On July 21, 2016, the Department of Justice sued to block two mergers between four of America’s biggest health insurance companies. Anthem had proposed a $48 billion acquisition of Cigna. Aetna simultaneously moved on a $37 billion buyout of Humana.
Either merger would have been the largest healthcare merger in American history. The Justice Department believed they violated antitrust laws. Aetna and Humana believe they can prove otherwise in court.
Is a diverse market a healthy one? What happens when insurance companies consolidate? What do these mergers mean for American healthcare?
Why Did the Justice Department Block the Mergers?
The proposed mergers were colossal and years in the making. If they had gone through, the new insurance companies would each make about $115 billion in annual revenue. That would put them among the country’s 20 largest corporations. They’d be larger than Microsoft or Google.
The Department of Justice’s Antitrust Division considered these mergers a major threat to the market’s health. They argued that consolidated bargaining power would reduce options and raise premiums. Consumers would suffer. People might even die.
"If allowed to proceed, these mergers would fundamentally reshape the health insurance industry,” said US Attorney General Loretta Lynch. “They would leave much of the multitrillion-dollar health insurance industry in the hands of three mammoth insurance companies, drastically constricting competition in a number of key markets that tens of millions of Americans rely on to receive health care.
"For most Americans, health insurance is not a luxury, but a necessity...In some cases, health insurance can quite literally mean the difference between life and death. If the ‘Big Five’ were to become the ‘Big Three,’ not only the bank accounts of the American people would suffer—but also the American people themselves.”
The Future for the Mergers
It seems the Anthem-Cigna merger is now dead in the water. Cigna declared they “do not believe the transaction will close in 2016 and the earliest it could close is 2017, if at all.” Anthem’s statement was similarly noncommittal. They said they will “remain receptive to any efforts to reach a settlement with the DOJ that will allow us to complete the transaction and deliver its benefits.”
Anthem and Cigna didn’t have much of a chance before a jury. Their merger was service-oriented and focused on cutting administrative costs. The goal was to remove their biggest competitor and increase market share. This is precisely the kind partnership the DOJ considers dangerous. Rather than offering anything new, Anthem was just trying to offer more of the same.
Aetna and Humana, on the other hand, are ready to “vigorously defend” their merger. Their court date is set for December 5. And there’s a good chance they’ll win.
Humana has a solid customer base of seniors purchasing Medicare Advantage packages. Aetna hasn’t been able to attract and retain Medicare Advantage customers nearly as well. Aetna wanted to acquire Humana to grow its Medicare Advantage holdings. They argue it’s a logical business expansion. They also claim the government’s existing Medicare package, which is free for all senior citizens, presents competition with their Medicare Advantage plans.
Aetna is currently divesting itself of its Medicare Advantage customers. They just sold $117 million in Medicare Advantage assets to Molina Healthcare. They’re giving up 290,000 Medicare Advantage customers in 21 states to prove in court there will still be plenty of competition if they acquire Humana.
But the most interesting thing about these mergers isn’t whether they fail or pass. It’s what they mean for Obamacare and the future of the American healthcare market. And right now, that future is grim.
Profit Over People
“Many countries have private health insurance, it’s not all socialized medicine,” says T. R. Reid, scholar of American healthcare and author of The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care. “But no country allows them to make a profit. They operate as charities. Their goal in life is to pay for people’s healthcare, to keep populations healthy. It’s only the United States that allows health insurers to make a profit, and so their goal by law is to pay their investors a quarterly dividend.”
Reid argues that American healthcare puts profits before people. Insurance companies spend too much money on marketing and salaries. They should be using premiums to pay people’s medical bills.
“Medicare, a publicly-run government health insurance plan for seniors, their administrative costs are 3.8 percent,” he says. “They don’t advertise, they don’t do any marketing, and the head of Medicare makes about $180,000 a year.
“The private health insurance companies, their administrative costs are 20 percent. They use it for marketing, advertising, paperwork, salaries. United Healthcare paid their chairman Stephen Hemsley $66 million last year, and their stock is up, so he’ll make more this year.”
American healthcare hasn’t always been profit-driven. Journalist John Girouard explained in a 2009 article for Forbes that health insurance here was originally seen as a public necessity. Times have changed.
“We once had a form of socialized medicine,” Girouard wrote. “Blue Cross, the most recognizable name, began in 1929 as a tax-exempt insurer covering a community of teachers in Dallas. Blue Shield was started as a tax-exempt insurer to cover employees of mining and lumber companies in the Pacific Northwest…
“We lost the positive aspects of affiliation health insurance starting in the 1960s and through the 1980s, when Wall Street discovered there was money to be made turning nonprofit health insurers, hospitals and nursing homes into investor-owned companies. What we got was a massive conflict of interest—profit vs. public good—that has culminated in a dysfunctional health delivery system that has undermined our economy, reduced our national wealth and torn our social fabric.”
Recent attempts to revive our not-for-profit market haven’t succeeded. The 2010 Affordable Care Act (Obamacare) created 23 not-for-profit co-ops. These co-ops were intended to restore competition to the market. They wouldn’t have the same overhead costs as private insurers. They would force the “Big 5” and others to bring down their premiums. The charity-oriented health insurance that Reid and Girouard covet would finally be functionally implemented.
Only seven co-ops remain. Sixteen have gone bankrupt. This is largely because they signed up the “sickest” Americans and then didn’t get the government money they’d anticipated. It seems we have a market where only for-profit insurance companies can succeed. But for this market to benefit consumers there must be healthy competition among providers.
Competition is Necessary for For-Profit Businesses to Benefit the Consumer
There’s no reason a for-profit healthcare system shouldn’t work. The power of the free market is what drove our economy to global hegemony. Companies compete for customers by offering the best possible care at the lowest possible rates. This competition keeps prices down and forces companies to be as efficient as possible.
The problem is that meaningful competition doesn’t really exist in health insurance. A study by the American Medical Association found that a single insurance provider had at least 30 percent market share in 89 percent of metropolitan areas. In 38 percent of cities, one insurer has a market share of at least 50 percent.
“The insurance companies are terrified of competition,” says Reid. “This is why they’re merging—they don’t want anybody undercutting them on price.”
The Anthem-Cigna and Aetna-Humana mergers are by no means the first. They’re just the biggest, and the first blocked by the Department of Justice. There have been decades of mergers before now.
Dozens of major deals went down after 2010’s Affordable Care Act. Many were national and many were regional. Cigna bought HealthSpring for $3.8 billion. Aetna bought Coventry for $5.7 billion. Anthem purchased Amerigroup for $4.9 billion and Simply Healthcare of Florida for $1 billion. Blue Shield bought California-based Care1st for $1.2 billion.
Another multi-billion-dollar deal that went unchecked by the DOJ spells out exactly what effect these mergers have. In 2008 UnitedHealth Group bought Sierra Health Services for $2.6 billion. UnitedHealth Group is the nation’s biggest insurance company. Sierra Health Services was a small, independent, regional insurer in Nevada. This buyout became the subject of a 2013 case study published in HMPI, the Journal of the Business School Alliance for Health Management.
“Prior to the merger,” reads the study, “there were five health insurers with market shares of at least 5 percent in the state of Nevada. Sierra and United had the first and third highest shares, respectively, and WellPoint, Inc. had the second. After the merger, the combined firm became the largest insurer in that state.”
Researchers wondered what happens when a national insurance titan buys a local insurer. Previous evidence that mergers lead to premium hikes had been “anecdotal or descriptive.” The researchers wanted to prove it.
“We find a large increase in health plan premiums in the wake of the merger,” the study concluded. Premiums rose 13.7 percent in a single year.
Aetna Pulls Out of Health Exchanges
“The insurance companies’ mergers would have been great for Wall Street and for their investors and their executives,” Reid says, “but they would have been terrible for customers because they would have raised prices. That’s what they do. The Antitrust Division of the Justice Department has a legal mission is to protect consumers, and so that’s what they did.”
But the DOJ can’t protect consumers from Aetna and Humana’s latest move.
On August 16th, Aetna announced it will pull out of many major Obamacare exchanges. Aetna currently offers individual policies in 778 counties in 15 states. Come 2017, they will only provide policies in 242 countries in Delaware, Iowa, Nebraska, and Virginia.
Aetna says their retreat is due to heavy losses. Others believe Aetna is punishing the government for blocking its merger. A letter dated July 5 from Aetna CEO Mark Bertolini to the Justice Department seems to prove the latter. Huffington Post reporters Jonathan Cohn and Jeff Young leaked the letter. It reads (emphasis added):
"Our analysis to date makes clear that if the deal were challenged and/or blocked we would need to take immediate actions to mitigate public exchange and ACA small group losses. Specifically, if the DOJ sues to enjoin the transaction, we will immediately take action to reduce our 2017 exchange footprint. We currently plan, as part of our strategy following the acquisition, to expand from 15 states in 2016 to 20 states in 2017. However, if we are in the midst of litigation over the Humana transaction, given the risks described above, we will not be able to expand to the five additional states. In addition, we would also withdraw from at least five additional states where generating a market return would take too long for us to justify, given the costs associated with a potential breakup of the transaction. In other words, instead of expanding to 20 states next year, we would reduce our presence to no more than 10 states.”
UnitedHealth and Humana will also be pulling out of exchanges across the country.
Arizona, North Carolina, South Carolina, Georgia, and parts of Florida will be hardest hit. Many marketplaces will have only a single insurer. Hundreds of thousands of people will have to find new plans. Many will have to change doctors and hospitals. Providers will face pressure from insurers with regional monopolies.
Consumers will also face rising premiums. In North Carolina, Blue Cross Blue Shield has asked to raise premiums by 18.8 percent. Aetna has asked to raise premiums by 24.5 percent. Areas of Illinois and Arizona will see premium hikes of at least 60 percent.
Could a single-payer healthcare system really be any worse? Some say universal healthcare would cost too much. People will wait longer and travel farther for care. Yet the American healthcare system already is the world’s most expensive and uniquely inefficient. It will only be worse come 2017.
As the American healthcare system becomes less and less able to provide adequate, affordable coverage, it becomes more and more likely we’ll replace it with something that can. Companies like Aetna and Humana may be hastening their own extinction by putting profits over people.