Why an antitrust settlement could trigger a big bang in health insurance

Health insurance markets are about to get something they've never had before: competition among some of the most powerful companies in the business.

A tentative $2.7 billion settlement of an antitrust case would free Blue Cross plans to invade each other's markets. Under the deal, the Blue Cross Blue Shield Association agreed to loosen a rule that barred such competition.

That would create big opportunities for Chicago-based Health Care Service Corp., which has been struggling to rev up growth in recent years. The nation's second-largest Blues operator—which owns Blue Cross plans in Illinois, Montana, New Mexico, Oklahoma and Texas—would be free to enter markets across the country as a fully national insurer on par with non-Blue rivals like Humana, CVS Health and Cigna. The proposed settlement also lifts a revenue cap on non-Blue business lines and restraints on acquisitions, opening up new growth pathways for the insurer.

With new opportunities, however, come potential threats. Just as HCSC would be free to enter the strongholds of other Blues plans, it could encounter more competition on its own turf. In theory, that could lead to face-offs with Blues behemoth Anthem.

"If Anthem, for whatever reason, really wanted to go in and dislodge Health Care Service Corp., and that's something the employer wanted to happen, there's definitely a greater potential for that going forward than before," says James Sung, an associate director at S&P Global.

The more likely scenario, experts agree, involves bigger Blues like Anthem and HCSC swiping customers from their smaller brethren. Large national employers that currently work with smaller Blues might now look to an HCSC or Anthem for a broader national plan.

"They could win more business in some of those areas where the smaller plans have been able to keep some of those legacy contracts," says Morningstar analyst Julie Utterback.

Freedom to enter more markets also potentially strengthens big Blues against non-Blue insurers. Such plans have had an advantage in the competition for national employer accounts because, historically, it has been easier for them to create large, multistate networks, Utterback says. But now employers might be more willing to work with large Blue companies—especially if those plans can offer lower prices.

Utterback notes that Blues plans "tend to have very low pricing in general."

COMPETITION

If the settlement leads more plans to enter into new markets, premiums in those markets could fall. But it's unclear whether increased competition will affect the ability of insurers to extract large discounts from hospitals and health systems, says Amanda Starc, an associate professor at Northwestern University's Kellogg School of Management.

"Ironically," Starc says, "you could end up with a situation where, nationally, the market looks less competitive, but in individual markets there is actually more competition."

The settlement also would eliminate a national revenue cap—while relaxing a local one—on products that aren't sold under the cross and shield, allowing plans to maximize profits in and out of their assigned service areas.

The rule could explain HCSC's relatively cautious expansion strategy. Meanwhile, other big insurers like UnitedHealth Group and CVS Health have executed multibillion-dollar transactions that blur the lines between insurers, pharmacies and doctors. Increasingly, they're acquiring physician practices and health care services companies, and marketing them to their own clients, as well as other Blue and non-Blue insurance companies, Sung says. "That piece is something I think a lot of the big Blues that have the capital might look at more deeply."

The proposed settlement also could lead to consolidation—both between Blues plans and non-Blue companies. A rule that requires buyers to ensure the majority of revenues come from Blue-branded products was among the roadblocks to Anthem's failed 2017 merger with non-Blue Cigna.

But freedom to compete comes with a steep price tag. The Blue Cross Association and all 36 independent Blues have agreed to pay $2.7 billion to settle antitrust charges brought by a large group of employers and individual policyholders. Anthem—the third-largest health insurer in the nation—expects to cover 22 percent of the settlement, or $594 million, according to the insurer's third-quarter earnings report. Sources say the charges likely are being allocated by size, with $104 billion-revenue Anthem paying the most, followed by $38 billion-revenue HCSC.

HCSC spokesman Greg Thompson says "each Blue Cross & Blue Shield company will be making a payment toward the settlement." He would not disclose HCSC's portion of the $2.7 billion or comment on the allegations. The proposed settlement requires approval by a judge.

OPPORTUNITIES

Thompson declines to comment on whether HCSC will pursue new competitive opportunities that might arise as a result of the settlement. But industry observers say HCSC could go after employers based in other markets with more than 5,000 workers, and look to buy or build for-profit subsidiaries that offer one-stop solutions focusing on specific conditions such as diabetes, as well as double down on a primary care joint venture with medical center operator Sanitas USA in Texas.

Anthem CEO Gail Boudreaux is similarly coy on how her company might capitalize on the loosening of competitive restrictions on Blues. "I really don't see this changing our stated strategy, and I think that we are very excited about the growth prospects we have across Anthem," Boudreaux told analysts on a recent quarterly earnings call.

Still, the proposed settlement aims to increase competition.

"Whether it does, and in which market it does, remains to be seen," Sung says. "There are a lot of strong Blues on their own, and they do have existing relationships between them. We'll see what happens and how they compete and evolve against some of the other players that have more strategic flexibility. But now the Blues have a little bit more as well."