Carrier Consolidation – Update

Carrier Consolidation – Update

Despite all the attention these last few month’s focusing on the Presidential election and the upcoming open enrollment season – activity continues around a number of large insurance carrier mergers.

As background, Cigna has agreed to be acquired by Anthem Inc. and Aetna is in the process of acquiring Humana.  Both transactions are currently being blocked by the U.S. Justice Department who has filed suit this past summer on antitrust grounds.  Once the lawsuits were filed, all 4 carriers began to aggressively pursue ways to complete these transactions.

Both Aetna and Anthem petitioned to have their cases heard separately rather than jointly and hearings are expected to begin shortly.  At one point, the Justice Department was trying to push the trials to 2017 while Aetna and Anthem wanted a faster resolution.  Aetna has a deadline with Humana to complete their deal by March 31st. 

In its preliminary arguments, the Justice Department states that both deals will reduce the number of national insurers from five to three impacting competition resulting in higher prices for consumers.  The Justice Department doesn’t see any possible settlement in either case and believes that the complexity of both cases is too large to rush a ruling.

Anthem asked for the trial to begin in less than 90 days from the lawsuit and further asked for a ruling to occur within 30 days of the trials conclusion.  The Justice Department countered by stating that “This case challenges the largest merger ever proposed in the health care industry requiring more pre-trial time than Anthem’s suggested schedule would allow”.

Anthem continues to argue that its merger would enable more people to receive coverage and would provide greater consumer access to exchanges.  Aetna and Humana have provisional agreements in place to divest some of their assets in an effort to appease some of the Justice Departments concerns.  The Justice Department maintains the position that any divestiture will not satisfy their concerns of limited choice and higher prices for consumers.  In response, Aetna stated “we believe that these divestitures taken together would address the Department of Justice’s perceived competition concerns.”

Driving these mergers are the carriers need to create better economies of scale.  With the need for huge rate increases and a challenging exchange environment, carriers need a more effective way to manage the cost drivers that negatively impact affordability for consumers. If they were larger in size, they could negotiate better reimbursement rates with medical providers.  Carriers also state that the Risk Corridor Program that was designed to stabilize the market and protect them from heavy losses is not working.

But there are pros and cons to these mergers.  While carriers might be able to capitalize on each other’s strengths and use their size to reduce the cost of care hopefully resulting in reduced premiums, there is equal concern that their savings would not be passed on to consumers.  With the Affordable Care Act’s (ACA) Medical Loss Ratio Provisions designed to protect consumers by limiting a carrier’s expenses and profits, some of these concerns are minimized. 

Without a decision by April 30th of next year, Anthem is concerned that Cigna will withdraw from their deal.  Rumors have already been reported that the relationship among the carriers is contentious.  Anthem has tried to use this to put additional pressure on the Justice Department to expedite the trial.  The Justice Department countered by saying “whether defendants are getting along (or not) should not cause the court to rush its schedule or deprive plaintiffs of an adequate opportunity to prepare for trial."

At this point, Anthem’s trial should begin in late November and is expected to be concluded by the end of the year with a ruling to be made in January. Aetna’s trial is scheduled to begin on December 5th.

With history on the side of the Justice Department, how will Anthem and Aetna respond if the Justice Department prevails?  One outcome might be a consortium among a number of carriers that can result in the same economies of scale that encourages hospitals, doctors and insurers to better work together.  A more likely outcome might be consolidation of smaller players that won’t run afoul of the Justice Department with logical targets such as Centene Corp., Molina Healthcare and WellCare. 

Universal American Corp., which specializes in Medicare Advantage and accountable care organizations, and Magellan Health, a managed-care company with a large pharmacy benefits arm, could become easy targets as well.

What is most attractive about Centene, Molina and WellCare is their primary focus on Medicaid, a program that has seen heavy enrollment growth across the country due in large part to the ACA's Medicaid expansion.

But with large “breakup fees” approaching almost $2 billion, will Anthem and Aetna have the cash, or the appetite, to go to battle again with the Justice Department so soon?

Stay Tuned

Stay tuned as we continue to monitor these and other issues that impact consumers, brokers and agents.

The views expressed in this post do not necessarily reflect the official policy, position, or opinions of BenefitMall. This update is provided for informational purposes. Please consult with a licensed accountant or attorney regarding any legal and tax matters discussed herein.

 

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