Health Care Law Spurs Merger Talks for Insurers
By: Andrew Ross Sorkin of The New York Times
President Obama signed the Affordable Care Act more than five years ago. At the time, members of the health care industry — hospitals, doctors and insurers — were anxious about what it would do to the business. Everyone had an opinion, but nobody knew for sure.
We're now beginning to see the answer: consolidation on a huge scale.
Just in the last couple of weeks, the nation's five largest health insurers began a round robin of merger talks — some still semiprivate, others now out in the open — that could whittle their number to three. Anthem made a bid for Cigna; Aetna approached Humana; and the UnitedHealth Group made overtures to Aetna.
Those potential deals come on the heels of a spate of hospital mergers over the last couple of years — and speculation about another round of such deals.
All of this deal-making is largely the result of the Affordable Care Act, which in effect constrains the amount of profit hospitals and insurers can generate, leading both to seek additional scale in hopes of generating higher margins by squeezing additional savings out of a broader customer base.
To some degree, consolidation among hospitals and insurers was part of the design of the law, which sought to provide health care for the uninsured and help push down health care costs. That led health care companies to find efficiencies. That, in turn, meant deals.
In 2011, the Aetna chief executive, Mark T. Bertolini, responded matter-of-factly to an analyst's question about possible mergers: "I expect and we expect that consolidation will continue going forward here as health reform shakes out winners and losers in the process."
The question, of course, remains whether the savings that might come from consolidation will trickle down to the consumer or will simply wind up in the pocket of shareholders.
The prevailing view is not promising.
"Seldom does consolidation result in reduced costs for consumers. Bigger insurance companies mean increased leverage and unfair power over negotiating rates with hospitals and physicians," the American Academy of Family Physicians wrote in a letter earlier this month to the Federal Trade Commission, urging that it block the latest series of deals. "More often than not, consolidation increases costs and reduces options for consumers, and we believe this would hold true in the health insurance market."
Perhaps more striking, Cigna, in its rejection of Anthem's $47 billion takeover bid, cited the risk of antitrust suits that have ensnared Anthem as the largest member of the Blue Cross Blue Shield Association. That association has been accused of cartel-like practices, deliberately preventing competition so as to increase prices for hospitals and patients.
Cigna's rejection of Anthem and its highlighting of antitrust risks, just to be clear, was not aimed at ending merger talks. Oddly enough, people involved in the negotiations suggested it was simply a tactic to press Anthem to pay more, in part to compensate Cigna shareholders for the possibility that a deal could be blocked.
Of course, regulators will most likely look hard at any large deals among insurers. But it would be ironic if the administration, after helping to get the law passed with the support of the insurance industry, then prevented insurers from merging.
So far, regulators have looked favorably at big hospital mergers, persuaded by the efficiencies argument.
"The fear that mergers curtail competition, leading to higher prices for medical care, reflects an old way of thinking that doesn't account for the introduction of population-health management," Dr. Kenneth L. Davis, the chief executive of Mount Sinai Health System, wrote persuasively in The Wall Street Journal. "This line of thought ignores the fact that health care delivery has become more efficient. Health care has changed, too: Medical advances mean that people recover from serious illness and injury faster and live longer, healthier lives."
Nonetheless, regulators would have good reason to consider ways to try to maintain competition among the largest insurers.
In one of the few studies conducted on the impact of consolidation in the insurance industry on premiums, academics looked at the effect of the 2007 merger of the UnitedHealth Group and Sierra Health Services on consumers in Nevada.
The results were striking. "If there were any benefits to consumers realized from the merger, we could not observe them, and we can infer that they did not come in the form of lower premiums," the authors wrote in the journal Health Management, Policy and Innovation. "On the contrary, the evidence suggests that large health insurer mergers are anticompetitive and cause injury to consumers through an increase in the price of health insurance services."
The authors said that they found "premiums in Nevada markets increased by 13.7 percent after the merger relative to the control group."
They added, "Our findings suggest that the merging parties exploited the market power gained from the merger."
Based on the high-flying stock prices of the big health insurers right now, investors must be convinced that bigger profits are in the offing. The chief executives are also expecting big paydays.
Virtually every one of them has planned large golden parachutes in anticipation that their companies could be taken over. According to data compiled by Bloomberg, Mr. Bertolini of Aetna stands to make $131.3 million in a takeover if he were pushed out; David Cordani of Cigna would make $58.7 million; and Bruce D. Broussard of Humana would receive $26.1 million.
Mr. Bertolini was probably right about winners and losers. The big health insurers could win. Their shareholders could win. Their executives could win. On the other side, however, may very well be the consumers.
Submit a comment