Cigna-Anthem Merger Might Not Be a Bad Deal for Consumers

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There used to be five big health insurance companies in the US. If the proposed Anthem-Cigna merger goes through, we’ll be down to three. Is this a good thing? Wonkblog’s Carolyn Johnson reports:

The effect on premiums are hard to predict, but are likely to be bad.

The question of how the mergers will affect card-carrying members is more complicated than it might seem. In general, consolidation in an industry leads to less competition and higher prices. Indeed, the few studies that have been done suggest that fewer insurers in the marketplace will mean higher prices.

….”The premise of the merger for both of these transactions is that they can achieve cost savings and economies of scale, and they of course maintain that will lead to their ability to price even more competitively,” said Richard Zall, chair of the health care department at Proskauer, a law firm. “It will take some time to see: 1) can they implement the mergers and achieve those savings and 2) is there still sufficient competition in the various markets that it won’t lead to price increases?”

Actually, it’s not this simple. There are several things that make it hard to predict how this will shake out:

  1. Health insurers do compete with each other, but even more they compete with providers (doctors, hospitals, drug companies, etc.). If there are multiple small insurers in, say, Kansas, then hospitals there have a lot of pricing power. If an insurer refuses to do business with a particular hospital, that puts them at a big disadvantage compared to their competitors and limits their leverage to negotiate lower prices. But if there are only one or two big insurers, it’s the hospitals that are at a disadvantage since they can’t afford to be out of their networks. In this case, insurers have much more leverage to negotiate lower prices.
  2. Unlike, say, diet colas, which are available everywhere, even big health insurers tend to be somewhat regional. This means there are some areas where there’s literally only one insurer available. This obviously could put consumers at a disadvantage.
  3. However, Obamacare mandates a minimum “medical loss ratio” of 80 percent. Even if there’s only one insurer in a county, they have to spend at least 80 percent of their premium dollars on actual health care. That number goes up to 85 percent for large group plans. So there’s a hard limit on how much insurers can charge no matter who controls the market.
  4. Generally speaking, we liberals would prefer a system in which there was only one insurer: the federal government. There are various reasons for this, but one of them is that a single nationwide insurer would have enormous pricing power. This is sort of the ultimate version of item #1. Medical costs are overwhelmingly set by providers, not by insurers, and the more leverage insurers have, the lower prices are for consumers.

In other words, while I’d normally be opposed to such severe consolidation in an industry, it’s a little trickier in this case. There are plenty of horror stories about health insurers, but when it comes to pricing, a smaller number of bigger insurers is probably a good trend. In the health care industry, the thing to be worried about is consolidation on the provider side. That would be bad for medical costs.

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