Payer mega mergers in question: Industry expert weighs in

July 27, 2016

Michael Abrams of Numerof and Associates healthcare consulting firm discusses how the DOJ’s actions to block the Anthem-Cigna and Aetna-Humana mergers could affect the industry.

United States Attorney General Loretta E. Lynch recently announced that the government had filed lawsuits to block Aetna-Humana and Anthem-Cigna mergers.

To learn more about how this could affect the industry and the growing trend of consolidation among payers and providers, Managed Healthcare Executive (MHE) asked Michael Abrams, cofounder and managing partner of healthcare consulting firm Numerof and Associates, to weigh in.

MHE: What will the insurers need to do in order to defend the mergers? What are their arguments likely to be?

The consolidation we’re seeing among insurers is just an extension of the consolidation we’re seeing across hospitals and employed physicians. Much of the impetus for this has been the regulatory burden imposed by Obamacare, and reductions in reimbursement built into the legislation that promise to make the whole business of healthcare delivery less profitable, given the inefficiency built into the current fee-for-service care model.

AbramsConsolidation at the provider level-among hospitals, systems, and physicians-drives the urge to merge for payers, who could otherwise find themselves at a negotiating disadvantage relative to large delivery networks in arriving at acceptable reimbursement terms.

Some of these big players have already pulled out of the exchange business in some markets because they’ve lost millions of dollars. These moves might be read as an implicit threat-that if they are not allowed to consolidate, they might indeed withdraw from the exchange market, rendering it unworkable in many markets.

If they had the size and scope to pressure CMS to approve higher premiums or to increase reimbursement they would. But at this point they don’t. Although consolidation is framed as pursuit of synergy and economies of scale, it also creates organizations whose market share gives them the clout to exert more significant influence on providers and even potentially on CMS.

Anthem has described DOJ’s analysis of the situation as “flawed,” and will have to make an argument that the result of the merger would not be anticompetitive. There has been talk of attempting to mitigate the anticompetitive consequences of the merger by shedding assets to competitors, but DOJ has not appeared receptive to this idea.

Next: What are the biggest arguments against the mergers?

 

 

MHE: What are the biggest arguments against the mergers?

Consolidation in any already concentrated industry that would reduce the top five providers to just three should attract DOJ’s attention. Add to this the administration’s vested interest in healthcare delivery, and DOJ’s attention is guaranteed.

DOJ has framed the problem with the mergers as a reduction in the choice of insurers from which to purchase coverage. Employers would have three rather than four major companies from which to purchase commercial group coverage; seniors in Medicare advantage plans would have only one of the two major coverage providers left from which to choose; and those who purchase coverage on the public exchanges would experience a reduction in the number of choices in plans (and providers) available to them that would vary from state to state. DOJ alleges that the reduction in competition would lead to higher health insurance prices, reduced benefits, less innovation, and worse service.

DOJ has also characterized the Anthem-Cigna merger as an attempt by Anthem to eliminate a competitive challenge by Cigna that would have forced Anthem to lower its prices and innovate to lower costs.

I think the biggest issue for the DOJ is the impact a megamerger would have on competition at the level of state exchanges. This consolidation would create entities that could be in a position to pressure state boards of insurance commissioners or even CMS for premium increases or other changes that would make their exchange business profitable.

While reduction in competition and choice is a major factor for DOJ in this situation, it’s surprising that we haven’t seen more challenges of mergers in healthcare delivery. The reduction in competition that will ultimately be experienced by consumers as a result of hospital, system, and physician mergers has significant consequences as well.

Next: What implications will it have for the industry if the mergers do go through?

 

 

MHE: What implications will it have for the industry if the mergers do go through?

Bigger insurers in general have more leverage negotiating reimbursement rates and terms with hospitals, systems and physicians. The impact varies, however, from market to market depending on the competitor set and the distribution of share. It’s probably safe to say that consolidation will narrow margins for providers.

On the other hand, the mergers could serve as a counterbalance to the consolidation among providers that has created healthcare delivery monopolies that dominate regions across the country. There is evidence that such consolidation leads to higher prices without corresponding improvement in the quality of care.

If the mergers do go through, it will put more pressure on physicians and provider organizations, encouraging further consolidation at that level. Likewise, insurance competitors will be disadvantaged by the resources of the newly merged institutions, and will feel the pressure themselves to buy or be bought.

The net effect if the mergers do go through is an acceleration of merger activity across the industry, leading to fewer, larger incumbents at all points in the healthcare delivery process with more pricing power. The result is likely to be more back-room deals governing price-controls and regulatory requirements in which the consumer is likely to be the loser.

MHE:What implications will it have for the industry if the mergers do not go through?

The consolidation taking place at the level of healthcare delivery is a stimulus for insurers to merge, and so this lawsuit will not halt the idea of mergers among payers. Instead, mergers will involve smaller insurance acquisitions to stay off the radar of DOJ, and we might see more vertical consolidation with payers buying delivery organizations.

The urge to merge is driven by the desire to gain more control. It’s a natural response to the increasing regulation coming out of CMS. As long as government sees the cure for healthcare cost inflation as coming from top-down regulation and not by encouraging market-based competition, payers and hospitals will continue to look for safety in size.

Next: What other considerations should healthcare executives have as they watch to see how these mergers pan out?

 

MHE: What other considerations should healthcare executives have as they watch to see how these mergers pan out?

Numerof and Associates’ State of Population Health Survey was designed to track the adoption of new care delivery and payment approaches that have the potential to lower the cost and improve the quality of care. New models like population health and bundled pricing can bring market forces to bear in driving reduced costs and improved quality. But our first administration in 2015 revealed that the actual implementation of such approaches in hospitals and systems across the country is nominal.

Successful dissemination of such new approaches will only happen if they are driven by payers. CMS as the largest payer in the healthcare landscape is taking incremental steps toward requiring such adoption. Economic pressure on private payers to sustain their margins would be useful in encouraging them to push for this new business model, but further consolidation is an invitation to sustain the status quo.

So far, it’s CMS that’s driving the change and private payers are, with varying enthusiasm, following their lead. The more consolidation in payer ranks, the more difficult it will be to get them to follow along.