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Mega-Mergers Among Health Insurers Bode Ill for Hospitals

By Gregory A. Freeman  
   June 18, 2015

Cash-rich insurers have consolidation in mind, which would mean higher returns for them but lower revenues for hospitals.

With hospitals already jockeying for the best negotiating position with rival insurers, the news that some of the biggest players in healthcare insurance are looking to merge with competitors is turning up the summer heat for healthcare leaders.

If these multi-billion dollar mergers go through, hospitals may lose much of their negotiating power.

After months of speculation, UnitedHealth Group Inc. and Anthem, Inc., the two largest insurers in the country by revenue, have both made moves to acquire smaller health insurance companies. (Anthem was known as Wellpoint until last year.) The Wall Street Journal reported Tuesday that in recent days, UnitedHealth made an overture to take over Aetna Inc., a deal estimated to be valued at $42 billion.

Robert Fuller, JD

Aetna already had been looking to acquire Humana Inc. and Cigna Corp. Cigna turned down Aetna's offer in the past few months, the Wall Street Journalreported Monday, an offer estimated to have been worth about $45 billion.

Aetna's $37B Humana Acquisition Has Providers Wary

The Journal also reported that in the past week, Anthem made a play for Cigna, trying to put together a deal that would bring Anthem closer in size to the current biggest player, UnitedHealth.

The two top payers are substantially larger than the insurers they are trying to acquire: UnitedHealth's revenue last year was $130.5 billion and Anthem's was $73.9 billion. Last year's revenue for target companies Cigna and Aetna, was $34.9 billion and $58 billion, respectively.

Anthem already dominates the individual and small-group markets in the 14 states where it holds the rights to be the Blue Cross and Blue Shield insurer, while Cigna is stronger in the self-insured commercial business. Another benefit: Merging would give the combined companies a leg up in the Medicare Advantage market, with more than a million Medicare members.

Bad News for Hospitals
Though commercial insurers are not confirming many of the reported details or merger speculation, some healthcare leaders and industry observers say consolidation is likely.

Feds May Spoil Mega-Mergers Among Payers

And that is uniformly bad news for hospitals, says Robert Fuller, JD, who served as executive vice president and chief operating officer of Downey Regional Medical Center in Los Angeles from 2001 to 2013, when he joined the law firm of Nelson Hardiman in Los Angeles as a healthcare analyst and attorney.

"The bottom line for hospitals, long term, is negative on consolidation," Fuller says. "This is not great for hospitals."

Competition among insurers has encouraged cost cutting innovations such as narrow networks, new arrangements with physicians, and incentive payments for population management, he notes, but that encouragement may turn into something else when the companies merge.

Clinically Integrated Network Wants to Collaborate with Payers

"If, as a hospital, you look up and all you see is gigantic UnitedHealth and gigantic Anthem, and no one else who might compete for your business, it's going to be blunt force applied to hospitals rather than trying to offer something attractive," Fuller says.

"The blunt force size plus lack of choice is going to give you higher returns for the insurance companies, which means lower revenues for the hospitals."

Insurers Hold Negotiating Advantage
Merger activity is heating up now because the insurers have become tremendously cash-rich, says Fuller, who studied the balance sheets of several companies this week. While hospital revenue is improving somewhat, he says, the balance of power when negotiating with the merged companies will definitely be in favor of the insurers, Fuller predicts.

"If you follow the consolidation to its logical conclusion, you're going to end up with two or three super players and I think they would be able to dictate terms," Fuller says. "That's when the political question will arise, asking 'why we're allowing all this profit to go to the insurers when they really aren't risk-bearing entities anymore?' The whole model of healthcare has changed in the past twenty years to have the provider taking the risk."

Fuller suspects that if Anthem and Cigna do merge, then Aetna and Humana would either have merge or offer themselves up to the two biggest companies. Otherwise, their ability to attract and maintain market share would dwindle as the two biggest players consolidated fixed costs and leveraged their huge pools of insured lives.

The End of Narrow Networks?

Providers' choices will decrease steadily over the next several years, he says, with many finding that where they might previously have been able to participate with several insurers to maximize the number of lives, they might soon only have one or two options.

That will result in insurers adopting a "take-it-or-leave-it" approach with hospitals, Fuller predicts, which could mean the end of narrow networks and other components that benefit the hospital's bottom line.

Bill Bithoney, MD

"When they're not under pressure to acquire market share anymore because they've already done it through acquisition, they won't have to undercut the other guy's prices too much or offer any creativity and innovation at all to attract hospital systems to your product," Fuller says. "In five or six years we'll be back to an insurer-dominated equation."

Medicare Advantage

Another way insurers might exercise that power is in the Medicare Advantage program, says Bill Bithoney, MD, a managing director at BDO Consulting. He formerly served as CEO, CCO, and CMO at Sisters of Providence Health System in Springfield, MA, where he developed a model accountable care organization (ACO).

Medicare Advantage is similar to an ACO because providers are allowed to retain savings, he notes, and it represents full-risk, full capitation for insurers.

"Insurers who are dominant in the market could easily set quality standards for cost and process outcomes, and say if you don't meet these you're excluded. That will be bad news for many hospitals," Bithoney says. "They couldn't do that so easily a few years ago when the insurance marketplace was more varied. That ability to dictate performance has grown recently, and these big mergers would take that a great deal further."

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