Providers fear insurance mergers will intensify rate pressures

Dr. Robert Wergin practices family medicine in Milford, Neb., population 2,000. His office interacts with many different health insurers. But three carriers—Blue Cross and Blue Shield of Nebraska, Aetna subsidiary Coventry Health Care and UnitedHealthcare—are the dominant private payers in his area. That number could shrink even more.

The health insurance industry is on the verge of large-scale consolidation as its leaders seek to drive down costs, increase negotiating leverage and boost profits. Anthem has gone public with its takeover offer for Cigna Corp., valuing the deal at $54 billion. Aetna is reportedly on the brink of acquiring Humana, while UnitedHealth Group is considering a complex buyout of Aetna. In addition, Wall Street views the smaller publicly traded insurers, such as Centene Corp., Molina Healthcare and WellCare Health Plans, as ripe targets for a second round of dealmaking.

Insurance consolidation could, in turn, spur more consolidation among providers to counter the greater bargaining power of a smaller number of big insurers. And independent providers are wary about that. “If providers merge, then insurers have to merge, and if insurers merge, then providers have to merge,” said Erik Gordon, a business professor at the University of Michigan. “It's a cyclical arms race, until antitrust steps in and says that's enough.”

The merger tremors worry Wergin, president of the American Academy of Family Physicians. Consumers' choice of health plans would shrink, and insurers' cost savings would not guarantee lower premiums for employers and consumers or broader provider networks, he said.

The AAFP wrote a letter this month to the Federal Trade Commission warning that letting health insurers morph into leviathans would result in “increased leverage and unfair power over negotiating rates with hospitals and physicians.” Deals would especially affect smaller physician practice groups like Wergin's.

“When you're rural or a small practice, your leverage is limited,” Wergin said. “If you take small practices like mine and squeeze me hard, you might be closing my doors.”

Insurance mergers have been building for years, spurred by the Affordable Care Act, which puts pressure on healthcare organizations to cut costs, improve care and strengthen care coordination. Provider organizations and insurers have seen that as a green light to combine and build economies of scale into their respective sectors.

Stand-alone hospitals and physician groups in crowded markets already have limited negotiating leverage with insurers, and often find themselves in a take-it-or-leave-it situation. That has led many physician groups to refuse to sign contracts, increasing the risk of patients getting stuck with large out-of-network medical bills. Wergin said his practice and his town's critical-access hospital have not signed network agreements with UnitedHealthcare because the insurer demands discounts that are “too deep.” Providers and policy experts worry insurance mergers will intensify these pressures.

“That's going to be a concern for the entire provider community,” said Steven Sonenreich, CEO of Mount Sinai Medical Center, a 608-bed independent teaching hospital in Miami Beach, Fla. “Unquestionably for stand-alone institutions, it's an even greater challenge.”

The first domino to fall in the insurance merger game appears to be Anthem and Cigna. Anthem offered to pay $184 per share for Cigna. In assuming Cigna's debt, the price tag would be about $54 billion, potentially the largest deal in health insurance history.

Anthem believes that $2 billion in costs can be cut from the merged company within two years. But Doug Sherlock, a veteran healthcare analyst at Sherlock Co., said only 15% to 20% of administrative expenses are subject to economies of scale in most mergers, making it important to not overstate potential savings.

Analysts predict Cigna ultimately will say yes. Cigna CEO David Cordani wants to head the new combined company, but Anthem has spurned that demand.

Instead, Anthem CEO Joseph Swedish would remain as chief and become the company's chairman and head of integration. Cordani, who would be owed almost $10 million in cash severance and tens of millions of dollars in unvested stock awards if Cigna is taken over, would become president and chief operating officer.

Cigna also has aired other concerns, such as approval from the Blue Cross and Blue Shield Association, which provides Blues licensing to Anthem, as well as pending antitrust litigation against the association. The Association limits how much of a licensee's business can be branded outside of the Blues and how the company can compete with other Blues plans. Lawsuits against the association allege that Blues plans collude to create monopolies in different healthcare markets.

But Anthem's Swedish said last week that “we have provided a clear, comprehensive and compelling offer. We just felt that the process was not developing in a way that we felt would be coming to an end that best represented the interests of the shareholders.”

Anthem and Cigna overlap in some markets. A combined entity would have about 1.1 million Medicare Advantage members, keeping Anthem as the fifth-largest Advantage insurer. But most of the scrutiny would come in the commercial market. In New Hampshire, for example, Anthem and Cigna control 67% of the large-group insurance market, according to the Kaiser Family Foundation. That would give them powerful leverage over area providers in rate negotiations.

While those areas of overlap may prompt scrutiny from the Justice Department's antitrust division, it wouldn't necessarily derail these deals. The merged companies could agree to make divestitures in markets where competition would be reduced. The Justice Department uses a measure called the Herfindahl–Hirschman Index to determine the competitive landscape of individual markets. “It's not a question of absolute size,” Gordon said. “It's a question of alternatives in the market.”

Not all hospitals would necessarily come under the thumb of bulked-up insurers. Dominant regional and national health systems still hold considerable negotiating power in certain markets. Ana Gupte, a managing director at Leerink Partners, said for-profit hospital chains such as Nashville-based HCA are watching insurance consolidation moves closely. But they “remain confident that their own local market strength remains decent in all potential scenarios,” she said.

“The reality is healthcare markets are local,” said Matthew Cantor, a partner at antitrust law firm Constantine Cannon. “What's going to make a difference is whether the insurer would have a large percentage of customers in a certain locality.”

Cantor argues that insurers would have had a stronger case for consolidation with the government's antitrust enforcers if the Supreme Court had thrown out the ACA's premium subsidies last week. Without subsidies, the individual market would have been severely disrupted. “It's going to be much harder to make that argument now because there's a lot of opportunity for organic growth out there,” he said.

With the likelihood of big insurance mergers growing, many observers remain skeptical about their broader societal benefits, citing the lack of evidence that mergers in other industries have helped consumers. “I'm trying to think of an example of where consolidation has driven down costs and improved service,” Sonenreich said. “I know I'm paying more for my cable bill, and I know I'm paying more for my airplane tickets.”