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Health Care Players Look at Possible Effects of Future Health Insurance Mergers

One of the tenets of a free and open marketplace is that competition keeps prices down and quality up.

What happens, then, when competitors merge, effectively reducing and maybe eventually eliminating competition?

Consumer groups, doctors and state government officials worry that consolidation in the health insurance industry is resulting in higher costs and less coverage. They protest large payoffs for insurance executives, write letters to the Department of Justice and require expensive mitigations, but, so far, the merger trend continues.

Last year, Anthem and WellPoint, two major national insurers, merged, creating the nation’s largest insurer. Now UnitedHealth Group, the second-largest insurer in the country, and PacifiCare Health Systems, one of California’s largest insurers, are planning to merge.

UnitedHealth, PacifiCare Propose Merger

UnitedHealth Group, headquartered in Minnesota, insures about 55 million U.S. residents through one of several companies under its corporate umbrella.

Headquartered in Southern California, PacifiCare is a leader in Medicare managed care plans with more than 700,000 members in its Secure Horizons plan, which includes discount cards for prescription drugs and other products for seniors. It is the nation’s second-largest Medicare managed care plan provider after Kaiser Permanente.

Officials at both companies say the merger will improve coverage for members and reduce overhead costs by millions of dollars.

“This merger joins together two highly complementary companies with significant capabilities and a demonstrated commitment to serving diverse constituencies and expanding options for the uninsured,” Howard Phanstiel, chair and CEO of PacifiCare, said.

“We believe combining UnitedHealth Group’s national health service capabilities with PacifiCare’s brand prominence and deep relationships in the Western United States will improve upon our nation’s health care system and enable it to better respond to the needs of all Americans,” Phanstiel said.

Physician Groups Oppose Proposal

The American Medical Association doesn’t see it that way.

“The AMA has been cautioning for some time about the long-term negative impact of the aggressive consolidation of health insurers on our patients — the ultimate consumers of health care,” Michael Maves, CEO of the doctors’ group, wrote in a letter to U.S. Attorney General Alberto Gonzales.

AMA is urging DOJ to block the merger because of antitrust issues.

“United and WellPoint, Inc., are clearly bent on market domination, with WellPoint being the nation’s largest insurer and United the second largest,” Maves stated. “If the PacifiCare merger is allowed to move forward, United will have increased its commercial health insurance membership by 29% in two years, to 25 million. The market power resulting from such mergers redirects money away from patient care and into corporate profits,” Maves added.

The California Medical Association, which represents 35,000 doctors in the state, also is lobbying against the PacifiCare-UnitedHealth merger.

“The merger troubles us,” Jack Lewin, head of CMA, said. “It places Wall Street’s demand for profits ahead of Main Street’s interest in good health care.”

Why Mergers Happen

“There are three or four main reasons that drive business consolidation,” said Christopher Ohman, CEO of the California Association of Health Plans, a trade group representing most health insurers in the state.

“Economies of scale is probably the biggest factor. Running a health plan is a very technology-based effort. Often a strong case can be made that one company’s technology is more efficient or better tailored to the jobs at hand. By joining forces, you often have lower administrative costs and better service,” Ohman said.

Acquiring or merging with another company opens commercial doors that might otherwise remained closed. “You can open up new markets, gain new customers by using the strength and positioning of another company,” Ohman said. “For example, PacifiCare and United both have strengths in Medicare but in different ways and in different areas. By joining, they can play off each other’s strengths.”

“The WellPoint deal illustrates how mergers can put companies in position to serve new customers,” Ohman said. “WellPoint, by gaining more diverse medical networks, is now better able to serve national employers, something they weren’t able to do as well before the merger.”

Questions Around Regulatory Issues

Two state agencies oversee health insurance mergers in California, but when mergers are national in scope, state regulation is limited.

The Department of Insurance does not have a formal position on mergers, although Insurance Commissioner John Garamendi (D) has made it clear he doesn’t approve of businesses profiting at the expense of consumers.

As last year’s Anthem and WellPoint merger made its way over various hurdles in other states, Garamendi set the bar higher in California. After 11 other states approved the merger, Garamendi withheld approval “until he was satisfied that the merger’s cost would not be borne by Californians and that the company would invest more than $300 million to improve California health care, particularly for low-income residents,” Norman Williams, a Department of Insurance spokesperson, said.

“In assessing merger proposals, the department considers a number of factors, including the proposal’s position with respect to California insurance laws and its potential impact on the financial condition of the companies,” Williams said. “There are obviously some mergers that do not negatively impact consumers, and there are some that would. We consider each proposal on its merits,” Williams added.

The Department of Managed Health Care, the second state agency involved in regulating health insurance mergers, is charged with assuring that companies adhere to provisions of the Knox-Keene Act, which outlines how managed care should work in California.

“In the case of the Anthem-WellPoint merger, WellPoint owned Blue Cross which is very big in California, so our main objective was to verify that this new entity would continue to operate Blue Cross under the Knox-Keene provisions,” Kevin Donohue, senior counsel for DMHC, said. California’s managed care blueprint includes 36 specific mandates, a dozen more than most states, according to Donohue.

Although DMHC has a limited regulatory purview, Donohue has considered the implications of insurance mergers.

“As you see more consolidation, you will also see fewer choices and less competition between plans,” Donohue predicted. “And if you see less competition in plans offered, you’ll probably see less competition in pricing as well,” he added.

Consumer Groups Question Payouts, Effects on Health Plan Members

Some merger proponents say that larger, merged companies reduce costs for consumers because the companies have more clout to negotiate lower prices with drug companies, hospitals and doctors, but some consumer groups say this isn’t the case.

The Foundation for Taxpayer and Consumer Rights, a Los Angeles-based consumer activist group, is lobbying state and federal regulators to scrutinize the PacifiCare-UnitedHealth proposal to ensure that the merger does not result in fewer choices and higher costs for patients, lower payments for doctors and hospitals and more waste in the health care system.

FTCR also is calling for regulators to limit payouts to insurance executives because of the merger.

Documents filed with the state last month showed that 39 PacifiCare executives would share nearly $230 million in cash and stock options if UnitedHealth Group’s proposed purchase for $9.2 billion is approved. By comparison, about 700 PacifiCare employee stock owners would share about $59 million in stock options.

“When HMO executives receive hundreds of millions of dollars of cash and stock, patients will invariably be asked to pay more for less care,” FTCR spokesperson Jerry Flanagan said.

While the health care world awaits regulators’ decisions in the PacifiCare-UnitedHealth proposal, another large consolidation looms on the horizon: Marketplace rumors have it that Aetna and HealthNet are talking merger.

Spokespersons for both companies declined to comment.

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