Healthcare Insurers Are Merging in light of The Supreme Court's Affirmation of the Affordable Care Act

08/04/2015

In June 2015, the Supreme Court of the United States affirmed the Affordable Care Act in King v. Burwell.  While the Republicans may continue to try to change some provisions, the Court clarified much of the uncertainty surrounding the fate of the ACA.  The ACA provides for a major expansion in the number individuals entitled to insurance coverage, and higher burdens on insurers to cover pre-existing conditions and other pathologies, among other requirements which make for more costly insurer requirements. New rules under the health care law also make insurers spend a fixed amount of the premiums they collect on care (vs administrative and marketing expense), essentially capping their profits even if they are charging much higher prices. The added burdens are causing the major insurers to consolidate to gain economies of scale and greater negotiating strength vis a vis large hospital chains.  Aetna Inc. and Humana, Inc. thus announced a $34.1b merger to create the No. 2 health-insurance company in the U.S., pairing Humana’s strong Medicare franchise with Aetna’s business of selling medical coverage to employers.  Aetna and Humana are now the third- and fourth-largest insurers by revenue, and the combined company would have about a million more Medicare Advantage members than its next-closest competitor, UnitedHealth.  Then, in July 2015, Anthem Inc., which operates for-profit Blue Cross plans in 14 states,announced that is buying Cigna Corp., another large healthcare insurer, for $54b in a transaction that will shrink the five largest U.S. health insurers to just three.  UnitedHealth Group, Inc., the largest insurer, has so far deferred to participate in the merger activity.  In late June 2015, Centene Corp., a Medicaid-focused health insurer, agreed to buy Health Net Inc. for $6.3b to boost its presence in California and other western states.

While the insurers claim that the efficiencies resulting from the combinations will benefit consumers, the reduced competition is not likely to lower premiums, which continue to climb.  The M&A deals are being reviewed by the antitrust authorities for anticompetitive effects, but are likely to pass muster in some form.

Insurance company mergers mirror consolidations among hospitals and other care providers, as both insurers and providers vie with each other for negotiating strength in terms of reimbursements paid by insurers to providers.

This and other vital healthcare M&A and industry dynamics are analyzed in the Strategic Healthcare M&A Report, produced quarterly by The Walden Group, Inc., specialized healthcare investment bankers.  Please make requests for the report at http://waldenmed.com/receive-strategic-healthcare-ma-report-and-other-information.