Thoughts on Recent Proposed Health Care Mergers: Guest Post by Michael DeLong
GUEST POST: Michael DeLong [email protected]: This year, health care companies have been striking deals at an impressive rate: Anthem/Cigna, Aetna/Humana, and Centene/Health Net. Plus in October 2015 Allergan reported that it was going to be bought by Pfizer.
Thus gigantic companies worth $270 billion are now in the process of being merged. It seems highly likely that these mergers will limit competition and choice, result in higher insurance premiums and hospital prices, help companies evade regulation, to the significant financial harm of health-care consumers.
I offer some thoughts on why these mergers are harmful, why they should be blocked, and what their launching illustrates about our current health care system.
As David Balto says in his overview fact check:
The vast majority of health care markets, 72 percent according to the American Medical Association, are highly concentrated. Moreover, data compiled by the Kaiser Family Foundation demonstrates that on average a state’s largest insurer has a 55 percent market share.
This is on average. By arithmetic, concentration is even higher in certain states and specific markets. Thus many Americans already have relatively little consumer choice when they go to the market to buy health insurance. The mergers of these large health care companies will further reduce competition. Reduced competition leads the way toward a more consolidated market and monopolies--to higher premiums, and less pressure for improved quality.
CEOs of Aetna and Anthem claim that these mergers will result in significant cost savings. But they offer very little evidence to support this. There are economies of scale. Theoretically, mergers could enable the companies to reduce administrative costs and offer more competitive products, and thus help people save money and get better insurance. But in practice it usually doesn’t work that way. Moreover, as Balto points out, consolidation of companies and elimination of insurance competitors not only reduces consumer choice but hinders innovation.
There is a great deal of evidence, surveyed by Thomas Greaney in “Examining Implications of Health Insurance Mergers”, that many of the increases in health-care costs are generated when dominant companies decide, because they can, to charge higher prices. The fewer the market participants, the more likely that both providers and insurers will not compete aggressively but instead strike formal or informal bargains enabling all of them to obtain higher profits.
If Anthem’s $48 billion acquisition of Cigna is approved, it will create the largest health insurance entity in the country, covering 53 million Americans. Aetna and Humana, if merged, would provide health benefits to 33 million Americans. In New Hampshire, a company that combined Anthem and Cigna would insure 65% of the state’s market. The mergers appear likely to have the most effect on concentration in Georgia, Florida, Connecticut, Colorado, and California. Individual consumers will then find it very difficult to find a way to bargain with and find alternative options to dealing with the dominant insurer in their market. Consumers would benefit if they had more genuine choices and should really choose between different coverage options.
And mergers often lead to more mergers. Companies find themselves in an arms race seeking to amplify bargaining power. The health care industry does not need more consolidated companies that dominate the market.
Perhaps most important, concentrated insurance and provider industries will also wield a lot of power and influence in Congress and the state legislatures, and influence regulatory decisions.
There is an intellectual movement calling for a new and more aggressive antitrust policy. Writing in The American Prospect, David Dayen argues that John Kwoka of Northeastern's data shows us that most mergers do not in fact benefit consumers. By his count, out of 46 well-studied mergers, 38 of them resulted in higher prices (with an average increase of 7.29%): "by [Kwoka's] analysis, consumers don’t benefit at all from merger activity, as market power overwhelms whatever efficiency gains."
Democratic presidential candidate Hillary Clinton appears unsure about these new mergers, issuing a statement that perhaps “the balance of power is moving too far away from consumers” and declaring that she was “very skeptical of the claim that consumers will benefit from [these mergers].... Too often the companies end up pocketing profits rather than passing savings to consumers.
There are grounds for optimism. These mergers have not yet been approved by the Department of Justice. Doctors, consumer groups, and hospitals are urging the department to scrutinize these deals--and reject them. In the past the Department of Justice has only challenged a few mergers of health insurance companies, and it has been criticized for its inaction. However, the case against these health insurance mergers appears more than usually strong--especially in Georgia, Florida, Connecticut, Colorado, and California, where the increases in concentration are likely to be most damaging.
