To merge or not to merge? 5 things to know.
The Justice Department filed lawsuits blocking two mergers of health insurance companies that would whittle the nation’s five largest health insurers down to three gigantic entities.
Why are the proposed mergers, totaling $85 billion, making Uncle Sam so nervous? And why are insurers pushing back? For example, this week Aetna announced plans to withdraw from health care exchanges in more than two-thirds of the counties where it participates.
Here’s a look at the key issues involved:
- Lack of competition could create a crisis.
American companies and individuals benefit from competition in the marketplace, according to William Baer, the Justice Department’s antitrust chief, who filed the lawsuit blocking the mergers in July.
During a CNBC video interview, Baer said the proposed mergers could reduce competition, drive up premiums, decrease quality and discourage innovation.
He could be right: The LA Times reported that hospital and insurance mergers that took place in the 1990s and early 2000s were disastrous for consumers, with price increases of up to 40% in communities that lost competition.
- The big five could become the mammoth three.
Currently the five largest health insurers are UnitedHealth Group, Anthem, Aetna, Cigna and Humana. The proposed agreements would create an Aetna-Humana merge and an Anthem–Cigna merge.
The agreement between Aetna and Humana raises competitiveness concerns primarily in the Medicare market, limiting options for seniors. Anthem and Cigna’s deal is a concern due to its large size and the companies’ geographic overlap, which would limit choices for major employers with a workforce in multiple states.
- The Affordable Care Act (Obamacare) is a two-edged sword.
Health reform legislation outlined opposing goals:
More choice. One major provision of the Affordable Care Act is to provide people with more health care choices and affordable policies. In an ideal world, competition would spur innovation and drive costs down. But in reality, major insurers are withdrawing from exchanges created by the Affordable Care Act because they’re losing money in those markets.
Better collaboration. Health reform’s success depends on decreased duplication, evidence-based treatment protocol and better utilization. This reshaping of the practice of medicine includes incentives for removing barriers and capturing value.
Mergers have the potential to improve this collaboration and generate economies of scale. As Aetna claimed with its merger announcement, “The combined entity would drive consumer-focused, high-value health care.”
- The government has an anti-trust mindset.
This isn’t the first merger roadblock in health care, and it won’t be the last. The New York Times reports that the current administration “has not been shy about quashing deals – especially in health care.”
Not only have mergers among large hospital systems been blocked, but the government contributed to the failed merger between Pfizer and Allergan by announcing new tax rules that made the deal less attractive.
- Merger mania continues.
Although these mega mergers are under scrutiny, smaller mergers continue across the U.S. among insurers, hospital systems, pharmaceutical companies and others.
As a case in point, independent hospitals are being gobbled up by larger health care systems, with 112 hospital acquisitions announced in 2015, according to management consulting firm Kaufmann Hall.
In addition, doctors are giving up independent practices in favor of employment by hospitals or large health systems, and insurance companies are joining forces to increase their negotiating clout. The CIT Healthcare Industry Outlook expects this consolidation to continue as a strategy to improve efficiencies, lower costs and increase revenues.
This is an ongoing saga that won’t come to a quick conclusion. The merger announcements came during a three-week span in summer of 2015, lawsuits challenging the mergers were filed this summer, and rulings aren’t expected until early next year.