DOJ steps in to oppose UnitedHealth-Change Healthcare deal

A lawsuit filed by the DOJ argues that the purchase would give UnitedHealth access to vast amounts of competitively sensitive data about rivals.

The government’s case is the latest move by antitrust enforcers to challenge corporate dealmaking and the first significant federal challenge to UnitedHealth’s acquisition-fueled growth. (Photo: Shutterstock)

(Bloomberg) –The U.S. Justice Department sued to block UnitedHealth Group Inc.’s proposed $7.8 billion purchase of Change Healthcare Inc., arguing that the combination could limit competition among businesses that move money through the health care system.

The department filed a complaint against the takeover in federal court in Washington Thursday, arguing that the purchase would give UnitedHealth access to vast amounts of competitively sensitive data about rivals.

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“If America’s largest health insurer is permitted to acquire a major rival for critical health care claims technologies, it will undermine competition for health insurance and stifle innovation in the employer health insurance markets,” Attorney General Merrick Garland said in a statement.

UnitedHealth shares fell 2.1% to $450.13 at 2:33 p.m. in New York, while Change Healthcare advanced 4.4%.

The merger would bring together UnitedHealth, the largest U.S. health care conglomerate, which has insurance and services arms, with a major supplier of health care payments and technology. The government’s case is the latest move by antitrust enforcers to challenge corporate dealmaking — underscoring the Biden administration’s goal to toughen merger enforcement and combat consolidation — and the first significant federal challenge to UnitedHealth’s acquisition-fueled growth.

UnitedHealth defended the deal. The combination “can increase efficiency and reduce friction in health care, producing a better experience and lower costs,” spokesman Eric Hausman said in an emailed statement. “The department’s deeply flawed position is based on highly speculative theories that do not reflect the realities of the health care system.”

A Change Healthcare spokeswoman said the company was “disappointed” by the challenge and said that the merger agreement was previously extended through April 5.

“We will continue our support of UHG in working toward closing the merger as we comply with our obligations under the merger agreement,” spokeswoman Katherine Wojtecki said in an email.

The attorneys general of New York and Minnesota joined the Justice Department’s complaint.

Insurance market

The Justice Department focused on two lines of business where UnitedHealth and Change overlap.

Both companies operate electronic clearinghouses that shuffle data and payments among medical providers and insurers. Change’s clearinghouse is the largest and used by many of UnitedHealth’s rivals in the insurance market. The companies also compete to sell software that helps adjudicate medical claims through a process called “first-pass claims editing.” The combined entity would control 75% of that market, according to the U.S.

Beyond reducing head-to-head competition in those two businesses, the U.S. said that the combination would harm competition in the health-insurance market. The goverment’s argument rests on a theory that UnitedHealth would use the data held by Change to “co-opt its rival insurers’ innovations and their competitive strategies,” ultimately raising costs for employers and members.

Change has considered asset sales including a possible divestiture of a payment integrity business called ClaimsXten to help satisfy regulators, Bloomberg News reported in January. The government wasn’t able to evaluate proposed divestitures without an agreement in place, and selling that business alone wouldn’t resolve other concerns, a Justice Department official said.

Hospital objections

The companies announced the deal, which is valued at about $13 billion when including Change’s debt, early in 2021, saying that it would simplify clinical, administrative and payment processes. At the time, they said the transaction would close by the end of 2021. UnitedHealth agreed to pay $25.75 a share in cash.

The American Hospital Association objected to the acquisition in a letter last March, urging regulators to investigate the proposed tie-up. The industry group said the deal would reduce competition and lead to higher prices. It commended the Justice Department action on Thursday.

After the hospital group’s letter, the Justice Department asked both companies for more information on the transaction and extended its time to review the deal.

Change Healthcare said in a securities filing that on Feb. 17 the companies notified the Justice Department that they intended to close the deal. Based on an agreement with the department, the notification gave the government 10 days to sue to block it.

Antitrust push

The lawsuit follows a push by President Joe Biden to toughen antitrust enforcement and boost competition across industries. In an executive order signed last year calling for government agencies to use regulations to promote competitive markets, Biden called out health care as deserving particular attention, saying Americans pay too much for prescription drugs and medical services.

In the first year of the Biden administration, the Justice Department has sued to block a number of high-profile deals, including Penguin Random House’s agreement to buy Simon & Schuster, an alliance between American Airlines Group Inc. and JetBlue Airways Corp., and Aon Plc’s proposed acquisition of Willis Towers Watson Plc, a deal the companies later abandoned.

At the Federal Trade Commission, which shares antitrust duties, Chair Lina Khan challenged Lockheed Martin Corp.’s deal for Aerojet Rocketdyne Holdings Inc. and Nvidia Corp.’s agreement to buy Arm Ltd. from SoftBank Group Corp. Both deals collapsed after the FTC sued.

Early questions

UnitedHealth, based in Minnetonka, Minnesota, plans to combine Change Healthcare with its Optum Insight division, which sells data, consulting, technology and other services to health-care clients including hospitals.

Change Healthcare leaders had questions about whether the combination would clear antitrust hurdles early on, the Nashville, Tennessee-based company disclosed in a securities filing last year.

During negotiations, the companies’ legal advisers discussed how far UnitedHealth would be willing to go to gain regulatory approval of the transaction, and drafted an “antitrust efforts proposal,” according to the filing.

Change Healthcare’s board at one point said it wouldn’t continue to explore the deal “unless UnitedHealth Group further strengthened its commitment to obtaining antitrust approval,” the filing showed. The deal proposal was later updated “in a manner that the Board viewed as more favorable to Change.”

The agreement says the companies may sell assets if required for approval, though divestitures accounting for more than $650 million in annual revenue would be a “burdensome condition” UnitedHealth wouldn’t be bound by.

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