On July 21, the Department of Justice filed suit to block two mega health insurance mergers: Aetna’s purchase of Humana and Anthem’s purchase of Cigna. These mergers would have consolidated the five national insurers to only three, shaking up the healthcare landscape. At this critical moment for the healthcare system and antitrust policy, regulators made the right call – and their skepticism should apply to all healthcare mergers.
A large body of research finds that consolidation of insurers tends to increase premiums, while competition tends to lower premiums. For instance, in areas where Aetna currently competes with Humana, Aetna’s premiums are up to $300 lower than in areas where the two companies do not compete. Their merger would not only eliminate this current competition, but also foreclose any future competition between them in other areas and markets.
But the healthcare merger frenzy is not just about insurance companies. Indeed, one reason insurers feel the need to merge is to increase their leverage against large hospital systems. Since the mid-1990s, more than 1,200 hospital mergers have resulted in large hospital systems, which wield their market power to extract excessive prices from insurers.
According to a recent analysis of billing data, these prices are the main driver of healthcare costs in commercial markets. Economists estimate that monopoly hospitals charge prices that are 15% higher than prices in more competitive hospital markets.
The solution to this problem is not to allow insurers to merge to counteract the market power of hospitals. This tit for tat would fuel an arms race in which corporations would profit at the expense of consumers. Rather, the solution is to enforce a strong presumption against mergers on both sides of the market, starting now.
Of course, drug corporations are also in on the game – accounting for about half of healthcare mergers. Thankfully, the Obama administration recently took action that effectively blocked a proposed merger between Pfizer and Allergan, which would have been the largest healthcare merger ever. But 2015 was still a record-setting year for mergers in the drug industry.
These mergers across healthcare sectors tend to drive up healthcare prices and costs for consumers and businesses. But they also have another pernicious effect – they contribute to rising income inequality.
Consider the deal between Aetna and Humana. The CEO of Aetna stands to gain $131m from the merger. What’s more, the transaction costs fuel an industry of Wall Street banks and corporate law firms, which have received more than $400m from the four merging insurers. To top it all off, the insurance companies can deduct these expenses from their taxes.
More generally, economists are coming around to the view that income inequality among companies explains much of the income inequality among workers. Some companies are increasingly able to enjoy super-normal returns – a trend that is associated with increasing market consolidation. According to McKinsey, two-thirds of non-financial firms with a return of 45% or more from 2010 to 2014 are in the healthcare or information technology sectors.
To lower healthcare costs – and help address income inequality – policymakers and regulators can take a number of steps.
Regulators should review the results of previous mergers on a regular basis. Regulators often approve mergers but require a company to sell its business in certain markets to a competitor. But these remedies, designed to preserve competition, have not worked well in the past.
For instance, as a condition of approval of a merger between Humana and Arcadian in 2012, the insurers had to sell 15 plans in certain markets to competitors. Subsequently, premiums increased for nine of these plans by an average of 44% – that is, until almost all of them exited the market.
There should be greater accountability and transparency. Regulators should have public hearings and issue public findings and justifications.
The nonpartisan Government Accountability Office should appoint an independent Health Consumer Advocate. Companies frequently meet with regulators behind closed doors and inundate them with biased economic studies, but consumers do not have formal input into the process or opportunity to challenge their data.
The advocate would monitor trends in prices, quality and utilization in healthcare markets. One purpose would be to shine a spotlight on outliers and identify drivers of cost growth. The advocate would also weigh in with regulators on proposed mergers and could dissent from their decisions. Public programs – as well as insurers that participate in these programs – would be required to provide the data necessary to carry out these duties.
Above all else, regulators must set a very high bar for mergers. With its decision on the mega health insurance mergers, the Department of Justice has done just that.
