Health System CEOs Oppose Insurer Mergers

Insurers claim that their industry's consolidation will benefit provider organizations through economies of scale. But hospital and health system CEOs don't buy that argument.

In some ways, the announcements that the nation's "big five" health insurers intended to shrink to a big three, with Anthem and Aetna consuming slightly smaller prey in Cigna and Humana, respectively, was unsurprising. Both deals were telegraphed for weeks prior to their announcement.

But unusually, stock prices of both the acquirers and the acquired soared. The markets think the mergers make huge sense, obviously. But the markets are interested in one thing: profits—and that, say many who plan to oppose the deals, is evidence the public will not be served if they are ultimately allowed to combine.

The Department of Justice and the Federal Trade Commission will weigh in eventually, but if they're leaning toward challenging either or both mergers, they'll get plenty of support from hospital and health system CEOs, who say, among other complaints, that any savings from such consolidation will accrue not to patients but shareholders, as the market reaction suggests. Hospitals can expect more pressure to lower costs—and their revenues—from negotiators who will have a stronger position in many markets.

"I'm opposed to both deals," says Mark Laney, MD, president and CEO of Mosaic Life Care, a health system headquartered in St. Joseph, MO, that covers 21 counties with its hospital and clinics in northwest Missouri, northeast Kansas, and southeast Nebraska. "It is likely these would result in cuts to hospitals and physicians groups, who are already struggling with decreases in Medicare and Medicaid reimbursement."

Laney cites the "dramatic" increase in stock prices of the four companies over the past six months (Cigna is up 57% this year, while Anthem is up nearly 30%) as evidence of where investors think the money will flow. Laney and Mosaic will oppose both mergers on principle through the Missouri Hospital Association and the American Hospital Association. Laney says the consequences of such a concentration of power among three companies would lead to greater pressure for providers themselves to consider following the insurers' lead by creating mega-systems, which indeed is already happening.

That's one area for opponents of these mergers to find hope that they will never be consummated. The Justice Department and the FTC have recently both been more aggressive and successful in denying or dismantling what they've ruled as anticompetitive mergers in the hospital and health system space. This leads some observers to believe the feds will be extra tough on the health insurance company mergers, especially given that the two huge deals have to be considered a package deal in some ways, given the likely dramatic effect on the marketplace from their combinations.

The four companies involved in the announced deals are claiming that economies of scale will reduce costs for both purchasers and consumers because of reductions in administrative costs that will ensue.

"I am highly skeptical of that assertion for several reasons," says Ron Paulus, MD, president and CEO of Mission Health, which operates six hospitals around its headquarters of Asheville, NC. He says with administrative costs at currently at 10% of total premiums, there's little room for premium reductions. Even with a reduction of administrative costs of 10%, which he calls likely unattainable, total premium costs could only be reduced by 1%.

"Further, post-merger, it is common for insurers to actually incur higher administrative costs as they consolidate claims processing and customer service systems—a process that often takes years (and many insurers have been on such a journey for decades)," he adds.

Paulus, whose organization is likely to be among the least affected, because none of the payers involved have more than a tiny presence in the local market, nevertheless opposes them and says the mergers are a growth strategy rather than an efficiency play.

"Three or fewer insurers already control more than 50% of the market in 29 states prior to the most recent mergers," he says. "Insurers are operating in a mature market (where those who can be insured are already insured) [and] where the only other way to grow in the market is to acquire a competitor."

Paulus says policymakers and those in government who may be in a position to challenge the mergers should remember that only care transformation can reduce costs while simultaneously maintaining, or hopefully improving, quality and safety of care.

"These mergers drive horizontal consolidation, when in fact vertical integration with care delivery is the only real path to transformation," he says. "Looking back to history for lessons, for all the consolidation we have seen previously, the market has not seen lower or even moderating premiums. In fact, the only time we saw moderating healthcare premiums is when the ACA passed with the various mandated pricing parameters."

Even other insurers will likely oppose the deal, including those organizations that have the state Blue Cross licenses to which Anthem doesn't currently own the rights.

A Race to the Bottom for Hospitals?

Kurt Barwis, president and CEO of Bristol Hospital, not far from Cigna's headquarters in Bloomfield and Aetna's in Hartford, says the consolidation is concerning but inevitable. He says his hospital, a 154-bed standalone organization, enjoys excellent relationships with Aetna, Anthem, and Cigna, and that the consolidation among insurers is understandable because the same thing is going on with providers, in his state and many others.

"It seems logical that payers would do the same," says Barwis.

But Barwis says Bristol, as a high-quality, low-cost provider versus its peers, is positioned well, although he concedes payer industry consolidation could be disruptive to the hospital's future, specifically through contract negotiations. That's where Bristol's affiliation with a geographically diverse group of providers can provide some protection.

"Consolidation will happen. We need to adjust [and] evolve our capabilities in parallel to sustain our mission and future," says Barwis. "High quality, low cost alone will not cut it."

Barwis says even if payer megamergers are quashed or altered by regulators, Bristol Hospital already feels downward pressure on reimbursement, which will continue regardless of what happens with these big mergers.

"With our low-cost position, you think we'd be the sure bet for continued contracting success. But competition in our market is intense. The CEO of the largest system in my region said to me the other day that 'It seems like it's a race to the bottom' in terms of cost [and] reimbursement."

Bristol fits the profile of low cost, says Barwis, but health plans are getting ever more granular with that definition.

"When I say we are low cost, I'm typically referring to the overall cost per discharge," Barwis says. "The payers are very sophisticated. If I'm not careful, I could be carved out of a critical, high-contribution service line."