On Friday, Anthem announced it had reached a deal to acquire Cigna. Earlier this month, Aetna announced it would be buying Humana – and suddenly, the Big Five health insurers could be shrunk to three.
As with the recent flurry of hospital mergers and acquisitions, the biggest driving force for the current insurance industry mergers is likely the Affordable Care Act (ACA). The New York Times says that although the ACA is bringing insurers more revenue by way of additional customers, greater pricing transparency and government funding cuts have also put more pressure on their profit margins.
According to The Washington Post, some analysts are saying insurance companies are increasing their scales in an effort to cut administrative costs because the ACA has limited the amount of profit the plans can make. Larger companies will also allow insurers to make more efficient technology investments and eliminate duplicate departments and give them more negotiating power when dealing with hospitals and physicians.
With about 53 million members, the merged Anthem-Cigna company would become the largest insurer in the industry. UnitedHealth Group would be second largest with more than 45 million members and the combined Aetna-Humana company would come in third with about 33 million members. But these mergers are still subject to regulatory approval, and whether they’ll be allowed to move forward is still questionable.
"The premise of the merger for both of these transactions is that they can achieve cost savings and economies of scale, and [the insurance companies] of course maintain that will lead to their ability to price even more competitively," Richard Zall, chair of the health care department at the law firm Proskauer, told the Post. "It will take some time to see. ... Is there still sufficient competition in the various markets that it won’t lead to price increases?"
Tucker Sharp, chief broking officer for Aon Health, a consulting company for health insurers, told CNN Money that ACA restrictions will not allow insurers to just raise prices whenever they want. On the other hand, he still believes the Department of Justice (DOJ) and the Federal Trade Commission (FTC) are going to be closely scrutinizing these deals. “[The DOJ and the FTC] were already concerned that there wasn't enough competition," he said.
According to Fox Business, government agencies will likely consider the following factors when determining whether to allow the mergers to move forward:
- What does competition look like in the markets—in states and for different insurance products where the companies now operate, and how might that change after the mergers?
- How easy is it for new competitors to enter those markets? If the number of big companies is reduced, would new ones come in to fill the gap?
- What is the impact of the ACA on competition in the industry?
The deals are also not necessarily an all or nothing proposition. It’s possible that both deals could go through with some restrictions or that one could be approved, but not the other.