Federal district courts recently blocked both the Aetna-Humana and Anthem-Cigna mega-mergers. Representing Obama administration policies, Attorney General Lynch rejected the argument of merge-planning insurers that competition is not harmed by consolidation. It’s not just the AG that thinks this way – physician practices have a huge stake in preserving private payer competition. These payers are essential to physicians’ revenue streams and large monopolies put downward pressure on rates. According to an American Medical Association (AMA) study in 2015, there were already 14 states with solely one private insurer dominating the market at that point in time. Across the country we see clients experiencing a ‘take it or leave it’ attitude from the largest payers in their regions; many are forced to participate or else they risk losing patient volume altogether.
But why such interest in mergers?
Ten million private insurance marketplace enrollees were estimated for 2016 (Milliman Research Report) most of these were linked to employer-sponsored health plans. However, Medicare private plan (Medicare Advantage plans, run by the commercial payers) enrollment in 2016 totaled 17.6% (according to Kaiser Family Foundation), with continuous growth each year since 2008, indicating that Medicare is an expanding business. The expansion of covered preventive services mandated by the ACA has provided a further potential reimbursement stream for physicians in group practices and/or solo practices.
Aetna-Humana Proposed Merger – Rationale
Aetna proposed spending $35 B in 2015 to acquire Humana, due in large measure to Humana’s large Medicare Advantage (MA) market position. The anticipated financial benefit of this huge investment was that the acquisition would enable the merged company to quickly attain the rank of second-largest private health payer in the nation. It would also catapult the merged company to the top of the MA market. Additionally recognized was that this combined company—encompassing 33 million members—would be positioned to have far greater leverage over the following players:
- Employers offering an insurance benefit to employees;
- Patients (as health consumers);
- State regulators in all 50 states;
- Healthcare providers (e.g., physicians and nurse practitioners)
With some consumer and provider push-back to the proposed merger, one month prior to the Republican-controlled House of Representatives’ plan for repealing and replacing the ACA—termed the American Health Care Act (AHCA)—Aetna announced its intention to withdraw from the ACA health exchange in 2018, thereby limiting insurer choice for non-Medicare-eligible employees who were not covered by employer-sponsored insurance. This move appears to have been in retaliation for blocks against the mega-merger.
Anthem and Cigna Merger Goals
The objective of Anthem’s offer in 2015 of $54 B to acquire Cigna —its larger competitor—was aimed at becoming the nation’s largest private insurer. Along with covering 53 million people, the calculated base profit to the new company was estimated at $115 B. As Aetna’s marketplace rival, Anthem viewed this acquisition as a crucial strategy to increase their market share in the MA product area, particularly in light of the Aetna-Humana merger.
On the other hand, as a member of the Blue Cross Blue Shield Association (BCBSA), the enlarged Anthem company would have sold health plans under brands potentially in direct competition with BCBSA. This was because BCBSA regulations precluded using the Blue Cross name to offer health plans in states where Anthem did not already have a Blue Cross license. Consequently, BCBSA was not demonstrably supportive of this proposed merger with Cigna.
On March 13th, in contrast to the opposition of the AMA and American Hospital Association (AHA), Anthem expressed its supportof the AHCA that was publicly-introduced as the ACA replacement plan on March 6, 2017. Why?
The DOJ Lawsuits – Definitions of Terms
Two Department of Justice (DOJ) legal definitions impacted the judges’ rulings in the Aetna-Humana and the Anthem-Cigna merger cases. These were the definitions for product market and geographic market. In defining these markets differently from the insurers’ lawyers, the DOJ argued that the insurer descriptions were misleading; they tried to portray more free market competition following the mergers than would actually exist.
In particular, the insurers’ claim of traditional Medicare and MA as one single market—and, therefore, able to provide the new mega-company with sufficient competition for its products—was not accepted by the DOJ. Instead, the DOJ’s viewpoint was that MA enrollees specifically chose an MA plan instead of traditional Medicare, so traditional Medicare could not be construed as a competitive entity. In other words, the merger would hugely curtail consumer MA choice by the offered products—including MA product lines— all being controlled in some geographic areas by one company.
Two Separate Anti-Trust Cases and their Rulings
The DOJ filed antitrust lawsuits to block the two mergers in July of 2016; these were titled United States v. Anthem and Cigna and United States v. Aetna and Humana, respectively. A decision was rendered on January 23, 2017 in the Aetna-Humana merger case by Judge John Bates, followed by a similar decision on February 8, 2017 in the Anthem-Cigna case by Judge Amy Berman.
Although the national health insurance trade association— America’s Health Insurance Plans (AHIP)—represents around 1,300 member companies, there are currently only five large-sized health insurance companies still existent in the U.S. Aetna-Humana and Anthem-Cigna mergers would have reduced that number to only three. Likewise, smaller insurers would be at high risk of acquisition or bankruptcy, due to their poor economic status in comparison to the remaining large-scale insurers. Similar to other DOJ anti-monopoly suits guided by Obama administration policy, the DOJ’s litigation was undertaken to prevent these large insurers from eliminating their competitors, and, thereby, severely restricting healthcare consumer options.
United States v. Aetna and Humana
Arguments by the DOJ in the Aetna-Humana merger case targeted Aetna’s and Humana’s two distinct product line offerings. In contrast to the insurers’ perspective that cost-controls would be exerted by competitive market forces, the DOJ viewpoint was that consumer options in both markets would be severely curtailed if the merger occurred.
The DOJ also argued that the insurers’ claim of traditional Medicare and MA representing one single market was misleading. In contrast, traditional Medicare and MA were not in direct consumer-based competition that could otherwise exert downward market pressure on the cost of insurance premiums and required deductibles. The insurers’ argument was that traditional Medicare could effect market-based price curtailment, but the judge assigned to this case sided with the DOJ.
Since the ruling, the CEOs of Aetna and Humana have been feuding publically. It has revolved around their binding obligations vis-à-vis their prearranged break-up agreement—which neither company expected to honor within such a short time period. According to Forbes Magazine, a $1 B “break-up” payment will be paid by Aetna to Humana to dissolve the merger. Furthermore, no federal appeal will be launched against the District of Columbia court’s decision disallowing these two insurers to merge into one entity.
United States v. Anthem
The DOJ argued in the Anthem-Cigna case that this merger would not only result in rising prices, but in poor services for enrollees. In addition, the legal animosity between Anthem and Cigna—that was evident early in federal district court proceedings—was offered by the DOJ as evidence that the merger also would not organizationally succeed.
But unlike Aetna and Humana, Anthem is planning to appeal the anti-merger ruling. This case may well reach the Supreme Court in a year or two, or be heard by a lower court, and thereby affect the merger decisions of other large insurers. Which goes back to the question of ‘why’ Anthem would support the AHCA (released March 6th – by the time we print this article, the AHCA may be something entirely different). It is because the appeal is likely to be heard by more merger-friendly ears under the current administration.
Impact of Trump-Era Policies
It has been stated that “Antitrust enforcement under Obama was uniquely robust,” according to an article in FierceHealthcare. Since Tom Price—who has expressed a commitment to repeal the ACA and reduce government regulatory control on the healthcare system — was confirmed as the next secretary of DHHS (as well as Jeff Sessions for Attorney General), it is likely that federal anti-trust lawsuits against insurance companies will not be undertaken under their tenure. Composed of two budget reconciliation bills, the AHCA introduced by House Speaker Paul Ryan, grants insurance companies specific tax incentives that favor large companies, but does not likewise address their capacity to merge and limit consumer options for insurance.
Even without their resistance to healthcare system government controls, larger insurers are oriented toward acquiring smaller companies in order to increase their profit potential. One reason is the rising cost of prescription drugs, which is reducing their profit capacity. However, the increased survival rate of enrollees with formerly terminal diseases is also creating a financial strain on insurers.
Nevertheless, the loss of a governmental bulwark against insurance company mergers will likely foster instability across the health system, and particularly impact independent physician practices. Akin to Amazon deciding to acquire all remaining department stores and determining the price of goods without any consumer resort due to lack of purchasing options, oversized insurance companies wield power over patients, who may no longer be able to afford insurer-determined co-pays for medical services, and physicians, who may be paid much lower fee-for-service rates. It may take physician and consumer outrage at continuously rising premiums, deductibles, and co-pays to influence government action to limit insurance company power.
Conclusion – It Ain’t Over Yet
The governing philosophy of most Trump appointees has been toward reducing government oversight. Supported by President Trump, the proposed replacement for the ACA eliminates the ACA mandate that all Americans have health insurance. Foundational to insurer capacity to avoid economic losses from participating in the health exchange was that younger and healthier people would enroll in equal measure to older and sicker adults. Meanwhile, there is opposition to the currently-configured AHCA from both congressional Democrats and conservative Republicans. Its passage is not guaranteed, especially since release of the CBO’s cost estimate on March 9, 2017 that predicted shrinkage in the non-group enrolled market as a result of the AHCA.
On the other hand, the Republican-controlled House and Senate are committed to repealing the ACA. This has fostered a sense of instability across the healthcare delivery system, while likewise fostering increased lobbying by the insurance industry to advance its economic interests. Although the AHCA currently maintains the ACA’s mandate that health insurance include Essential Health Benefits (EHBs), private insurance prior to the ACA varied greatly in terms of covered benefits. For example, Blue Cross Blue Shield of Michigan prior to the ACA offered a plan to small businesses that excluded coverage for blood products, which are recognized as a high-cost medical item. As healthcare costs continue to rise for insurers, it is likely that insurer pressure will be exerted to eliminate the federal mandate for EHBs. Since millennials are recognized as averaging a high level of student loan debt as compared to the previous generation, these younger individuals may prefer health plans with lower premiums and reduced coverage, and thereby burden healthcare facilities with unpaid invoices following provision of required but uncovered services. In this manner, insurers may pass on this type of financial risk to physicians and hospitals.
Meanwhile, 118 federal judicial vacancies can be filled by Trump appointees, and who are expected to reflect his administration’s opposition to government intervention in most business activities. The confirmation of Neil Gorsuch to the Supreme Court may also lead to an overturn of federal decisions related to mergers and required insurer coverage, due to his philosophical leanings toward less federal regulatory power.
Indeed, the perspective of the authors of a recent Health Affairs article is that private insurer mergers are likely to accelerate—and that Trump’s appointees will probably embolden mega-insurers to attempt further mergers. Therefore, the precedent that would probably have been set by these anti-trust decisions in accordance with Attorney General Lynch’s decisions as a member of the Obama administration is likely to have little long-term legal effect. While the movement toward an increased number of Accountable Care Organizations (ACOs) may slow in future, insurance company mergers will likely continue in an effort to adjust to impending health system instability as ACA-related regulations are overturned. Physicians and consumers are likely to bear the economic brunt of these changes, in which the largest and most powerful insurers control healthcare provider reimbursement rates along with health consumer options, and in tandem with decreased governmental involvement.