2 health insurance mega-mergers are underway. Now Obama’s trying to stop them.

Sarah Kliff · Thursday, July 21, 2016, 2:07 pm

The Obama administration wants to block two health insurance mega-mergers.

The Department of Justice announced Thursday that it would file lawsuits against the proposed merger of Cigna and Anthem, and of Humana and Aetna.

Right now there are five major health insurers in the United States — and if these mergers went through, that would drop to three. Taken together, those three companies would cover around 132 million Americans — about half the population under age 65.

It's not hard to understand why the Obama administration is stepping in here. When health insurers get bigger, they use their increased clout to negotiate cheaper prices from doctors and hospitals. But instead of lowering premiums, they pocket the savings as profit.

"Even if the insurers are getting lower prices, and lower prices are good for the consumer, they're not usually getting passed on," says Martin Gaynor, an economist at Carnegie Mellon University who studies health insurer consolidation.

Health insurance mergers generally raise premiums

The consumer impact of health care mergers is more complicated than consolidation in many other areas, like the airline industry. There, it's pretty easy to see how bigger companies can lead to higher prices, as consumers have fewer options to choose from.

Think, for a moment, about how airlines work: They own their airplanes and decide how much they want to charge for a ride, a relatively simple exercise. They do buy goods and services — like airplane parts or the salaries of pilots who fly their planes — but the prices of those are not super variable (at least, not when compared with health care prices).

Health insurers, by contrast, are doing something more complex: They have to negotiate prices with hospitals and doctors. There's a decent body of research that suggests health plans aren't good at these negotiations and often don't get the best deals. This could become increasingly true as hospital systems have increasingly consolidated in recent years — and as health care providers have brought more clout to their side of the bargaining table.

There's some reason to think that bigger insurers with more customers could get hospitals to give them a better deal. And theoretically, that could translate into lower premiums for consumers.

Leemore Dafny is an economist at Northwestern University who has studied this exact issue. She looked at what happened when Aetna bought Prudential's health insurance business in 1999. That move did seem to give Aetna more bargaining power — as a result of the merger, doctors' salaries had dropped 3 percent by 2006.

But this didn't seem to do much for consumers: Premiums still went up 7 percent as a result of the merger. Aetna used its new clout to net higher profits.

"The evidence to date suggests that consolidation leads to higher premiums," says Dafny. "The question in my mind is whether the Affordable Care Act changes that."

Read more
http://www.vox.com/2016/7/21/12248014/merger-cigna-aetna-doj-lawsuit