Is the Health Insurance Industry Super-Sizing?

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July 6, 2016 by Harry Stoll

Anthem, the 2nd largest health insurer in the U.S., is attempting a takeover of Cigna, the 5th largest insurer; and UnitedHealth, the largest insurer, is seeking to acquire Aetna, the 3rd largest carrier.  The Wall Street Journal reported the UnitedHealth deal will cost somewhere north of $40,000,000,000.  According to Fortune Magazine, the high profile merger could send the combined UnitedHealth-Aetna insurer to fifth place on the Fortune 500 list.  It’s been estimated by economists, after this merger frenzy, the three largest insurers will cover 133 million people.  If the Department of Justice lets the insurer mergers happen, the Federal Trade Commission, which oversees hospital mergers, may think that hospitals need a counterweight to all that newly-formed pricing power for insurers.  There are real pressures pushing these institutions to merge.

So why is the insurance industry consolidating? There are several reasons including some I will discuss today. First of all, heavily regulated industries thrive on consolidation.  These companies have a ton of regulatory overhead, first for compliance and second for lobbying.  The bigger you are, the easier it is to afford a team of experts to make sure you understand all the pertinent regulations, and to afford a second team of experts to prevent legislators from burdening you with a lot more regulations.  These are largely ‘fixed’ costs, and merging reduces them.  It’s also more difficult for legislators to ignore your calls once you are larger through merging.

Another reason for this trend to consolidate is Obamacare’s new exchanges. This may not play a huge role in these mergers since the exchanges are a small piece of the overall insurance market.  However, that small piece may get larger if Obamacare succeeds in restructuring the market for health care, as employers convert more positions to part-time jobs with no benefits, or decide it’s  cheaper and easier to give people money to shop on the exchanges than to deal with the increasing cost of providing health insurance.  Thanks to the exchanges and their comparable and transparent pricing , the individual health insurance market is more competitive then in the past.  Simultaneously, insurers are not able to differentiate from one another in their benefit terms.  All plans are assigned a ‘Metal’ label.  Pricing power suddenly matters more – not the power to charge consumers more, but the power to pay providers less.  Consequently, we see Obamacare plans with ‘narrow networks’ to control pricing paid to providers.

This brings us to the third main reason for these large mergers: Insurers are under pressure from other sections of the healthcare industry that are also consolidating. Hospital networks have become bigger and more powerful.  Physicians are increasingly going to work for hospitals or large practices.  Indeed, the consolidation trend has struck healthcare providers, too.  The hospitals and physicians are responding to the same incentives insurers are.  This could put insurers at a disadvantage when negotiating prices.  All of this consolidation has produced something of an arms race between insurers and providers trying to get bigger so they might gain a financial advantage.

To ensure payments on submitted insurance claims, doctors’ offices need to spend money for specialists who can navigate the paperwork. Obamacare and other laws aimed at improving health care delivery have also added costs and workload for providers.  The drive toward Accountable Care Organizations (ACO’s), for example, almost forces physicians to consolidate into larger practices, because small offices cannot support either administrative overhead or the financial risks involved.  Electronic Health Records (EHR’s), another project of the Obama Administration, are also more efficient when they’re implemented at large scale.

The consolidation of such large insurers would place additional stress on healthcare providers as they navigate all the changes that have been swirling around them.  It remains to be seen what may happen to our healthcare system if these super-sized insurance mergers are allowed.  We do know, however, that our healthcare providers will need assistance rowing through these rough waters.

At UCS, we stand ready to help healthcare providers with all of their medical collection needs.

Founded in 1950, United Credit Service, Inc. is a full service, licensed revenue cycle management and debt collection agency in Wisconsin providing effective, customized one on one management and recovery solutions for our business partners. Visit our website at, call 877-723-2902 or check out our YouTube video.


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