in 
care. You will see a much more clinic approach to MinuteClinics 
as we go forward as well. And I think those are probably the 
highlights of how we will move forward in that area.
    Mrs. Handel. If I can just follow up on that. You keep 
saying, [expanding services.] And so, I am looking for 
specifically --
    Mr. Moriarty. Sure.
    Mrs. Handel.--is it going to be more of a full scale, the 
way the neighborhood sort of urgent care clinics work? Which 
are not really urgent care anymore. They are, just they are 
open late, and we can go there, like that? Or, something scaled 
down?
    Mr. Moriarty. For example, so today, Congresswoman, the 
MinuteClinics address roughly 40 to 45 percent of what can be 
done at primary care. We envision over the next year or so that 
we can expand that to about 90 percent. It will not involve 
having X-rays or the ability to fix broken bones or things 
along those lines. But it will be much more the acute 
conditions that you will see; the ear infections, eye 
infections, skin abrasions, other things, flu.
    And perhaps more importantly, chronic care management. As 
diabetes becomes more and more of an issue, the ability to 
interface with patients on a much more regular basis to ensure 
they are compliant with their A1C testing, taking their 
medications. That chronic care counseling will become a very 
big part of what we do going forward.
    Mrs. Handel. Okay, great. Thank you. I wanted to talk a 
little bit about lower prices. There were some recent media 
reports suggesting that Caremark had recently slashed 
reimbursements for generic prescriptions to the independent 
pharmacies. My question is less about that, and more about were 
those lower prices passed on to consumers in keeping with Mr. 
Sabatinos comments about passing along cost savings to 
consumers? How is that going to work so that consumers really 
do see a competitive lower cost outcome from this?
    Mr. Moriarty. That is a great question, Congressman. Let me 
start to take a step back, because I think if we look at 
reimbursement at the retail pharmacy level, there is incredible 
pressure there for a lot of different reasons. I think one of 
the single biggest things that is happened over the last two 
years is the changes in reimbursement for Medicaid.
    So, changes were made roughly in 2016 and have taken some 
$600 million in reimbursement from retail pharmacies out of 
Medicaid. Savings to CMS, savings to the Medicaid program. 
Those are significant cost impacts and headwinds that retail 
pharmacy is bumping up against. That has had a natural drag on 
pressure in the commercial world as folks have seen those 
rates, there is been a lot of pressure from our employer, 
clients, and others who are looking to save money.
    I feel very strongly that we solve for this longer term, is 
we have a new model for pharmacists where much more of the 
professional skills they bring in terms of the ability to 
counsel patients, work with patients on chronic conditions and 
otherwise is acknowledged and reimbursed, not only by the 
Federal Government, but also by commercial payers. And we 
fundamentally believe as we put these models together, we can 
see the value of that showing up in medical costs. We can 
create new reimbursement models for pharmacists as we go 
forward.
    Mrs. Handel. And has the response or the input from the 
pharmacists, what has that been? Pro? Con? Inbetween? Wait and 
see?
    Mr. Moriarty. Well, actually interesting, today the 
National Community Pharmacy Association which represents the 
independent pharmacist stated that they had no position on the 
merger.
    Mrs. Handel. That is interesting. Okay. Thank you so much. 
I appreciate it. Mr. Chairman, I yield back.
    Mr. Marino. The Chair recognizes Val Demings from Florida. 
The newest Member of our Judiciary Committee and our 
Subcommittee. And we look forward to your input. So, welcome.
    Ms. Demings. Thank you so much, Mr. Chairman, and thank you 
to both of you for being here with us today. I think you have 
both said that healthcare is complicated and that is an 
understatement. Certainly, we need to expand care and lower 
cost. Could each of you please tell me how the proposed 
transaction will benefit more underserved communities?
    Mr. Moriarty. Yes. I can start. I think, Congresswoman, as 
you look first and foremost it will take the form of what we 
can offer within not just our pharmacies, but how we can extend 
that to other pharmacies. We know in certain areas that, from a 
behavioral standpoint and from just social determinants, that 
where you live has as much to do with your healthcare and your 
health outcomes as any other factor.
    We can extend and push care, not just physically, but also 
through telemedicine and other related capabilities that we 
will be able to invest in as part of this transaction. Those 
are things we are doing today. Those are things we will 
accelerate as we go forward with Aetna.
    Mr. Sabatino. Yes, and let me start by saying that I think 
we all recognize that not only is healthcare complicated, but 
the status quo is unacceptable. We are not able to provide 
healthcare to everyone in an effective way and we are working 
to do that. We believe that by getting to our communities, by 
becoming much more locally focused on people and their issues, 
we can get at those social determinates of health that are 
affecting it.
    Mr. Moriarty alluded to this. Our CEO is famous for 
saying--not famous. I do not know if he is famous or not. But 
he will say, [That today we now recognize that our zip code 
matters more than our genetic code] in terms of whether or not 
our health outcomes. So, we need to get into those communities. 
This transaction allows us that opportunity to do that. It 
allows us to get where the people are in every community in 
which we operate. And so, we think that is the best way to get 
at increasing the health of individuals and reducing the costs.
    Ms. Demings. And some antitrust experts express skepticism 
about the merger being necessary to expand services. Could you 
tell me why this merger is necessary as opposed to a 
contractual relationship?
    Mr. Moriarty. Again, I can start, and Sabatino can add to 
it. We start with the very proposition of we have a $3.2 
trillion healthcare budget in this country. We know the data 
suggests that one-third is not being spent appropriately, may 
even being wasted.
    So looking at solutions as to how we get at that. Whether 
it is unnecessary emergency room visits, lack of compliance, 
lack of people taking their medications as prescribed by the 
doctors costs $300 billion each year. There is a fragmentation 
in the system today where the primary care doctor will 
recommend that you do X, Y, and Z and that is not being 
followed through on.
    Our ability to integrate the data that Aetna has in terms 
of it is medical records, with our touch points at the 
pharmacists can lead to a much more connected care management 
system that we think will make a real difference.
    It will also allow us to extend things like we are doing 
today with the Veterans Administration in Phoenix. As 
we have looked at what is happening at the VA, we have been 
able to extend MinuteClinic services to those veterans to 
triage conditions that can be seen at MinuteClinic. Reduce the 
back log at the hospitals that are in the VA systems, get the 
veterans the care they need for what we can take care of, and 
only those who truly need to be back in the VA system actually 
go there. These are all examples of things that we can extend 
and accelerate when we put the combination together.
    Ms. Demings. Thank you.
    Mr. Sabatino. And I would just add that from 
Aetnas prospective, CVS has the doorways that we need 
to go to. We do not have those doorways today. We have the 
analytics. We have the medical professional network that we can 
link in with the system, and we cannot fully integrate those 
unless we are actually one part, part of one combined company. 
Our data analytics will fuel that, but it needs to be as part 
of a single entity for us to really get to the true value that 
is able to be captured Ms. Demings. And finally, could you talk 
just a little more about, kind of, the guarantee that you will 
not force your consumers to use one or the other because you 
need to remain competitive. Could you just talk a little bit 
more about how that makes you more competitive?
    Mr. Moriarty. Sure, I can do that.
    Ms. Demings. Allows you to be more competitive than the 
other way.
    Mr. Moriarty. That is right. And, ultimately the model is 
we will want them to come. We cannot force them to come. And, 
in fact, if we look at our broad customer base at CVS and the 
number of companies we provide services for, if we try to 
restrict these only to Aetna, we would lose so much other 
business that we are just simply cannot do that as part of our 
model. So, what we have built today, and we will continue doing 
is offering and developing services made available across the 
healthcare spectrum. Not limited to any one company or to only 
one group.
    Mr. Sabatino. And I would just simply add that for us to 
continue to serve our customers, school, unions, corporations, 
we need to be able to provide access to a retail pharmacy 
wherever they may be and a large number of those. So, it is 
imperative that we keep our network wide and broad in order to 
continue to provide those services.
    Ms. Demings. Thank you so much to both of you. Mr. 
Chairman, I yield back.
    Mr. Marino. Thank you. Seeing no other Members on the day 
as for questions, this concludes the first panel of our 
hearing. I want to thank our witnesses. Gentleman, your 
testimony has been very encouraging. I think I speak on behalf 
of Mr. Cicilline, particularly pursuant to some of the 
legislation and issues on which we are working, thank you very 
much. You are excused.
    Mr. Moriarty. Thank you for the opportunity. Mr. Marino. 
And it is time now we will call the second panelfor 
todays hearing. I will begin by swearing in our witnesses 
before we introduce them. So would you please stand and raise your 
right hand? Do you swear that the testimony that you are about to give 
before this Committee is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Let the record reflect that the witnesses have confirmed in 
the affirmative and may be seated.
    I will now introduce all of the witnesses before we go into 
your individual statements. And if I mispronounce your name, 
let me know.
    Dr. Craig Garthwaite is the Herman R. Smith research 
professor in hospital and health services management and the 
Director of the Health Enterprise Management Program at 
Northwestern University, Kellogg School of Management. His 
research focuses on a variety of issues related to the pricing 
and development of pharmaceutical products and the effects of 
the changing healthcare market on the operations of hospitals 
and other healthcare providers. Dr. Garthwaite has a bachelors 
and masters degree from the University of Michigan and 
a Ph.D. in economics from the University of Maryland. Doctor, 
welcome.
    Dr. Lawrence Wu is an economist and president of NERA 
Economic Consulting. A global firm of experts in economics, 
finance, and statistics. Dr. Wu specializes in health economics 
and antitrust. And over the past 25 years he has analyzed the 
competitive impact of scores of mergers across the healthcare 
industry.
    From 2011 to 2015, he was a visiting scholar at the 
Stanford Institute for Economic Policy Research at Stanford 
University. From 1992 to 1996, before he joined NERA, he was a 
staff economist in the Bureau of Economics of the Federal Trade 
Commission. Doctor, welcome.
    Mr. George Slover is a senior policy counsel at Consumers 
Union, the advocacy division of Consumer Reports, where he 
works on competition policy, regulatory policy, and other 
consumer protection policy issues. He has authored numerous 
comments on agency rulemakings, has testified before Congress 
on several antitrust and competition policy matters, and has 
assisted with the drafting of a number of bills. Before going 
to Consumers Union, he worked in the legal policy section of 
the Justice Departments Antitrust Division, as well as 
at the House Judiciary Committee, where he was again focused on 
antitrust issues. He holds a JD from the University of Texas 
Law School and a Master of Public Affairs from the LBJ School. 
Counselor, welcome.
    Mr. Geoffrey Manne is the founder and Executive Director of 
the International Center for Law and Economics. A nonprofit 
research center based in Portland Oregon. He is an expert in 
law and economics with two degrees from the University of 
Chicago; a BA in economics and political theory and a JD. And 
he is the son of Henry Manne, one of the founders of Law and 
Economics and former dean of George Mason Law School.
    He was a law professor at Lewis and Clark Law School in 
Portland, a lecturer in law at the University of Chicago and 
the University of Virginia and worked as a research assistant 
for Judge Richard Posner. Jeff has written extensively on 
antitrust law and economics, particularly on vertical mergers 
and on merger issues in the healthcare and health insurance 
industries. Welcome, Counselor.
    Each of the witnesses written statements will be 
entered into the record in its entirety. And again, I ask that 
when you make your statements, please try to keep them within 5 
minutes. And as you heard, you will see that there is a timing 
light. And when the green light goes to yellow, you have 1 
minute, and when it goes to red, your time has run out.
    And as I say, I will be very polite and diplomatic. If you 
excessively run over, I will just raise the hammer a little bit 
to give you an idea that it is time to wrap up. So, with that 
in mind, Dr. Garthwaite, would you like to make your opening 
statement?
    STATEMENTS OF CRAIG GARTHWAITE, ASSOCIATE PROFESSOR OF 
STRATEGY, DIRECTOR, HEALTH ENTERPRISE MANAGEMENT PROGRAM, 
KELLOGG SCHOOL OF MANAGEMENT, NORTHWESTERN UNIVERSITY; LAWRENCE 
WU, PRESIDENT, NERA ECONOMIC CONSULTING; GEORGE SLOVER, SENIOR 
POLICY COUNSEL, CONSUMER UNION; AND GEOFFREY MANNE, EXECUTIVE 
DIRECTOR, INTERNATIONAL CENTER FOR LAW AND ECONOMICS

                     STATEMENT OF CRAIG GARTHWAITE

    Mr. Garthwaite. Chairman Marino, Ranking Member Cicilline, 
Ranking Member Nadler, and Members of the Subcommittee, thank 
you for holding a hearing examining the merger between CVS 
Health and Aetna and the potential implications of vertical 
mergers of this nature. As you have said, I have prepared a 
written statement for the record that I will briefly summarize 
here today.
    First, I would like to clarify for the Committee that I 
have not been in contact with any representatives of either of 
the organizations, nor do I have access to any propriety 
documents relevant to the merger. Therefore, my testimony is 
primarily intended to highlight the broad economic incentives 
involved with a merger of this nature. As such, it is also 
generally relevant to other similar combinations of assets we 
see in the market, such as those with United Health Group with 
its United Healthcare and Optum divisions.
    The proposed merger, as you mentioned, is primarily a case 
of vertical integration, a situation where a firm and either 
its customer or supplier attempt to organize into a single 
entity. Such strategies involve effectively abandoning the 
broader supplier market in favor of an internal supplier, and 
they are often met by with skepticism by economists and 
strategy professionals, a skepticism that stems from our 
knowledge that well-functioning economic markets allow firms 
such as Aetna and CVS to obtain the best price quality 
combination for various inputs and services.
    That said, we also know that firms often do not face the 
well-functioning and efficient markets that inhabit many 
economic textbooks. In fact, features such as the presence of 
incomplete information, uncertainty, meaningful transaction 
costs, decreased market efficiency, and facing those imperfect 
markets, strategic vertical integration can increase social 
welfare.
    And concerning the merger of CVS Health and Aetna, I can 
identify three primary rationales for how vertical integration 
could increase social welfare in this context. First, the 
proposed merger may allow a better coordination of the various 
components of the health insurance benefit. Often, medical and 
pharmacy insurance benefits that we receive are provided by 
different firms, each of which is naturally focused on 
maximizing its own profits. For example, a PBM rarely bears 
risk for medical spending, and thus primarily focuses on how 
its decisions on copays and which drugs to cover affect drug 
spending rather than total health spending.
    The potential inefficiency is easiest to consider for 
something like the treatment of diabetes, where a PBM aims to 
minimize drug spending, while a firm responsible for total 
health spending realizes that diabetics who were not adherent 
to their medications result in future inpatient 
hospitalizations that are costly for society.
    A merged CVS-Aetna would have both the incentives and the 
information to offer this more coordinated benefit that 
considers these spillovers. That would be good for consumers, 
because such a benefit both increases health and lower 
healthcare spending.
    A second potential source of value creation is addressing 
inefficiencies in the existing PBM market. While there are many 
complexities to drug pricing, at a high level, payors such as 
an employer pay a publicly available list price to a 
pharmaceutical firm. They then hire PBMs to do, among other 
things, negotiate rebates from that list price, and then those 
rebates are shared to the firm and the PBM keeps some portion 
of it as well.
    In a well-functioning supplier market, PBMs would compete 
for a payers business until the appropriate amount of 
the rebate was transferred. But the PBM market does not appear 
to be as competitive as we would like, and is, in fact, quite 
concentrated. As a result, PBMs and pharmaceutical firms have 
an incentive to increase list prices and the size of the rebate 
in an attempt to capture value for themselves.
    My research suggests that in the current PBM market, both 
of these firms are benefitting from higher drug prices. This 
increases premiums and forces customers to pay directly higher 
prices at the pharmaceutical counter. But a merged CVS-Aetna 
would not have a similar incentive to raise these list prices 
for its insurance customers, since this would decrease the 
profitability of the merged firms insurance product.
    And a final source of potential value creation stems from 
the provision of medical services in new lower cost settings. 
And we heard both of the general counsels talk a lot about 
that. A merged CVS-Aetna could provide the appropriate 
incentives for more care to be provided at low cost locations 
such as CVSs chain of MinuteClinics. Currently, when 
CVS picks the services they offer at those clinics, they focus 
on maximizing retail revenue. They do not focus on services 
such as chronic disease management for diabetes, and COPD, and 
other conditions. That would benefit customers and society 
through a reduced future health expenditure but would not be 
directly profitable for CVS as a standalone pharmacy.
    CVS does not invest in those services because it is worried 
its investments will be captured by another firm such as a 
health insurer, an economic concept we refer to as [hold up.] 
However, a merged CVS-Aetna would make those investments, 
because it would know that some portion of the merged firm, 
either the insurance arm or the pharmacy arm, would benefit 
from the future reduced savings and the increased rates of 
revenue. It would be beneficial both for consumers and for 
society.
    Despite the potential for value creation, it is still 
possible the value will ultimately be kept by CVS-Aetna rather 
than the consumers. How the value is ultimately distributed 
hinges on whether there is sufficient competition in the health 
insurance market. Without competition, the merged firm has 
little incentive to return the value it generates back to 
consumers in the form of lower premiums.
    However, if there is not sufficient competition in 
insurance markets, policymakers have tools to regulate the 
future profits of the firms. Note that this is not an option if 
the value creating activities from the merger never occurs in 
the first place.
    Overall, there are many potential economic avenues whereby 
this merger would increase value. At a minimum, we know the 
healthcare market is evolving. Given this fact, we should not 
imagine that the existing firms have the right combinations of 
assets and activities to succeed for this newly emerging 
market. And this merger appears to be one attempt of an example 
of two firms that are undertaking to address this fundamental 
reorganization of healthcare. I thank the Committee for having 
me here today, and I welcome any questions you may have.
    Mr. Garthwaites written statement is available at 
the Committee or on the Committee Repository at:https://
docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-JU05-
Wstate-GarthwaiteC-20180227.pdf Mr. Marino. Thank you, Doctor. 
Dr. Wu?

                        STATEMENT OF LAWRENCE WU

    Mr. Wu. Chairman Marino, Ranking Member Cicilline and 
Members of the Subcommittee, I am pleased to appear before you 
today to share with you a few observations on the proposed 
merger, given my experience as an economist who has specialized 
in healthcare antitrust.
    I am Lawrence Wu. I am president of NERA Economic 
Consulting. For over 25 years, I have had the opportunity to 
analyze mergers and acquisitions across the spectrum of 
healthcare services. I am proud to be affiliated with NERA, but 
the views and opinions I express today are entirely my own. I 
have not been retained by any party to evaluate the proposed 
transaction.
    Before I share my thoughts with you, let me tell you how I 
approach transactions like the one we are discussing today. I 
always start by asking how a proposed transaction is going to 
improve consumer welfare. In the context of a healthcare 
merger, this means I focus on whether the transaction is likely 
to result in lower prices, an improvement in the quality of 
healthcare provided to consumers, increased access to care, 
and/or more innovation.
    Transactions that lead to such benefits would be called, 
[procompetitive.] Transactions that lead to the opposite 
outcome would be called, [anticompetitive.] This is the same 
approach that the antitrust agencies take as well. So, with 
that, here are three observations on the proposed transaction.
    First, an important characteristic of this transaction is 
that with the exception of Medicare Part D, prescription drug 
benefits, the merger combines companies that operate at 
different points along the pharmaceutical supply chain. This is 
why many describe the transaction as a vertical merger as 
opposed to a horizontal merger, which would be a transaction 
that combines companies that compete in the same market.
    This is important, because while vertical mergers can 
sometimes raise competitive concerns, they also have the 
potential to reduce costs and inefficiencies along the supply 
chain, with the result being lower prices.
    Second, the importance of MinuteClinics is in their ability 
to deliver to patients the care they need in a more cost-
effective setting. Getting patients to the right place at the 
right time is currently a major challenge in this country. To 
give you an example, half of all U.S. hospital admissions come 
through the emergency department, which is an expensive place 
for doctors to figure out whether a patient needs to be 
hospitalized or not.
    This is a problem that insurers and providers and 
healthcare systems have been trying to address for a long time. 
If the proposed transaction can increase the use of low-cost 
clinics for diagnostic care, or if it can facilitate the 
expansion of these clinics, especially in areas where access to 
outpatient care clinics or urgent care centers is limited, then 
the proposed transaction is a big step forward.
    Third, and my last observation, is based on my experience 
seeing providers and insurers adapt and try new business models 
in response to market changes in an industry that is highly 
dynamic and innovative. Mergers and acquisitions have played an 
important role in achieving these goals. The proposed 
transaction is another example of innovation in action.
    Clearly, there are many ways for insurers to get cost-
effective PBM services and ensure that their subscribers get 
their medications at a low cost. And there are many ways that 
providers can encourage patients to use low-cost clinics. Will 
the merged entity be successful in accomplishing these goals? 
Well, time will tell, and only time will tell whether the 
combined firm will pass the market test.
    The transaction has the potential to benefit consumers. I 
am confident that the talented attorneys and economists at the 
Antitrust Division are working hard to ensure that any 
potential for competitive harm that they foresee is minimized. 
If the Antitrust Division finds that the proposed transaction 
has a low risk of competitive harm, then lets see what 
innovation flows from the transaction and let the experiment 
happen. Thank you for convening this hearing. I look forward to 
answering any questions that you might have.
    Mr. Wus written statement is available at the 
Committee or on the Committee Repository at:https://
docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-JU05-
Wstate-WuL-20180227.pdf Mr. Marino. Thank you, Attorney Slover?

                       STATEMENT OF GEORGE SLOVER

    Mr. Slover. Thank you. We have been working since our 
founding in 1936 for a healthcare marketplace that brings 
quality affordable care to all Americans. One key to making the 
marketplace work for consumers is meaningful choice, from 
effective competition, so consumers can shop around. That 
motivates businesses to respond to consumers wants and 
needs with more affordability and better quality, lest 
consumers go elsewhere.
    The healthcare marketplace is complex. Most costs are not 
directly paid by the consumer, and the ways costs are 
negotiated and shifted among various commercial actors are 
often obscured. Active antitrust enforcement can help foster 
competitive market forces in all parts of this marketplace, 
from hospitals and medical practices to health insurers, to 
drug makers, pharmacies, and pharmacy benefit managers.
    The CVS-Aetna merger would combine two giants into a new 
corporate structure, straddling more market sectors andcreating 
new, far-reaching profit-maximizing incentives, impacting all those 
parts. If CVS-Aetna finds it has new ways to bring down costs and 
improve quality, what antitrust calls [efficiencies,] that can be good 
for consumers and the economy. We have heard those explained today, and 
that is the picture CVS and Aetna are painting. Some, or even most, of 
that picture might prove to be accurate.
    For example, encouraging Aetna policyholders to use a CVS 
MinuteClinic for simple, routine care instead of a hospital 
emergency room will cut expenses for Aetna. That might be 
passed along in lower costs or improved service--might. It is 
far from certain. For one thing, we would need transparency in 
competition, so those on the receiving end are aware of the 
savings upstream, and able to insist on a fair share or to go 
elsewhere. Unlikely in our current healthcare marketplace.
    What is more, efficiencies often turn out to be illusory or 
exaggerated. And when they are real, they can often be achieved 
without merging. Why does Aetna need a merger to encourage 
policyholders to visit MinuteClinic instead of an ER? And we 
could instead see reduced competition, which brings no benefit 
except to CVS-Aetna.
    For example, as we have heard today, CVS-Aetna might tell 
Aetna policyholders they can go only to MinuteClinic, not to a 
conveniently located walk-in clinic run by someone else, or 
might direct them to fill prescriptions only at CVS; or to use 
MinuteClinic for an expanded set of medical needs instead of 
seeing their own doctor. Or CVS Caremark might negotiate 
different, better prescription drug deals only for Aetna 
insurance, or only for purchases at CVS. The black box 
surrounding PBM back-end rebates and side agreements makes this 
area particularly open to anticompetitive abuse.
    CVS and Aetna said they would never do any of that. Maybe. 
But this is not about what present intentions might be, or what 
is happening now in the marketplace. It is about how incentives 
and capabilities would be altered by the new, market-straddling 
corporate structure.
    Solo Aetna would encourage policyholders to use 
MinuteClinics, but would also be fine with them choosing other 
walk-in clinics. CVS-Aetna would see a trade-off--MinuteClinic 
visit adds to profits; going elsewhere means profits forgone. 
CVS-Aetna would probably still want to do business with those 
other clinics, but the terms would be more restrictive.
    This kind of merger is called [vertical,] because CVS and 
Aetna do not compete with each other, they deal with each 
other. We have heard about the differences in how you analyze 
competition issues with these kinds of mergers. It has 
sometimes been said, though, that vertical mergers cannot harm 
competition. This is not accurate. The concerns I am describing 
are squarely within established antitrust law. Forty years ago, 
they were often being cavalierly dismissed in the so-called 
[new thinking.] But our understanding has evolved and deepened.
    The Justice Department is challenging the proposed AT&T-
Time Warner merger based on very similar kinds of concerns.
    We do not prejudge the outcome of the investigation, but we 
expect it to be thorough. And for the Department to take action 
as needed to protect competition.
    Genuine risks to competition will not be fixed by pledges 
of good behavior. As Assistant AG Delrahim recently noted, that 
unrealistically asks the merged company to make daily business 
decisions that run counter to its profit-maximizing incentives.
    Given the stakes, if the Department takes no action, we 
will want to know why. Of course, if the Department takes 
action, we will see a full explanation in the court filings. 
Thank you.
    Mr. Slovers written statement is available at the 
Committee or on the Committee Repository at:https://
docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-JU05-
Wstate-SloverG-20180227.pdfMr. Marino. Thank you. Attorney 
Manne?

                      STATEMENT OF GEOFFREY MANNE

    Mr. Manne. Thank you, Chairman Marino, Ranking Member 
Cicilline, and Ranking Member Nadler, Members of the 
Subcommittee. Thank you for allowing me to testify before you 
today. The overriding theme of my testimony is that the 
proposed merger is a commendable effort by two industry leaders 
to experiment with substantial reform of what, we can all 
agree, is a beleaguered healthcare system.
    I think it was interesting; one analyst talked about the 
thinking behind the deal and said, [What if an entire array of 
services was available at the pharmacy. Better yet, what if it 
would cost less?]
    The advantage is clear. Send the patients to the pharmacy 
and free up the doctors for more pressing needs. Everyone 
recognizes the urgent need to realign the healthcare industry. 
But the extent of agreement that something should be done is 
exceeded only by the extent of disagreement over what exactly 
should be done. And I think it is difficult to overstate the 
singular importance of private sector efforts to try new things 
in the healthcare industry.
    So, in that light, I look at this merger as not as a 
combination tending to increase or concentrate economic power 
in the existing industry structure, but as a step toward 
reorganization of that structure itself in which we do not know 
where the economic power will lie.
    Amidst the typical antitrust concerns about industry 
concentration or foreclosure, it is often missed, I think, that 
changes in technology, changes in demand, experimentation with 
new ways of doing business, virtually always lead to changes in 
industry structure. Restructuring that may, in the abstract, 
seem troublesome, is often easily understood as a response to 
changing market conditions.
    Absent overwhelming evidence that the merger would create 
unacceptable risks of harm, this partnership and some others 
that I will talk about in second, that try to break down the 
old paradigms and fundamentally rethink traditional industry 
models should be welcomed by consumers and lauded by 
regulators.
    It is important that the relevant standard here is not that 
they demonstrate that they can increase efficiency and pass it 
all on. The real relevant standard here is that they can 
demonstrate that they are trying something. They are 
experimenting. They are doing something new, but most 
importantly, that they are not harming consumers. Those are 
very different.
    As I said, the impotence behind this merger, I think, is a 
change in the industry. It is a technological evolution 
particularly with respect to data and data processing abilities 
and the growing movement away from fee for service care toward 
value-based care. Taking advantage of these, though, requires 
large investments in technology, comprehensive tracking of 
preventive care activities, and health outcomes, and more 
holistic supervision of patient care. And arguably, all of this 
may be accomplished more efficiently and effectively by larger, 
better-integrated firms.
    The idea that this kind of combination of diverse aspects 
of the current healthcare industry might better serve the 
direction that healthcare is going also comes from the fact 
that there is a veritable wave of these sort of interesting 
vertical mergers going on right now. There are a lot of 
examples, but I want to jus draw your attention to two of them 
that I think are particularly interesting.
    So Walmart recently announced a deal with Quest Diagnostics 
to offer diagnostic testing services and potentially other 
basic healthcare services inside of some Walmart stores. Now, 
what is interesting about this arrangement that while it does 
not necessarily do this right out of the gate, it does portend 
the possibility of an expansion of the use of patient-initiated 
as opposed to doctor-authorized tested in States that allow it.
    Very much consistent with the direction, I think, of the 
sort of consumer-centric, outcome-based healthcare and 
potentially remarkably cost saving. It is something that I do 
not think Quest would really necessarily be able to accomplish 
on its own. But in partnership with Walmart, one can easily 
imagine that happening.
    And maybe even more interesting, is the pharmaceutical 
company Roche announced this month that it would buy cancer 
data company Flatiron Health, and as it said, [to speed 
development of cancer medicines,] and this is the interesting 
part, [and help price them based on how well they work.]
    Now, not only is the deal intended to improve 
Roches drug development price pipeline, but it is also 
aimed at accommodating efforts by other players in the industry 
to shift the pricing of drugs toward an outcome-based model. I 
think that is terrific, and I also think, again, it is driven 
largely by the technological ability that we have now with the 
integration of data and other sorts of practices. And as I 
said, as a part of this transformation in the industry, I 
think.
    So, I think with respect to the Aetna-CVS merger in 
particular, as we heard this morning, there seem to be a lot of 
interesting opportunities. And again, I want to highlight just 
one, because sadly I do not even have time to do that, but I do 
not even have time to highlight more.
    And in particular, I think we heard about the Meals on 
Wheels program that Aetna runs. Well, they run another program 
that involves community care managers who typically drive to 
subscribers homes. They provide them with advice. They 
evaluate their needs. It acts on a very small scale, and it 
requires a lot of driving, it requires special meetings; it is 
probably not something that most subscribers see as something 
that sort of fits into the normal course of their day.
    But now, imagine that something like, say, and I am making 
this up, a third of workers in every CVS retail store has 
specialized training. And these care managers are located in a 
dedicated space in the store. And they do not interact with 
just a few patients between scheduled drives, but with hundreds 
of patients as they pass through the stores. You can imagine 
something like concierge medicine for the masses. And I think 
this is the kind of opportunity that this merger presents and 
exactly what we need in the healthcare industry today.
    Mr. Mannes written statement is available at the 
Committee or on the Committee Repository at:https://
docs.house.gov/meetings/JU/JU05/20180227/106898/HHRG-115-JU05-
Wstate-ManneG-20180227.pdfMr. Marino. Thank you. We now will 
start with our 5 minutes of questioning, and I will recognize 
myself. And if I select someone for a question and anyone else 
wants to respond to it, go ahead, but just bear in mind we are 
talking about 5 minutes. Dr. Garthwaite, Americans pay some of 
the highest prices worldwide for prescription drugs. Do you see 
this merger helping to drive drug prices down?
    Mr. Garthwaite. I think it is important to think about why 
we pay the highest prices for these prescription drugs. And I 
do not think it is a situation in which, you know, we should 
think about comparing the prices we pay here to the prices we 
pay in Europe. We should think about the value we get for the 
dollar in the United States.
    I think that what you would see in terms of prices in the 
United States is that the primary effect here would be on list 
prices as opposed to the net prices being paid by just sort of 
rank order. And that is sort of the pre-rebate price that we 
face. A lot of times, we dismiss that as a fiction, right? No 
one ever pays that price, we all get discounts.
    I would note, though, that increasingly consumers find 
themselves exposed to those list prices. And that is where, you 
probably heard a lot from your constituents in the sense that 
they are in their deductible, or they pay a percentage of the 
list price for their coinsurance. I think that is where you 
would see some incentives to no longer play games to 
artificially inflate list prices to get high rebates. And you 
would see an effect there more than you would on sort of the 
aggregate spending on prescription drugs.
    Mr. Marino. Okay. Dr. Wu, would you care to respond?
    Mr. Wu. Well, I mean, drug pricing is a complicated topic. 
And this transaction does not cover all of those issues. But I 
think this transaction does represent an innovative way to 
tackle some hard issues that we face. And we need innovation. 
And this transaction is an example of that.
    Mr. Marino. Attorney Slover?
    Mr. Slover. Yes, I think the merger is likely to lead to 
reduced costs within the CVS-Aetna corporate structure. The 
question is at what cost to the rest of the marketplace? And 
that is going to depend on other external factors, the 
competition that is available throughout the marketplace and 
the competition that remains after the merger and whether any 
of those costs get passed along to the rest of the market and 
ultimately to consumers. And that is, I think, going to require 
a careful look by the Justice Department.
    Mr. Marino. Thank you. Attorney Manne?
    Mr. Manne. I will just say very quickly; I think there are 
lots of opportunities in this merger to reduce double 
marginalization at various points in the pharmaceutical supply 
chain. And so, I think we can all agree that there are reasons 
to expect that the cost of delivering drugs to patients will go 
down.
    To Mr. Slovers point, I do not see any reason to 
expect that the merger would portend higher prices for either 
the customers of Aetnas and CVS customers or 
outside the firm elsewhere in the market. And as a result, even 
if the savings are not passed on, I cannot imagine a story that 
would explain why things would get worse with respect to drug 
prices following this merger. And I can certainly see some 
reasons why I might think they would get better.
    Mr. Marino. Okay. Dr. Wu, United and Humana are both health 
insurers that also have PBMs. Has there been any antitrust 
problems or consumer harm based on these companies being both 
insurers and PBMs that you are aware of? And, again, anyone 
else can comment on this too.
    Mr. Wu. I am not aware of any antitrust issues with the 
integration of PBMs and insurers. Again, this is the market 
experiment that is taking place. I do not think it is clear if 
there is one business model that will be more successful or 
less successful. The integrated model is the structure that CVS 
and Aetna want to move towards. This is an experiment. Will it 
work? Will it not work? You know, this is the market test.
    Mr. Garthwaite. I would also note just broadly that this is 
also the model that Anthem is moving towards as well as CVS-
Aetna. So, you have got all the major insurers looking to this 
integrated model at this point.
    Mr. Marino. Attorney Slover?
    Mr. Slover. Yes. PBMs make a lot of their money by 
negotiating reductions on the price they pay for pharmaceutical 
drugs and not turning all of that money over to the health 
insurers. And so, there is definitely a competition issue 
there. The reason they turn over what they do is because there 
are options for health insurance companies to go to a different 
PBM or to do that service themselves. To the extent that the 
new market structure and coupled with other consolidation 
taking place removes those options, it could definitely have an 
effect.
    Mr. Marino. Thank you. Attorney Manne?
    Mr. Manne. I do have thoughts, but I see the time is up.
    Mr. Marino. We are fine. Go ahead.
    Mr. Manne. Well in case you had another question I thought 
I would leave it for you. But that is fine. Not surprisingly, I 
agree with Dr. Wu. I think the most important thing here is 
once again, it is difficult to see why there would be problems 
arising from this. And the PBM market such as it is has been 
kind of in a state of disruption for about a decade now.
    And I think it seems pretty clear, as Dr. Garthwaite said, 
what direction it seems to be heading. But it will not be 
inexorably in that direction. We will see some other changes 
happening, too. This seems like a perfect opportunity to try 
out this particular combination of companies around PBM market, 
see if it works, and if not, we will continue to try other 
things, too. I do not see any great problems in that market as 
it happens.
    Mr. Marino. All right, thank you. The Chair now recognizes 
the Congressman from New York, the Ranking Member of the full 
Committee, Congressman Nadler.
    Mr. Nadler. Thank you, Mr. Chairman. Mr. Slover, a number 
of questions for you. The health insurance market is already 
highly concentrated. According to studies by the AMA, there has 
been a near total collapse of competition among health 
insurers. The cost of health insurance has also grown 
dramatically over the past 30 years. What effect does 
concentration in this market have on premium growth, worse 
customer service, or less choice for health insurance options?
    Mr. Slover. Well, I think your question kind of contains 
the answer. The more -
    Mr. Nadler. Best kind of question.
    Mr. Slover. The more concentration there is, the fewer 
choices are available in all levels of the marketplace. And 
when there are fewer choices, the ones who are offering those 
choices do not have to try as hard to make those choices 
attractive.
    Mr. Nadler. Thank you. Would the combination of Aetna, a 
dominant health insurer, with CVS Health, which is the largest 
pharmacy benefit manager and second larger retail pharmacy, 
create risks of anticompetitive conduct?
    Mr. Slover. Yes. It certainly could in some of the ways 
that I have described. If there is a silo where it is favoring 
its in-house operations, the question is whether it still has 
the incentive to make those same offerings available to others 
and to what extent. I think they will try to have their cake 
and eat it, too. And so, how that changes will affect the 
quality of those choices that are still available.
    Mr. Nadler. Now, I asked Mr. Moriarty and he says the 
following is not a concern for reasons you probably heard, but 
let me ask your opinion. Are you concerned that the proposed 
transaction would increase the risk of CVS Health steering 
Aetna enrollees to its own pharmacies or creating 
disadvantageous conditions for rivals?
    Mr. Slover. I do not envision something happening right 
away that suddenly the merge company wants to lock everybody 
else out, but it is a question overtime. For examples one of 
the scenarios that was described is CVS taking its 
MinuteClinics into markets in rural areas or undeserved areas 
where there are no primary care physicians. Well, if they are 
meeting a need that cannot be met some other way, I think that 
is an unmitigated good.
    But why would CVS stop at that point and say we are only 
going to offer these profitable services in areas where there 
are not primary care physicians? They are going to say, [Well, 
look we have got it established, we will move into the other 
areas. We can take some of the business away from the primary 
care physicians.] So, it is a continuum, and the question is 
where the line changes in terms of having your cake and eating 
it too.
    Mr. Nadler. And there are studies that indicate that health 
insurance premiums and insurer profits tend to rise in the wake 
of health insurance mergers. Is this also true for vertical 
acquisitions effecting the availability of health insurance in 
your opinion?
    Mr. Slover. I think it is more complicated, as a lot of 
people have discussed here, how vertical mergers affect the 
marketplace. They generally do provide opportunities for cost 
cutting within the new merged entity. Then there is the 
question of whether those are going to get passed along to 
others. And then on the other side, there is the potential for 
foreclosure if it is profitable to the combined entity to 
freeze out others, or to disadvantage others, or to make life 
harder for others so that more business comes to it.
    Mr. Nadler. And as you note the market for pharmacy benefit 
managers or PBMs is highly concentrated with just three PBMs 
accounting for 70 to 80 percent of the market. What effect with 
the proposed transaction have on competition on the PBM market? 
And do you believe that consumers would benefit from Aetna 
entrance into the PBM market through organic growth and 
competition rather than through this proposed transaction?
    Mr. Slover. Well, we heard Aetna say that they had already 
looked at that a few years ago and decided that it did not make 
sense for them to go into that market themselves, and that they 
would have a contractual relationship with CVS. I think, absent 
the merger, they are going to take a fresh look at that.
    And if they say, [You know what? It kind of makes sense for 
us to give this a try, because we really have decided now that 
we want our own in-house PBM,] and they did enter, then it 
would provide another major competitor in the concentrated PBM 
marketplace.
    Mr. Nadler. Thank you. I have one last question. There is 
general consensus as you note in your written testimony that 
behavioral remedies are not an effective toolto address harms 
to competition in merger enforcement. To the extent the Justice 
Department determines that there are anticompetitive harms of the 
proposed transaction, such as increasing the risk of vertical 
foreclosure or steering by the merging companies, how might they 
address these concerns? In other words, what mitigation or remedies 
might there be?
    Mr. Slover. Well, in a vertical merger, it is very 
difficult to handle that with divestiture or partial structural 
remedies, you are really talking about deciding whether or not 
the merger should be blocked or not. The Department has decided 
to challenge the AT&T-Time Warner merger for that very kind of 
reason. If you do not do that, the behavioral remedies may be 
the only alternative. And so, they can be considered as a last 
resort but they are very time consuming, very problematic to 
enforce, and like I said in my written statement, they actually 
require the merged company to act against its interests --
    Mr. Nadler. In other words, behavioral remedies are the 
only remedies and they do not work very well? Is that your 
testimony?
    Mr. Slover. Well, the other remedy is to challenge the 
merger and say it should not go forward. And then there may be 
some others. I hope that the Justice Department will look at 
the full range of opportunities, and will do whatever it can to 
protect competition.
    Mr. Nadler. Thank you. I yield back.
    Mr. Marino. The Chair recognizes Congresswoman Handel from 
Georgia.
    Mrs. Handel. Thank you very much, Mr. Chairman. I 
appreciate it. Dr. Wu, in your opinion, how reliable are the 
economic techniques that the Department of Justice and FTC 
regulators use in predicting whether or not a proposed merger 
will have an anticompetitive impact?
    Mr. Wu. I am confident that the antitrust attorneys and 
economists at the Federal Trade Commission and Department of 
Justice have the tools and talent that they need to address 
these questions. They evaluate mergers before they happen, and 
they are also in a great position to evaluate mergers after 
they happen. And they should evaluate consummated mergers 
whenever they see problems arise.
    Mrs. Handel. Great, thank you very much. Mr. Manne, do you 
have any specific concerns regarding anticompetitive effects 
from this merger in the insurance marketplace, pharmacy market, 
or PBM market?
    Mr. Manne. No. I can elaborate a little bit more. I think 
that some of the arguments that have been suggested, for 
example, with respect to the possibility that it is more 
difficult for other insurers to enter because they will not be 
able to compete unless they also have a PBM or some of the 
foreclosure arguments that Mr. Slover has suggested. I think 
all of those actually end up being examples of what they are 
actually saying this merger to the extent that it creates a 
more efficient arrangement, it makes it harder for other 
entities to compete. And that is not a bad thing. That is 
exactly what we want.
    So, there are, you know, some arguments out there, and we 
do not have enough time to go into them in great detail. But I 
am not persuaded that any of them are particularly problematic.
    Mrs. Handel. Okay. And one last question since there has 
been several references to the AT&T-Time Warner merger. Does 
the DOJs challenge of AT&T-Time Warner merger suggest 
anything about this particular merger?
    Mr. Manne. Is that for me?
    Mrs. Handel. Yes.
    Mr. Manne. I do not think so, no. I think that the 
challenge of that merger is absolutely a bucking the trend, and 
the precedent, and the economics on vertical mergers. I am 
quite confident that the DOJ will lose that as well which also 
will mean that there will be no lasting precedent from that 
challenge. It is a little hard to suss out exactly why they did 
bring that merger. And, of course, there have been some stories 
floating around. I do not really have any idea if they are 
accurate or not. But I actually think that part of the story 
turns on what AG Delrahim said about behavioral remedies. And 
it goes to some of what Mr. Slover said.
    And I do have one important comment to make on that which 
is the real problem is not behavioral remedies. The problem is 
behavioral remedies that have nothing to do with the merger 
itself. And there are some terrible examples of the DOJ and 
other agencies engaging in those. Properly applied behavioral 
remedies are actually effectively just the same thing as saying 
the DOJ is going to continue to enforce the antitrust laws and 
make sure that no ongoing behavior causes anticompetitive 
problems.
    For example, if they said, [It would be anticompetitive to 
engage in certain foreclosure activities, and we are going to 
apply a behavioral remedy that prevents that.] That is no 
different than the world in which the DOJ has to monitor a 
company and make sure they do not engage in those allegedly 
anticompetitive problems.
    So, I actually do not think there is any problem with a 
behavioral remedy here or anywhere else. And I just want to 
say, of course, that in that last discussion they left off one 
option which is approve the merger without any remedies at all, 
of course.
    Mrs. Handel. All right, thank you very much. Mr. Chairman, 
I yield back.
    Mr. Slover. If I could jump in really quick and --
    Mrs. Handel. I am yielding my time back, sir. Thank you. 
Mr. Chairman, I yield back.
    Mr. Marino. Your testimony is very helpful. But I would 
like to ask Mr. Slover, you testified before on behalf of our 
CREATES Act.
    Mr. Slover. That is correct.
    Mr. Marino. I remember that. Could you please comment on 
the CREATES Act? What you think about it? What benefits there 
are to it? Why if you believe we need it?
    Mr. Slover. Well, one of the big insights that Congress had 
many years ago in enacting the Hatch-Waxman Act was that if an 
easier way could be found for generic alternatives to enter the 
market, they would be more affordable. Consumers would have 
greater choice; they would be able to get the drugs that they 
needed at a better cost. And since then, the brand name drugs 
have looked for ways to try and throw obstacles in the way of 
that happening.
    And one of the ways that they had been doing that is to 
block access to the samples, because the generic drug makers 
need to have the samples to be able to test their drug 
alongside the brand name drug to show the FDA that they are 
bioequivalent. So, that is one of the ways that they have 
impeded the entry of competition for more affordable generics.
    Another way has been that there are some drugs that have 
protocols. There are dangers that are significant enough in 
misuse or misprescription that they need to have a protocol 
established to make sure that that is taken care of properly. 
And if those protocols are blocked, if the generics are denied 
access to those protocols, they can also be a hamper from 
entering the market.
    So, the CREATES Act just takes care of those two specific 
problems. There are others too. But those are two very 
important ones to take care and so that is why we 
enthusiastically support that bill.
    Mr. Marino. The CREATES Act, I think you would agree with 
me, that this all takes place after the patent has expired. 
Correct?
    Mr. Slover. A lot of times it is a challenge that is being 
brought by the generic to the patented drug, and they found a 
way to successfully challenge the patent.
    Mr. Manne. The access to the sample sometimes happen--that 
process can start, I believe, before the patent expires, right? 
I mean all of this is taking place generally at the end of the 
--
    Mr. Slover. It is in anticipation of the patent expiring.
    Mr. Marino. You cannot infringe upon the patent.
    Mr. Manne. Right. Well, it would not be an infringement. 
That is right.
    Mr. Marino. Right. Yes, sir?
    Mr. Garthwaite. I think you asked earlier about drug 
pricing as it encourages to the Committee focusing on this 
issue of generics. Because there are two sets of high drug 
prices in the United States. There is one for brand name drugs 
that we think provide this dynamic incentive to get better 
cures in the future.
    And then to your last statement, there is these generic 
drugs where the patents expired. And we want to do everything 
we can to push things to marginal cost. And we see an incessant 
amount of gaming in that area that is causing high prices 
particularly from very valuable small market drugs.
    And so, your ability to influence drug pricing there is 
going to have far more of an effect on consumer welfare and a 
far more unambiguous effect on consumer welfare then things on 
brand name medications.
    Mr. Marino. Manne?
    Mr. Manne. I had one quick comment which is just that as 
you may know I have written in support of the CREATES Act as 
well. I submitted some materials for the record. I think it is 
a great idea. I want to just flag one thing which is that the 
problems that it tries to solve are not necessarily endemic to 
the brand patent industry.
    There are plenty of actors who are acting perfectly 
appropriately in that market. And in some ways, I think, it is 
a relatively small number of potentially bad actors who sort of 
have been consistently identified. Now, that does not mean that 
the other ones could not do it, but companies like Pfizer, for 
example, are not engaging in these practices.
    And, so, it is important not to paint with too broad a 
brush and tar the whole industry when it is not the whole 
industry.
    Mr. Garthwaite. These are often non-pharmaceutical 
companies that are doing this. These are private equity 
companies coming in. And this is a profitable trade like 
anything else. This is not large pharma engaging in these 
tactics.
    Mr. Marino. All right. It has been referred numerous times 
that this vertical merger is an experiment. And I kind of like 
that concept. But I think generally speaking and I do not want 
the public to think that or my constituents to think that we do 
not know what is going to happen here in this experiment.
    So, if you could comment on that, after I state that at any 
time if we see an antitrust issue particularly on this 
Committee, we can immediately address that. At any time, DOJ or 
the Federal Trade Commission can do the same thing. So, we will 
be watching this. I would not be supporting if this would not 
be a bipartisan matter, if we did not there was merit to this. 
There is no such thing as the perfect piece of legislation, but 
what I think the newer Members of Congress look at, it can 
always be tweaked.
    Just to go along with that, before I went to college and 
law school I was in manufacturing. And I am a baker by trade 
actually. And we always tweaked a product to make it better. If 
one of my supervisors that worked for me said to me, 
[We cannot be more efficient,] I knew I did not need that 
supervisor.
    And hospitals, the administrators, are constantly calling 
me about the cost of running an emergency room. And it should 
be this way, anyone who comes in, they really have to give them 
care, particularly if it is a life or death situation. But how 
are the hospitals--what do you think their position is going to 
be on these urgent cares or clinics, what impact is that going 
to have on the hospitals? Anyone.
    Mr. Garthwaite. I think one interesting thing about this is 
that we have long thought that provider sponsored health plans 
were coming, and Attorney Manne had spoken about the idea that 
we are seeing a move away from fee-for-service medicine. What 
is unique about these mergers is that it is the insurance 
companies that are buying up providers both United Healthcare 
buying up ambulatory surgical centers, and CVS-Aetna. But they 
are not interested in purchasing the in-patient hospital, and 
that is because in many ways that business is not going to be a 
very good business to be in going forward. At least that 
appears the debt people are making.
    That if we run these urgent care centers well, if we do a 
good job with the type of innovation these companies are 
looking at; we can cut in-patient volumes. And you are seeing 
declining in beds per capita. You are seeing utilization of the 
hospital go down. And so, they are going to be upset in some 
way because you are taking away their business. But that is not 
necessarily bad for society. Because for society, it is better. 
I do not think any of us want to be in the hospital. And so, if 
you do this right and you reduce in-patient hospitalization, 
that is a positive from this merger, not a negative.
    Mr. Manne. I totally agree with that and I would just point 
out also lest we forget the in-patient hospital is itself a 
vertical and horizontally integrated entity. And there is every 
reason to expect exactly what I was saying before that when the 
market conditions change, those kinds of integrations change as 
well because whatever drove them before may not exist anymore, 
and vice versa.
    And so, for example, the fact that insurers may not be 
interested in buying in-patient hospitals may indeed suggest 
that they think that the most efficient form of offering care 
in the future may change. That does not mean that they are 
against provider care. That does not mean they are against 
anything that is done in the hospital. They may just think that 
that particular organization is not the most efficient way to 
do it. I do not know that that is true. But it may very be the 
truth.
    Mr. Marino. Dr. Wu and then Attorney Slover.
    Mr. Wu. Chairman, you are absolutely right that the 
antitrust agencies are in a good position to resolve antitrust 
issues when they see it. There is innovation and tweaking on 
all sides.
    For the antitrust agencies, for example, the Federal Trade 
Commission conducted a major hospital merger retrospective 
about 10 years ago. That was after the Federal Trade Commission 
and Department of Justice lost a number of merger cases at 
trial. They did a fantastic study. They learned what they were 
doing right. They learned what they were not doing. And it 
really strengthened their premerger investigations. That is 
tweaking on that side.
    On the hospital side, this is called competition. I know we 
focused today on the competitive effects of the proposed 
transaction. But one thing we should keep in mind is the 
competitive response by rivals, and that includes hospitals who 
have emergency rooms. And emergency rooms are very important 
places, but it is not exactly the right place for a lot of the 
services that people go to. And they will have their challenges 
too, and I expect them to respond.
    Mr. Marino. I have two more brief questions. But if you are 
ready to catch a plane, I will conclude. Is everybody all right 
for now? How about explaining to the public, because I do it 
all the time in meetings that I have, the difference between 
the expense of running the hospital and, you know, emergent 
care? Because a lot of people do not realize the differences 
between that. I know it and you know it, but as far as the 
expense of running a whole hospital compared to an emergency 
room, an operating room, and everything else. So, could any of 
you shed some light on that?
    Mr. Slover. Well, not as a healthcare expert but as someone 
who has had to use the emergency room services a couple of 
times recently on a doctors recommendation, I might 
add, the emergency room is all hands on deck. And it has 
everything that you could possibly need. So, it is a very 
expensive proposition because they want to be able to provide 
anything in an emergency situation.
    Mr. Garthwaite. I mean, I think hospitals get this wrong a 
lot when they talk about this as well, right? They did not 
think about the difference between their fixed and their 
marginal costs. It is clearly that the hospital is a higher 
fixed cost. And indeed because having all this all hands on 
deck side.
    The other thing that is very different about the hospital 
emergency room that is important, and you referenced it 
earlier, are the regulatory structures that we put on them. In 
which they are required to treat and stabilize all comers, 
whereas an emergent care center that does not have an ER is 
not. And that changes the nature of the payer mix that you 
have, and your ability to serve the public.
    So a well-run ER in a fairly wealthy area is a profit 
center for a hospital. Even well-run ER in downtown Chicago or 
on the Southside of Chicago is just a loss. It should not be 
surprising, right, when the University of Chicago built their 
new hospital recently and neglected to put an adult trauma 
center in because of the negative payer mix that comes with 
that. So, I think that is a big issue. It is on the cost side, 
but also on the expected revenue side.
    Mr. Marino. Attorney Manne, you wrote about an ill-advised 
return to the biggest baddie antitrust of the 1960s and 1970s. 
Can you elaborate on the risk to consumer welfare from a 
reflexive opposition to corporatecombinations?
    Mr. Manne. At great length, in fact. You know, I think it 
actually it bears on a lot of the things we have been talking 
about. There are certainly circumstances in which, especially 
at a very horizontal level, an absence of competition can 
create problems for competitors. We all understand that 
perfectly well.
    But we also understand, and we have heard a lot about--
talking about this merger--how the fact that an entity may be 
somewhat larger than before especially if it grows through a 
vertical integration does not necessarily mean that its either 
in a position to, or has any intention of taking advantage of 
its consumers, or other consumers. And, in fact, those kinds of 
integrations, the particular agglomerations of skills and 
resources, and all sorts of other things are in most 
circumstances and especially when vertical lead to benefits for 
consumers.
    So, of course, stopping that kind of thing simply because 
it is bigger than what we had before means that the consumers 
never receive the potential benefits of that. So, the harm to 
consumers is deterring the creation of what otherwise would be 
more efficient collections of capital, and of other resources. 
Because we simply say well, that is bigger, and so we do not 
like it.
    Mr. Slover. I think we need to be careful not to create a 
straw man that is too easy to knock down. I think simply saying 
big is always bad, and we should always be opposed to any 
merger because it is always going to make something bigger than 
it was before the merger is different than saying that the 
bigger the size that you are looking at, and the bigger a chunk 
of the market that is going to be captured by that merger; the 
closer look it needs, because the bigger entity is going to 
have more ability to potentially cause harm to the marketplace.
    If we were talking about a health insurer here that had 5 
percent of the market, and PBM that was just a sliver of the 
market, and a pharmacy chain that was a sliver of the market, 
and they were all going to try to some new experiment; we would 
be looking at that much differently than if there was one PBM, 
one insurer, one pharmacy, and they were all going to unite.
    So, somewhere in-between there are infinite shades of 
difference. And that is why we have an antitrust division 
taking a close look at this rather than just somebody making a 
snap judgement.
    Mr. Marino. Antitrust issues are some of the most 
complicated pieces of legislation to litigate. I clerked for a 
Federal judge as an intern, and when I was U.S. Attorney we had 
a civil division. This is just probably some of the most 
complex areas in the judicial system that there are. But we 
become smarter at it because of people like you.
    And I want to thank you for being here, because I learn 
something every time I have a hearing. And todays 
hearing was exceptional with the gentlemen in the first panel, 
and you. And at the risk of boring some people, I will not 
continue questioning because we could do this all night. But I 
want to thank you so much.
    And for the record I do want to enter in two statements. 
The statement from the National Community Pharmacists 
Association, NCPA, and a statement from the American Medical 
Association. Is there any objection? And that is what is nice 
about being here alone, there is no objection. So these will be 
answered into the record.
    This material is available at the Committee or on the 
Committee Repository at:https://docs.house.gov/meetings/JU/
JU05/20180227/106898/HHRG-115-JU05-20180227-SD003.pdf Mr. 
Marino. And this concludes our hearing. Again, thank you so 
much for attending, and you are excused.[Whereupon, at 4:22 
p.m., the Subcommittee was adjourned.]
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