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Anthem’s acquisition of Cigna is being called the first “merger of titans” by industry watchers. Here's what to know.
Anthem’s acquisition of Cigna is being called the first “merger of titans” by industry watchers.
The forces of consolidation are well under way and the merger was not totally unexpected-all of insurance is going through similar consolidation, according to Munzoor Shaikh, a director in West Monroe Partners' healthcare practice.
“Healthcare insurance business is not the best today in terms of return on capital,” Shaikh says. “We see this as a trend in consolidation toward an oligopoly system. The U.S. healthcare system is averse to a single payer system-monopoly-and we see an oligopoly as an alternative equilibrium point.”
John Santilli, partner, Access Market Intelligence, a company of thought leaders, innovators and advisers, agrees.
“The consolidation of the health insurers market has been inevitable as a result of the [Affordable Care Act (ACA)] as the companies seek to gain greater scale to capitalize on growing opportunities in the government and individual markets and reduce costs,” Santilli tells Managed Healthcare Executive. “The ACA has increased revenues for health insurers but has also increased profit margins as the movement toward pricing transparency has grown and funding for government plans has decreased.”
The employer-sponsored commercial segment is the strength of both Cigna and Anthem, according to Santilli. “However, each company focuses on different employers. Anthem’s focus is on local employers, with the majority of members located in the headquarter state of the employer. Cigna’s focus is on employers with employees spread across multiple states. Along with increased membership, the merger should help the new company with integration issues in multistate employer accounts.”
The international market should open up for Anthem, as Cigna offers medical benefits to about 1.3 million people around the world, especially in Europe, adds Santilli.
Additionally, Anthem’s specialty business should be strengthened as a result of the merger, offering insurance policies focused on medical services related to dental, vision, disability, and chronic conditions.
“The merger also offers synergies in the pharmacy benefit management [PBM] business of the new company as the PBM market will evolve offer the next few years,” he says.
Shaikh sees this is as a mega-merger of two slightly different cultures, one being a non-profit “which seems a bit more community focused,” and one a for-profit, “which is a bit more focused on efficiency of processes and outcomes,” he says.
“The cultural merger will be interesting to see which, if either, culture becomes dominant,” Shaikh says. “Healthcare should ideally be a social business-similar to a low-profit limited liability company [L3C]. With the slightly two different cultures, it will be interesting to see where the combined company lands.”
According to Shaikh, the Anthem-Cigna marriage should create more efficient processes and offerings to the marketplace.
“Contracting will be an interesting area to watch as there will be a lot of work on behalf of the combined entity to work on consolidating contracts,” Shaikh says. “Though the ‘best of both worlds’ is a theoretical possibility, the inertia and difficulty of merging two behemoth claims and contracting systems will be a significant barrier to post-merger integration causing a delay in a possible synergy realization for the end-consumer as well as for the shareholders.”
The merged company will likely encounter branding issues in 14 states where Anthem operates as Blue Cross or Blue Cross/Blue Shield, according to Santilli.
In additional to the possibility of brand issues, Santilli points out a few additional downsides of the merger: The new company will have the scale to compete against UnitedHealthcare, but it will still lag in technology and vertical integration, he says. “[In addition] it will increase the new company’s position in the Medicare Advantage market, but it will have only 6% share post-acquisition."
The experts offer 10 things you need to know about this merger:
#1. Synergy realization may be difficult.
#2. Population health solution offerings will get worse. “Though one would expect that a merger of two titans would bring the best of both worlds in terms of producing better outcomes for members, the organizational change management barrier will overtake the ability to integrate the clinical processes and systems in a way to help improve population health,” Shaikh says.
#3. Hospital and clinic executives should beware of pricing pressures from the combined entity with greater purchasing power.
#4. Employer groups and individuals should expect a moderate premium increase due to larger bargaining power and slower synergy realization from the combined company.
#5. Competitor executives need to watch out and proactively look to acquire others themselves. They should “merge now or get outcompeted.”
#6. The merger does not increase the new company’s capability of delivering vertical or accountable care, which is the leading trend in healthcare as providers work to keep people out of hospitals, offer transparency and compliance, and increase wellness offerings.
#7. With the announcement happening so close to the Aetna-Humana merger, regulators will have to consider both deals at the same time, and decide if this significant consolidation in the health insurance market will be anticompetitive for consumers.
#8. Health insurers are all struggling to shift from a plan and claim-centric model to a consumer model. Making this transition while completing a merger and integrating two of the industry leading companies will be more difficult.
#9. Merger creates a new company that will be a leader in providing healthcare services and strengthens care management capabilities. The new company will also be a force in providing pharmacy benefits, serving members who use more than 600 million prescriptions annually.
#10. The implementation of the ACA has resulted in what some say has been the inevitable consolidation of the health insurance market leaders. What will be the next steps should the consolidation prove unsuccessful?