The Curious Case of Health Care’s Merger Mania — Is Obamacare To Blame?

The health care industry is getting bigger.

And so are its key players.

CVS last month bought Target’s pharmacy business for $2 billion. Anthem offered $54 billion for Cigna. Aetna and Humana are talking about partnering up.

Why is health care dealmaking in full swing?

The conventional wisdom is that the Affordable Care Act is pushing health care entities to merge, by creating new pressures on how health care providers do business and adding millions of newly insured Americans to the marketplace. And now that King v. Burwell is resolved, some think that health care insurers are especially ripe to consolidate.

“The ruling could remove uncertainty for the insurers who are seeking deals,” Reuters reported.

But if the ACA is the preferred explanation, it’s an incomplete one. As “Road to Reform” previously reported, the uptick in health care mergers actually began during the recession, several years before the ACA was even signed into law. That’s partly because the weakest organizations saw their revenues dwindle and margins shrink, and many reached out to deeper-pocketed systems, seeking to partner up.

“The Affordable Care Act is driving a variety of changes,” former Obama administration official Steven Rattner said on CNBC last week. “But consolidation within the hospital arena and insurer arena was probably coming anyway.”

“Take New York,” Rattner points out. “New York has five major hospital systems and tens of dozens of small hospitals that still aren’t really part of a system. You don’t need that kind of level of [dispersion].”

State of Play for Health Insurers: Stable, After All

The ACA also isn’t a clear driver for health insurers to band together, either.

Looking at the health insurance industry, some prognosticators predicted that the ACA would be bad for business. The health law capped the percentage of revenue that could be routed to overhead and administration at 15%, and created a wave of uncertainty.

In January 2014, Moody’s downgraded its outlook for the health insurance industry from “stable” to “negative.”

“[T]he ongoing unstable and evolving environment is a key factor for our outlook change,” Stephen Zaharuk, author of Moody’s report, said at the time. “The past few months have seen new regulations and announcements that impose operational changes well after product and pricing decisions were finalized.”

But within a year, Moody’s analysts had changed their opinion: They concluded that the insurance business was stable after all.

“Our revised outlook on the US health insurance sector reflects the insurers’ ability to adapt to health care reform,” Zaharuk wrote in February 2015. “While ongoing legal and political uncertainties remain, we believe that insurers will continue to minimize these risks over the next 12 to 18 months.”

With the benefit of time, it’s become clear that the ACA is bringing in new customers. RAND Corporation earlier this year estimated that of the nearly 23 million people who have gained health coverage through the ACA, more than 15 million obtained it through private insurance. Recent CMS data suggests that the percentage of Americans covered by private insurance is actually higher than when the ACA first was enacted.

And in the past few years, the big five health insurers have seen their stock valuations soar.

One proffered rationale for further insurer consolidation is that the deals will lead to more efficiency.

But “Road to Reform” spoke with several health economists last month, and they were skeptical of that argument.

Further consolidation among already super-sized insurers “reminds me of the airline sector, and I don’t think there have been efficiencies gained there — and they have a more direct way of finding efficiencies, with the hub-and-spoke model,” Bob Town, a health care professor at the Wharton School, told California Healthline.

“Here, it’s a little less clear where they get those efficiencies,” Town added. “The economies of scale in insurance are relatively modest.”

Effect on the Industry

Some watchdogs say that more health care deals aren’t necessarily good for patients. A number of studies suggest that health care consolidation leads to higher health care prices, as organizations can wield more market power.

“The country may be left with two or three super-insurers duking it out with the local Blue Cross Blue Shield plans that remain,” Trudy Lieberman wrote at the Columbia Journalism Review. “An obvious question — for journalists, for the regulators who must sign off on these deals and for the public — is what the impact of these mergers will be for consumers.”

And if health insurers band together, that may only create more downstream consolidation, as hospitals and doctors feel pressure to team up and negotiate.

But other observers think that a rise in dealmaking is a good thing.

“I think this is an industry that needs consolidation [and] needs rationalization,” Rattner said last week.

“It was run a little bit like a mom-and-pop kind of operation with a few big grocery stores around.”

Around the nation

Here’s what else is making news on the road to reform.

How law professors shaped the Supreme Court’s decision. A handful of health law professors, including Tim Jost, Nicholas Bagley and Abbe Gluck, spent years dutifully writing about and analyzing the implications of the King v. Burwell court case. Their work appeared to influence the court’s ruling to affirm the administration’s position, Harvard Law School fellow Rachel Sachs writes for “Bill of Health.”

What’s next for the ACA. Writing at the New Republic, Bill Gardner explores several ways that the health law could be improved and focuses on the need for more cost control and tactics to improve outcomes.

Republicans and Obamacare. At the New York Times, David Leonhardt shares the story of how Ronald Reagan — who famously opposed the creation of Medicare — eventually became a fierce defender of the entitlement program. Could the same hold true with Republicans and the ACA?

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