August 5, 2015
Aug. 4 — A slate of proposed health insurance company consolidations could mean higher premiums for consumers and employers based on industry merger trends.
Health insurers had already announced $45 billion worth of mergers and acquisitions in 2015 before Anthem said in late July it planned to buy Cigna, according to Bloomberg Intelligence's Jason McGorman. The proposed Anthem-Cigna deal, along with an earlier announced Aetna-Humana merger, would leave just three major players—including UnitedHealth—in the health insurance market.
McGorman said the consolidation trend may end up increasing consumer premiums as well as encouraging consolidation within the hospital industry.
Previous health insurance company mergers have led to increased premiums, McGorman said, and hospitals have responded with higher prices after mergers.
For example, when Aetna purchased Prudential's health business in 1999, premiums increased by 7 percent, according to a study from the American Economic Review, and when UnitedHealth acquired Sierra in 2008, premiums rose 14 percent, according to a Health Management report.
Anthem announced July 24 it had reached a deal to buy Cigna for $48.4 billion, and Aetna announced July 3 a $35 billion deal to buy Humana.
Beyond the potential for higher premiums, the two proposed insurance deals could also upend the Medicare Advantage market.
Humana had 3.2 million Medicare Advantage enrollees as of March 2015, accounting for 18 percent of all MA enrollments, according to the Centers for Medicare & Medicaid Services. UnitedHealth accounted for 19 percent of all MA enrollees, while Anthem and Aetna accounted for 3 percent and 7 percent, respectively.
(Click image to enlarge.)
The Department of Justice may require Aetna to drop enrollees in hundreds of counties, McGorman and Bloomberg Intelligence analyst Jennifer Rie said.
Specifically, the DOJ is likely to seek MA divestitures in counties where the deal would result in Aetna-Humana having a greater than 40 percent market share.
Previous health insurance mergers have involved significant MA divestitures, including Humana's acquisition of Arcadian Management Services in 2011.
Humana was required to divest MA businesses in 11 counties in four states, while Arcadian was required to divest MA business in 34 counties in five states.
The expected MA divestitures could be a boon for Centene Corp., which recently said it would consider purchasing MA businesses divested by Aetna.
The possibility of purchasing divested MA plans was raised by Centene Chief Executive Officer and Chairman Michael F. Neidorff during a July 28 conference call focused on second quarter financial results.
Centene already has MA plans in nine states, and that number will grow once it completes a $6.3 billion merger with Health Net.
The health insurance mergers may contribute to increased hospital consolidation, McGorman said, due to hospitals seeking greater leverage in negotiating with a dwindling number of health plans.
For example, hospital mergers and acquisitions in the first quarter of 2015 were 24 percent greater than the first quarter of 2014, McGorman said.
Overall, there have been $27 billion in hospital deals proposed since the Affordable Care Act was passed in 2010, according to McGorman.
Hospital consolidation generally leads to higher prices, McGorman said, which can then result in health plans raising premiums.
McGorman said several recent studies have demonstrated that hospitals buying physician practices and surgical centers tends to increase their prices.
With hospital prices potentially rising, along with rising insurance premiums, consumers may end up switching to high-deductible, low-premium health plans, McGorman said.
Roughly 41 percent of all beneficiaries covered by employer-provided health insurance plans had deductibles higher than $1,000 in 2014, McGorman said, compared with only 22 percent in 2009.
However, McGorman said the move to high-deductible, low-premium plans can often result in higher overall health-care costs, as lower-income patients delay preventive medical services due to cost.
(Click image to enlarge.)
While the four companies involved in the recently announced mergers expect those deals to close in the second half of 2016, Congress will weigh in on the mergers in September. The deals must also survive antitrust reviews from the Department of Justice as well as potential shareholder complaints.
The House Judiciary Committee plans to hold several hearings focused on competition within the insurance industry, beginning in September. The first hearing will look at the role the ACA has played in health-care consolidation, while the second will specifically review the two insurance mergers, according to a notice from the committee released July 23.
House Judiciary Committee Chairman Bob Goodlatte (R-Va.) said he's been long concerned that the insurance industry marketplace is becoming less competitive and is being displaced by the federal government, and speculated that the ACA's regulations have played a part in the insurance consolidation, according to a July 23 statement.
“That fear was realized when Obamacare was enacted into law and we are seeing its tangible effects today,” Goodlatte said.
In a July 23 statement, Rep. Tom Marino (R-Pa.), chairman of the Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law, echoed Goodlatte, saying that the ACA has helped stifle competition through excessive regulation.
Judiciary Committee ranking member John Conyers (D-Mich.) and Rep. Henry C. Johnson (D-Ga.), the regulatory reform subcommittee's ranking member, also acknowledged anticompetition issues within the insurance industry, especially those due to antitrust exemptions granted by the McCarran-Ferguson Act of 1945.
Under McCarran-Ferguson, general federal antitrust laws don't apply to insurance companies as long as the companies are being regulated by a state. However, a federal antitrust law specifically focused on insurance would be able to preempt state law.
“[C]onsolidation in the health insurance market had been occurring for decades before passage of the Affordable Care Act, largely as the result of faulty laws and lax antitrust enforcement, resulting in potential harm to consumers due to further rapid consolidation among health insurers,” Conyers and Johnson said in a joint statement released July 23.
Thomas Greaney, co-director at the Saint Louis University School of Law Center for Health Law Studies, told Bloomberg BNA he expects the DOJ's reviews of the Anthem-Cigna and Aetna-Humana deals to be extensive and time consuming.
Greaney said the DOJ will have to gather massive amounts of data on each insurer's business lines, including Medicare Advantage and commercial plans.
“It's certainly going to take a long time for the DOJ to sort through all of the antitrust issues,” Greaney said, referring to overlaps within the business lines of Aetna-Humana and Anthem-Cigna.
Even if the companies are prepared to spin off business lines to resolve antitrust issues, such as divesting Medicare Advantage plans, “there's still a lot of uncertainty as to how the spin-off arrangement would work,” Greaney said.
Greaney said the mergers might run contrary to the original purposes of the ACA, which was designed to spur new competition in insurance markets.
“You might say the loss of potential competition is a concern, and it could lead to premium increases or reductions in quality,” Greaney said.
Reductions in quality could mean narrower networks and fewer covered services, Greaney said.
Looking to the future, Greaney said there's always the possibility of “cascading effects” from the mergers.
“There's always a concern that mergers lead to more mergers,” Greaney said, and the current mergers could trigger further insurance consolidation as well as consolidations on the provider side, such as hospital systems and physician practices.
The provider-side mergers could occur as providers seek to gain more leverage in negotiations with insurance plans, Greaney said.
However, he said it's hard to predict whether the Anthem-Cigna and Aetna-Humana mergers would be approved.
To contact the reporter on this story: James Swann in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Kendra Casey Plank at email@example.com