Big meets even bigger: More consolidation in the offing

This year’s proposed mergers between Aetna and Humana, and Anthem and Cigna are expected to be just the start, as consolidation of all aspects of the health care industry continues apace in 2016.

Antitrust regulators are expected to decide next year whether to let the health insurance behemoths get even bigger. If the deals, worth a combined $91 billion, go through, it would leave just three large publicly traded national health insurers: Aetna, Anthem, and UnitedHealthcare.

At the same time, provider systems are joining forces and snapping up private practices while Walgreens is currently poised to acquire Rite Aid. Meanwhile, vertical integration is taking place, as companies diversify their portfolios. UnitedHealthcare, for example has purchased a PBM, Catamaran, and an urgent care clinic operator, MedExpress.

“The merger market is still pretty rich,” says John Sarich, vice president of strategy at VUE Software, which specializes in software for the insurance industry.

For the first nine months of this year, 1,073 health care mergers in all sectors were announced, with a value of $358 billion, according to Irving Levin Associates. Health care mergers are likely to outstrip 2014’s record 1,299 transactions, valued at $387 billion.

The merger mania caught fire with the implementation of the ACA and the clarification of its legal status. This summer, the Supreme Court upheld the availability of federal tax credits for lower- and middle-income consumers who buy insurance in states that didn’t set up their own health exchanges. “The fuse got lit by the ACA,” Sarich says.

AMA: States where proposed mergers will hurt competition

Source: AMA, “Competition in Health Insurance: A Comprehensive Study of U.S. Markets,” Sept. 2015

For health insurers, consolidation provides an opportunity to diversify their business, as well as to grab a piece of the expanding pool of government spending on Medicaid and Medicare. Insurers also say they need size to negotiate effectively with large providers. Providers say they are fighting size with size when it comes to payers. In recent months, for example, DaVita HealthCare Partners, the independent medical group, announced it was acquiring the Everett Clinic, which has 20 sites in the Seattle area, and Tenet HealthCare announced plans to form a joint venture with Baptist Health System in Alabama.

The consolidation trend may emerge as a talking point in the 2016 election. Democratic frontrunner Hillary Clinton has issued a statement that says she is worried about “the balance of power” moving too far away from consumers as providers and insurers consolidate. Clinton also said she had “serious concerns” about the proposed mergers between Anthem–Cigna and Aetna–Humana.

Overwhelming approval

Aetna and Humana shareholders have already overwhelmingly approved the merger of those companies. Humana brings to the table its strong presence in the Medicare Advantage market. Insurance commissioners in nearly 20 states, as well as several attorney general offices and the federal Department of Justice must sign off on that merger.

Shareholders still must vote on the planned Anthem–Cigna merger. Cigna’s draw is its presence in the employer marketplace. If that deal wins shareholder approval, it will need to run a gantlet of approvals similar to one that the Aetna–Humana deal must go through.

A report released by the American Medical Association in September showed the Anthem–Cigna deal would diminish competition in 111 metropolitan areas and the Aetna–Humana deal in 58. The report noted that there is already a lack of competition with a single insurer now having at least a 50% share of the commercial market in nearly 2 out of 5 metropolitan areas.