Mergers Aside, Health Insurance Costs Rising

    Health insurance has long been a complicated issue and a significant cost for consumers, and the proposed consolidation of 4 of the 5 largest insurers into just 2 companies may simplify some issues— but at what cost? According to federal regulators, the costs are too great to allow the transactions to move forward.  On the other side, the insurers suggest—and possibly threaten—that there will be significant costs if the transactions are not permitted.  In either case, a common factor of the costs is that they will be borne largely by consumers
and providers.

    A little more than a year ago, Aetna and Humana, Inc. announced an agreement under which Aetna would acquire all outstanding shares of Humana in a transaction valued at $37 billion. A few weeks later, Anthem, Inc. and Cigna Corporation announced a transaction where Anthem, Inc. would acquire all outstanding shares of Cigna in a transaction valued at $54.2 billion. Press releases for both transactions identified benefits for consumers and the health care system overall, stating generally that the transactions will allow the consolidated health insurance companies to enhance affordability and cost of care.

    This summer, however, the U.S. Department of Justice filed two lawsuits seeking to stop the transactions, with 17 states joining one or both of the suits. The bases of the lawsuits are generally that the proposed transactions would actually decrease competition and increase
costs in the market.

    Not surprisingly, Aetna, Anthem, Cigna and Humana dispute the DOJ’s determination regarding the competitive effects of the proposed transactions. In fact, a July 5, 2016, letter from Aetna CEO Mark Bertolini appears to threaten that Aetna will pull out of a number of public health exchanges if Justice blocks its proposed transaction. Subsequently, though, Aetna and Humana announced on Aug. 2, 2016 that they were divesting certain Medicare Advantage assets covering 290,000 members in 21 states, including Illinois and Missouri to address DOJ concerns. And, at an August hearing regarding the Anthem/Cigna suit, an attorney for the DOJ stated that there was a willingness to discuss settlement options—potentially indicating a way forward for the transaction.

    If the health insurance companies are to be believed, they need to consolidate to spread risk across more lives—creating a bigger pool of healthy people whose low healthcare costs offset the high costs of sicker people. In addition, the health insurance companies believe that the mergers will give the remaining, larger entities more leverage in negotiations with providers, including physicians, hospitals and other individuals and entities, to lower costs. Another argument typically used to support mergers, and raised by the insurers, is that economies of scale will create additional efficiencies and lower costs.

    Even assuming there is some truth to these arguments, consumers may not see any health insurance decre-ases for several reasons.  First, there is no guarantee that savings realized by the health insurance companies will find their way to consumers’ pocketbooks.
   In a market with a lot of health insurance options, it is foreseeable that the insurance plans would seek to lower premiums to get more customers. To the contrary, though, if there are only two or three major players in a market, there may be less incentive to compete on cost.

    Second, the economies of scale argu-ment seems to run into another economic principle, namely the point of diminishing returns, with respect to the present mergers. It is not clear that a merger of any 2 of the largest 5 insurance companies would generate savings that would be noticed by consumers. Undoubtedly, the mergers would allow elimination of some administrative costs (i.e. jobs), but it’s difficult to imagine that cost savings would result in a big change in finances that would save consumers a noticeable amount on premiums.

    The strongest argument of the insurers for the mergers is the increased negotiat-ing power. With fewer, bigger insurance companies, the insurance companies are likely to be able to negotiate lower rates with providers, with the largest benefits in the case of large hospital companies. This leverage can only go so far, though, because it costs money to provide healthcare so if health insurance companies push rates too low, at some point providers will leave their networks or even the market and this could have an inverse impact on cost.

   Finally, despite the potentially grim picture with respect to short term health-care costs, hopefully there is good news in the big picture. There is a lot of innovation occurring in the current market, amongst the big 5 insurers and providers, to shift payment systems to reward quality care instead of quality of care (often referred to as “accountable care organizations”).

    In theory, these efforts align the interests of patients, providers and payers. In the meantime, Aetna, Anthem Cigna and Humana seem intent on moving forward with the proposed transactions.