How Healthcare Leaders Can Weigh Pros, Cons of Payer Megamergers

By Kelsey Waddill

December 12, 2023 - When rumors circulate about major payers planning to merge, it always stokes the question: are payer megamergers ultimately good for the healthcare system?

When the news broke that Cigna and Humana may be in talks about a merger, Richard Ricciardi, professor in the School of Nursing and the executive director for the Center for Health Policy and Media Engagement at the George Washington University, told HealthPayerIntelligence he approached the topic with “a good deal of skepticism and fear.”

On the one hand, as a provider at the Mercy Health Clinic caring for underserved populations, Ricciardi is personally aware of the US healthcare system’s complexity. Between 15 and 25 percent of national healthcare spending is wrapped up in administrative fees, he pointed out. Merging two companies that cover, in total, 35.1 million lives could shrink these fees.

But, on the other hand, these headlines always inspire the question: does merging massive payers lead to a more efficient and cost-effective structure overall? The answer might vary based on the organizations involved in the deal, Ricciardi said.

In this article, HealthPayerIntelligence explores how healthcare industry leaders can evaluate potential health insurance mergers to anticipate their impacts.

Regulatory landscape, oversight for payer megamergers

Before evaluating the potential impacts of any specific merger, it is critical to have a strong grasp of the regulators in charge of assessing these deals and what they are looking for.

The Department of Justice (DOJ) usually oversees insurance-related mergers, according to a KFF brief on the subject. However, sometimes DOJ partners with the Federal Trade Commission (FTC) to evaluate deals for anticompetitive practices.

When assessing deals between major health insurers—also known as “horizontal mergers”—these federal agencies are determining whether the deal would choke out competition from smaller companies. The agencies also scrutinize vertical and cross-market mergers, but horizontal mergers may pose a bigger threat since they consolidate two competitors into one.

Three laws regulate the anticompetitive space, stretching back across two hundred years of regulatory history in the US: The Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914.

The Sherman Act forms the foundation for anticompetitive law in America, while the Clayton Act and FTC Act fill in any gaps. Together, they prohibit unfair or deceptive competitive practices and establish reporting practices.

Additionally, DOJ and FTC have “Horizontal Merger Guidelines” that govern their assessment of horizontal mergers. The most important aspect is that DOJ and FTC use the Herfindahl-Hirschman Index (HHI) to evaluate the level of concentration. The agencies also released a draft reworking these guidelines. The draft addresses platform competition and restores a stricter HHI concentration threshold, among other changes.

Employers and state agencies can also bring companies to court over anticompetitive actions.

When DOJ or another entity pursues anticompetitive litigation against a company or companies, the restitution will involve either restructuring or a change of conduct, depending on the anticompetitive practice. Restructuring may involve selling off certain assets or simply stopping the merger altogether.

History of payer megamergers

As a result of these authoritative entities overseeing the merger and acquisition space, most health insurance megamergers do not come to fruition.

Two payer megamergers were proposed in 2015, reportedly prompted by the Affordable Care Act’s implementation. The payers involved were four of the five biggest payers in the US. Most of them are still the largest payers in the market at the time of this article’s publication.

These deals are high stakes and high cost. If approved, Elevance Health (formerly Anthem) would have paid $54 billion to purchase Cigna. CVS Health’s Aetna would have paid $37 billion to own Humana.

Elevance Health and Cigna’s plans to merge fizzled in April 2017. The trial court found that the merger would cut provider reimbursement, according to the American Medical Association (AMA). Instead of improving healthcare for patients, the court determined that this decision posed a risk to the quality of care and consumers’ options.

Meanwhile, Aetna’s efforts to purchase Humana failed due to heavy consolidation in a particular market. The judge found that such a merger would have resulted in significantly lower competition in the Medicare Advantage market, where Humana had the second-highest and Aetna the fifth-highest market shares in 2017.

Benefits and drawbacks of major payer mergers

Assessing the potential benefits or drawbacks of a megamerger—rumored or actual—is tricky. The process involves a lot of trade-offs, Ricciardi explained. In emailed comments, he laid out the nuances of megamergers’ impacts.

For example, proponents of the megamerger might argue that the deal will result in cost savings. Larger health insurers have more leverage to negotiate rates with providers, so horizontal mergers may lead to lower spending, according to a report from the Department of Health and Human Services’ (HHS’s) Assistant Secretary for Planning and Evaluation (ASPE).

However, ASPE also noted that insurers do not necessarily have to pass these savings on to consumers. In fact, health insurance market concentration often resulted in higher premiums for members.

Another argument in favor of megamergers is that they offer patients a broader provider network. Having broader networks is often considered an advantage.

But if mergers coincide with more provider consolidation, they can reduce provider options and access to care. Provider consolidation is rampant. In 2019, only 4 percent of hospital referral regions were unconcentrated, ASPE found.

Efficiency is touted as a positive downstream effect of megamergers. Interoperability could be smoother when two health insurance giants combine. However, the process of consolidating two companies’ systems into one can result in disruptions of care, Ricciardi mentioned.

These large-scale deals can also have impacts internally on the companies. For instance, a megamerger may result in health system restructuring that could lead to some positive changes in processes and new opportunities for health insurers’ employees. However, it could also result in layoffs, relocations, or job description changes that are not aligned with employees’ goals, Ricciardi pointed out.

Potential impacts on value-based care

Protecting value-based care progress should be a primary objective when evaluating the impact of a potential merger. Just like the other potential drawbacks and benefits, these massive deals can have mixed results on the nation’s value-based care progress.

Ricciardi emphasized two aspects of value-based care that megamergers could address.

First, deals between big payers can improve care coordination in ways that exceed the average payer’s scope of influence. Larger health insurers with a broader span of providers at their disposal can design more comprehensive care teams, fulfilling a major goal of the value-based care movement.

The second aspect of value-based care that major mergers could impact is tangentially related to the first. Not only do payers need to make sure that they bring in the right providers, but increasingly the healthcare system has prioritized placing primary care providers at the center of care. If the newly combined companies embrace this approach, the merger could have positive impacts.

“A merger that is looking at ways to improve efficiencies and effectiveness, that wants to look at new models of care and optimizing the workforce or re-engineering the workforce to where those new models of care can be represented under this merger—which includes pharmacists being at the front lines of care…mental health professionals being at the front lines of care, and paying them and having the appropriate medications that patients have access to—I'd be all for that, if the merger was going to support that kind of model,” Ricciardi explained.

However, when merging payers choose to cut services instead, the merger may serve to limit or reverse value-based care progress.

Strategies for other healthcare leaders

Ricciardi evaluates potential mergers by assessing each party independently to see if they are advancing and embracing principles that streamline care and improve quality and outcomes.

“What I look at is the corporate history, their values and what they've done in the past, how they negotiated some of the strategies that we need as a country…to look at how they allow for improved access to marginal populations,” Ricciardi said. “If that's not part of who they are, then it's not going to be part of who they are when they merge.”

Healthcare leaders who are in partnerships with merging health insurance companies should study the details of that deal very closely. It may require bringing in dealmaking experts and lawyers who specialize in corporate law, Ricciardi shared. Knowing the nuances and the direct impacts of the deal will protect partners from surprising repercussions.

Additionally, healthcare leaders involved in horizontal mergers should make team-based care delivery central to their efforts. As the newly combined health plans rearrange their networks and processes, incorporating pharmacists, nurse practitioners, physician assistants, and specialty care providers in members’ care teams could produce positive results.

Ultimately, Ricciardi indicated that while megamergers, when done well, can reflect the level of integration that many healthcare leaders would like to see industrywide, true reform will require a regulatory shift. While horizontal mergers have the potential to streamline care for insured individuals, they neglect the 25.3 million people in America who are uninsured.

In the short time between the Ricciardi interview and this article’s publication, new rumors hit the news cycle: Cigna and Humana may have dissolved their alleged plans to merge amid strong reactions from shareholders. While the dealmaking behind the scenes remains veiled, the rumors—if true—could underscore that consumers and stakeholders remain trepidatious about these big deals, regardless of the potential benefits.

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