A rumored merger would create yet another health care titan
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A potential merger between two of the country's largest health insurers would create yet another massive health care company in an industry increasingly dominated by titans.
Why it matters: Decades of consolidation among hospitals, doctors and insurers has alarmed some experts — and, increasingly, politicians — who argue the tie-ups have allowed companies to bulk up at the expense of patients and taxpayers.
Driving the news: If merger talks between Cigna and Humana, first reported by the Wall Street Journal, are successful, the combined company would rival UnitedHealth Group and CVS Health in size.
- The impact wouldn't just be limited to the insurance market. Each company also owns a firm that manages drug benefits.
- The combined company could create a pharmacy benefit manager (PBM) that controls a third of the market, making it as large as CVS's PBM, Caremark.
- CVS since 2018 has also owned Aetna, one of the country's largest health insurers.
- As of last year, the country's three largest PBMs — Caremark, Cigna's Express Scripts and United's OptumRx — already controlled roughly 80% of the market, and all are housed under the same roof as a major health insurer.
The big picture: High-profile mergers of insurers and PBMs in recent years came after decades of hospital consolidation and the widespread acquisition of physician practices by health systems, private equity and even insurers.
- The result is a system characterized by massive companies, including some which can't easily be categorized. For example, United now employs or is affiliated with roughly 10% of U.S. physicians, STAT reported this week.
- The problem, many economists say, is that these consolidated companies increasingly have monopoly power in markets around the country or — in the case of companies with a stake in different parts of the health system — can elbow out competitors.
- "As the set of names under each corporate masthead grows, there are fewer opportunities for unintegrated entities to win business and therefore a greater chance they seek acquirers or exit the market entirely," said Leemore Dafny, an economist at Harvard Business School and a former Federal Trade Commission official.
The potential result is an arms race for the upper hand in price negotiations, with insurers and providers using their market power to secure better deals. Who has more leverage can vary from market to market.
- "Broadly, when firms gain market power, it softens the pressure on them to compete, it allows them to have higher markups and more profits," said Zack Cooper, an associate professor at Yale University.
- "If you had a bicycle and the front tire became flat, the solution isn't to go slash the back tire," he added. "Just because the hospital market is consolidated, the solution doesn't follow to go break the insurer market."
Between the lines: Economists generally agree that hospital consolidation has resulted in higher prices for patients and insurers without delivering better outcomes.
- But each part of the health care industry refutes the idea that consolidation within its sector is harmful to patients or anti-competitive, and economists are careful to note that not all consolidation is inherently bad.
There is less research on the competitive effects of vertical integration, Cooper noted.
- "Is the rise of health care conglomerates good? ... I think the honest [answer] is, we don't know," Cooper said.
- "One of the challenges is sometimes the pace of these deals is going faster than our understanding of the harm they could create or the theory about what's happening," he added.
What they're saying: Ben Ippolito, an economist at the American Enterprise Institute, said the rise in conglomerates isn't unique to health.
- "Logistically, it's much easier now to run large, national chains in a way it wasn't previously, so we've seen this happen across markets," Ippolito said.
- But health care is different from other markets — for example, sporting goods stores or coffee shops — in some key ways, Ippolito said. The federal government is heavily involved, and consumers are usually insulated from prices or aren't in a position to make decisions based on them.
- "When you have anti-competitive markets, it not only increases prices, but it severely decreases the pressure to improve the product," he added. "When that product is a health insurance plan, or a hospital or a doctor's office or whatever, if you don't have the threat of losing customers to another firm, the quality issue becomes really important."
What we're watching: Should Cigna and Humana pursue a deal, it's likely to face tough antitrust scrutiny.
- The DOJ has successfully blocked other insurer mergers in recent years, including Aetna's attempt to acquire Humana and Anthem's attempted merger with Cigna.
- The Biden administration has signaled it's taking a more stringent approach to mergers, and lawmakers from both parties have expressed interest in reducing incentives for consolidation.
But Cooper argues not all issues posed by health care conglomerates can be resolved by antitrust regulators. There's also "sort of this broad dependence on big companies," he said.
- "We've got lots of specific tools for antitrust violations," he said. "We don't really have a set of tools for the political challenge of big companies."
