Insurance Mergers and Acquisitions May Increase Premiums

November 20, 2015 - Mergers and acquisitions are popping up all over the healthcare industry from drug makers and hospital systems to health insurers. The year 2015 has been a beehive of activity for the consolidation of a large number of medical companies.

The New York Times reported that mergers and acquisitions within the healthcare market have hit $270 billion during the first nine months of 2015.

“Low interest rates and cheap capital are fueling merger activity across many industries, but healthcare is especially devoted to the mantra that bigger is always better,” The New York Times continued.

“And there are both the short-term goal of increasing revenue and the longer-term need to restructure in response to changes in the health care landscape under the Affordable Care Act. Unlike other areas, like telecommunications, where a tremendous amount of consolidation has already occurred, health care has been fragmented, with many smaller players.”

“All of the parties are under intense pressure to reduce costs, and consolidation is seen as necessary to do so, especially among smaller entities like hospitals.”

CVS Health Corporation announced in a press release this past June that it will be acquiring Target’s pharmacy and clinic businesses. The acquisition will cost CVS $1.9 billion and will bring more than 1,660 CVS pharmacies across 47 states. The drug industry such as Pfizer has had major deals taking place in the mergers and acquisitions arena.

However, one of the most intriguing contracts taking place this year has been in the health insurance market. With five major insurers presently serving consumers throughout the United States, the future may hold only three large health insurers due to mergers and acquisitions. Anthem is presently attempting to purchase Cigna for $50 billion while Aetna is moving toward acquiring Humana.

The Harvard Business Review discussed some of the potential risks and problems associated with consolidating health insurance companies. Will a smaller number of insurers truly meet the needs of consumers? Will the health plans be affordable while offering much-needed services?

Often, mergers cite that administrative costs will be lowered once two companies consolidate. However, prior large mergers have rarely offered public analysis on cost savings, which shows that these spending reductions may or may not occur, the Harvard Business Review explains.

It would be beneficial for health insurers planning a merger to show their stakeholders evidence of past mergers and acquisitions that have led to a reduction in administrative costs as well as implement a plan to achieve these savings.

When it comes to medical costs, the merged insurance companies are claiming to be able to better negotiate prices from providers due to the fact that there is less competition available in the market and they will represent a bigger share of the providers’ business.

The Harvard Business Review states that there’s “no evidence savings from health-plan mergers are passed through to consumers in the form of lower premiums.” When it comes to improving the quality of care and health plans, insurers in the midst of a merger often mention that providers would be urged to implement new payment models that reward value and quality while reducing unnecessary spending.

The payers would encourage the development of disease-management programs. However, when new payment reforms and models of care are implemented by a provider, it is often established across the board and many benefit the competitors of an insurer as well as themselves, which may make it less attractive to the original payer. Additionally, research has shown that the more competition is available in a given region, the greater the amount of prescription drug benefits and other consumer needs.

Along with these findings, researchers uncover that having a smaller health insurance market would lead to higher premiums for consumers among the private plans as well as the health insurance exchange.

“We need additional systematic research to address the many unanswered questions about whether and where consolidation might harm or help consumers. But the evidence to date points to a real potential risk for higher premiums — with no evidence of commensurate improvements in quality. Discriminating consumers need more facts to be convinced that payers’ promises are more than sweet talk,” The Harvard Business Review concluded.

As previously reported, former Secretary of State Hillary Clinton has spoken about the potential negative effects of these health insurance mergers. Specifically, Clinton has said that the “balance of power is moving too far away from consumers.”

The biggest issue at hand is that these mergers and acquisitions between Humana, Aetna, Anthem, and Cigna could lead to higher monthly premiums for consumers across the board. Clinton is urging antitrust officials and policymakers to look more into these mergers and acquisitions to ensure no illegal actions are being taken to harm other businesses.

The Coalition to Protect Patient Choice and the American Medical Association have also spoken out against these mergers and acquisitions taking place in the health insurance marketplace. Affordability of health plans and consumer choice in coverage are major issues that these organizations are stressing when it comes to the acquisitions taking place within the health insurance marketplace.

“The combination of Anthem and Cigna and Aetna and Humana will further weaken the feeble competition in a large number of insurance markets,” the Coalition to Protect Patient Choice stated. “It is incumbent upon federal and state enforcers and regulators to review these mergers with the utmost scrutiny. The coalition will provide tools and valuable information to facilitate review of these mergers, as well as offer information and analysis of other health care competition concerns.”