Regulators at the Federal Trade Commission and the Department of Justice will scrutinize any potential mega mergers among health insurance companies for signs of market dominance and the attendant risk of higher costs.
Editor's note: Aetna Inc. announced early Friday, July 3, that it would buy Humana Inc. for $37 billion. The deal raises the possibility of federal intervention over market dominance in 180 counties where the combined entity would hold 75% of the Medicare Advantage members.
Amid the merger frenzy going on among healthcare insurers, the mere mention of one word can give healthcare leaders pause: antitrust.
The recent Supreme Court ruling upholding subsidies for Obamacare was like a starting gun for healthcare leaders eager to acquire competitors, but afraid to move until they knew the future of the government health plan. The 6–3 ruling in King v. Burwell reassured healthcare companies that 6 million Americans will be able to keep their health insurance subsidies and not suddenly fall off the rolls of paying customers.
Now that health insurers and hospitals are haggling like floor traders on Wall Street, government regulators are preparing to play the spoiler. In the biggest potential merger of insurers, Aetna appears on the verge of buying Humana, according to a recent report from Bloomberg. Humana has been using its best feature, a large share of Medicare Advantage enrollees, to woo potential buyers.
Anthem also made overtures recently to Cigna, which turned down the offer after speculation became public, according to the Wall Street Journal. United HealthGroup has also made takeover signals toward Aetna.
It is conceivable that as few as three companies could control most of the U.S. healthcare insurance market.
Hospitals also have been in a marrying mood, with 95 hospital transactions announced in 2014, according to an analysis by Kaufman, Hall & Associates. The number of transactions in 2014 is a 44% increase compared with the 66 transactions in 2010, and 2015 seems to be following the same pattern.
Hold On
But all this conjoining of rival insurers and hospitals could be slowed, and some deals vetoed entirely, if the Federal Trade Commission doesn't like the idea of already dominant companies becoming even bigger. Regulators at the FTC and the Department of Justice are watching the potential mergers carefully, one official told the Wall Street Journal. If several deals happened at once, the official said, regulators would assess the collective antitrust effect rather than looking only at the merits of each individual merger.
The FTC "will absolutely review" the structure of these potential deals given the likely concentration of market share, particularly in Medicare Advantage, says Hank Osowski, co-founder and managing director of Strategic Health Group, a healthcare consulting firm in Los Angeles. He notes that the top six Medicare Advantage plans by membership are:
- United Healthcare (3.2 million members)
- Humana (2.9 million)
- Kaiser (1.3 million)
- Aetna (1.1 million)
- Anthem (0.6 million
- Cigna (0.5 million)
"The FTC may have less concern in commercial markets, even though all these potential combinations have significant share of the commercial markets given the greater freedom of movement for commercial accounts on an annual basis and the relative level of competition for these accounts," he says.
There may be some issues relative to reduced competition in a limited number of health insurance exchanges, Osowski says. Combining Medicare Advantage's top plans will have FTC attorneys looking closely at the potential deals and will undoubtedly require the combined plan to divest significant membership in those markets where there would be a significant concentration of market share, he says.
Osowski notes that that an Aetna-Humana merger (potentially totaling 4.0 million Medicare Advantage members) would create 180 counties where the combined entity would have 75% of the Medicare Advantage members, mostly in the South and Midwest. A United Healthcare-Aetna merger (potentially 4.3 million Medicare Advantage members) would have about 68 counties where the combined membership would be at least 75% of the market.
The possible Anthem-Cigna merger may be less problematic since, even combined, the new entity would have significantly fewer Medicare Advantage members than United, Aetna or Humana and it does not appear that there is much market overlap between the two companies, Osowski says.
The accelerated pace of provider consolidation has to be a concern to the FTC, which won a series of relatively recent rulings against hospital mergers and consolidations, says Dale Webber, JD, a shareholder and healthcare analyst with the law firm of Buchanan Ingersoll & Rooney in Tampa, FL.
"These rulings have generally found that the increased market power and risk of higher costs associated with provider consolidation have outweighed the increased efficiencies to be achieved through the greater coordination of care across a new, broader provider network," Webber says.
Federal Scrutiny
The FTC will analyze prospective health insurer mergers and consolidations through the same anticompetitive lens it uses to evaluate health provider transactions, Webber says. The FTC's focus will be on whether a proposed health insurer transaction will lessen competition or tend to create a monopoly, either of which would tend to drive up the costs of insurance to the consumer by distorting the equilibrium of the health insurance market.
"The FTC's enforcement activity in the healthcare provider area highlights the fact that regardless of the efficiencies to be gained in any health insurer merger or consolidation, the FTC will look at such transactions with a jaundiced eye if the risks to the consumer are deemed to be excessive," Webber says.
And an FTC investigation is no small matter. No matter how powerful the players are in the healthcare insurance industry, they are no match for the FTC, Osowski says. Once FTC regulators step in, company CEOs lose much of their control.
"Our past experiences with the FTC and market divestiture is that the FTC attorneys will absolutely run the process," Osowski says. "It will be a comprehensive market by market review and in the end, the FTC will seek to have an acquirer with the deepest pockets possible, in the form of the strongest reserves, to avoid any possible market disruption."