Po­ten­tial in­sur­ance merg­ers could spur more provider con­sol­i­da­tion

Modern Healthcare - - NEWS - By Bob Her­man

The ti­tans of the health in­sur­ance in­dus­try are locked in a dance of buy­ing and selling. Hos­pi­tals, physi­cians, em­ploy­ers and con­sumers could ex­pe­ri­ence fi­nan­cial reper­cus­sions if any big deals are con­cluded.

In­sur­ance con­sol­i­da­tion could spur more con­sol­i­da­tion among providers to counter the greater bar­gain­ing power of a smaller num­ber of big in­sur­ers. But some pre­dict the Obama ad­min­is­tra­tion will be wary of ap­prov­ing any big in­sur­ance merg­ers.

Unit­edHealth Group, An­them, Aetna, Hu­mana and Cigna Corp— the five largest for-profit health in­sur­ers in the coun­try—are all in the mix for some kind of tie-up. Unit­edHealth has made a move to ac­quire Aetna, while An­them has taken a run at Cigna, ac­cord­ing to the Wall Street Jour­nal. Aetna and Cigna also have con­sid­ered buy­ing Hu­mana, which put it­self on the block last month.

Scott Fidel, an an­a­lyst at Deutsche Bank, equated the man­aged-care deal­ings to “Game of Thrones,” the HBO se­ries in which sev­eral high­power char­ac­ters bat­tle to reign over the king­dom.

The merger talk has sharp­ened the long- stand­ing war of words be­tween in­sur­ers and hos­pi­tals over con­sol­i­da­tion.

Health in­sur­ers have been sharply crit­i­cal of hos­pi­tal tie-ups across the coun­try, such as merg­ers in re­cent years be­tween Trin­ity Health and Catholic Health East and be­tween Bay­lor Health Care Sys­tem and Scott & White Healthcare. Amer­ica’s Health In­sur­ance Plans, the in­dus­try’s lob­by­ing group, has said that when hos­pi­tals merge, it “comes with a price that con­sumers and em­ploy­ers sim­ply can­not af­ford.”

Hos­pi­tals are just as crit­i­cal of po­ten­tial in­sur­ance deals, ar­gu­ing that in­sur­ance oli­gop­ol­ies keep provider pay­ments low while boost­ing prices for cus­tomers.

“The ques­tion re­ally should be, what value are (in­sur­ers) go­ing to bring to the con­sumer and to the pre­mium pay­ers?” said Chip Kahn, CEO of the Fed­er­a­tion of Amer­i­can Hos­pi­tals. “Does this con­sol­i­da­tion mean that higher cost-shar­ing and nar­rower net­works are what con­sumers will end up with?”

In­sur­ers view the in­creased scale as a pri­mary way to boost earn­ings and di­ver­sify their prod­ucts. The Af­ford­able Care Act caps health in­sur­ance prof­its as a per­cent­age of pre­mium rev­enue. The in­sur­ers, along with some in­de­pen­dent observers, also ar­gue that get­ting big­ger will en­able them to lever­age lower prices from providers, drug­mak­ers and other in­dus­try play­ers, thus sav­ing money for em­ploy­ers and con­sumers.

Each in­surer brings dif­fer­ent moves to the merger dance. Hu­mana is one of the largest Medi­care Ad­van­tage in­sur­ers. Cigna pre­dom­i­nantly serves em­ploy­ers. Aetna’s busi­ness is spread across em­ploy­ers, Medi­care and Med­i­caid.

Michael Bern­stein, a part­ner with Baird Cap­i­tal’s pri­vate-eq­uity team, said he didn’t ex­pect to see in­sur­ance con­sol­i­da­tion at this “jumbo” scale. For in­stance, if United-Health bought Aetna, it would cre­ate a com­pany with $200 bil­lion in pro- jected rev­enue this year. That’s al­most four times as large as the two big­gest for-profit hos­pi­tal com­pa­nies, HCA and Com­mu­nity Health Sys­tems, com­bined. “When you al­ready have most or all of the ben­e­fits of enor­mity, I’m not sure be­com­ing even big­ger con­fers more eco­nomic ben­e­fit,” said Bern­stein, for­mer pres­i­dent of Wis­con­sin’s Blue Cross and Blue Shield plan.

Hav­ing only three big com­mer­cial in­sur­ers re­main­ing, Bern­stein said, might nudge providers that have been sit­ting on the fence to merge with a larger sys­tem, cre­at­ing a chain re­ac­tion of more in­dus­try con­sol­i­da­tion. Be­yond that, in­sur­ers would cut back on the mul­ti­ple ven­dors that pro­vide them tech­nol­ogy and care-man­age­ment tools. “I can’t read a sce­nario where the in­dus­try that serves pay­ers isn’t neg­a­tively im­pacted by a com­bi­na­tion,” Bern­stein said.

Any in­sur­ance merg­ers al­most cer­tainly would face rig­or­ous an­titrust scru­tiny from the U.S. Jus­tice Depart­ment be­cause of the colos­sal sizes of com­pa­nies in­volved and the mul­ti­state im­pact. The Obama ad­min­is­tra­tion in the past has been crit­i­cal of in­sur­ers’ pre­mium in­creases, and rate in­creases by big­ger new en­ti­ties could jeop­ar­dize the ad­min­is­tra­tion’s cost-con­trol ef­forts un­der healthcare re­form.

The price tags of Aetna, Cigna and Hu­mana could range from $35 bil­lion to $65 bil­lion or more, us­ing av­er­age val­u­a­tion mul­ti­ples of healthcare deals this year. That’s just as large as the $45 bil­lion Com­cast Corp.-Time Warner Ca­ble merger that ul­ti­mately fell through. The com­mu­ni­ca­tions giants re­port­edly called off the deal be­cause the Jus­tice Depart­ment’s an­titrust di­vi­sion was pre­pared to block it.

Sh­eryl Skol­nick, a man­ag­ing di­rec­tor at Mizuho Se­cu­ri­ties USA, said a large in­sur­ance merger could face the same push­back from the lame-duck Obama ad­min­is­tra­tion. “They have noth­ing to lose by say­ing what they re­ally want to say, which may be no,” she said. “These merg­ers di­rectly af­fect Oba­macare.”

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