The investment world is bubbling with news that the Big Five, publicly held health insurers have come down with merger fever that could have huge consequences for healthcare markets nationwide.
First, Medicare Advantage titan Humana made it known that it would love to marry up with the right insurer partner. Then it became known that Blue giant Anthem (30 million members) has been in negotiations to purchase Cigna (13 million), the national carrier with strength in self-insured commercial plans. Stock analysts for years have whispered about No. 3 insurer Aetna's need to gain market share through M&A to better compete against No. 1 UnitedHealth Group, perhaps purchasing Humana or Cigna.
Now even UnitedHealth, the United States, largest and best-diversified health insurer, is rumored to be in the hunt, with Aetna reportedly the object of its attentions. (Despite the fact that UnitedHealth's executives, rightly, have maintained that it, the Goliath of the health insurance world, really doesn't need to purchase market share, thanks.)
It's kind of hard not to envision gigantic sharks circling each other here. So what is going on, and why now?
First the timing. The major insurers have all done very well financially under the Affordable Care Act with the addition of commercial and Medicaid members, and are flush with money. Borrowing is cheap at the moment. And the industry has pretty much adjusted to the major changes of the ACA.
Now the why, and it's just what you think. The ACA has changed everything. It brought millions of new paying customers into the insurance market, but it has also placed significant new regulations and operating-margin restrictions on individual and small business coverage, two segments that used to have the highest margins, and potential profit, for commercial insurers. Commercial insurance for individuals is more standardized through the health insurance exchanges. New regulations within Medicaid and Medicare Advantage will place similar margin constraints on those segments as well.
So now that operating margins (money that plans are left with after they've paid for medical expenses and pharmacy) are limited, adding volume becomes the best way to spread operating expense and thus improve profits. Thus the frenzied struggle to combine.
But this feeding frenzy has massive and immediate consequence for hospitals, physician groups, big pharma, and consumers of healthcare, and should be of concern to state and federal regulators.
The merger of, say, Aetna (22 million lives) and UnitedHealth (34 million) would significantly reduce health plan choice in major markets nationwide. For hospitals and physician groups, this would give UnitedHealth an even bigger stick to wield in network and pricing negotiations. (What provider group could afford to say no to an insurer holding 40 percent of insured patients in an area) For surviving competitors, it would be that much harder to compete with such an entity on price or network strength.
An Anthem merger with Cigna presents an interesting problem for the Blue Cross and Blue Shield plans nationwide. Anthem, as a parent to 14 Blue plans, is supposed to abide by the BCBS Association's licensing rules that prohibit it from competing in other Blue plans, territory with Blue-branded products, and which appear to limit Anthem's ability to sell Cigna-branded products in direct competition with other Blue plans.
An Aetna-Humana merger would create a carrier roughly the size of Anthem, with strength in the commercial segment and the largest Medicare Advantage membership in the country. At this point, it's likely that one or two of these insurer mega-mergers will happen soon, possibly followed by the snapping up of smaller players such as Centene, Molina Healthcare, and Health Net.
The irony is that so many opponents of the ACA predicted that the reforms would kill for-profit healthcare in the U.S. Not so, it just made the stakes that much higher.
Follow Paula Wade on Twitter @PaulaWadeDRG