Editor’s Note: Since this piece was originally published in Benefits Selling, Anthem Inc. purchased Cigna Corp. for $48.4 billion.
When Aetna announced its intention to acquire Humana for $37 billion in early July, the shock-wave effect was almost instantaneous. Insurance commissioners and attorneys general in several states announced their intentions to review the merger, stock in both companies dropped, and some industry experts—and outsiders—wondered whether this could be a harbinger of the future of health insurance, or even a step in the direction of a single-payer system.
Then, in a smaller but still significant deal, Centene’s acquisition of Health Net for $6.3 billion was announced, and the speculation about the potential impact on the industry grew more pointed.
Players in the health benefits world disagree about what the deals mean, and even whether they mean anything at all.
“Are regulators going to allow this to change the industry?” asks Kevin Ramsier, CEO and managing partner at Vesticor Advisors. “That’s hard to predict; I think they’re probably likely to limit the numbers of these major mergers, so only the people first to the party get the green light.”
However, he added, “Big deals like this tend to trickle down, and I do think we’ll see more of these health insurers pay into more areas of the industry—technology platforms, patient engagement platforms, pharmaceutical companies and a host of other add-ons.”
Mike Sullivan, executive vice president and CMO at Digital Insurance/Digital Benefit Advisors, says bigger deals in the carrier space could be increasingly common as they begin to reflect the consolidation and integration that’s already taken place to some extent in the health care provider sphere.
“Carrier consolidation is following what’s going on in the provider segment,” he says. “Our entire system has been built on pricing leverage—how big are you, and when we’re sitting across the table negotiating pricing, who carries a bigger stick? It’s a natural by-product of the fact that the business is getting significantly tougher.”
Scott Carver, president at PlanSource, notes that “there’s still a lot of fluidity around whether or not these deals will come together.” But, he added, “If they do, it sets up a much more accelerated pace for industry consolidation. It could have a very significant impact on our industry.”
Location, location, location
Susan Combs, president at Combs & Co., says that New York seems to go through a merger cycle “every five to 10 years. Seven, eight years ago, we had Oxford, United and HealthNet as three separate companies. Now, in New York, they’re all one.
“I know we’re talking about major players, but in New York, Oxford, United and HealthNet were all major carriers,” she adds. “It resulted in higher rates.”
The situation, however, has changed. “We have all these micro-carriers born out of the exchange,” Combs says. “Now that there are these smaller networks with localized coverage, I think it is a matter of time before consolidation happens again.”
Localized coverage is thriving in some parts of the country, so there’s reason to believe it could continue to do so despite carrier consolidation.
“Health care is still very geography-centric,” Carver says. “While you might have large players who dominate at some level, I think there’s still very much a need for localized insurance, if you will, that reflects the local provider community and the constituents who reside there.”
Some larger carriers, of course, will target those markets. Still, one of the most reliable ways for carriers to acquire new clients is to acquire a company. “There might be certain markets that you want to go after geographically—segments of the population you want to target that you’re going to be in a much better position to target after a merger,” says Joe Torella, president of the employee benefits division at HUB International Northeast. “It really is all about having profitable membership on the books, and carriers can’t always go out and get new membership by organic growth.”
What’s PPACA got to do with it?
Health care experts offer several reasons why the passage of the Patient Protection and Affordable Care Act is going to drive further carrier integration.
One obvious effect of the law is the 80 percent medical loss ratio established by PPACA, which requires insurance companies to invest 80 cents out of every dollar received from consumers on claims or expenses that improve the quality of clients’ health care. Complying with the new MLR guideline means that economies of scale wouldn’t be a luxury for carriers—they could become a necessity. Most insurance companies can’t operate at that level, says Eric Wilson, principal at Wilson & Associates.
“PPACA has led to structural uncertainty in the business,” Sullivan says, “and when there’s structural uncertainty, you need to cover your bases relative to your clients. Scale is one way in which industries and companies deal with uncertainty.”
PPACA also implemented the formation of accountable care organizations on the provider side of the equation. ACOs took on more of the financial risk of caring for chronically ill patient populations. In turn, those ACOs began working much more closely with carriers.
“ACOs are popping up everywhere now,” says Ron Goldstein, CEO at Choice Administrators. “We’re seeing the more local, regional carriers doing a better job, especially with branding and what they can bring to the table in that small geographic area.”
An 800-pound gorilla in the room
Of course, some industry insiders are worried that carrier mergers could be the beginning of a move toward a single-payer system.
Combs, for one, thinks that’s an overreaction.
“Look at who has that kind of system,” she adds. “You’re talking about countries that have a population the size of the state of Missouri. You can keep track of 5 million people.
“Even if there was a single-payer system that goes into place like there is in Canada, all the companies would be doing supplemental insurance,” she says. “The national plan is what consumers have if they can’t afford anything else, and people don’t want to wait to see the doctor, so all of our clients who have offices in Canada have supplemental coverage.”