Insurers Playing a Game of Thrones

Companies pursue strategic megadeals as industry braces for seismic changes

By Christopher Weaver
June 16, 2015 7:36 p.m. ET

Big U.S. insurers are courting one another for possible multibillion-dollar deals. How they pair off could have significant implications for the managed-care industry, its individual and corporate customers, and U.S. medical providers.

Each potential target has strengths in different parts of the managed-care puzzle. For Humana Inc., its fast-growing business covering Medicare beneficiaries could be attractive to several suitors. Aetna Inc. has forged relationships with health systems that use its information-technology services, which could benefit rivals. And, Cigna Corp. brings international customers and close ties with employers big and small.

These companies, along with UnitedHealth Group Inc. and Anthem Inc., have been talking to each other about possible deals, with UnitedHealth approaching Aetna, Anthem talking with Cigna, and Humana exploring a sale, The Wall Street Journal has reported.

Analysts expect tie-ups to reduce the field of five big publicly traded insurers to just three players. The final roster's strengths and geographic sweep could look very different, depending on how the courtships end—and assuming regulators allow any deals the companies manage to strike.

Consumers might be left with fewer choices in some places, and hospitals and doctors could face tough negotiations with powerful health plans over their pay.

“Everyone is looking to have a completely broad portfolio,� and will look for deals that supplement any weaknesses said Jack Rowe, former chief executive of Aetna and now a professor at Columbia University. And, Dr. Rowe added, any deal would likely trigger “a domino effect� as other plans looked to beef up, too.

A big deal to acquire Humana could forge a powerful new Medicare player, but some would-be buyers would face antitrust challenges—particularly UnitedHealth, which is already the nation's biggest player in privately managed Medicare, known as Medicare Advantage.

A behemoth among corporate customers would emerge if Anthem locks arms with Cigna. Or, a merger between United and Aetna could create a company with massive market share in many states that might be able to extract deep discounts from medical providers.

A deal for “any one of them is a seismic event in the industry� that could put outsize market power in the hands of one company, said John Gorman, an adviser to managed-care companies, including some of those now in the mix. But, he said, some of the possible tie-ups make more sense than others.

The moves come as insurers' core business—covering workers on behalf of big companies—flatlines while new opportunities driven by the Affordable Care Act and other changes emerge.

“Employer markets have been flat and they're declining in terms of the dollars that go in,� said Dan Mendelson, chief executive of the consultancy Avalere Health. “In that world, if you want to grow, you have to go into the high-growth markets,� which include Medicare and other government business, he said.

That is what Humana offers its suitors: The insurer, which has shopped itself to rivals, is the No. 2 player in Medicare Advantage. Enrollment in that program is swelling as aging baby boomers opt for managed care over the traditional program. About one-third of Medicare's 50 million beneficiaries are now in such private plans—about three million of them with Louisville, Ky.-based Humana.

Any deal for Cigna or Aetna, meanwhile, would forge a major competitor in the employer-plan business that could gain economies of scale and bulk up market share.

Such deals would “help [the companies] on straight discounts and new contracting models,� said Ana Gupte, an analyst for Leerink Partners LLC. Insurers are increasingly experimenting with new ways to pay doctors and hospitals, such as tying reimbursement to the overall quality of care, but such arrangements are only attractive to hospitals when plans cover a large share of patients.

Ms. Gupte said Cigna also offers experience in managing plans for employers that self-insure. Some plans anticipate they can nab a larger share of employers that opt for that model instead of paying premiums to insurers, in order to lower costs and avoid health-law changes.

For employers, any wave of mergers could potentially result in higher premiums or fees, at least in the short term, several experts said. Many companies put contracts out for bid by health insurers every few years.

“If there are fewer players, there are fewer options to look at,� said Steve Wojcik, vice president of public policy for the National Business Group on Health. That could result in employers getting bids from insurers that feature higher prices and “fewer bells and whistles,� he said.

Long-term though, analysts and experts expect customers to realize some of the savings insurers might gain from increasing market share or improving efficiency.

Hospitals and medical providers have rapidly consolidated in recent years—sometimes leading to higher prices—and employers may benefit from a similar wave in the insurance industry if the heftier health plans can tamp down those prices.

“When you're negotiating against another entity…size helps,� said Paul Fronstin, director of the health-research program at the Employee Benefits Research Institute. “It may be that insurance companies need to get bigger, or there needs to be fewer of them, in order to negotiate bigger discounts from providers.�

That kind of scale, however, might not help smaller customers, especially individuals who buy coverage on their own.

“Usually, fewer competitors means prices will be less advantageous for consumers,� said Gary Claxton, an insurance expert at the Kaiser Family Foundation. “It probably means they're going to be in a better position to maintain their margins,� he said.