The health insurance industry has been rocked with the announcement of three large mergers: Aetna/Humana, Anthem/Cigna, and Centene/HealthNet. But many benefits of megamergers put forward by these companies will not materialize, and there will be few benefits for consumers. Wall Street is understandably skeptical. Here’s why.

Three broad reasons have been proposed by the insurers for these acquisitions: scale economies, negotiating leverage in hospital and physician contracting, and diversification. But scale economies, where fixed assets and overhead decrease with firm size, are very uncertain in health insurance mergers. Some deals create leverage with providers, and some won’t. Some mergers will add or create “best in class” capabilities, and some won’t.

Scale Economies

Health insurers have significant fixed costs and overhead, such as claims systems and human resources (HR) departments. The cost per member for these things should theoretically go down as an insurer grows, but there is little evidence that this happens in the real world.

In fact, publicly traded health insurers report a range of administrative cost savings, but no clear pattern related to size (Sherlock Company, Pulse Reports). Several studies of health insurers have found little or no economies of scale following mergers. Studies in other industries suggest that even when economies of scale exist, the advantages dissipate with very large company sizes. Since administrative costs are a small portion of health insurance prices (10 to 15 percent, on average) it would take a large reduction in administrative costs to create a meaningful price reduction.

For Aetna, this shouldn’t come as news. In 2004, after Aetna’s disastrous merger with U.S. Healthcare, University of California health economist James C. Robinson described Aetna’s transformation and lessons learned:

In the new thinking, economies of scale exist in health insurance, but they are modest and do not bring major cost reductions sufficient to support low premiums, further growth, market domination, and eventual profits.

Anthem will face unique barriers to obtaining benefits of scale compared to other megamerger participants. The Indianapolis-based company has struggled for years to consolidate the core systems of its acquired Blue Cross/Blue Shield plans. Moving Anthem and Cigna business to a common platform would be another difficult, expensive, and time-consuming project.

Anthem has been optimistic, to be sure. The company has estimated “approaching $2 billion in synergies,” with operational efficiencies as one source.

And yet, in regulatory filings, Anthem states it will not reduce staffing in either company post-merger. If so, then most of the savings are likely to come from moving Cigna business to the larger discounts with hospitals and doctors that Anthem has negotiated in states under its Blue Cross/Blue Shield brand.

One area where size might matter is the ability to invest in new services and programs. Large insurers are certainly able to invest more in market-facing innovations such as mobile health applications, shopping, and price transparency tools, than small, regional health plans. Large insurers also can invest more in analysis of health information and electronic links to provider partners.

But Aetna, Anthem, Cigna, and Humana already outshine regional rivals in dollars invested.

Deloitte found that capital investments by the five largest U.S. health insurers averaged $554 million, six times the average capital investment of 18 independent Blue plans ($92 million) in 2012. Will even more investment dollars really matter?

Negotiating Leverage In Hospital And Physician Contracting

Meanwhile, the American Hospital Association and the American Medical Association are worried that mega insurers will have more negotiating leverage in provider contracts with hospitals and doctors. The reality is more nuanced.

For example, the impact of the Anthem/Cigna will depend on particular state circumstances. Anthem is the dominant insurer in states where it has the Blue brands and it usually pays lower prices for health care in those states. Anthem also has access to the Blue national network, which also generally pays lower prices. If Anthem converts the Cigna business to the Blue brands in those states, current Cigna customers will have lower medical costs.

But in states where Anthem already has high market share, anti-trust scrutiny will be strongest, so Anthem may need to divest some Cigna businesses, though Anthem CEO Joseph Swedish has stated he does not expect anti-trust review to require any divestiture.

If all Cigna business is retained, there are still limits to the value of market share in negotiating price. I have had responsibility for provider negotiations in health plans with 35 percent, 60 percent, and 80 percent market share. In my experience, a 60 percent market share plan does not always yield substantially lower pricing than a 35 percent share plan. Thus, Cigna’s impact on Anthem negotiations may not be great. Cigna customers will benefit from the lower prices Anthem already has, but Anthem customers won’t see much improvement. In states where Anthem does not have the Blue brand, it will have no greater leverage with providers than Cigna has now.

The Aetna/Humana combination will increase Aetna’s share of a provider’s total revenue. However, neither Aetna nor Humana have high market shares in most states. Another fly in this ointment is that, typically, commercial and Medicare Advantage payment rates are negotiated separately, even with the same carrier. Thus Aetna/Humana may not derive any negotiation benefit in the commercial market from Humana’s sizeable Medicare Advantage business.

In the Centene/Health Net merger, their combination will only help negotiations in markets where the companies currently overlap in Arizona, California, and Washington.

The Aetna and Centene acquisitions should help in negotiations with national referral centers (e.g. Mayo Clinic) because their total national volume would increase. Interestingly, Anthem’s contracts with many such centers come through the Blue Card network. Under the Blue Card program, the local Blue plan negotiates with providers on behalf of all Blue Plans. It is not Anthem’s size that matters for prices at the Mayo Clinic, it is the size of the whole Blue system. The addition of some Cigna business to the Blue system may not have a significant impact on Blue Card discounts. Cigna branded business will decrease, potentially reducing its leverage with national centers.

In the end, consolidation will somewhat increase the leverage mega insurers have with hospitals and doctors, but not as much as many expect.


Finally, diversification is also a reason for these mergers. Aetna clearly benefits by acquiring Humana’s Medicare Advantage business. With this move, Aetna becomes the leading competitor in the growing and profitable Medicare segment. Aetna’s capabilities in the employer market and its provider facing capabilities in its Healthagen subsidiary may also help Humana. Centene’s Health Net acquisition makes Centene less dependent on Medicaid by adding commercial and Medicare business. This should give Centene a more stable financial performance.

The synergy between Anthem and Cigna is harder to see. Anthem will bring expertise to Cigna in the individual market, but might not overcome the strength of local Blue Plans in non-Anthem states. Cigna’s Medicaid business may improve Anthem’s position in this segment. Cigna brings behavioral health expertise through its Healthspring subsidiary. Compared to the significant benefits obtained by the other two mergers, these benefits are not game changing.

Choice And Consolidation

On the other hand, consumers will not lose a lot of choice in most markets. The studies of health insurance consolidation using the Herfindahl-Hirschman Index (HHI) tend to ignore how different market segments have different competitive structures. For example, the Anthem/Cigna merger would have the greatest impact on HHI in Anthem states, but while Anthem is strong in the individual and small group market, Cigna is not.

Removing Cigna from these segments will have minimal impact on choice. In the large group market where Anthem and Cigna do compete heavily, major employers still have strong negotiating leverage and a sufficient number of choices (United, Aetna, Anthem and/or a local Blue plan). The Aetna/Humana merger will reduce Medicare Advantage choices in some markets, but not severely.

The Bottom Line

Certainly, Wall Street isn’t yet convinced that the advertised benefits of these mergers will occur. On December 18, Aetna was trading 13.6 percent lower than on its announcement day. On the same day, Anthem shares were trading about 15.7 percent below its May 28 closing, the basis for the stock portion of the deal with Cigna. Centene shares have sagged 13 percent since the company’s July 2 announcement that it will buy Health Net.

Consumers would see marginal benefits from mega insurers. Administrative costs will not go down in a meaningful way. Some consumers and employers would see lower health care prices, but many would not. Some consumers may see new products or services they value.

Lurking in the background is nationwide health care cost inflation. The Centers for Medicare and Medicaid Services project annual per capita cost increases of 4.9 percent between 2014 and 2024. Rising costs could neutralize any marginal benefits gained through these mergers.

So the size of health insurers may not matter. What may matter is whether insurers or health systems of any size can give consumers access to quality health care at a price consumers can afford.