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Payer Concentration Reaches End Game

 |  By Christopher Cheney  
   July 15, 2015

With health insurance markets highly concentrated at the state level from coast to coast, the proposed merger of Aetna and Humana will face intense scrutiny from federal regulators.

Political advocates of financing the healthcare industry through a publicly operated single payer often extol the societal benefits that scale and standardization could generate.

Market forces put a premium on scale and standardization, too.

This month's proposed $37 billion merger of Aetna and Humana is the latest move in a decades-long consolidation trend in the commercial health plan sector that has accelerated since passage of the Patient Protection and Affordable Care Act in 2010.

If the proposed merger passes Department of Justice muster, the combined new company would have more than 33 million health plan members and would post revenue this year estimated at $115 billion, according to a joint statement from Aetna and Humana.

UnitedHealthcare, a division of East Minnetonka, MN-based UnitedHealth Group, is the reigning king of health plan membership, serving more than 26 million members in the commercial group and individual markets alone.

Vivian Ho, PhD, a professor of economics at Rice University and professor of medicine at Baylor School of Medicine in Houston, says the proposed Aetna and Humana merger could be the end of the line for payer consolidation, with regulators stepping in to preserve the balance of negotiating power between healthcare providers and payers.

"It's fair to say the insurers are way ahead in the consolidation game. There have been studies that have shown that payers have market power," Ho told me last week. "There is definitely a lot of skepticism about this merger going through. The federal government is very sensitive to this."

Monopolistic Market Conditions
Skepticism? Healthcare providers are apoplectic at the prospect of payer consolidation.

Last fall, the Chicago-based American Medical Association released a payer consolidation report based on 2012 data that drew alarming conclusions. A key finding indicated monopolistic market conditions already in place in many states: 17 states reported having a single healthcare payer controlling at least 50% of the commercial market share, and 45 states reported having two payers controlling at least 50% of the commercial market share.

The authors of the AMA report, "Competition in Health Insurance: A Comprehensive Study of U.S. Markets," urged antitrust regulators to act aggressively. "We find that the majority of U.S. commercial health insurance markets are highly concentrated. These markets are ripe for the exercise of health insurer market power, which harms consumers and providers of care. Our findings should prompt federal and state antitrust authorities to vigorously examine the competitive effects of proposed mergers between health insurers in the future."

In a conference call last week with analysts from 10 financial institutions, including several investment banking behemoths such as Wall Street icon Goldman Sachs, top executives at Aetna and Humana said their merger deal is not only good for their businesses, but also good for the evolving healthcare industry.

Aetna Chairman and CEO Mark Bertollini said the proposed merger would generate a host of benefits inside and outside the combined company, mainly as a result of scale, adoption and standardization of best practices, and the combination of corporate cultures that are equally committed to the healthcare industry's shift from service volume to service value.

"The combination with Humana will create one of the nation's premier managed care companies. Additionally, the combination will increase Aetna's exposure to faster growing government programs, with government programs representing 56% of projected 2015 operating revenue on a combined basis…

"The acquisition of Humana will also strengthen our efforts to be a leader in the move to a more consumer-oriented healthcare marketplace. Humana's consumer strategy and investments to date are very much aligned with Aetna's vision of the future of healthcare delivery…

"A key component of our growth strategy is rooted in our efforts to lead the transformation of the provider model from one of episodic care to population health management. We have organized our provider enablement assets under the Healthagen banner to create an organization focused on enabling this transformation in the marketplace. Humana is also enabling providers in their transition to a population health model through the integration of its Certify and Anvita assets under the Transcend Insights banner…

"The acquisition of Humana will strengthen the care management capabilities we offer our customers by creating a comprehensive spectrum of provider solutions, including a robust offering of patient-centered provider services, clinical intelligence, data integration, and analytic solutions. The combination brings together two companies with long-standing commitments to promoting wellness, health and access to high-quality healthcare for everyone, while supporting the communities in which they serve. Finally, this transformational acquisition will further enhance our ability to generate capital to invest in our growth strategy, provide new and innovative products and drive additional shareholder value."

Federal Review
Only the passage of time and the granting of credit lines will prove whether the banking community has confidence in Bertollini's kinder, gentler vision of payer consolidation. The more immediate concern for Aetna and Humana is the Department of Justice's antitrust review of their proposed merger.

David Balto, a former trial attorney in the DOJ Antitrust Division and former policy director for the Federal Trade Commission Bureau of Competition, says the merger deal is a longshot.

"The Antitrust Division is getting more aggressive on healthcare mergers, and they know they can go to court and win," the Washington, DC-based private attorney told me last week. "Increased payer concentration has reached a tipping point. With these numbers, losing even one large insurer to a merger is terrible. Research shows mergers lead to higher prices. When health insurers become more concentrated, there are fewer options [for patients and providers]."

Professor Ho says healthcare providers would be the biggest losers if the proposed Aetna and Humana merger is finalized. "The greatest impact is going to be felt by the hospitals and the physicians. They're not going to be able to negotiate the reimbursement rates they were before."

It also is far from certain that the proposed merger will fatten patient wallets, she says. "I'm not sure there is enough market competition out there among health plans to drive down premiums… A public alternative insurer was discussed during the [Patient Protection] and Affordable Care Act debates. Leaving that public alternative out of the law may have been a mistake."

Christopher Cheney is the senior clinical care​ editor at HealthLeaders.

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