With a $54.2 billion deal between Anthem and Cigna looking likely by the end of this week, the nation’s five largest health insurers could soon have the power of three.
Anthem’s purchase of Cigna for $188 a share would result in the creation of a health-insurance giant serving 53 million people. Next in membership size would be UnitedHealth Group with 45 million members. Humana and Aetna, which announced a merger earlier this month for $34 billion, would serve 33 million people.
The largest of the giants by revenue would be UnitedHealth Group ($154 billion in projected revenue for 2015), followed by Anthem-Cigna ($117 billion) and Aetna-Human ($115 billion).
Healthcare companies have been looking to boost efficiency and cut administrative costs ever since the passage of Obamacare in 2010. That’s no surprise. What’s not so clear? The impact these mergers will have on consumers. Will the increased clout of the new Big 3 actually benefit consumers by helping to negotiate lower rates and prices with hospitals and medical providers? Or will the mergers serve as a quasi-monopoly, locking in rates no one can dispute?
“Less competition rarely leads to lower prices for consumers in the end, though the insurance market has some quirks that make the analysis more complicated,” says Larry Levitt, Senior Vice President at the Kaiser Family Foundation. “As the hospital industry consolidates, there are some advantages for employers and consumers to having bigger insurers around to counter the market power of health care providers. How that ultimately shakes out for consumers will vary from market to market and depends on the relative market strength of hospitals and insurers.”
Levitt also points out that the Affordable Care Act includes protections that limit the ability of insurers to gain windfall profits from less competition. According to the 80/20 rules, the Medical Loss Ratio regulations in the Affordable Care Act insurers are required to spend a minimum of 80 percent of premium income on medical care to consumers and small businesses. For large businesses, that threshold is 85 percent. Insurers that fail to spend a certain share of their premium revenues on health care expenses for patients will have to give rebates to consumers and employers.
The consolidations will no doubt kick off antitrust scrutiny to examine how the mergers will affect Medicare, Medicaid, individual insurance and commercial insurance. Currently the bulk of Cigna’s business is large employers who are self-insured. The company also insures 24 million behavioral care customers, almost 14 million dental care members, eight million pharmacy benefit plan members and 1.5 million Medicare Part D pharmacy customers.
As recently as June, Cigna rejected a $47.7 billion offer from Anthem, worth $184 a share, because of differences over who would lead the company, issues of corporate governance, and potential conflicts with Blue Cross Blue Shield. Anthem currently operates health plans under Blue Cross Blue Shield in 14 states. It is part of the BCBS national network, which is made up of 37 different health plans.
If history is any indication, the mergers could hurt consumers. As The Washington Post reported, a 2012 consolidation study of the 1999 Aetna-Prudential merger concluded that premiums increased by seven percentage points after the merger.
Still, there are reasons for consumers to remain optimistic. Dan Mendelson, the CEO of Avalere Health, predicts the mergers will go through and could very well produce “more capable organizations that are more effective at managing risk and improving the quality of health care. Information technology, aggregating data, using analytics—these are the kinds of activities that really benefit from scale.”
This story was updated on July 24th at 9:15 am.