Healthy Together?

Why are health insurance companies consolidating?

Source: Public Domain Pictures

Aetna is buying Humana. Anthem wants to buy Cigna. And United Health wants to buy Anthem. The merger-talk among the big health insurers has a lot of people confused and worried. If all these firms combine, will we just be left with one big insurer?

That’s what it feels like. Of course, the U.S. Justice Department will weigh in. If one company looks like it will have too big of a market share, they’ll likely stop the deal. But even smaller combinations raise the question as to why this wave of consolidation is happening.

Part of this is timing. When Obamacare was being debated, insurance companies stayed quiet. They didn’t want to do anything that made their role more prominent, lest they become the target of some new revenue initiative.

But now that the law in in place, they’re free to adjust to the market’s new structure. And part of that is the increased competitive landscape created by health care exchanges and accountable care organizations. Hospitals and doctors’ offices have been consolidating, so health insurers are merging as well.

This should come as no surprise. Since hospitals around town are now encouraged to talk about how to improve care, it’s likely they also talk about other things—like how to bargain more aggressively. And insurers are pushing back by reducing the number of competitors. Patient care seems to be an afterthought.

All this positioning and consolidation feels like the phone-wars of the ‘90s, where we ended up with one or two big carriers—with everyone complaining, but no one having much choice. The economist Adam Smith could have predicted this: when businesses get together, he said, it usually ends in a conspiracy against the public. Because when companies compete, consumers win. But when they collaborate, it often doesn’t end so well.

Douglas R. Tengdin, CFA

Chief Investment Officer

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