Insurance Consolidation: Big Bites, Big Business

Health insurers are gobbling each other up, but workers remain leery when fewer choices are available.

If you remember playing Hungry Hungry Hippos as a kid, you have a great visual for what’s been happening in the health care industry over the past 18 months. Since January 2015, health care organizations from hospital systems to health insurers have been gobbling each other up with the fervor of pastel-colored hippos going after white marbles.

Aetna Inc. — the nation’s largest provider of Medicare Advantage plans — announced last July its intent to acquire Humana Inc. for a combination of cash and stock valued at $37 billion that would cover 33 million members. Later that month, Anthem Inc. said it would buy Cigna Corp. for $54 billion and cover 53 million members. In the same month insurer UnitedHealth Group completed its purchase of pharmacy benefits manager Catamaran for $12.8 billion. 

That’s a lot of white marbles gobbled up in a single month. And in the health care industry, marbles — aka members — equal power. That’s a concern for industry experts and consumers regarding the quality of health care that will ultimately be available when the dust of this acquisition frenzy settles.   

During the first nine months of 2015, deals in the health care industry alone were valued at $270 billion, according to Mergermarket Group, a media company specializing in corporate financial news and analysis. Arguably more important than the amount spent is the fact that these acquisition bids — the Aetna and Anthem deals were still awaiting regulatory approval at deadline — will shrink the nation’s largest health insurance companies to three from five.

Ironically, affordability is one of the drivers of the many industry mergers, according to Thomas O’Connor, managing director at Berkery Noyes Securities, an independent investment bank that provides merger and acquisitions consulting. 

“The Affordable Care Act forced insurance providers like Aetna and Humana to change their offerings,” O’Connor said. “Insurers had to take an educated guess at the kinds of plans consumers would want as a result of the health care mandate, and in many instances, they guessed wrong. Six years later, the mergers and acquisitions we’re seeing across the industry are a response to these providers wanting to be able to offer the policies and tools consumers are demanding.”

While their intentions may be good, organizations such as the American Medical Association are more concerned with the effect on the industry than intent. The AMA has been vocal about its fear that consolidating the market will diminish competition and result in employers and employees paying higher premiums. It is for that reason that the AMA urged the U.S. Justice Department to block both acquisitions.

“While good for business, we are focused on patient care and the ability of consumers to gain access to the care that they need,” said Dr. Barbara McAneny, AMA immediate past chair in a statement. “We don’t want the bottom line to get in the way of that.”

ACA Forces Change  

When the ACA was signed into law March 23, 2010, the health care game changed. The legislation created the employer shared responsibility provision, which states that the federal government, state governments, insurers, employers and individuals have shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States.

“Basically, it means we’re all in this together,” O’Connor said. “Unfortunately, some of us are paying more than others.”

As a part of that provision, employers with 50 or more employees are mandated to provide insurance to at least 95 percent of their full-time employees and dependents up to age 26, or pay a $2,000 per employee fee.

“Even though the employer mandate didn’t go into effect until 2015, employers were suddenly looking for any and all ways to cut costs,” O’Connor said. “High deductible health plans put the burden of paying for health insurance on employees.”

The Kaiser Family Foundation reports that average annual out-of-pocket costs per worker rose almost 230 percent between 2006 and 2015, based on its annual survey of employer health benefits coverage published in 2015.

Further, 24 percent of all workers were enrolled in a high-deductible health plan with a savings option in 2015. This is a dramatic rise from 2009, when just 8 percent were covered under such plans. The latest Kaiser survey also suggests that 46 percent of employees have annual deductibles of over $1,000.

Providers weren’t ready with offerings that would help consumers control costs on their own, said Patrick Pilch, managing director and national health care advisory leader of The BDO Center for Healthcare Excellence & Innovation. The mergers and acquisitions the industry is currently experiencing are a reaction to the high price employees in particular are now paying for health care insurance.

It’s not just Anthem-Cigna and Aetna-Humana,” Pilch said. Insurers want to strengthen their data analytics and technology offerings in particular to know how consumers are spending, and develop plan offerings that reflect those buying trends.

 Aetna’s November 2014 acquisition of bswift — a benefits, HR and payroll technology platform — is an example. Bswift’s platform is consumer-friendly and allows consumers to make decisions more easily about their health care needs, she said.

O’Connor agrees that the ACA has forced insurers to bolster their software and technology offerings in a way that wasn’t necessary before the legislation went into effect.

“The amount of money changing hands is distracting consumers from the intended end goal of these acquisitions,” O’Connor said. “Insurers aren’t trying to create a monopoly. They’re stockpiling resources to ultimately drive down cost.”

FTC, DOJ Won’t Let Monopoly Pass Go

Despite confidence from some industry experts that these mergers will help and not hinder access to affordable health care, there are still some powerful people advocating against consolidation in the industry.

One of the most powerful is Democratic presidential candidate Hillary Clinton. In a statement she said, “I’m worried that the balance of power is moving too far away from consumers.” She has since urged regulatory bodies including the Federal Trade Commission and the U.S. Justice Department to review the acquisitions carefully for violations of anti-trust laws.

And they are doing their due diligence.

Regulators will be looking at whether consumers will pay higher prices and if they have alternatives, said C. Scott Hemphill, a professor at New York University Law School and a recognized antitrust scholar. 

In the case of mergers and acquisitions in particular, the FTC will focus on Section 7 of the Clayton Antitrust Act, which examines whether the intent is to create a monopoly. The FTC wants to make sure that the companies have put structures in place that protect consumers from paying higher premiums, only having access to lower-quality plans and having limited access to their providers.

The review process is twofold and begins with a pre-merger notification. Companies considering a deal begin by filing a “first request” with the FTC and Justice Department. The report includes information about the two companies’ line of business and sales revenue.

The FTC or DOJ will then take 30 days to determine if more information is necessary to make a decision..

If that information checks out, the companies in question can enter a process called “second request” that is more investigative in nature. Regulators can request information on the companies’ products and services, market conditions and an analysis of potential competitive effects of the merger, Hemphill said.

Both the Aetna-Humana and Anthem-Cigna deals are in second request, which remains open until the regulatory body is satisfied with the information the companies have provided and regulators believe they have enough information to make a decision. 

When all the information is submitted, the regulatory body again has 30 days to review the documents and make a decision.

There are three possible outcomes from a regulatory review: approval, denial and compromise.

Often in the case of large acquisitions like this, the FTC will come back with a change that needs to be made before the deal can close. A lot of times it involves selling off portions of the company to avoid the possibility of a monopoly. Breaking up the company helps ensure that it can’t take control of the market.

A Look Ahead

While each deal awaits approval, O’Connor is quick to remind employers and employees alike that the buck doesn’t stop here. This merger mania will likely continue for the next 10 years. And it has the potential to favor smaller startup companies that have the ability to focus on niche market needs. 

“While these deals are getting done, the little guy has the opportunity to look over the data from the past six years and really dive deep into what consumers want,” O’Connor said. “The Aetnas and Anthems of the world may be bigger, but, unless they’re giving consumers the control they demand for the price they’re now having to pay, there’s still an opportunity for someone to come in and do it better.”

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