DOJ Fights Mergers

by Dr. Merrill Matthews

Many health policy experts warned that the Affordable Care Act would lead to massive consolidation in the health care industry, including hospitals, physicians’ practices, and especially health insurers. Now the Justice Department is pushing back by opposing the mergers of four large health insurers—Aetna with Humana and Anthem with Cigna. The real question is whether the insurers will continue to sell in the exchanges if they aren’t allowed to merge?

The Obama administration says that the mergers would reduce competition. Attorney General Loretta Lynch explained, “If allowed to proceed, these mergers would fundamentally reshape the health insurance industry.” That’s rich, since nothing has reshaped the health insurance industry more than Obamacare—and by design.

But government antitrust litigation is almost always about politics rather than economics. And that’s why free market advocates tend to be skeptical of most government antitrust efforts; companies, not the government, are in the best position to judge whether a merger would be beneficial.

And politics is certainly at work in this instance. President Obama promised the country that his health care legislation would increase competition and lower health insurance premiums. Now that just the opposite is happening, his administration is trying to limit the fallout and appear to be fighting for the consumer. But blocking the mergers will likely hurt consumers and competition.

Health insures are fleeing the Obamacare exchanges because of financial losses. A recent McKinsey & Co. survey found that health insurers selling in the individual market—where individuals buy their own coverage, usually through Obamacare exchanges—lost $2.7 billion in 2014. Those loses only compounded in 2015. The Hill reports that Humana “is pulling out of Obamacare plans in all but a handful of states after a year of nearly $1 billion in losses.”

Aetna said it lost about $140 million on the individual market in 2015. The Texas Blues Cross parent company, which controls Blues plans in five states, lost a reported $2 billion—$720 million just in Texas.

Oscar, a start-up health insurer that was supposed to bring new thinking to the individual health insurance market lost $105 million on Obamacare exchanges in 2015—and that was in just two states, New York and New Jersey.

UnitedHealthcare, the largest health insurer, reported last January that it lost $720 million in 2015 selling individual health insurance on the Obamacare exchanges. And about $1 billion when 2014 and 2015 were combined. And 16 of the 23 nonprofit Obamacare co-ops—which were the left’s consolation price for not getting their “public option”—have gone under, with more collapses on the way.

The left has long wanted to “take the profits out of health care,” and Obamacare seems to be doing exactly that. Obama officials dismiss the health insurer losses, claiming that many of the insurers are still profitable. But that’s because health insurers often have several lines of business, some of which may be profitable even as they lose hundreds of millions of dollars selling in Obamacare exchanges. No responsible board of directors will let such losses continue indefinitely. Larry Levitt of the Kaiser Family Foundation has been quoted as saying, “Something has to give. Either insurers will drop out or insurers will raise premiums.” And that’s exactly what we’re seeing. Nationwide, there was a 12% decline in plans in 2016 as compared to 2015, and that includes a 40% decline in PPO plans. There will be even more exits in 2017. Prior to Obamacare there were 18 insurers offering individual coverage in Kansas. Today there are three. The Obama administration initially praised health insurance competition in Maricopa County, Arizona. This year there were eight plans available on the Obamacare exchange; next year there will only be four—unless Aetna drops out, too. And insurers that choose to remain are increasing premiums. Texas Blue Cross has requested an increase of up to 60% for its 2017 premiums, and Arizona Blue Cross requested a 65% increase.

We know Humana, without the merger, is pulling out. Aetna claimed for months it would remain in the Obamacare exchanges, but is now saying it may scale back. And Anthem announced recently that it will only expand into other exchanges if it’s Cigna merger goes through. In other words, the Obama administration’s efforts to keep four insurers from becoming two may mean that only one or none will continue selling on the Obamacare exchanges.

Expect to see even fewer insurers participating and higher premiums as financial losses increase, especially if the Obama administration continues its efforts to stop money-losing insurers from merging. Policyholders will likely be receiving the notice that their premiums are rising or policy is being canceled in September or October—just before the election.

Merrill Mathews is a resident scholar with he Institute for Policy Innovation at ipi.org.

Bill Aims to Protect Consumers Amid Health Care Mergers

This week, the Senate Health Committee will hear S.B. 932 (Hernandez). The bill would require state regulators to scrutinize proposed health industry consolidations to ensure that they are in the interest of consumers. The public would have opportunities to offer comment and feedback on the deals. The bill would prevent hospitals from making anti-competitive demands when negotiating with health plans and insurers. Hospitals, especially those with a large market share, would not be allowed to insist on contract provisions that result in them being the only option for care.

This bill has been introduced in the midst of a wave of pending health care mergers in California. Two of four major health insurance mergers have been finalized: Blue Shield of California acquired Care1st last year, and Centene’s proposal to acquire Health Net was approved with conditions by state regulators last month. Two other health insurance mergers are still pending, Aetna-Humana and Anthem-Cigna. Other hospital and health mergers have also taken place, including the Daughters of Charity Health System purchase by an investment firm in 2015.

Anthony Wright, executive director of Health Access California said, “Health industry mergers have led to price increases, less choice, and greater consolidation. Companies…almost always say that the merger will lead to efficiencies and savings, but they rarely…pass those [savings] to consumers, if [the savings] ever actually materialize. Companies that want to merge need to show that the merger causes no harm to consumers, and that consumers will actually benefit. Some of these health mergers are required to face public hearings and scrutiny while others fly under the radar. It’s time to set a clear standard of…oversight for all these deals that have such a profound impact on the health system.”

Insurance Consolidation Continues

The insurance industry saw significant increases in mergers and acquisitions globally in 2015, according to a study by Conning. Jerry Theodorou, vice president, Insurance Research at Conning said, “The distribution sector remains in a state of consolidation, with the number of global mergers and acquisitions increasing for a third consecutive year…Deal volume…reached a new high in 2015 at nearly $20 billion, albeit driven by one significant transaction.”

The Conning study analyzes U.S. and non-U.S. insurance industry mergers and acquisitions across distribution and services sectors. Specific transactions are detailed, and trends are analyzed across sectors. Steve Webersen, head of Insurance Research at Conning said that insurance services sector transactions increased more than 25%, driven by acquisitions of claims adjusters/TPAs, health services firms, and insurance technology providers. He added that buyers are interested in big data and predictive analytic technologies as well as greater capabilities to meet the demands of a changing health care environment, such the Affordable Care Act.

Groups Says that Divestitures Don’t Keep Medicare Advantage Competitive

Requiring companies to divest does not maintain competition amid health insurance mergers, according to an issue brief by the Center for American Progress. (Competition authorities frequently require merging parties to divest a number of brands or operations in order to clear a proposed merger.) The Center says that divestitures don’t restore competition with Medicare Advantage plans. Also, seniors pay higher premiums for divested plans. By 2015, acquiring partners exited more than half of the affected counties. Only two of the 15 divested plans are offered, and premiums increased an average of 44% for more than half of the divested plans. Researchers at the Center say that divestitures in the proposed Aetna-Humana merger won’t be successful in maintaining competition and protecting seniors. In fact, the proposed Aetna-Humana merger would greatly reduce market competition for Medicare Advantage beneficiaries. In markets where Medicare Advantage beneficiaries have a choice of insurers, Aetna’s average annual premiums were lowered by as much as $302 and Humana’s annual premiums were lowered by as much as $43. Under the merger, premiums could increase beyond these amounts because of the greater market power of the combined company.

Greater Insurer Competition Leads to More Satisfied Consumers

SatisfiedCustomer

Health plan members are most satisfied when there is more competition among health plans, according to a J.D. Power study. The study rated satisfaction on a 1,000-point scale. The study rates satisfaction as follows:

  • Cost: 610 in competitive markets versus 606 in markets dominated by a single plan.
  • Customer service:743 in competitive markets versus markets 740 dominated by a single plan.
  • Information and communication: 646 in competitive markets versus 641 in markets dominated by a single plan.

When one carrier controls more than 50% of the market, member satisfaction is significantly lower when it comes to communication and customer service. Greg Hoeg of J.D. Power said, “Carriers are shifting toward member satisfaction as they face more legal restrictions on profitability. Having a choice of providers boosts member satisfaction in markets with less competition. “Sometimes, having fewer, simpler plan choices makes it easier for the member,” says Hoeg.

The ACA’s medical-loss ratio has forced health insurers to focus on increasing their market share to compensate for slimmer margins. Carriers are paying particular attention to cost management. One way to do that is to combine with other carriers, says Hoeg. Traditional plans are merging to reduce costs and increase market power. Examples are the merger of blue plans, national deals like Aetna/Humana, and Anthem/Cigna, and major market-driven acquisitions for UnitedHealthcare/Optum. Many have speculated that Anthem’s proposed acquisition of Cigna will harm competition and consumers by reducing the ability of other health insurers to compete with Blue plans.

Member satisfaction averages 688 in 2016, up from 679 in 2015, and 669 in 2014. Driving increased satisfaction are coverage and benefits (+12 points), information and communication (+11), and customer service (+10). Nationwide, member satisfaction has improved nine index points in 2016 at 688. This follows a 10-point improvement in 2015. Member satisfaction with health plans reached a low in 2014, following the introduction of the health insurance marketplace as part of the Affordable Care Act (ACA).

Health plans with integrated delivery systems are poised for success as health insurance focuses more on member satisfaction. An integrated system includes a hospital organization, a multi-specialty medical care delivery system, the capability of contracting for any other needed services, and a payer. Integrated plans have an average satisfaction score of 746, which is 63 points higher than that of non-integrated plans.

There has been a slight decrease in members’ monthly premiums. On average, the monthly premium for a family plan is $355 in 2016, down from $374 in 2015 while individual plan premiums are $207, down from $216.

Satisfaction is highest among health plan members in California (707), Michigan (699), Mid-Atlantic states (698); Illinois-Indiana (697), and Northwest states (692). Satisfaction is lowest among members in the Southwest (661) and Minnesota–Wisconsin (666) regions.

How the Affordable Care Act Challenges Insurers

In the past year, the Affordable Care Act (ACA) has had a more pronounced effect on large and small health insurance carriers, according to an A.M. Best report. The fact that the enrollment population continues to be older and riskier, is having a bigger negative financial effect than anticipated.

Publicly traded companies fared well, reporting an increase in earnings through Sept. 30, 2015. The ACA health insurer fee has affected insurers’ earnings. It was $11.3 billion in 2015 and is a similar amount for 2016. Since the fee is not tax-deductible, it has a greater effect on net income. Many insurers have compensated for the fee through premiums. Since some government-funded programs are more sensitive to premium increases, carriers have not been able to consistently pass the fee along in rates.

To alleviate the growing financial pressure, health insurers are looking at initiatives to control the cost of care, such as disease management programs and better care coordination. As a result, there has been increased collaboration with providers that can benefit all parties involved, including the patient.

Merger and acquisition activity accelerated in 2015 with several large transactions announced during the year. The desire for further diversification is driving the mergers and acquisitions among insurance companies and other health-related businesses. A.M. Best’s outlook for the U.S. health insurance sector was recently revised to negative from stable, largely due to earnings and capitalization pressures as a result of the ACA. The industry pressures are expected to continue to hurt earnings. The lower earnings and growth in premiums from increased membership will result in lower levels of risk-adjusted capitalization.

The merger and acquisition activity will bring additional earnings pressure to the bigger carriers since they will need to service higher debt loads. Since many of these pressures will not subside in the near term, A.M. Best says that there could be more negative rating actions on health insurers.

The report also explores other trends, such as how health insurers are viewing cyber risk, changing consumer demands, emerging member-focused insurers, rising pharmaceutical costs, and 2015 rating trends

DMHC’s Year in Review

Shelley Rouillard, director of  the California Department of Managed Health Care (DMHC) provides a year in review. The following is a summary of her comments:

Merger Mania: This past year, we saw a wave of potential mergers and consolidations in the health care marketplace. In October, the DMHC approved Blue Shield’s acquisition of Care1st Health Plan. The DMHC’s approval included a series of commitments by Blue Shield to improve access and health care quality. Blue Shield also agreed to make investments to strengthen California’s health care delivery system. This includes $50 million toward a provider directory database project and an encounter data project, and $10 million for consumer assistance programs. Given the public interest in these mergers, the DMHC is committed to holding a public meeting on each significant merger even if it is not required. The Department held a public meeting on the acquisition of Health Net of California by Centene on December 7 and on the acquisition of Humana by Aetna on January 4. A public meeting will also be scheduled on the acquisition of Cigna by Anthem. For more information on these public meetings sign up for the DMHC list serve at www.HealthHelp.ca.gov.

Alameda Alliance for Health Conservatorship: The DMHC ended its conservatorship of the Alameda Alliance for Health after Alameda met milestones outlined in a corrective action plan including launching a claims-processing system, meeting financial solvency requirements, and clearing a backlog of claims . The DMHC will continue to monitor the plan closely.

Premium Rate Review: Since January 2011, the DMHC has saved Californians more than $100 million in health care premiums through its premium rate review program. Under state law, proposed rate increases for individual or small group health plans must be filed with the DMHC. Department actuaries review all proposed rate increases. The DMHC does not have the authority to approve or deny rate increases. However, the department’s review often results in a reduction in the proposed rate increase. The DMHC found two premium rate increases unreasonable in 2015. The unreasonable findings were for increases in Aetna’s small group products.

Federal Mental Health Parity Compliance: In 2015, the DMHC completed the first of a two-phase approach to ensure compliance with the federal Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act (MHPAEA). In phase one, health plans were required to submit compliance documents to the DMHC. The DMHC worked with plans to correct deficiencies. During phase one, the DMHC looked at three key parity indicators for compliance:
1. Cost-sharing charged for mental health and substance use disorder services.
2. Quantitative treatment limits, such as limits on the number of days or visits inpatient or outpatient services,
3. Non-quantitative treatment limits, such as authorization rules, drug formulary design, and provider qualifications.

The second phase involves on-site plan surveys, which are scheduled to begin in the spring.

Provider Directory Enforcement Actions: In November, the DMHC fined Blue Shield $350,000 and Anthem Blue Cross $250,000 for deficiencies provider directories. Blue Shield has already reimbursed more than $38 million to enrollees who incurred out-of-network costs.  Blue Shield and Anthem will report to the Department the final number of enrollees reimbursed and the total amount reimbursed. The DMHC has initiated follow-up surveys to assess the plans’ efforts to correct the deficiencies.

Help Center: The DMHC has helped more than 1.6 million Californians resolve health plan problems through the Help Center. The Help Center assisted more than 125,000 consumers in 2015, an increase of about 20% from 2014. Help Center patient rights advocates, health care professionals, and consumer service representatives help consumers in 148 different languages.

Hospitals Well Positioned for Insurer Consolidation

The for-profit hospital industry is well positioned to weather the wave of mergers and acquisitions (M&A) among the largest for-profit health insurers, but consolidation could have some important longer-term ramifications, according to Fitch Ratings.

M&A activity among health insurers is not likely to result in immediate price pressure for hospitals. In many markets, health insurers are already fairly consolidated. Recent actions by hospitals to build market presence will shore up negotiating power. However, it could hurt the competitiveness of smaller insurers in some markets. It could also accelerate the shift towards value-based payments for hospitals and other healthcare providers.

The merger of Aetna and Humana would create the second largest national for-profit health insurer by revenue. The announcement of the merger comes after some favorable developments for the hospital industry. Most importantly, the Supreme Court recently ruled that public health insurance exchange plans could keep the financial subsidies that make these plans more affordable. In part because of the ACA-related expansion of health insurance coverage, hospitals have recently had more patients. M&A activity among acute care hospitals has given them more negotiating clout. Hospitals have been expanding their presence in key geographies through acquisitions and financial partnerships

Last Updated 11/13/2019

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