How will the merger of health insurance giants Aetna and Humana affect consumers? Critics and industry analysts struggle to form a consensus view on the impact these new mega-deals will have on the health insurance marketplace.
The mega-merger of two of the nation’s biggest health insurance companies heralds an era of consolidation in the health insurance marketplace.
Of course, Aetna and Humana aren’t the only industry heavyweights talking nuptials. They just happen to be the first to the party. Anthem, Inc. and Cigna Corp. have also restarted merger discussions.
But Why Merge?
In a ruling this past June, the Supreme Court upheld a critical pillar of the Affordable Care Act (ACA). Specifically, the court’s decision in King v. Burwell backed the Obama administration’s position on subsidies. The justices said that the tax subsidies of 8.7 million Americans currently receive will not depend on geographic location.
The 2010 ACA completely revamped the health insurance landscape. However, the law faced a considerable backlash from political elements on the right, with many politicians vowing to repeal the law, or at least undermine it. This latest ruling by the Supreme Court, along with the landmark 2012 ruling requiring all Americans to secure insurance, have made it clear that the ACA is more or less here to stay.
Boosted by the promise of ongoing subsidies for consumers, health insurance providers are rushing to bulk up and compete for future dominance in the new Obamacare era.
Good or Bad? We Don’t Know Yet.
While the Supreme Court’s ruling has been a coup for hospitals and providers, the impact of any mega-deals between health insurance companies on consumers, and by extension employers, has been less clear.
Generally speaking, less competition in any sector usually means that consumers lose. If Aetna and Humana finalize a merger, the players in the field will also follow suit by necessity, setting in motion a wave of mergers and acquisitions. Should Cigna and Anthem also work out a deal, that would mean that the marketplace would be dominated by just three humongous corporate entities – Aetna-Humana, Anthem-Cigna, and UnitedHealthcare. Each could boast revenues of as much as 100 billion dollars per year.
As a result, premiums could rise dramatically. A 2012 study of the aftershocks of the 1999 merger between Aetna and Prudential demonstrated a seven percent rise in premiums after the deal.
However, industry advocates argue that won’t happen.
According to experts, the health insurance industry is already highly regulated, and pricing is thoroughly scrutinized by the Federal government. The ACA itself limits the amount companies can profit from the individual plans they offer to consumers. As a result, growth in the near future will largely be accomplished through cost-cutting innovations.
Merging is one such cost-cutting tactic.
By serving more people, health insurance companies can leverage economies of scale and reduce administrative costs. Perhaps more significantly for consumers, increasing the number of people they serve also boosts their clout with hospitals and service providers, thereby allowing them to offer a cheaper, more affordable product to the rest of us.
Of course, whether the glass is half full or half empty, only time can tell. Pending a review by the Securities and Exchange Commission and shareholder approval, Aetna-Humana still has a long way to go. But that doesn’t mean that insurance agents and professionals shouldn’t prepare for the potential future reign of an industry Big Three.