Anti-Trust Alarms Sounding Over Humana/Aetna Merger

If the $37 billion deal to combine Humana, Inc. with Aetna Inc. happens, as more than 99% of the shareholders of both firms hope with their approval last month, life will change for orthopedic physicians and their patients.

Immediately after the overwhelming shareholder approval of this merger, the American Medical Association (AMA) sent a letter to the U.S. Department of Justice (DOJ) saying that Aetna’s proposed acquisition of Humana and Anthem’s proposed acquisition of Cigna would create “a near total collapse of competition.”

The letter went on also say: “The lost competition through these proposed mergers would likely be permanent.”

Approximately 92% of orthopedic physicians are financially dependent on their contracts with health care plans. The rest are either concierge or cash-only practices (source: Orthopedic Surgeons: #1 in Pay, #11 in Satisfaction).

Health Insurer Monopsony

Said the AMA: “Health insurer monopsony, or buyer power, acquired through the proposed mergers would likely degrade the quality and reduce the quantity of physician services.”

Monopsony is economics-speak for a buyer’s monopoly.

The classic example of a monopsy is the relationship of farmers to food buyers. Hundreds of thousands of individual farmers sell to just a handful of food buyers. To level the negotiating playing field farmer cooperatives like the American Farm Bureau and the National Farmers Union (and later such co-ops as Land O Lakes, Ocean Spray, Sunkist, Organic Valley and Michigan Sugar) organized in the 1900s.

With only four or five buyers, individual farmers had no negotiating power. But when they combined into co-ops, they had leverage.

The five major health insurers in the U.S. purchase the services of a vast majority of orthopedic physicians. And orthopedists typically work in small practices with 10 or fewer colleagues.

This creates a classic monopsony. And the American Medical Association is raising the alarms.

In their November 11, 2015 letter, the AMA said the current wave of mega-insurer mergers is creating a textbook monopsony scenario where dominate health insurers will be able to dictate pricing to the hundreds of thousands of physicians in the U.S.—including the 15, 000 orthopedic physicians.

“If physicians were to refuse the terms of any health insurer, they would likely suffer an irretrievable loss of revenue. That is because medical services can neither be stored nor exported.”

Orthopedic physicians have no individual leverage against mega-insurers. If they are unhappy about low payment rates what are they going to do? Terminate the contract?

Not likely.

Raising the Anti-Trust Alarm

A July 2015 analysis from the Kaiser Family Foundation (KFF) said that a merger of Aetna and Humana would create a mega insurer covering 26% of all Medicare Advantage enrollees.

When they looked at specific markets, the coverage percentage jumped significantly. Humana, for example, covers more than 50% of the Medicare Advantage patients in Kentucky, Louisiana, and Virginia, and more than two-thirds of the patients in Mississippi and West Virginia.

Aetna covers approximately 25% of the quarter of enrollees in eight different states. Add these two firms together and they now control coverage for more than 50% of the Medicare Advantage patients in 39 counties out of the 335 counties with at least 10, 000 Medicare Advantage enrollees.

The Big Five Become the Big Three

In September 2015, Republican Senator Mike Lee of the Utah, the Chairman of the Senate Judiciary Committee’s Subcommittee on Anti-trust, Competition Policy and Consumer Rights, said that the relevant “antitrust inquiry” is “whether the combination [of insurers] will lead to a market concentration that may substantially lessen competition.” If the DOJ approves the Aetna–Humana deal and another pending merger between Anthem and Cigna, Lee stated that the “big five” in the health insurance industry will be reduced to the “big three.”

Other Medical Associations Step Up

The Texas Medical Association (TMA) wrote in a recent letter to the DOJ that Texas’ health insurance market would suffer due to the decreased competition, potentially resulting in higher prices for plans and lower prices for services. Specifically, TMA pointed to more concentrated market power in several major Texas cities in health maintenance organizations (HMO), preferred provider organizations (PPO), and point of service plan markets.

The Texas doctors went on to raise concerns about the new mega-insurer’s ability to unilaterally reduced prices below the actual service costs or to exclude physicians below the plan network and force those practices out of business.

AMA President Steven J. Stack, M.D., chimed in saying that the AMA has “long cautioned about the negative consequences of large health insurers pursuing merger strategies to assume dominant positions in local markets.” And added: “We could have 42% of the U.S. population covered by three companies. Staggering, right?”

The American Academy of Family Physicians President, Robert Wergin, M.D., lent his voice to the growing chorus saying, “Your grandmother may have seen me for 20 years. Then she signs up for Medicare Advantage and I have to tell her that I’m not in the network and she’ll have to pay for me out-of-pocket.”

Are These Insurance Mega-Mergers Inevitable?

More than 99% of the shareholders of both firms approved the Humana/Aetna merger.

On July 3, 2015, when Aetna announced its plans to acquire Humana, it assured the public and the government that the transaction would be good for physicians and patients and have no effect on competition.

Aetna and its CEO, Mark Bertolini, are moving quickly to establish a sense of inevitability for the merger saying that he “took a conservative view” of what his company might need to divest in order to comply with any Department of Justice anti-trust concerns in merging with Humana.

Furthermore, Bertolini noted in discussions with Wall Street analysts, this transaction would be the first among the biggest insurers to merge and that would give them an edge in a review by anti-trust regulators. Aetna is the third largest insurer and Humana is the fourth, respectively by revenue. Combined they would have about a million more members in Medicare Advantage—the private insurance version of the federal program for seniors and the disabled than UnitedHealth, the next closest competitor.

Bertolini and his counterpart at Humana, CEO Bruce Broussard, also mentioned that the two insurers have complimentary rather than overlapping strengths—Aetna’s is in commercial coverage and sells insurance primarily to employers while Humana’s is in Medicare.

The Department of Justice Review

In what may well be signaling the Department of Justice’s take on the Aetna/Humana merger and the other mega insurer mergers in the works, Assistant Attorney General Bill Baer—the DOJ’s top antitrust enforcer—expressed concern about consolidation in the health insurance industry.

In a keynote address at a health care industry conference at Yale Law School, Baer said:

“Competition is central to the provision of affordable quality health care in the U.S. It promotes innovation and helps deliver the best health outcomes for the lowest prices. Consumers benefit when they have meaningful choices among insurers and hospitals, physicians and therapists, prescription drugs and medical devices.”

And then he specifically talked about anti-trust issues with insurers:

“Over the last decade and a half, the division has either blocked outright or required divestitures from seven health insurance mergers. We did this to protect individual purchasers, employers buying small and large group insurance, Medicaid managed-care enrollees, and seniors who rely on Medicare Advantage.”

“We don’t pick winners and losers. Our job is to block mergers that threaten to reduce competition; our job is to challenge competitors who want to conspire rather than compete; and our task is to ensure that companies do not raise barriers that deny competitors the opportunity to enter new markets or expand their existing market presence.”

“As my friend and mentor Bob Pitofsky said about this argument some years ago, the antitrust laws ‘reflect a fundamental premise that consumer choice, rather than the collective judgment of sellers, should determine the mix of price and quality options available in the market place.’ This is still true. Consumers do not benefit when sellers—or buyers—merge simply to gain bargaining leverage. Consumers benefit when there is entry, expansion, innovation and competition.”

What Happens Next?

There is much discussion about how the changing landscape of health care service delivery is forcing insurance companies to consolidate. But, based on Assistant Attorney General Baer’s comments at Yale, that may ultimately be irrelevant to the staff economists at the Antitrust Division.

Those lawyers and economists are studying these mergers carefully and the AMA and other physician groups are making it abundantly clear that the harm to individual physician practices is serious and no manner of legal maneuvering, political deal making or even corporate restructuring through divestitures may overcome it.

In many respects, a soft ruling on the Aetna/Humana deal opens the door to other mega mergers so it may well be the DOJ that draws the line in the sand—with support from the physician community.