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As the nation’s top five health insurance companies jockey through merger proposals that could leave just three large companies at the top, a big question is, what does it mean for consumers – and the rest of the industry? Those insured by large organizations with strong negotiating power can expect little if any change in premiums, says Mark Pauly, a Wharton professor of health care management. But individuals and small businesses would likely see health insurance premiums tick up. And while would-be merger partners often project greater efficiency and lower costs as a goal, it rarely turns out that way, Pauly adds. He offers additional views on the effects of the proposed mergers in this Knowledge@Wharton interview.
An edited transcript follows.
Knowledge@Wharton: Welcome to Mark Pauly. He’s a professor of health care management here at Wharton and he’s going to discuss the merger frenzy that’s going on among health care insures.
Mark, the top five companies have been talking but merging with each other in different ways. So we have Anthem, which is a consolidation of Blue Cross companies. They’re making a play for Cigna — that’s a $48 billion deal if it went through. United Health is talking about picking up Aetna, that’s a $40 billion deal. And Aetna itself is talking about picking up Humana, which is a $30 billion deal. These are the top five players all told. And if all of these things went through, we’d be left with the top three instead of the top five. So first question is, why are these merger efforts coming now?
Mark Pauly: That’s a good question. I think one answer is that in the period of Obamacare, insurers found it politic to lay low and not do anything dramatic that might upset the boat because they had to maintain their position of probity. And now it’s almost as if somebody has said, okay, it’s open season now, all those things that have been bottled up for five years, Obamacare actually started in 2009, now it’s a free for all. Go out and do whatever you want to do.
So just to some extent I think the coincidence of all of this discussion right now is probably because the assumption the insurers are making is, the cork’s out of the bottle and they can get back to doing whatever they would have been doing. But there are certainly some features of Obamacare that have actually led to motivation for insurers to try to merge
Knowledge@Wharton: What are those?
Pauly: There are really two of them. One is the main feature of Obamacare. I think that most people know that it reformed the market for buying individual insurance. It’s important to say most of us don’t get our insurance that way, we get our insurance through our job. And if we work for a big company our employer is really not very much, if at all, affected by these mergers, at least not directly. So most of us can sleep well at night regardless of what happens.
If we work for a big company our employer is really not very much, if at all, affected by these mergers, at least not directly.
But if you work for a small business, or if you own a small business or if you get your insurance as an individual because you’re self employed and you’re using either the Obamacare exchanges, or even the remaining individual market, of course, the goal of Obamacare was to try to increase competition in the individual market by making it much more transparent about what the different plans would be. [It would do that] by regulating the insurers in an attempt to cut the profit margins in the individual insurance market.
This is a kind of counterattack on the part of insurers saying, well, if you’re going to try to stimulate competition, we’re going to counteract by reducing the number of competitors, so at least we won’t have to worry about as many competitors stabbing us in the back by cutting prices if we can buy them up or acquire them. So that’s number one.
Number two, an important part of Obamacare is particular to the Medicare population — to organize delivery systems, accountable care organizations, which are supposed to be entities to care for the full set of needs of a population of people. That has often meant, for obvious reasons, that since people use more than one hospital, all the hospitals in town have an incentive to work together. When they get together, Adam Smith probably could have warned us about this, they not only talk about, we suspect, about how to improve care, they also talk about how to bargain more aggressively with insurers. And so the ACO part of the Affordable Care Act has stimulated, among other reasons, consolidation on the provider side. What we’re seeing here is a reaction to that consolidation by insurers saying, well, if the providers are now going to gang up on us, we better gang up on them.
Knowledge@Wharton: A battle of the titans.
Pauly: Right, in which John Q Public is probably going to get squashed, at least that’s the way economists see it.
The Affordable Care Act has stimulated … consolidation on the provider side. What we’re seeing here is a reaction … by insurers saying, well, if the providers are now going to gang up on us, we better gang up on them.
Knowledge@Wharton: Others have pointed out that the consolidation for hospitals and doctor groups and medical device companies has often led to higher costs for consumers. You point out that since most people get their insurance through their employer that that might not have a big effect because big employers would have some bargaining power, and that it could protect consumers. But can we generally assume that because of this consolidation, were it to all happen, that this does increase their market power and their pricing power, and that there will be a substantial effect on health care cost overall? Is that fair to think?
Pauly: That’s sort of what economists traditional assume, that if you reduce the number of sellers that’s going to increase pricing power and increase the mark-up ratio or the mark-up percentage that a seller can charge. In principle there could be some reductions in cost if there are some economies associated with the mergers, and the merger partners have been talking about synergies and all of that.
But we’re still worried that even if their costs fall, whether those reductions get transformed into lower prices is somewhat up in the air because the mark-up will go up. So it’s not a foregone conclusion that prices are going to rise, if you cut costs enough, but there’s still a concern that that would happen. And I think there’s, in the research, not only on mergers of insurers and even for that matter mergers of hospitals, but mergers in general, there’s fairly profound skepticism that these economies of scale actually end up materializing to any appreciable extent.
Knowledge@Wharton: And if they do, whether they would trickle down or not.
Pauly: And whether they would trickle down. Now if any of these firms were the traditional kindly non-profit Blue Cross plan, in principle owned by its insures — like Independence Blue Cross — that’s still in principle like that. If it ganged up on health care providers here in town I’d probably cheer that. But if it was bought out and converted to a company that trades on the New York stock exchange I might get a little more worried.
Knowledge@Wharton: Not surprisingly there’s already a lot of opposition to this. The American Academy of Family Physicians has already come out. They’re reaching out to the Federal Trade Commission saying that they’re not happy about this. Physicians may feel at a disadvantage if they’re suddenly dealing with a bigger behemoth. So what are the odds of something like this getting past the Federal Trade Commission? One assumes there are going to be challenges?
In the research, not only on mergers of insurers and even for that matter mergers of hospitals, but mergers in general, there’s fairly profound skepticism that these economies of scale actually end up materializing to any appreciable extent.
Pauly: Presumably there will be opposition.
Knowledge@Wharton: What are the odds of it getting past the FTC?
Pauly: Well, it will certainly be better if the opposition didn’t come from the providers of health care who have their own ax to grind and came from consumers. But I suspect that will happen, certainly I personally would sign onto that.
But the government is in something of a compromised position because as I mentioned it has encouraged these accountable care organizations. So far the Federal Trade Commission though hasn’t gotten the memo that they should be easy on mergers. Some other states, in Massachusetts for example, the attorney general there, Martha Coakley, drafted a new policy, which essentially said we will allow these hospital mergers as long as the hospitals promise to play nice afterwards. And so there’s a bit of a conflict — that the Federal Trade Commission traditionally has taken the point of view that they view any merger with great skepticism. It’s kind of up to the merging partners to prove if they’re not doing something harmful to the welfare of consumers.
Here though there is the counter argument — the insurers can say, “You the government told us that you wanted health care market to consolidate for purposes of coordination of care. And so we’re just going along with the program that you outlined.” think the short answer is going to be politics. And in a way who’s in charge, who employs the attorney general at the time, when and if these things actually come to a decisive point.
Knowledge@Wharton: We’ve talked a lot about sort of the business of this and the pricing and who has more leverage. What does this mean for health outcomes of patients?
Pauly: Well, it’s in the mix in the sense that if the consequence of the merger is to raise premiums and that frustrates the public policy, which is intended to encourage people to take insurance, and we think having insurance is a good thing for your health. The more it counteracts the existing public policy to encourage people to become insured, the worse it’ll be. So if the high prices discourage people from buying insurance that’ll be a bad thing for people’s health.
Otherwise though I don’t think it’s terribly relevant. Even according to The Wall Street Journal article on this, they’ve actually done some research for us. They had an interesting study which showed that the primary markets that would be affected by these mergers was the market for private Medicare insurance, the so called Medicare Advantage Plans. And those plans cover about a third now of all people on Medicare. But there is a protection, which is that if the private insurers get together and try to rip off us old folks, we can still take our Medicare from the government plan. So there’s a protection there both in terms of quality of care, in terms of cost of coverage, that probably makes this less troubling than other mergers would be. For example, I’m much more troubled about mergers among hospitals or large physician groups than I am about insurers.
Knowledge@Wharton: Are there any other reasons for mergers other than gaining market power?
Pauly: There are according to the research, and it’s common sense that you will want to sell out or maybe would be a good take over target if your market value is lower than the true value of your company. I am intrigued that Humana, whose main business is Medicare Advantage, put itself up for sale, I think, because it’s making a lot of money off of Medicare Advantage and it thought now is a good time to cash in and have somebody pay a high price. And then my cynical side says, that is in part because the salad days, the gravy days of making a lot of money off of Medicare can’t go on forever. But if they can persuade some other insurer to buy them out at a relatively high price based on their current good fortune, the current stockholders can have a happy walk to the bank. So some of this is probably also associated with perception that some of these firms are undervalued in the market relative to the value they would bring in a more consolidated setting.