California Insurance Commissioner Dave Jones said the proposed merger would have significant anti-competitive impacts on consumers and health insurance markets and would also pose a concern in the Medicare Part D market.
Nationally, Aetna has a 9 percent market share among Part D plans while CVS Health has a 24 percent market share, with even greater overlap in some geographic markets. Economic evidence suggests that increasing the market concentration and reducing competition for Part D plans will likely result in higher premiums, Jones said.
California is the largest insurance market in the U.S., according to Jones. Insurers collect $310 billion annually in premiums from individuals and businesses in the state.
"Mergers which decrease competition are not in the interest of Californians," Jones said in the August 1 letter to Attorney General Jeff Sessions and Assistant Attorney General Makan Delrahim.
In 2016, Jones also vetoed the proposed Anthem/Cigna and Aetna/ Humana mergers that were both blocked by federal regulators.
Jones did approve of Centene's plan to acquire Health Net, a deal that also received federal approval.
Those mergers would have combined competitors in the same industry, while CVS has dominant market power as a supplier.
Post merger, CVS would have less incentive to keep down the cost of prescription drugs for insurers competing with Aetna, Jones said. Insurers would have difficulty using CVS's pharmacy benefit manager, CVS-Caremark.
CVS currently provides PBM services to 94 million plan beneficiaries nationally, of which 22 million are Aetna subscribers.
The merger would increase market concentration in the PBM market, eliminate Aetna as a potential entrant in that market and put other insurers at a competitive disadvantage, he said.
Many of the largest PBM competitors are also owned by health insurers, such as OptumRx, which is part of UnitedHealthcare, and Cigna, which has initiated a merger with Express Scripts.
"The PBM market's lack of competition and the merger of CVS-Aetna is likely to put other insurers that do not own a PBM at a disadvantage," Jones said.
The merger would not benefit consumers and it would also harm independent pharmacies, he said.
The California Department of Insurance does not have direct approval authority over the proposed acquisition because the transaction does not involve a California insurance company. It does involve Aetna subsidiary, Aetna Life Insurance Company, which is licensed by the state.
The proposed merger was announced in December. The deal has been going through the regulatory process.