The Justice Department is gearing up for an exacting look at any
proposed mergers among the nation's top health-insurance companies,
amid questions inside and outside the department about whether
industry consolidation could suppress competition.
The five biggest health insurers have been circling one another
for potential deals. Anthem Inc. has made public a $47.5 billion
bid for Cigna Corp., which Cigna has so far rejected. Aetna Inc.,
meanwhile, has made a takeover proposal for Humana Inc.
If the insurers succeed in striking such deals, it would leave
the industry topped by three big companies, each with annual
revenue of more than $100 billion. UnitedHealth Group Inc.,
currently the largest health insurer, also recently made a takeover
approach to Aetna.
Many of the mergers under discussion have the potential to raise
antitrust concerns, a senior Justice Department official said,
adding that health insurers considering such deals should do a
careful antitrust risk-assessment of the transactions.
Antitrust enforcers have had initial discussions about how they
would approach any insurance tie-ups, and they are preparing for
the possibility they could face multiple deals simultaneously, this
official said.
If there were a wave of mergers at once, the department would
look at the deals collectively, rather than each one in isolation.
Enforcers would try to determine what effect the deals could have
on the marketplace, and pursue questions about whether they would
benefit consumers, the official said.
The big insurers declined to comment on the antitrust scrutiny
that any potential deals in the industry might face.
In a recent call with industry analysts, Anthem Chief Executive
Joseph Swedish said a combination of his company with Cigna would
have "the scale to drive greater efficiency and affordability for
our customers," and would be able to "accelerate improvements in
the total cost of care."
A spokeswoman for America's Health Insurance Plans, the industry
trade group, said health-plan combinations don't increase premiums,
and that insurers' "focus is on making sure consumers have
affordable coverage."
The prospect of consolidation poses high stakes for the Obama
administration, whose signature domestic policy legacy is the 2010
health-care law. Some aspects of the health law were designed to
increase insurance-industry competition, including marketplaces for
health coverage and the creation of new nonprofit cooperative
health plans around the country.
But the law also includes provisions that may have helped
inspire consolidation, at least indirectly. For instance, it
requires insurers to spend a certain percentage of premiums on
health care, which adds to the pressure to trim administrative
costs,--a benefit insurers are likely to seek from merging.
A Wall Street Journal analysis from earlier this month found
some combinations of the top health insurers could damp competition
in certain markets around the country.
The law also contains policies encouraging health-care providers
to move to forms of payment that involve tracking the care of
groups of patients, aiming to save money and improve care.
Providers say they need size and resources to transform health
care, one of the driving sentiments behind recent consolidation by
hospital groups and other health-care providers.
Just as the Justice Department is eyeing the health-insurance
side of the equation, the Federal Trade Commission, which also has
antitrust enforcement powers, has raised concerns about
consolidation on the hospital side, challenging several
mergers.
In fact, insurers are bulking up partly to face off against the
larger hospital systems in negotiations about rates and payment
models.
"All of this consolidation is about bargaining power," said
Glenn Melnick, a professor at the University of Southern California
who specializes in health-care finance. He co-wrote a study
published in the journal Health Affairs that suggested increased
health-insurer consolidation could benefit consumers by pushing
down hospital rates, "as long as health-plan markets remain
competitive."
Some research has linked having fewer health insurers to higher
insurance rates.
"There's no good evidence out there that scale is associated
with lower premiums or improvements in plan quality," said Leemore
Dafny, a former FTC official who is a professor at Northwestern
University's Kellogg School of Management. Ms. Dafny, who co-wrote
a paper tying greater competition in the health-law marketplaces to
lower rates, said it isn't clear insurers would pass on to
consumers the benefits of any hospital discounts they achieve.
The Justice Department has challenged, or threatened to
challenge, health-insurance mergers previously. In past deal
reviews, it has focused both on how a merger would affect local or
regional markets as well as markets for specific insurance
products.
In 2012, the department found antitrust problems with Humana's
acquisition of Arcadian Management Services Inc. The companies
resolved the government's objections by agreeing to divest Medicare
Advantage plans—the private-health-insurance version of the
government program—in 51 counties and parishes.
That same year, the department expressed concerns about
WellPoint Inc.'s acquisition of Amerigroup Corp. The parties
addressed those concerns by divesting Amerigroup's Virginia
Medicaid managed-care business. WellPoint is now called Anthem.
In 2010, Blue Cross Blue Shield of Michigan abandoned its
planned acquisition of an in-state rival when the Justice
Department threatened to file an antitrust lawsuit to block the
deal.
As in past government merger reviews, the input of third parties
who would be affected by any insurance mergers, such as employers
and health-care providers, will be important, the Justice
Department official said.
Groups representing large national employers, which rely on the
biggest insurers to administer their coverage, have expressed
concerns publicly about a potential loss of options.
The official said the department will look closely at whether
there are merger-specific cost savings produced by an insurance
deal that would stimulate competition and benefit consumers, and
whether any such benefits outweigh any potential risks posed by a
megamerger.
Duke University law professor Barak Richman said it makes sense,
with such massive deals possible, for the Justice Department to
look at the combinations holistically.
"Does this create some kind of greater concentration of power in
aggregate?" he said. "Are we thinking carefully about all the
markets where they don't currently compete but could in
future?"
A broad Justice Department examination would add to pressures on
health insurers. The system of Blue Cross and Blue Shield plans is
facing private antitrust lawsuits in federal court alleging that
they function as an illegal cartel. The Blue Cross Blue Shield
Association has said its actions are legal and benefit
consumers.
Write to Brent Kendall at brent.kendall@wsj.com and Anna Wilde
Mathews at anna.mathews@wsj.com
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