Insurer mega-mergers could produce counterintuitive effect

Following news of the hallmark acquisition of Humana by Aetna, many observers' first thought — and concern — is this kind of consolidation is a bad thing, as it will inevitably lead to less competition and higher prices. However, some industry experts are anticipating the opposite.

While the fear that consolidation will reduce competition is justified in many cases, this may not necessarily be true in the health insurance industry. In fact, consolidation between Aetna and Humana, as well as Cigna and Anthem, which are also discussing a potential deal, would create an entity that would likely be able to win more favorable contract terms from medical providers, according to CFO magazine

"Scale is becoming increasingly important when you look at the technology investments needed to do more sophisticated data analysis to figure out how to help people be healthier," Jim Winkler, chief innovation officer at Aon Hewitt Health, told CFO magazine. "That requires capital. But scale will also give health plans better negotiating leverage. Providers obviously won't love that, but it will help the healthcare marketplace move faster toward payment for value instead of paying providers on a fee-for-service basis. And that's a good thing."

Mr. Winkler acknowledges that it may be counterintuitive to think that consolidation could have a positive effect on pricing. While he admits that a narrower choice of carriers could enable insurers to increase their fees for administering health plans, fees account for only 15 to 20 percent of overall health costs. The more significant portion of these costs is for claims, and "those costs are a function of the contracted rates negotiated between providers and insurance carriers," he said.

It is consolidation among providers more so than insurers that employers and individual consumers should be worried about, as these can lead to increased cost, according to Mr. Winkler. For example, a hospital that acquires an independent physician practice essentially transforms it into an outpatient facility but charges higher prices for services and procedures than the stand-alone practice did.

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