Mergers in Health Insurance Market Don’t Pose ‘Pure Monopoly’

December 15, 2015 - In recent months, four major players in the health insurance market have come together to form two separate mergers. The Aetna-Humana and Anthem-Cigna mergers have caused significant uproar among medical organizations that fear such a consolidation will lead to a monopoly in the health insurance market.

As previously reported, both the American Hospital Association (AHA) and the American Medical Association (AMA) find the mergers taking place in the health insurance market troublesome for the consumers and other payers. Federal and state regulators will be looking into the health insurance mergers to determine whether the consolidation will lead to significant anti-competitive implications.

To learn more about the health insurance mergers and the issues that health payers should be aware of, HealthPayerIntelligence.com interviewed Patrick Pilch, Managing Director and National Healthcare Advisory Leader of The BDO Center for Healthcare Excellence & Innovation.

HealthPayerIntelligence.com: Will the Aetna-Humana and Anthem-Cigna mergers lead to a monopoly within the health insurance marketplace or will it bring cost savings down to the consumer?

Patrick Pilch: “There are several perspectives on this. If you start looking at why there are these large mergers, one reason is due to scale. Ideally, when you think of scale, there could be some reduction in administrative costs, better negotiation with local healthcare providers, and ultimately the ability to pursue more value-based payment arrangements and initiatives.”

“Theoretically, mergers could allow insurers to offer more competitive products and possibly pass on the savings to consumers. From that platform in terms of scale, insurers would engage more directly with consumers as we move more toward a consumer-driven healthcare world.”

“With more data available and the ability to understand geographies to offer different kinds of plans, the opportunity is also to identify a diversification mix process that could be availed through a merger or acquisition.”

“The goal would be to understand the market segments, understand different distribution channels and the public and the private exchanges. These are the three biggest driving forces behind the mergers.”

“I don’t envision seeing monopolies, possibly oligopolic organizations. There certainly will be market concentrations. I do know the Department of Justice looks at the Herfindahl–Hirschman Index (HHI) as a means to calculate  market share for respective participants and where the calibration and concentration is that causes them concern.

The DOJ considers a calculation in excess of certain thresholds as indicating market concentration, the definition which informs actions to be pursued by the DOJ - I think, by virtue of that, we will see some peel back of plans that have certain geographic market share concentrations. That’s where that will be the offset for a potential for monopolistic organizations.”

“One could make the argument that these payer mergers will lead to single payer or maybe a utility so that it becomes regulated. I believe that this will be a long way away. Through the FTC, regulators are looking at where the measures of concentration are and how they play there.”

“Let’s say one particular market has a high Medicaid volume. The managed Medicaid payer in that market has the premium product and the premium market share. Regulators may look deeper into that. There are other  measurements to explore the issues of mergers.”

“As far as a pure monopoly, I don’t see it as I do believe there will be considerable pushback by the FTC.”

HealthPayerIntelligence.com: What are some of the biggest issues insurers should watch out for during a merger or acquisition (especially when trying to cut administration costs)?

Patrick Pilch: “I would look at the FTC at first. I would havemy market concentration analysis performed.  . I would incorporate this process into my due diligence process both – buy side and sell side due diligence.  From the standpoint of really driving out administrative costs, I would look where the synergies are in terms of the back office.”

“If you’re acquiring a payer that has a large ASO book of business, is there an alignment there? Do you get real savings there or do you have to segregate two systems and lose the benefit expected with a merger? On paper, one might think that there are great synergies through a diversified mix of risk pools.  Often, the synergies dissipate as we have found often one plus one equals two and a half in terms of back office costs.”

“Including the kind of IT and operational analysis in the due diligence process is critical. Also, understanding the population, changing demographics, and market into which you are trying to enter is vital as you need to incorporate your customer strategy to align with your network and infrastructure.”

“If you understand customer needs, your administrative costs and platform can be designed to be more efficient in terms of services and processing claims. This is important as we move toward the ratings seen in Medicare Advantage plans where consumer, member and patient satisfaction are foundational to the rating methodology. This is maturing to  commercial plans, skilled nursing facilities, and hospitals.”

“The quality of access to the network is going to make a determination of what type of consumers you can offer to and what costs of administration of those services would be. In terms of administrative costs, I think contextually there has to be a future state vision of what this post-transaction organization will look like.”

HealthPayerIntelligence.com: How will the two large health insurance mergers affect consumers and their health plan choices?

Patrick Pilch: “I think you could run into an issue with respect to networks and in the narrowing of networks. That’s the challenge. This gets back to an earlier thought - the thought is that networks could reduce administrative costs. On the commercial side, I believe that is possible. There’s more functionality and scalability in terms of administration. Insurers could pursue more value-based payment arrangements.”

“Theoretically, payers could create a network based on higher-quality providers who create a platform for providing better care and lowering the total cost of care. The key thing to focus on – where the direct impact would be – is the narrowing of networks – not limiting of access. Negotiating directly with high quality providers is good for the consumer base.”

“However, where the transaction is limited to cost savings not associated with efficiencies but rather access curbing, the consumer is limited by his or her choice – this is not a significant benefit to the consumer. That’s a direct affect right there.”

HealthPayerIntelligence.com: If the Aetna-Humana and Anthem-Cigna mergers do take place, how will this impact the business practices of other health payers? What should payers be wary of?

Patrick Pilch: “Other payers will be trying to get scale just like Aetna and Anthem. I do believe there will be more pursuits to scale and more activity in mergers and acquisitions. The other piece is that, in those markets, where plans are being diversified out or spun out, middle market plans may be interested in acquiring some of those markets if it makes strategic sense for them.”

“The other piece is, at the end of November, CMS released proposed rulemaking for the 2017 benefit and payment parameters program. I do believe that CMS is really looking at how to get more robust standardization of health plan options. Consideration among other payers may be: ‘Where am I going? Am I going to scale up and be like the Aetnas, Humanas, and Cignas of the world? Or am I going to try to build around and add on to my midsize plan to boost my capital?’”  Again – payers need to think about the customers – its members.

“Payers have to make that decision in terms of an acquisition. Can you make it on your own? Do you need to scale? I would say, likely, in most cases, you do need to scale. Geography is ultimately the answer. If you’re a medium-sized plan with a good presence in a particular geography with good plans and effective network adequacy, you should be in a good spot for a period of time.”

“Think about the banking industry. The four largest banks today were 35 companies in the 1990s.   You don’t hear names like Nations Bank or First Union. Now compare that to fiscal intermediaries of these big plans. That’s a good model of comparison. That is a model you can compare these plans going towards.”