Past Is Prologue: What Previous Health Insurance Mergers Can Teach Us

July 15, 2016

 

As the Department of Justice, State Attorneys General, and State Insurance Commissioners  review the Anthem-Cigna and Aetna-Humana mergers, they can learn from previous health insurance mergers and their effects on competition and consumers. Despite numerous conduct remedies and divestitures, past mergers between health insurers ultimately led to higher prices for consumers and less competition.

 

To give just a few examples: In 1999, Aetna merged with Prudential and was required to divest about 427,000 enrollees to Blue Cross and Blue Shield of Texas, which acquired the plans for $500 million. The Department of Justice also required 12 conditions to support the divestiture and appointed a trustee to oversee those conditions. The remedy was partially successful; Professor Leemore Dafny conducted a study and found that DOJ “achieved its objective of neutralizing the merger’s effect on market concentration in Texas markets.” However, the merger also lead to an increase in health insurance costs, a reduction in the employment of health care workers, and a decrease in physician earnings. And this divestiture was only partly successful even though Blue Cross Blue Shield was a very strong insurer in the state.

 

In 2008, United acquired Sierra and had to divest around 26,000 enrollees in Medicare Advantage plans in Clark and Nye Counties. Humana acquired the plans for $185 million and DOJ included 20 conditions to ensure the divestiture was effective, and once again required a trustee to oversee them. A study of the divestiture found that for plans sold to employers, prices went up by 13.7% as a result of the merger, and the remedies still failed to restore competition. Humana was the strongest nationwide competitor in Medicare Advantage, but even it could not make this divestiture a complete success.

 

Third, in 2012 Humana had to divest 12,700 Medicare Advantage members when it acquired Arcadian. Again, DOJ required 12 conditions for the divestiture and a trustee to monitor them. As we previously noted, two of the three acquiring firms failed and exited the market, and premiums substantially increased. Moreover Cigna was one of the acquiring firms that failed to restore competition.

 

These examples have not gone unnoticed. In their letter to the Department of Justice about the Anthem-Cigna and Aetna-Humana mergers, seven U.S. Senators wrote that “history suggests restoring competition is especially difficult in the health insurance industry…We are not convinced that any divestitures required of the merging parties will succeed today, given that they have so clearly failed in the recent past.” Additionally, Economics Professor John Kwoka conducted a comprehensive analysis of past mergers and found that prices increased post-merger. In a more recent study, Kwoka found that when mergers result in fewer than five firms in a market it poses competitive problems.

 

The past is prologue; DOJ and other antitrust regulators would do well to learn from the above instances where mergers harmed consumers, and block the current proposals.   

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