Merged Health Insurers Will Seek Higher Premiums, Analysts Predict

By Sara Hansard

Nov. 17 — The proposed mergers of Anthem Inc. with Cigna Corp. and Aetna Inc. with Humana Inc. are likely to lead the combined companies to seek higher premiums for consumers, two Wall Street health-care analysts said Nov. 17.

“I can't imagine a merger of two powerhouses in a market not resulting in a higher price. It's just pure common sense,” Sheryl Skolnick, director of research and senior health-care analyst for Mizuho Securities USA Inc., said at the 20th annual Wall Street Comes to Washington Conference. However, she said, whether the insurers will be able to get regulatory approval for higher premiums is “a question mark in a highly regulated industry,” such as health insurance.

Matthew Borsch, vice president of global investment research at Goldman Sachs, agreed that “it's hard to see that concentration in markets won't have some effect on the prices that groups and individuals are paying.” It may be hard to know how much the proposed mergers will affect prices because “there's definitely economies of scale, efficiencies, that over time presumably will work their way into prices,” he added.

ACA Boosting Insurer Mergers

The proposed mergers of the major insurers are “definitely being catalyzed by the Affordable Care Act,” said Ana Gupte, senior analyst for health-care services at Leerink Partners LLC. Regulation under the ACA “has limited the profitability for these companies to a great degree,” she said.

Gupte cited caps on insurers' profitability under the ACA's medical loss ratio requirement and rate reviews that limit pricing and underwriting insurers can undertake. In addition, she said, there is provider consolidation, which is “an important trend that they have to respond to.”

Aetna is trying to acquire Humana because it wants “to diversify away from a slowing-growth commercial employer-sponsored marketplace and shore up their Medicare capabilities,” Gupte said. The ACA's Cadillac tax on high-cost employer plans, which begins in 2018, will drive health plans from the group insurance market to the individual market, she said.

But the Anthem-Cigna merger is aimed at strengthening the two companies' positions in the employer health insurance market, Gupte indicated. Cigna isn't strong in the individual market and Anthem doesn't have capabilities for providing stop-loss insurance to smaller companies that may want to self-insure, she said. Together those two companies can bring complementary capabilities to service the entire spectrum of employers from small group to large national accounts, she said.

Marketplace Plans Unprofitable

Borsch said that, based on an analysis of the medical loss ratios of health plans as well as public statements by many plans, “the ACA exchanges have been a huge driver of losses across the industry,” particularly for the nonprofit BlueCross BlueShield (BCBS) plans. Most of the BCBS plans have offered products widely in the marketplaces “and most have suffered considerable losses,” he said.

In contrast, results in the non-ACA group commercial business “have been much more steady,” Borsch said.

Coupled with stringent ACA marketplace rate reviews, plans are not able to absorb losses they're experiencing with the relatively sick population that is enrolling in the marketplaces, Gupte said. The health law's three premium stabilization programs were supposed to be a back-stop on plan losses, and the reinsurance program paid out well for 2014, she said.

Low Risk Corridor Payments Hurt Plans

But the Centers for Medicare & Medicaid Services has only paid about 13 percent of 2014 risk corridors claims (191 HCDR, 10/2/15). That has resulted in a number of the ACA nonprofit CO-OPs folding, and it has also hurt some of the publicly traded insurers, Gupte said.

“Humana is now in the second year of tremendous losses” from its marketplace plans, Gupte said. The company has attempted to subsidize its marketplace losses with its Medicare Advantage business, she said.

Further, there is speculation “that they would not have had to sell the company had they not been in such a bad position where they're seeing 15 percent of their earnings being lost within the exchanges and are not sure if they'll reach break-even next year as well,” she said.

Consumers Leaving Marketplace Plans

In the third quarter, managed care companies also have started complaining about attrition in the ACA marketplaces, Gupte said. Insurers report that “the persistency of the consumers is very low. They come in for one, two, three months and pay premiums, get a lot of procedures and services delivered, and then they're dropping off, either because the premium subsidies are not adequate or the cost-sharing subsidies are not adequate and the sticker shock is enormous.”

While subsidies are available for marketplace enrollees earning between 100 percent and 400 percent of the poverty level, for people above 250 percent of the poverty level “that market right now looks broken,” because many consumers in that income range can't afford the premiums, Gupte said. That portion of the market may end up “becoming more of an unstable high-risk pool-type marketplace.”

There is also “a very troubling rise in the uncompensated care” at hospitals, Gupte said. It appears that marketplace attrition is “a fairly big driver of what's going on,” she said.

For 2016, it's not clear whether penalties imposed under the ACA on individuals who don't have health insurance will be effective in getting younger, healthier people to buy marketplace plans and keep paying premiums through the year, Gupte said.

Government Action on Drug Prices Predicted

Turning to another topic, Skolnick predicted that with the recent publicity on high costs for specialty drug, there is an increased possibility of government action to attempt to rein in prices.

Republicans in Congress have agreed to hold hearings on high drug prices, Skolnick said. “It's political suicide not to agree in an election year to investigate what's clearly a bad-actor alleged behavior. It's a no-brainer. This thing has legs. It's going through the election year. It's not going away. And by the time we're done we may actually get some real savings out of it. If we don't, it would be a real pity and waste of resources.”

Valeant Pharmaceuticals International Inc. has been one of the drug companies particularly targeted due to questions about its business and accounting practices, Skolnick indicated.

A representative of the House Oversight and Government Reform Committee confirmed to Bloomberg BNA that the committee plans to hold a hearing on drug prices early in 2016.

To contact the reporter on this story: Sara Hansard in Washington at

To contact the editor responsible for this story: Janey Cohen at