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In the Nation's Interest

Top Healthcare Stories for 2016: Insurance Mergers

by COURTNEY BAIRD February 16, 2016

To continue my series about the healthcare stories that are most likely to heat up in 2016, today I turn to the impending mergers of four major health insurance companies: Aetna is poised to purchase Humana and Anthem is poised to purchase Cigna. Americans continue to name the cost of and access to healthcare as the most urgent health problems facing the United States. Many Americans are struggling to pay their medical bills, and they are concerned about any changes that may affect their out-of-pocket costs or coverage.

In July, Aetna announced that it would buy Humana for $37 billion, consolidating the third and fourth largest health insurance providers, by revenue, in the country. Later that month, Anthem announced that it would purchase Cigna for $54 billion, consolidating the second and fifth largest providers.  If approved, these mergers will reduce the number of major firms in the health insurance market from five to three.  In October, shareholders from both Aetna and Humana approved their merger with a resounding 99% ‘yes’ vote. This was significant given that just two weeks earlier Humana had been embattled in a class action lawsuit that challenged the deal. Two proxy advisory firms – companies that are hired to research and analyze proposals that are submitted for a shareholder vote – endorsed the merger. Similarly, the Anthem-Cigna deal faced class action lawsuits that disputed the terms of the merger, but Anthem and Cigna settled these lawsuits and obtained overwhelming shareholder approval for the merger in December. The deal received blessings from three prominent investment advisory firms, which urged shareholders to support the proposal.

These are significant steps forward for these mergers, but they still have several hurdles to overcome before the deals are closed. Under the Hart-Scott-Rodino Act, neither merger can be completed until the companies file their premerger notifications and the specified waiting period has passed. During this time the U.S. Department of Justice (DOJ) has the chance to file a “second request,” in which it asks for more documentation that will help it evaluate the legality of the merger. The mergers are currently in this more intense investigative phase, which could take more than a year.  If regulators believe that the mergers will lead to uncompetitive markets that cause higher prices, lower quality, and less innovation, the regulators could either work with the companies to reach agreements that rectify these concerns, or they can file in federal court to block the deals. The mergers also need approval from state insurance departments and state attorneys. Executives from the companies involved have said they expect the transactions to be completed in the second half of 2016, but many experts anticipate the process will take much longer, given the magnitude of the deals and the substantial level of consolidation in the industry.

Source: Public company financial statements

Criticism of the Mergers:

Critics fear that the mergers would lead to an uncompetitive market in the health insurance industry, resulting in fewer choices of healthcare plans and greater premiums. Major healthcare provider associations have been particularly vocal about their concerns. Both the American Medical Association (AMA) and the American Hospital Association (AHA) have testified before Congress to express their fears and have sent letters urging DOJ to block the mergers. In November, a group of consumer advocates, employers and unions formed the Coalition to Protect Patient Choice to advocate against the mergers.  In general, these opponents argue that:

1. The health insurance market already lacks competition. The AMA found that in 41 percent of metropolitan areas studied, a single health insurer had at least a 50 percent share of the commercial health insurance market. The health insurance market was found to be highly concentrated in nearly 75 percent of US metropolitan areas based on federal guidelines used to assess market competition.
2. The mergers would further enhance market power. The AMA’s analysis of the mergers predicts that the Anthem-Cigna merger would enhance market power in 85 metropolitan areas within 13 states, and that the Aetna-Humana merger would enhance market power in 15 metropolitan areas within 7 states. The analyses found that overall, the two mergers would diminish competition in up to 154 metropolitan areas within 23 states.
3. Increased market concentration will be bad for patients.  Critics say that greater consolidation is driven by the insurers’ goal to increase profits.  This will lead to price increases and limited choice for patients and employers and reimbursement below competitive levels for hospitals and physicians.  Both of these will undermine quality and reduce coverage.

Arguments in Support of the Mergers:

Proponents of the deals have two main arguments:

1. Smaller, local insurance companies would keep the industry competitive. In September, the CEOs of Aetna and Anthem testified in Senate hearings that robust choice and competition would remain in the Medicare, individual and commercial insurance markets, given the abundance of local insurance plans and new insurers entering the market.
• Mark Bertolini, Chairman and CEO of Aetna, stated that, “There are 143 health care companies offering Medicare Advantage plans, with new entrants coming into Medicare Advantage: 28 new health plans have joined over the last 3 years, of which 15 are owned by providers. On the commercial side of the market... after the transaction other companies will have 87 percent of the commercial enrollment.”
• Joseph Swedish, President and CEO of Anthem, stated that, “The number of health insurers increased by 26 percent in 2015 with 70 new entrants offering coverage... At Anthem, we look at the provision of small group as insurance plans for small employers with 2-50 employees; we have a presence in this segment in 14 states. Cigna does not market to this group. Likewise for purchase of individual plans... the combined company would only share a limited number of rating regions within just five states, where there is now and will continue to be robust competition.”

2. With continued competition, the mergers will provide better quality care at lower prices for customers.  Executives from Aetna and Anthem have stated that the acquisitions would: reduce administrative costs; leverage the strengths of each company; enable the sharing of best practices, research and technology; enhance bargaining power with hospitals, physicians and pharmaceutical companies; and increase company diversification for reduced risk. In a press release, Aetna’s CFO noted that, “The complementary nature of our two companies provides us with a significant synergy opportunity, furthering Aetna’s efforts to increase its operating efficiency. We expect synergies from the transaction to be $1.25 billion annually in 2018.” Anthem’s purchase of Cigna is projected to save even more, with synergies estimated to be $2 billion per year.  The merging companies argue that these savings will translate into lower premiums for consumers.

Political Commentary

At the September hearing of  the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, both Republicans and Democrats expressed concern over the proposed mergers. Senator Amy Klobuchar (D-Minn) said she wants to ensure that the mergers do not harm consumers through increased costs and decreased benefits. Similarly, Senator Mike Lee (R-Utah), who chairs the subcommittee, worried that consumers would be "locked into the offerings of a few dominant companies." While both parties have voiced apprehension, Senators have differing views on what is driving the consolidation. Many Republicans believe that the Affordable Care Act is increasing regulatory burdens to the point where it is too expensive for smaller insurers to do business.  On the other hand, many Democrats suspect that the consolidation is motivated solely by a drive to increase profits.  Democrats have been more critical of the mergers, challenging the CEO claims that savings will be passed onto consumers and noting the lack of evidence that providers and consumers benefit from consolidation. Thus far, the Presidential candidates have remained relatively silent on the issue.  More hearings are expected this year, but ultimately, Congressmen have little say in the outcome. They play the important role of voicing and assembling the views of various constituencies, but in the end it is up to the regulators to decide the fate of the proposed mergers.

CED’s Perspective

CED has consistently argued that robust competition is crucial to ensuring the efficient allocation of resources in the healthcare market. As explained in our latest policy statement on healthcare reform, Adjusting the Prescription, competition puts pressure on insurance companies to create higher quality plans at lower prices. With the recent exponential growth in health expenditures, it is crucial that we utilize the power of competition to reduce costs. Competition also leads to more choices for consumers, which is especially important for health insurance. A firefighter in New York City will probably need coverage that differs from a healthy college student in California. Numerous factors – age, health status, genetics, and risk tolerance, to name a few – call for differing options from health plans. Competition is also good for the insurance companies in the long run. Competition spurs innovation that leads to more efficient processes and the invention of new and better products. It is unclear whether these mergers would create an uncompetitive market. Both the provider associations and the insurers have presented their own research and evidence regarding whether the mergers will enhance or diminish competition.

On the one hand, the merger proponents make a strong point about local insurance plans maintaining competition, given that many insurance plans are inherently local. Most regions have several integrated delivery systems (networks of physicians and hospitals under the same insurance plan) which offer managed care insurance plans. Intermountain Healthcare in Utah, MayoClinic in Minnesota, and Kaiser Permanente in California are just a few examples of such local plans. However, the level of competition provided by local plans, and the amount of overlapping market share by Aetna and Humana and Anthem and Cigna, varies in each region. Given this level of complexity, this case will require months of evaluation by experts on antitrust in the health insurance market. The crucial task for the regulators will be to define the actual markets for particular types of coverage in particular locales, and to determine whether the mergers will actually undermine competition in some specific markets where the insurers used to compete with each other. If so, the regulators will have concerns to remedy. If not, they surely will approve the mergers.