There’s merger mania in the health insurance world, with the latest domino to fall Friday when Anthem and Cigna announced a highly-anticipated $54.2 billion deal early Friday morning. Here’s what you need to know:
1) The “big five” health insurers are now the “big three.”
Ranked by number of health plan members, Anthem and Cigna will be the biggest insurer, with more than 53 million members. UnitedHealth Group has more than 45 million members. In early July, Aetna and Humana announced they would merge, creating a company with 33 million members.
2) This is one of the ripple effects of the Affordable Care Act.
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The five biggest insurers have been looking to get even bigger largely as a result of health reform, which changed the terms on which these companies can compete. Due to caps on the profits they can make from plans, health insurers are looking to use economies of scale to become more efficient. That means they can eliminate administrative redundancies – they don’t need things like two human resources and two actuarial departments. The Aetna-Humana deal was projected to result in $1.25 billion in savings annually by 2018, for example. The Anthem-Cigna deal is expected to enable $2 billion in savings.
In addition, as health care has become more innovative, it also requires up-front capital investments to support the technology infrastructure for services such as telemedicine or electronic health records – something that is more efficient for the mega companies to do.
3) The effects on premiums are hard to predict, but are likely to be bad.
The question of how the mergers will affect card-carrying members is more complicated than it might seem. In general, consolidation in an industry leads to less competition and higher prices. Indeed, the few studies that have been done suggest that fewer insurers in the marketplace will mean higher prices.
But health care is an odd duck – a regulated industry in which the marketplace varies widely depending on where a person lives, making it harder to tell exactly what to expect. In theory, the new companies are going to be more efficient, and some analysts believe they will pass those savings on to consumers, slowing the growth in premiums at the very least. But much remains to be seen.
“The premise of the merger for both of these transactions is that they can achieve cost savings and economies of scale, and they of course maintain that will lead to their ability to price even more competitively,” said Richard Zall, chair of the health care department at Proskauer, a law firm. “It will take some time to see: 1) can they implement the mergers and achieve those savings and 2) is there still sufficient competition in the various markets that it won’t lead to price increases?”
4) To make it more complicated, those effects on premiums will likely depend on where you live.
Although these are big national companies, health care is also fundamentally a local business. That means that to understand the effects on consumers, it’s often necessary to look market by market, to see in which areas the consolidation really changes the landscape.
Paula Wade, an analyst at Decision Resources Group, uses the example of Connecticut to explain how the merger could lead to a significant drop in competition:
“The consolidation of the largest insurers will certainly reduce competition, leaving employers with fewer options for finding a low-priced plan for employees. In Connecticut, for example, Anthem already holds 35 percent of the commercial market share, and the addition of Cigna brings their market share to 51 percent statewide. Where an employer might have had his choice of Anthem, Cigna, UnitedHealth and Aetna, after these mergers he’s only got three companies from which to choose,” Wade wrote in an e-mail.
5) Regulators will be scrutinizing these deals.
The companies say these deals will make them more efficient and benefit consumers, but they are likely to get serious scrutiny from federal and state regulators. It could be that the combined companies would control too much of a certain local market, which is a typical concern for anti-trust officials. Also, Anthem and Cigna have businesses that overlap to a much greater degree than the other big deal announced in July, the $37 billion merger of Aetna and Humana.
Even if both big health care deals get regulatory approval, they are not expected to close until 2016. Integrating these giant companies will take awhile – potentially several years for the companies to realize the savings they expect and then pass them on to consumers – or not, Proskauer’s Zall said.