The Impact of Mass Consolidation in the Health Insurance Industry

The Impact of Mass Consolidation in the Health Insurance Industry

Recently, new events have warranted an update of the state of the health insurance industry.  The first involves two companies that many industry experts expected to merge. Humana was seen as an attractive target for acquisition, and the company had presented itself for sale by other insurers. Aetna had been in talks with Humana and announced that it had struck a tentative deal to purchase Humana for $37 billion. The other major takeover involves the purchase of Health Net Inc. by Centene Corp. for almost $6.3 billion.

The blockbuster merger of Aetna and Humana is expected to conclude next year when shareholders approve the deal.  This is the first of several potential insurer mergers that the industry has been expecting, and would produce a monolithic insurance entity out of the third and fourth largest current health insurance companies. The resulting entity would have almost 33 million customers and $115 billion in annual revenue.

There are a number of potential challenges which could kill the deal, however.  The primary obstacle is intervention by federal regulators who could cite antitrust considerations.  As the first major insurer consolidation, this takeover is likely to face lower antitrust barriers than those that follow, but regulators could demand that the Aetna-Humana entity divest itself of up to 575,000 Medicare Advantage customers to facilitate more competition in the retiree market. The loss of these Medicare subscribers would equate to almost $6 billion in lost revenue.

There is also the potential for a third party takeover.  UnitedHealth Group Inc., the largest health insurer in the country, had approached Aetna regarding a possible acquisition.  If Aetna’s shareholders are lured into a sale, this could halt or complicate the Humana deal.

The other major health insurer deal between Centene and Health Net Inc. would create an organization with 10 million members of which there could be up to 6 million Medicaid enrollees.  Health Net also brings many more Medicare Advantage members, which would shore up any deficiencies in this retiree market for Centene. The benefits for Centene include greater presence in California, Arizona, Oregon and Washington, as well as streamlining many overlapping operations, have boosted stock prices 5 percent for Centene and 5.4 percent for Health Net. If approved by shareholders, this deal could create a company with up to $37 billion in annual revenue and be completed by early next year.

Much of the fervor among health insurers to purchase competitors is fueled by an enormous injection of capital from the establishment of health insurance exchanges around the country.  The almost 16.4 million new insurance enrollees have generated enormous cash reserves for insurance companies as well as enthusiasm for greater market share.  This mass consolidation in the health insurance industry was expected—and, possibly encouraged—by the federal government but, how much will be allowed before anti-competition concerns outweigh a more “efficient” healthcare system is currently unknown. However, consolidation is expected to continue for the appreciable future.

In a study of the 2007 UnitedHealth Group and Sierra Health Services, it was found that there was a 13.7 percent boost in premiums following the merger.  The elimination of competition enabled monopolistic insurers to elevate their premiums without concern for undercutting by rivals.

 

Article written by:
Robert Moghim, M.D.

CEO, Onyx M.D.

 

Disclaimer: The views expressed in this article are the personal views of Robert Moghim, M.D. and do not necessarily represent and are not intended to represent the views of the company or its employees.




Comments

Post a Comment

Required Field