Anthem-Cigna merger poses promise, perils for providers and consumers
Anthem’s announced $54.2 billion takeover of Cigna Corp. last week is the latest and largest sign of health insurers’ lust for scale. But at the heart of the merger momentum is their desire to expand their government business, particularly in the lucrative Medicare Advantage market.
While many analysts say the mergers, if approved by antitrust regulators, will create greater efficiencies, the consolidation from five major publicly traded insurers to three is fueling worries among policymakers and healthcare providers. They fear that the deals will undermine the Affordable Care Act’s goal of creating greater private- market competition and a robust consumer-choice model. Healthy competition is seen as key to achieving stronger coordinated-care networks, improving quality and reducing costs.
There also are concerns that collaboration between health plans and providers on innovative payment and delivery models could suffer as the bigger, more powerful payers gain more bargaining muscle over providers. But other experts say more payer clout is needed to drive down excessive provider prices.
“Now you have the big three,” said Stuart Gunn, a healthcare managing director at investment bank Houlihan Lokey, referring to Aetna, Anthem and UnitedHealth Group. “It gives them pretty good provider negotiating leverage across a number of states.”
More than 10,000 baby boomers and disabled Americans are becoming eligible for Medicare every day. Insurance executives herald the Medicare Advantage program as a primary sector for growth, especially considering the fully insured employer health insurance market is flat or shrinking. Anthem and its rival Aetna—which this month signed a $37 billion merger deal with Medicare Advantage powerhouse Humana— both want to bulk up their Advantage business through their proposed merger deals. But they are looking to do so in fundamentally different ways.
Aetna’s pending acquisition of Humana is a traditional market grab. Aetna and Humana have strong Advantage memberships, and combined, they become the leader in the market with 4.5 million Medicare enrollees. That surpasses UnitedHealth, which has 3.5 million members.
Anthem will have 1.1 million Advantage beneficiaries after absorbing Cigna, leaving it well behind Anthem and United and slightly behind notfor-profit Kaiser Permanente. Indianapolis-based Anthem has struggled in recent years to expand this side of its government business.
“Anthem has really never been able to make much of a splash in the Medicare Advantage market,” said Paula Wade, a healthcare analyst at Decision Resources Group. “Every time they’ve tried, they’ve had to back up.”
But executives outlined a longerterm strategy to build the Medicare business through the biggest strength of Anthem and Cigna—their large employer-group business.
More than 80% of Anthem’s revenue will come from commercial con-
tracts with employers across the country, as a vast majority of Anthem’s 53 million medical-plan members are in employer-sponsored plans.
Most companies that work with Anthem and Cigna are self-insured and use the insurers as a third-party administrator and claims processor. That’s a less profitable enterprise than taking on full insurance risk for employer groups.
Anthem’s goal is to retain that massive pool of workers and their families as they age into Medicare. The company will specifically focus on six big states— California, Florida, New York, Ohio, Pennsylvania and Texas—in which it has both a large presence and the potential to sway large numbers of older workers into its Medicare plans. The same strategy could work with lowincome people who churn between Medicaid and the ACA’s insurance exchanges and who eventually will become Medicare-eligible.
“We have all the ingredients to have an extremely well-positioned, very growth-oriented” Medicare business, Anthem CEO Joseph Swedish said last week.
Swedish, the former head of Trinity Health, a hospital system based in Livonia, Mich., will stay on as CEO and chairman of the new company. Cigna CEO David Cordani will become Anthem’s president and chief operating officer, assuming the deal receives approval from state and federal regulators as well as Anthem’s brand sponsor, the Blue Cross and Blue Shield Association.
Private supplemental Medicare coverage is most common among large companies, which are more likely to offer retiree benefits. Analysts say it’s a ripe business for Anthem for two reasons. People with employer-sponsored insurance are generally healthier and less costly than those without such coverage.
Anthem will be in a strong position to capture that healthier, aging employee population, rather than losing them to traditional Medicare or a different Advantage insurer.
“It’s an easy transition to go to that individual and say, ‘You’ve had Anthem, you’ve had Cigna, sign up with us,’ ” said Steve Zaharuk, a senior vice president at credit ratings firm Moody’s Investors Service.
Together, Aetna, Anthem and United will control more than half of the Medicare Advantage market, with even higher percentages in particular markets. That may raise red flags for federal and state antitrust regulators, who could require Anthem and Aetna to divest some local plans.
Yet Medicare is only one element of the consolidating market. Anthem is one of the largest operators of Medicaid managed-care plans, a booming segment with many states shifting their programs to managed care as a way of achieving more predictable budgetary costs.
Anthem and Cigna also will have a dominant position in many employer markets, particularly Georgia, Indiana, New Hampshire and Virginia.
Critics contend that even if the big insurers are forced to shed some assets, they still will wield enormous market power and will use it to cut payment rates to providers, raise premiums and create narrow provider networks, rather than using their economies of scale to lower costs to consumers and employers.
“There’s nothing that will compel those lower costs to go to lower premiums because they’ll possess market power,” said David Balto, an antitrust attorney who formerly worked at the U.S. Justice Department and the Federal Trade Commission. “You’ve created a Frankenstein monster.”
Antitrust watchdogs are not alone in their concerns. The combined Anthem and Aetna companies each would have about $115 billion in annual revenue, putting them among the 20 largest corporations in the U.S.—larger than Microsoft, Google and many other household names. Providers warn that kind of size and power could lead to strong-arm negotiations.
“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,” Dr. Steven Stack, president of the American Medical Association, said in a written statement.
For their part, hospitals also have been consolidating rapidly. Studies show that provider consolidation often leads to higher prices. On the other hand, studies have found that very concentrated health insurance markets show monopsony tendencies and sometimes lead to higher premiums for consumers.
“Anthem complains all the time that hospitals have too much negotiating power,” said Douglas Leonard, president of the Indiana Hospital Association, which represents 130 acute-care hospitals in Anthem’s home state. “But I’m not sure that’s the case.”
In acquiring Cigna, Anthem is gaining one of the most active insurers in private accountable-care contracts. But hospitals lack confidence that the newly merged insurers will feel the need or desire to push forward in collaborations with providers on valuebased payment and delivery models, the direction most experts agree the U.S. healthcare system needs to go.
“Our members have frustration with payers not being innovative on quality and patient safety,” Ohio Hospital Association CEO Mike Abrams said. “This merger may make them even less willing to be collaborative with the provider community. That concerns me.”
Rick Herbst, a partner at Sikich Investment Banking, acknowledged there are “real concerns” about less competition resulting from these giant insurance mergers. Still, he argued, gaining economies of scale is one of the few options insurers have to spread risk and build the technology infrastructure that can help them manage their members’ health and medical costs.
“If you can intervene earlier and help people avoid hospital stays, the better you’re going to be able to manage your costs and profitability,” Herbst said.
The combined Anthem and Aetna companies each would have about $115 billion in annual revenue, putting them among the 20 largest corporations in the U.S.—larger than Microsoft, Google and many other household names.