Potential insurance mergers could spur more provider consolidation

The titans of the health insurance industry are locked in a dance of buying and selling. Hospitals, physicians, employers and consumers could experience financial repercussions if any big deals are concluded.

Insurance consolidation could spur more consolidation among providers to counter the greater bargaining power of a smaller number of big insurers. But some predict the Obama administration will be wary of approving any big insurance mergers.

UnitedHealth Group, Anthem, Aetna, Humana and Cigna Corp.—the five largest for-profit health insurers in the country—are all in the mix for some kind of tie-up. UnitedHealth has made a move to acquire Aetna, while Anthem has taken a run at Cigna, according to the Wall Street Journal. Aetna and Cigna also have considered buying Humana, which put itself on the block last month.

Scott Fidel, an analyst at Deutsche Bank, equated the managed-care dealings to “Game of Thrones,” the HBO series in which several high-power characters battle to reign over the kingdom.

The merger talk has sharpened the long-standing war of words between insurers and hospitals over consolidation.

Health insurers have been sharply critical of hospital tie-ups across the country, such as mergers in recent years between Trinity Health and Catholic Health East and between Baylor Health Care System and Scott & White Healthcare. America's Health Insurance Plans, the industry's lobbying group, has said that when hospitals merge, it “comes with a price that consumers and employers simply cannot afford.”

Hospitals are just as critical of potential insurance deals, arguing that insurance oligopolies keep provider payments low while boosting prices for customers.

“The question really should be, what value are (insurers) going to bring to the consumer and to the premium payers?” said Chip Kahn, CEO of the Federation of American Hospitals. “Does this consolidation mean that higher cost-sharing and narrower networks are what consumers will end up with?”

Insurers view the increased scale as a primary way to boost earnings and diversify their products. The Affordable Care Act caps health insurance profits as a percentage of premium revenue. The insurers, along with some independent observers, also argue that getting bigger will enable them to leverage lower prices from providers, drugmakers and other industry players, thus saving money for employers and consumers.

Each insurer brings different moves to the merger dance. Humana is one of the largest Medicare Advantage insurers. Cigna predominantly serves employers. Aetna's business is spread across employers, Medicare and Medicaid.

Michael Bernstein, a partner with Baird Capital's private-equity team, said he didn't expect to see insurance consolidation at this “jumbo” scale. For instance, if UnitedHealth bought Aetna, it would create a company with $200 billion in projected revenue this year. That's almost four times as large as the two biggest for-profit hospital companies, HCA and Community Health Systems, combined. “When you already have most or all of the benefits of enormity, I'm not sure becoming even bigger confers more economic benefit,” said Bernstein, former president of Wisconsin's Blue Cross and Blue Shield plan.

Having only three big commercial insurers remaining, Bernstein said, might nudge providers that have been sitting on the fence to merge with a larger system, creating a chain reaction of more industry consolidation. Beyond that, insurers would cut back on the multiple vendors that provide them technology and care-management tools. “I can't read a scenario where the industry that serves payers isn't negatively impacted by a combination,” Bernstein said.

Any insurance mergers almost certainly would face rigorous antitrust scrutiny from the U.S. Justice Department because of the colossal sizes of companies involved and the multistate impact. The Obama administration in the past has been critical of insurers' premium increases, and rate increases by bigger new entities could jeopardize the administration's cost-control efforts under healthcare reform.

The price tags of Aetna, Cigna and Humana could range from $35 billion to $65 billion or more, using average valuation multiples of healthcare deals this year. That's just as large as the $45 billion Comcast Corp.-Time Warner Cable merger that ultimately fell through. The communications giants reportedly called off the deal because the Justice Department's antitrust division was prepared to block it.

Sheryl Skolnick, a managing director at Mizuho Securities USA, said a large insurance merger could face the same pushback from the lame-duck Obama administration. “They have nothing to lose by saying what they really want to say, which may be no,” she said. “These mergers directly affect Obamacare.”