Two Legal Arguments For and Against Health Insurance Mergers

October 12, 2016 - In 2015, the national insurer Anthem began proceedings to acquire Cigna while Aetna planned to merge with Humana. Very quickly, opposition lined up against the two planned health insurance mergers, with some arguing that bringing the top five national payers down to only three could lead to higher premiums for consumers. The American Medical Association (AMA) along with the American Hospital Association (AHA) have expressed concern regarding the decline of market competition that these health insurance mergers could bring.

The AHA also sent a letter to the Department of Justice Antitrust Division asking for the federal agency to determine whether consumer rights are protected and antitrust laws are adhere to within the health insurance mergers.

“There are two levels of analysis and argument in the issue. First comes the consolidation of the national insurance markets taking the five largest players down to three largest players, which the government is arguing is harmful to employer plans by reducing the potential selection of plans available to employers for their employee benefits plans and reducing competition in the market for Medicare Advantage plans,” Bill Horton, Healthcare Practice Attorney at Jones Walker, told HealthPayerIntelligence.com. “Aetna and Humana are two of the largest players in Medicare Advantage market and the government has expressed concern of this consolidation.”

“Then in state and local markets, state insurance authorities have the same sort of concerns but focused more on the impact of competition in a given state or municipal market,” Horton continued. “There is also a lot of concern among physicians and other providers in those markets that if competition among payers is reduced, the provider side is going to be in a weaker position in terms of negotiating rates and coverage and will see what they’re getting paid driven down.”

On the other side of the equation, the national payers Aetna and Humana have argued in legal defense statements that the health insurance mergers would benefit millions of consumers by providing more affordable insurance products for low-income families and the elderly.

Additionally, the various challenges that have hit payers since the Affordable Care Act was passed especially the difficulty with remaining profitable on the health insurance exchanges may mean that the health payers needed the mergers to remain operational on the public marketplace. Soon after the Department of Justice filed a lawsuit against the two health insurance mergers, Aetna began leaving most of the public exchanges it was planning to participate in next year.

“The insurance companies, on the other hand, are arguing that this is a whole new world out there,” said Horton. “The Affordable Care Act has really changed the dynamics of the market and we need to consolidate in order to have administrative efficiencies. We need to consolidate in order to have the ability to respond to the pressure to change away from fee-for-service models of reimbursement toward value-based payment models.”

“Essentially, the companies involved in the mergers are arguing that in order to continue doing business, in order to be viable in the changing dynamics of the health insurance market, they’ve got to get bigger and got to consolidate so that they can improve efficiencies and survive.”

Several months ago, the Department of Justice (DOJ) filed a lawsuit against the two health insurance mergers, citing its concerns with consumer protections and the potential anti-competitive stance the acquisitions could bring. Aetna and Humana, however, attempted to allay the fears of the DOJ by investing in divestitures. The two payers have sold $117 million of their Medicare Advantage assets to Molina Healthcare.

“Human and Aetna are two of the three players in that market and they’re going to consolidate and take it down to a two-company market. Traditionally, what you would do in those markets where competition is going to be reduced, is that you would sell off your products in that market. You would find third party company that would come in and essentially buy some of your position in that market from you so that the market remains at a competitive level,” explained Horton.

“On a national level, the health insurance markets, in terms of the people who are participants in the large employer and Medicare Advantage market, is pretty concentrated right now,” Horton continued. “Potential third parties that can come in and buy some of those plan assets and preserve competition in that market is not that large. The health insurance markets on the employer benefit side has only a handful of big companies that have the capital to compete in those markets. By comparison, it’s not like a hospital merger situation where there are a lot of companies out in the hospital business and selling off hospitals to avoid trust concerns [won’t be difficult].”

The outcome of the lawsuit began by the Department of Justice will show whether or not the health insurance mergers are beneficial for consumers, providers, and market competition. If the mergers were to proceed, the outcome depends on which argument of the two sides comes true, explained Bill Horton.

“It depends on whose argument you find more credible,” he pointed out. “The insurance companies argue these deals will enable them to become more efficient and will be able to consolidate administration as well as executive management. They argue the mergers would allow them to divert more of resources to improving products and service. Consumers, hospitals, and physicians tend to take the other side of that argument. They say that if you eliminate this competition, in a market that already lacks competition, you’re going to give these payers more power to dictate prices.”

“Consumer advocates say the savings that may be produced from these consolidations are not going to be passed onto consumers in the form of lower premiums or greater benefits. They’re going to be retained by  the companies for executive compensation or greater dividends to shareholders,” Horton said. “The AMA has come out fairly strongly against both of these proposed transactions. The AMA, speaking on behalf of doctors, is concerned that if you reduce competition in the local insurance markets, then the ability of physicians and hospitals to negotiate prices with the payers will be reduced.”

The reason that the ability to negotiate prices will be decreased is due to the fact that two competitors would allow the client to bid for their business. If one doesn’t offer what a client is looking for, the other payer could have more affordable packages or better benefits. When two competitors become one company, the client would have “no negotiating leverage,” says Horton.

Horton also explained what may happen if the lawsuit stops the health insurance mergers from proceeding.

“I would expect that you will continue to see a pullback of large insurance companies dropping from the exchanges because most are saying they can’t make money on the exchanges,” he continued. “The argument in these deals has been that they need to have these consolidations to put themselves in a better position and continue to participate in the exchanges. I expect, regardless of what happens, that we will continue to see a retreat from the exchanges by large insurance companies because, economically, the exchanges haven’t worked very well for those companies.”

Dig Deeper:

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