Health Mergers Could Cut Consumer Options

Potential deals among large U.S. health insurers could have market overlaps that hinder competition, Journal analysis finds

By Anna Wilde Mathews and
Christopher Weaver
Updated June 21, 2015 10:55 p.m. ET

The nation's biggest health insurers, which are pursuing a series of potential megamergers, have market overlaps that could damp competition in sectors such as private Medicare plans, an analysis of state and federal data by The Wall Street Journal has found.

The board of Cigna Corp. on Sunday rejected a $47.5 billion bid from Anthem Inc. that was disclosed on Saturday. Aetna Inc. has made an offer for Humana Inc. in recent days. Those deals, if completed, would shrink the current top five insurers to a powerful big three, each with revenue on paper of more than $100 billion. Meantime, the largest player by revenue, UnitedHealth Group Inc., has recently made a takeover approach to Aetna.

Some of the combinations could pose challenges to competition around the country, according to the Journal's analysis. For instance, an Aetna-Humana tie-up would increase by about 180 the number of U.S. counties where at least 75% of customers for Medicare Advantage plans are in the hands of a single insurer.

In addition, in eight states, an Aetna-Humana merger would remove a competitor from the exchanges where individuals can buy coverage under the Affordable Care Act. A UnitedHealth-Aetna tie-up, meanwhile, would remove a competitor in exchanges involving 11 states. Insurers may not offer plans in every region of a state, however.

Insurers will be able to point to operational efficiencies they can glean from consolidating, as well as better deals with health-care providers, which could result in lower costs for customers. Hospitals themselves have been merging at a rapid pace. Many experts have said that the provider consolidation can drive higher rates—and that more-powerful insurers might have a better chance of countering them and striking pacts for new forms of payment that incentivize efficiency.

“Insurers may be thinking, in order to maintain negotiating position and not have our lunches eaten by these large providers, we need to get bigger,� said Martin Gaynor, a professor at Carnegie Mellon University and former Federal Trade Commission official.

A spokeswoman for America's Health Insurance Plans, a trade group for the industry, said health-plan mergers don't drive higher premiums, and insurers “are in the business of ensuring consumers get the best value for their health-care dollars.�

The insurers' overtures amount to a high-stakes endgame for the industry, after years of consolidation that has already wiped out many of the regional players that were once prominent. Any of the deals would get tough scrutiny from the Justice Department as well as a gauntlet of state regulators, experts said. Federal antitrust authorities would examine local-area market share in segments such as Medicare Advantage as well as the effects on doctors and hospitals, said Tim Greaney, a professor at Saint Louis University School of Law.

Todd Moore, chief executive of Alliance Bank Central Texas, in Waco, is alarmed at the prospect of insurance mergers. The 55-employee bank last year had five insurers battling for its business, which it shops out annually to ensure competitive rates. Now he is worried about losing some of the options. If there are fewer choices, “I think we'll end up with a worse product, at higher cost,� Mr. Moore said.

Research suggests that having fewer insurers leads to higher premiums, said Leemore S. Dafny, a former FTC official who is a professor at Northwestern University's Kellogg School of Management. A recent study she co-wrote linked greater competition in the health-law marketplaces to lower rates. A 2012 paper in the American Economic Review, an academic economics journal, examined an earlier health-insurance merger and found premiums for employer plans rose in areas where the combined companies had strong market share.

To gauge how potential insurer deals might change the competitive landscape, the Journal analyzed June enrollment records released by the Centers for Medicare and Medicaid Services for Medicare Advantage, the private-insurer version of the federal program for the elderly and disabled.

The approximately 180 counties where the Journal found that a combined Aetna-Humana would newly hold at least 75% of Medicare Advantage customers are mostly in the Midwest and South. In Sedgwick County, Kan., all but about 400 of the 15,000 consumers in the program would be covered by the combined company, the data show.

About 41,000 Medicare Advantage enrollees live in Jackson County, Mo., which includes part of Kansas City. Aetna and Humana cover about 33,000 of them. Most of those Aetna covers there are in plans it acquired two years ago by buying Coventry Health Care Inc., in the last big takeover in the industry.

John Gorman, a consultant to the health-care industry on Medicare issues, said that analyses such as the Journal's are a first step in any insurance-merger due-diligence process. He said antitrust regulators would look closely at locations, but the overlap between Aetna and Humana wouldn't likely be “enough to torpedo the deal; you may see some divestments, but not a mushroom cloud.�

Jackson County, Mo., resident Brad Teachman said he relished the relatively broad options available when he turned 65 and shopped for a Medicare plan last year. “ I like the competition,� he said. Mr. Teachman said he worries an insurer that was too powerful could lean heavily on doctors.

There are at least 271 U.S. counties where UnitedHealth and Aetna each have 10% or more of Medicare Advantage membership.

In some cases, it is far more. In Bergen County, N.J., near New York City, a UnitedHealth-Aetna merger would leave 90% of membership with a single company. In St. Louis, a combined company would cover about 60% of the roughly 70,000 members of Medicare Advantage plans.

A UnitedHealth-Aetna deal would result in at least 68 more counties where the combined company had at least 75% of the Medicare Advantage customers. There are already many U.S. counties where a single insurer has at least 75% of the Medicare Advantage business, the Journal found.

The Journal also looked at federal and state information reflecting insurance offerings through the health-law exchanges, or marketplaces. Arizona, Florida, Georgia, Missouri, Ohio and Texas all include at least four of the five biggest publicly traded insurers. In Missouri, all five offer plans in at least some counties. Cigna and Anthem don't share any exchange territories.

“Where the reduction in competitiveness plays out is different� with different potential deals, said Michael Z. Stahl, a senior vice president at insurance agency HealthMarkets Inc. That firm, a national seller of Medicare Advantage and individual plans, has done an internal analysis of various scenarios and is worried about the impact on some locations, Mr. Stahl said: “No one would go to an ice-cream shop that only serves vanilla.�

The health-insurance combinations could also change certain employer insurance markets, according to 2013 data compiled by the Kaiser Family Foundation.

For instance, in New Hampshire, Anthem holds a majority of the business among larger, fully insured employers, meaning those that aren't “self-insured� but pay premiums to insurers. A tie-up with Cigna, the No. 3 insurer in that segment in New Hampshire, would give the combined company about two-thirds of the local market.

The data show that in Texas, a UnitedHealth-Aetna merger could yield a powerful rival—holding about 34% of the market—to the dominant Health Care Service Corp., parent of Blue Cross and Blue Shield of Texas, with around 44% of the fully-insured large-employer market.

The potential deals could trim the number of insurers with the national reach to bid for the business of big companies with offices around the country. “The bottom line is, our reaction is concern� about the potential for mergers among top insurers, said David Lansky, chief executive of the Pacific Business Group on Health, a group for employers.