In recent weeks we have seen an uptick in mergers and merger/acquisition rumors. Cigna's acquisition of HealthSpring, rumors about Aetna and Humana, United's supposed interest in Coventry and others seem to be fueling these rumors. So why is there so much activity, especially recently?
In a typical or normal economy, companies consider acquisition or merger when they see marketplace bargains or alternative approaches to more quickly achieve their objectives than growing their own operations. To buy or to grow has been the major question facing leadership. The marketplace pressures health plans for continued growth, particularly in the publicly traded sector which emerges as a major driver when growth isn't as spectacular as desired.
Today's health plan economy is not typical or normal. On the positive side, health care trends seem to be subsiding somewhat surprisingly while major changes with unknown impact from healthcare reform loom out in 2014. Rumors of mergers among the major players have been out there for many years. Consolidation has been expected, but the major catalyst for change has been health care reform. The marketplace wisdom seems to assume that bigger is always better. No one is satisfied with their growth history especially when there is a larger competitor out there. Whether or not that competitor is doing a better job, the pressure to be larger is far too enticing. Leader plans that want to fill in their presence in thin markets look for other plans that have a deeper presence.
The emergence of exchanges and the public's inability to effectively sift through more than a handful of different players further accelerates the market's desire for additional consolidation. Given more than four or five choices in a given market, and the various plan options offered by each, the plans in a local market ranked by size beyond the top four or five are at a significant disadvantage. It is doubtful they will get a fair shake in the exchange environment beyond their current membership. For example in Southern California where I live, the obvious winners will be Kaiser, Blue Cross of California (i.e., Anthem), Blue Shield of California, United (i.e., the former PacifiCare), and most likely HealthNet. Beyond these four Aetna, CIGNA, and some other smaller players will have to fight to get attention. This doesn't include the many self-funded options or very local choices offered in only a few communities.
Many in the industry refer to BUCA (i.e., the Blues, United, Cigna and Aetna). Ironically much of the merger hubbub is focused on these players. Kaiser should definitely be included in the mix, being one of the largest players although not in every state. I expect continued merger and acquisition chatter until at least 80 – 85% of the enrollment resides in a handful of plans. Anti-trust regulations will likely preclude this from shrinking to two or three plans, but further consolidation will continue for some time. Regional giants and major not-for-profit plans will probably be the slowest to merge with others, but they too will not be immune from this consolidation activity. Market-specific players (i.e., Medicare or Medicaid only plans) will also be involved in this process. One of the unintended consequences or outcomes of health care reform has been consolidation. Ironically, the concern about the "big and nasty" health plans that fueled reform has led to even bigger health plans. Hopefully, they are becoming bigger and better health plans!
