Providers fear in­sur­ance merg­ers could in­ten­sify rate pres­sures

Modern Healthcare - - NEWS - By Bob Her­man

Dr. Robert Wer­gin prac­tices fam­ily medicine in Mil­ford, Neb., pop­u­la­tion 2,000. His of­fice in­ter­acts with many dif­fer­ent health in­sur­ers. But three car­ri­ers—Blue Cross and Blue Shield of Ne­braska, Aetna sub­sidiary Coven­try Health Care and Unit­edHealth­care—are the dom­i­nant pri­vate pay­ers in his area. That num­ber could shrink even more.

The health in­sur­ance in­dus­try is on the verge of largescale con­sol­i­da­tion as its lead­ers seek to drive out costs, in­crease ne­go­ti­at­ing lever­age and boost prof­its. An­them has gone public with its takeover of­fer for Cigna Corp., valu­ing the deal at $54 bil­lion. Aetna is re­port­edly on the brink of ac­quir­ing Hu­mana, while Unit­edHealth Group is con­sid­er­ing a com­plex buy­out of Aetna. In ad­di­tion, Wall Street views the smaller pub­licly traded in­sur­ers, such as Cen­tene Corp., Molina Healthcare and Well­Care Health Plans, as ripe tar­gets for a sec­ond round of deal­mak­ing.

In­sur­ance con­sol­i­da­tion could, in turn, spur more con­sol­i­da­tion among providers to counter the greater bar­gain­ing power of a smaller num­ber of big in­sur­ers. And in­de­pen­dent providers are wary about that. “If providers merge, then in­sur­ers have to merge, and if in­sur­ers merge, then providers have to merge,” said Erik Gor­don, a busi­ness pro­fes­sor at the Univer­sity of Michigan. “It’s a cycli­cal arms race, un­til an­titrust steps in and says that’s enough.”

The merger tremors worry Wer­gin, pres­i­dent of the Amer­i­can Academy of Fam­ily Physi­cians. Con­sumers’ choice of health plans would shrink, and in­sur­ers’ cost sav­ings would not guar­an­tee lower premi­ums for em­ploy­ers and con­sumers or broader provider net­works, he said.

The AAFP wrote a let­ter this month to the Fed­eral Trade Com­mis­sion warn­ing that let­ting health in­sur­ers morph into leviathans would re­sult in “in­creased lever­age and un­fair power over ne­go­ti­at­ing rates with hos­pi­tals and physi­cians.” Deals would es­pe­cially af­fect smaller physi­cian prac­tice groups like Wer­gin’s.

“When you’re ru­ral or a small prac­tice, your lever­age is lim­ited,” Wer­gin said. “If you take small prac­tices like mine and squeeze me hard, you might be clos­ing my doors.”

In­sur­ance merg­ers have been build­ing for years, spurred by the Af­ford­able Care Act, which puts pres­sure on healthcare or­ga­niza- tions to cut costs, im­prove care and strengthen care co­or­di­na­tion. Provider or­ga­ni­za­tions and in­sur­ers have seen that as a green light to com­bine and build economies of scale into their re­spec­tive sec­tors.

Stand-alone hos­pi­tals and physi­cian groups in crowded mar­kets al­ready have lim­ited ne­go­ti­at­ing lever­age with in­sur­ers, and of­ten find them­selves in a take-it-or-leave-it sit­u­a­tion. That has led many physi­cian groups to refuse to sign con­tracts, in­creas­ing the risk of pa­tients get­ting stuck with large out-of-net­work med­i­cal bills. Wer­gin said his prac­tice and his town’s crit­i­cal-ac­cess hos­pi­tal have not signed net­work agree­ments with Unit­edHealth­care be­cause the in­surer de­mands dis­counts that are “too deep.” Providers and pol­icy ex­perts worry in­sur­ance merg­ers will in­ten­sify these pres­sures.

“That’s go­ing to be a con­cern for the en­tire provider com­mu­nity,” said Steven So­nen­re­ich, CEO of Mount Si­nai Med­i­cal Cen­ter, a 608-bed in­de­pen­dent teach­ing hos­pi­tal in Mi­ami Beach, Fla. “Un­ques­tion­ably for stand-alone in­sti­tu­tions, it’s an even greater chal­lenge.”

The first domino to fall in the in­sur­ance merger game ap­pears to be An­them and Cigna. An­them of­fered to pay $184 per share for Cigna. In as­sum­ing Cigna’s debt, the price tag would be about $54 bil­lion, po­ten­tially the largest deal in health in­sur­ance history.

An­them be­lieves that $2 bil­lion in costs can be cut from the merged com­pany within two years. But Doug Sher­lock, a vet­eran healthcare an­a­lyst at Sher­lock Co., said only 15% to 20% of ad­min­is­tra­tive ex­penses are sub­ject to economies of scale in most merg­ers, mak­ing it im­por­tant to not over­state po­ten­tial sav­ings.

An­a­lysts pre­dict Cigna ul­ti­mately will say yes. Cigna CEO David Cor­dani wants to head the new com­bined com­pany, but An­them has spurned that de­mand.

In­stead, An­them CEO Joseph Swedish would re­main as chief and be­come the com­pany’s chair­man and head of in­te­gra­tion. Cor­dani, who would be owed al­most $10 mil­lion in cash sev­er­ance and tens of mil­lions of dol­lars in un­vested stock awards if Cigna is taken over, would be­come pres­i­dent and chief op­er­at­ing of­fi­cer.

Cigna also has aired other con­cerns, such as ap­proval from the Blue Cross and Blue Shield As­so­ci­a­tion, which pro­vides Blues li­cens­ing to An­them, as well as pend­ing an­titrust lit­i­ga­tion against the as­so­ci­a­tion. The As­so­ci­a­tion lim­its how much of a li­censee’s busi­ness can be branded out­side of the Blues and how the com­pany can com­pete with other Blues plans. Law­suits against the as­so­ci­a­tion al­lege that Blues plans col­lude to cre­ate mo­nop­o­lies in dif­fer­ent healthcare mar­kets.

But An­them’s Swedish said last week that “we have pro­vided a clear, com­pre­hen­sive and com­pelling of­fer. We just felt that the process was not de­vel­op­ing in a way that we felt would be com­ing to an end that best rep­re­sented the in­ter­ests of the share­hold­ers.”

An­them and Cigna over­lap in some mar­kets. A com­bined en­tity would have about 1.1 mil­lion Medi­care Ad­van­tage mem­bers, keep­ing An­them as the fifth-largest Ad­van­tage in­surer. But most of the scru­tiny would come in the com­mer­cial mar­ket. In New Hamp­shire, for ex­am­ple, An­them and Cigna con­trol 67% of the large-group in­sur­ance mar­ket, ac­cord­ing to the Kaiser Fam­ily Foun­da­tion. That would give them pow­er­ful lever­age over area providers in rate ne­go­ti­a­tions.

While those ar­eas of over­lap may prompt scru­tiny from the Jus­tice Depart­ment’s an­titrust di­vi­sion, it wouldn’t nec­es­sar­ily de­rail these deals. The merged com­pa­nies could agree to make di­vesti­tures in mar­kets where com­pe­ti­tion would be re­duced. The Jus­tice Depart­ment uses a mea­sure called the Herfind­ahl–Hirschman In­dex to de­ter­mine the com­pet­i­tive land­scape of in­di­vid­ual mar­kets. “It’s not a ques­tion of ab­so­lute size,” Gor­don said. “It’s a ques­tion of al­ter­na­tives in the mar­ket.”

Not all hos­pi­tals would nec­es­sar­ily come un­der the thumb of bulked-up in­sur­ers. Dom­i­nant re­gional and na­tional health sys­tems still hold con­sid­er­able ne­go­ti­at­ing power in cer­tain mar­kets. Ana Gupte, a man­ag­ing di­rec­tor at Leerink Part­ners, said for-profit hos­pi­tal chains such as Nashville-based HCA are watch­ing in­sur­ance con­sol­i­da­tion moves closely. But they “re­main con­fi­dent that their own lo­cal mar­ket strength re­mains de­cent in all po­ten­tial sce­nar­ios,” she said.

“The re­al­ity is healthcare mar­kets are lo­cal,” said Matthew Can­tor, a part­ner at an­titrust law firm Con­stan­tine Cannon. “What’s go­ing to make a dif­fer­ence is whether the in­surer would have a large per­cent­age of cus­tomers in a cer­tain lo­cal­ity.”

Can­tor ar­gues that in­sur­ers would have had a stronger case for con­sol­i­da­tion with the gov­ern­ment’s an­titrust en­forcers if the Supreme Court had thrown out the ACA’s pre­mium sub­si­dies last week. With­out sub­si­dies, the in­di­vid­ual mar­ket would have been se­verely dis­rupted. “It’s go­ing to be much harder to make that ar­gu­ment now be­cause there’s a lot of op­por­tu­nity for or­ganic growth out there,” he said.

With the like­li­hood of big in­sur­ance merg­ers grow­ing, many observers re­main skep­ti­cal about their broader so­ci­etal ben­e­fits, cit­ing the lack of ev­i­dence that merg­ers in other in­dus­tries have helped con­sumers. “I’m try­ing to think of an ex­am­ple of where con­sol­i­da­tion has driven down costs and im­proved ser­vice,” So­nen­re­ich said. “I know I’m pay­ing more for my ca­ble bill, and I know I’m pay­ing more for my air­plane tick­ets.”

Dr. Robert Wer­gin coun­sels pa­tients in his Mil­ford, Neb., fam­ily medicine prac­tice.

“It’s a cycli­cal arms race, un­til an­titrust steps in and says that’s enough.” Erik Gor­don Busi­ness pro­fes­sor Univer­sity of Michigan

“I’m try­ing to think of an ex­am­ple of where con­sol­i­da­tion has driven down costs and im­proved ser­vice. I’m hard pressed to do that. I know I’m pay­ing more for my ca­ble bill, and I know I’m pay­ing more for my air­plane tick­ets.” Steven So­nen­re­ich, CEO Mount Si­nai Med­i­cal Cen­ter Mi­ami Beach, Fla.

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