And then there were three: Obamacare forces health insurer consolidation
In the latest in what has become a roller coaster of mergers and acquisitions in the health insurance sector this month, No. 2 insurer Anthem Inc. announced this morning it will purchase No. 4 competitor Cigna Corp. in a $54.2 billion deal. If approved, the move would allow Anthem to leapfrog over UnitedHealth Group to become the largest in the nation by number of members served.
The news comes on the heels of two other significant deals earlier this month. First, No. 6 insurer Centene Corp. announced it was buying No. 7 insurer Health Net Inc. in a $6.3 billion deal. Then, No. 3 insurer Aetna Inc. announced a $37 billion deal to buy No. 5 insurer Humana Inc. The combined Aetna-Humana would have been the second-largest group, but with the Anthem-Cigna deal, now likely will remain at No. 3.
With these deals, there would be only three significant general purpose health insurers operating at the national level — Anthem, Aetna and UnitedHealth. The rest of the market is largely composed of state-level mutuals, Medicaid specialists and supplemental plan underwriters. Of course, this assumes that Anthem isn’t still considering being swallowed by UnitedHealth, a much-rumored transaction the past few weeks, which would leave us with only two.
All this consolidation is a predictable, even inevitable result of the medical cost pressures that were exacerbated by Obamacare. The combination of the individual mandate; the guaranteed issue requirement; lifting the cap on annual and lifetime benefits; rules requiring an 80 or 85 percent minimum loss ratio; and a lengthy list of mandatory benefits all boost demand for health care, while the law does nothing to alleviate any of the pressures that constrain supply.
It isn’t that health insurers were hurt by Obamacare, per se. As the ranks of the uninsured shrink, they gain access to many more customers. Indeed, as shown by this chart from SNL Financial on companies’ Q2 performance, most are seeing significant earnings gains for the first time in years:
And it’s true that the first couple years of Obamacare actually were accompanied by relatively low medical inflation: 6.5 percent in 2014 and a projected 6.8 percent this year, far below the double-digit growth you saw in the early part of the century.
But bear in mind that the spread between medical inflation and general consumer inflation — which rose just 0.8 percent last year — remains pretty significant. And there are delayed effects just over the horizon, given massive consolidation by hospital groups, pharmaceutical companies and others on the provider side of the equation.
In response, the first move by health insurers has been to raise rates, something that is obviously easier to do in an environment with fewer competitors. In the longer run, to get ahead of the cost curve, health insurers are consolidating to gain more bargaining power. But you can be sure this arms race won’t end here. There will be more provider network consolidation in the future and, likely, even more health insurer consolidation as well.
I’m skeptical that insurers can win this arms race. Partly, because the health insurance sector already is fairly concentrated; certainly much more so than the provider sectors. But also because, whereas the insurers must contend with government-imposed price controls, the providers don’t have that problem.
In the old days, the left used to debate whether it would be better to have a single-payer system, like Canada, or a single-provider system, like the United Kingdom. We appear to be well on our way to having both.
