Where Will the Insurance Company Mergers and Acquisitions Leave Anesthesiologists?
The value of healthcare acquisitions in the U.S. in the first seven months of 2015 is now more than $356 billion. The final figure for all of 2014 was $326.1 billion, according to the Wall Street Journal.
Within anesthesiology alone, 14 different entities acquired 27 anesthesia practices in 2014 at an estimated total cost of nearly $1 billion. Almost as many acquisitions were completed in the first quarter of this year alone. (Anesthesiology Acquisition Rate Still at Fevered Pace, Anesthesiology News, July 2015).
Merger and acquisition (M&A) activity in health care has spread far beyond the consolidation of groups and hospitals and health systems. We are now in a phase where health insurance companies are trying to grow by buying others. The potential for a landscape dominated by just a handful of insurance behemoths is raising concerns across the industry.
Anthem, Inc. announced on July 24th that it had entered into a definitive agreement to acquire all the outstanding shares of Cigna Corporation in a $54.2 billion transaction. The new company will have more than $115 billion in pro forma annual revenues—more than Microsoft or Google or all but the 20 or so largest U.S. corporations—and will insure some 53 million individuals. The announcement by Joseph Swedish, Anthem’s president and chief executive officer mentioned the word “affordable” and “affordability” as well as “competitive” multiple times. At the same time, the company expects earnings per share to increase by ten percent in the first year.
Anthem’s deal with Cigna, which is expected to close later this year, comes on the heels of another huge acquisition: Aetna’s purchase of Humana, valued at $37 billion, and like Anthem-Cigna expected to yield $115 billion in annual revenues. The two mergers involve four of the five largest health insurers and will reduce the number of key players from five to three.
The driving force behind these mergers is obvious. They seek the leverage that increased size would bring to price negotiations with health care providers—hospitals, medical groups, pharmaceutical and device manufacturers and others. Providers are very concerned. The American Medical Association issued a statement entitled Insurance Mergers Will Reduce Competition and Choice on July 24 stating:
The AMA’s own study shows that there has been a serious decline in competition among health insurers with nearly 3 out of 4 metropolitan areas rated as ‘highly concentrated’ according to federal guidelines used to assess market competition. In fact, 41 percent of metropolitan areas had a single health insurer with a commercial market share of 50 percent or more.
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The lack of a competitive health insurance market allows the few remaining companies to exploit their market power, dictate premium increases and pursue corporate policies that are contrary to patient interests. Health insurers have been unable to demonstrate that mergers create efficiency and lower health insurance premiums. An AMA study of the 2008 merger involving UnitedHealth Group and Sierra Health Services found that premiums increased after the merger by almost 14 percent relative to a control group.
Equally concerned are the employers who face rising premiums for employee health coverage. Ayla Ellison and Molly Gamble commented in their article Anthem to buy Cigna—and then there were three: 7 key points (Becker’s Hospital Review, July 23, 2015):
A recent AON Hewitt survey noted that 46 percent of large and midsize employers expect a negative impact from health insurer consolidation and only 21 percent saw it as good thing for costs. As the number of insurers shrinks from five to three, those payers will likely have more leverage on both sides of the equation—with employers and providers. Employers who are large enough may resort to trying to work around the payers.
Both the Anthem-Cigna and the Aetna-United deals face the regulatory approval process before the mergers are consummated. Most significant is federal antitrust review by the Department of Justice (DOJ), which will likely consider the competitive effects of the two transactions in tandem. The AMA and the American Hospital Association have called upon the DOJ and Congress to exercise a significant level of scrutiny. Several state attorneys general as well as the insurance commissioners from 18 states had announced that they would seek to participate in federal examination of the Aetna-United acquisition (Aetna-Humana deal will face scrutiny from state authorities, FierceHealthPayer, July 13, 2015). The states’ interest in the Anthem-Cigna deal is expected to be no less intense. Anthem faces the added hurdle of navigating rules related to its membership in the Blue Cross Blue Shield Association. Both Anthem and Aetna are seeking to grow their overall shares of the booming Medicare Advantage market and may be required to divest some local Medicare Advantage plans.
The outcome of regulatory review is far from certain. One of the confounding factors is obviously the possibility of a Republican Administration after the 2016 elections, with a change at the top of the DOJ that would be expected to be more favorable to large insurers. Robert Cyran observes in his article The Regulatory Hurdles to Health Insurance Mergers (New York Times, July 24, 2015) that:
The Affordable Care Act [ACA] could be the answer. President Obama’s health care overhaul creates online exchanges for buying coverage, allowing insurers to expand into new markets without hiring expensive agents. The companies will still need the approval of state commissioners, but the lower barriers to entry should stir more competition—and, at least in the future, appease regulatory fears. It’s unclear whether that would be enough to counterbalance concerns over the top five insurers’ currently chunky market shares.
It is also unclear what the outcome of the consolidation will be given that in many states the health insurance industry is already highly concentrated. Will the mergers lead to the use of economies of scale and greater efficiencies that will lower costs for patients and for employers—not just by driving down provider prices? Or will merger fever in the insurance sector undermine the ACA goal of enhancing private market competition? Will it result in premium increases and provider payment cuts? Will the acquisitions give rise more narrow provider networks, and to less—or to more—innovation in payment and delivery models? There are only questions at this stage of the game, not answers, although it is hard to see that payer consolidation will be anything other than disadvantageous to providers. Readers should consider contacting their representatives in Washington to voice their concerns about the shrinking number of payers.
We would make one prediction: larger and more powerful payers will drive providers to try to grow, most likely through consolidations, to keep up with the increased bargaining power of a smaller number of payers. The M&A frenzy that we have been witnessing among anesthesia practices is far from over. The shift to value-based purchasing and to shared risk is also apt to demonstrate new vigor. We will continue to bring you information that we hope will help you navigate the changes.