For Health Insurers, Bigger is Better

Author: Saeculum Research

Bottom Line

• Watch out: The merger mania taking place among health insurers will change this market dramatically.
• Expect any proposed mergers to come under strict scrutiny.
• Look for big insurers and providers to continue merging with each other.
• Get ready for “bundled care” to become the new normal

Now that the Affordable Care Act has officially been upheld as the law of the land, the nation’s biggest health insurance companies are on the prowl for deals. Anthem just announced that it will buy Cigna for $48.3 billion—the largest-ever deal in the industry. Health insurers are bulking up in anticipation of a market reshaped by major changes, among them an expanded array of public and private plans serving millions of new customers, declines in employer-sponsored plans, and new opportunities in the government market. Different generations are also putting their own stamp on health insurance, with Boomers pushing continued growth, Xers championing choice, and Millennials gravitating toward managed all-in-one plans.

The merger continues a sweeping wave of consolidation. News of this agreement comes just weeks after Aetna announced it would pay $37 billion to acquire its rival Humana. Earlier, UnitedHealth Group—the top U.S. health insurer by revenue ($130.5 billion in 2014)—approached Aetna, which was busy squaring off against Cigna for Humana. Analysts predict that when the dust settles, the Big Five insurers will ultimately end up a Big Three composed of United-Health, Anthem, and Aetna. Meanwhile, smaller firms are busy striking deals of their own: Managed health care company Centene recently agreed to buy its competitor Health Net for $6.8 billion.

Driving the consolidation is the Supreme Court’s affirmation of the Affordable Care Act, which has driven rather than offering traditional companywide benefits. According to Accenture, 6 million workers bought coverage from private exchanges (run by benefits administrators like Aon Plc) this year, double the number in 2014. By 2018, it’s estimated that a quarter of employees who are insured through work will select a plan this way. This strategy helps limit what employers spend on health benefits and ensures that this market will slow— putting pressure on Aetna and Cigna, whose biggest source of business has long been large employers. Down the road, the “Cadillac tax” (set to hit in 2018) will further make these plans less profitable.

Instead, health insurers are betting on big growth in the government market. Alongside Medicaid, Medicare is expanding fast—most significantly Medicare Advantage, the privately-run, managed-care alternative to traditional fee-for-service Medicare. According to consulting firm Avalere Health, the number of people enrolled in Medicare Advantage hit 17 million this year—up from 12.2 million in 2011. Insurers that specialize
in these plans have become hot prospects. Case in point: At just-acquired Humana, the program accounts for 65 percent of revenues.

Given these changes, experts say that merger mania was inevitable. Health insurers are seeking diversified offerings and greater scale in hopes of extracting additional savings out of a broader customer base. Some argue that this is a good thing: Larger insurance companies will be able to drive harder bargains and win better terms from medical providers, leading to lower costs for patients. They could also offer provider networks with greater choice of doctors and hospitals.

Consumer advocates, however, are skeptical that any savings will be passed on to the public. Researchers examining previous mergers and acquisitions have found that premiums tend to rise as the result of less competition. The 2007 merger of UnitedHealth Group and Sierra Health Services, for example, resulted in premiums that were 14 percent higher for consumers in Nevada. In the journal Health Management, Policy, and Innovation, the authors concluded: “Our findings suggest that the merging parties exploited the market power gained from the merger.”

How are different generations faring in today’s new insurance landscape? Aging Boomers—who are both more numerous and, on average, less healthy than their own parents were at the same age (see CW: “Boomer Malaise”)—are powering the majority of health care spending. In 2010, per-capita spending (excluding out-of-pocket expenses) was estimated to be $16,000 for adults age 65 and older, compared to $7,100 for 45- to 64-year-olds and $3,800 for 19- to 44-year-olds. As more Boomers become eligible, the popularity of Medicare Advantage plans is only going to keep growing—suggesting that Democrats may soon back off from their attempts in Congress to scale back the
program.

Generation X has welcomed the shift from employer-sponsored plans to individual options. The marketplaces allow them to shop around and personalize their coverage more readily. Xers just want to find health care that is cost-effective and suited to their lifestyle, whether it occurs on a per-treatment basis, under a single umbrella, or takes place in person or on a tablet screen.

Millennials, by contrast, are looking to be taken care of. Their preferred plans will likely offer more tightly coordinated group care. This model has long been criticized for being too restrictive, but young people may consider giving up some freedom of choice a fair exchange for the convenience and relative simplicity of centralized health care— particularly if it’s a flexible, point of service (POS)-style plan with more options than an HMO or PPO. Over the long term, the line separating insurers from health care providers will become increasingly blurred—with insurers, hospitals, and physician groups combining to control costs and patients opting for the one-stop shop that can manage all their needs.

Takeaways

• Watch out: The merger mania taking place among health insurers will change this market dramatically. The Supreme Court’s affirmation of the Affordable Care Act has kicked off a spate of mergers among health insurers trying to get ahead in the new marketplace, which promises new opportunities in the government market and less traction for employer-provided plans. Anthem plans to buy Cigna, while Aetna has announced the same for Humana. If approved, these deals will shrink the Big Five insurers down to a Big Three of outsized scale and power. Today’s generations are also playing a major role in determining the future of health insurance—with Boomers consuming the most care, Xers welcoming individual plans, and Millennials looking for more coordinated care options.
• Expect any proposed mergers to come under strict scrutiny. By striking the first major deal, Aetna and Humana hoped to get an edge in reviews by antitrust regulators. But the Department of Justice has signaled that it plans to review all merger combinations—current and future—closely. A recent Wall Street Journal analysis warns these potential deals would have anti- competitive effects and likely drive up prices—considerations that led the DOJ to block similar mergers as recently as 2012. The insurers counter, however, that they need size and resources to effectively face off against also-rapidly consolidating health care providers.
• Look for big insurers and providers to continue merging with each other. The past few years have seen a growing number of partnerships among once-adversarial players. One of the most prominent examples is Anthem Blue Cross Vivity, a massive joint venture in California between Anthem, seven rival hospital groups (including big-name hospitals like Cedars-Sinai), and their doctors. Similar arrangements are now available through St. Louis-based hospital system Ascension Health and New York’s North Shore-LIJ Health System. Though these deals have been initiated by different parties, the result is the same: more hospitals that offer health plans and insurers who provide health care.
• Get ready for “bundled care” to become the new normal. The fee-for-service model that has long dominated health care is on its way out. Obamacare’s cost controls, the growth of individual high-deductible plans, and local and state incentives are among the myriad forces favoring managed care. The results have been promising: UnitedHealth Group recently announced that its 2015 revenue would exceed projections by
  $2 billion, thanks to its pivot to managed care combined with more customers. The next frontier may be for these firms to push “direct primary care”—the capitated flat- fee model now most closely associated with Qliance, which serves both affluent payers and Medicaid patients.

Suggested Reading

• Christopher Weaver. “Insurers Playing a Game of Thrones.” The Wall Street Journal. June 16, 2015.
• Dana Mattioli, et al. “Anthem Nears Deal to Buy Cigna for $48 Billion.” The Wall Street Journal. July
  22, 2015.
• Larry Levitt, et al. “How Have Insurers Fared Under the Affordable Care Act?” Kaiser Family
  Foundation. June 1, 2015.