The Regulatory Hurdles to Health Insurance Mergers

Anthem and Cigna are the latest big American health insurers to propose a blockbuster merger. They and their peers need to satisfy many regulators, though, before the deals are approved. Here’s a look at the agencies and the deals that officials may be asked to swallow in an already concentrated industry.

What transactions are in the works?

Aetna has agreed to buy Humana for $37 billion, Anthem will pay $48 billion for Cigna, and the UnitedHealth Group might top either offer. The companies seek the leverage that increased size would bring to price negotiations with hospitals and drug makers. Mergers could also lead to cost savings and higher profit, a growing concern for insurers since the Affordable Care Actrequired them to spend at least 80 percent of premiums on medical care. And fewer rivals could mean more room to raise premiums.

Which regulators will be involved?

State insurance commissioners have primary responsibility, so each deal must pass muster with those in jurisdictions where the parties do business. The commissioners consider local competition, the companies’ financial condition and similar factors in determining whether a merger is in the public interest. They also trump federal officials on antitrust matters involving “the business of insurance,” as defined by the McCarran-Ferguson Act. Insurers are allowed to collude, for example, by pooling data to set policy rates.

Mergers aren’t considered the business of insurance, however, and the Justice Department will determine whether any deals violate antitrust laws. In 2012, for example, federal trustbusters required Anthem to divest itself of certain operations before buying its rival Amerigroup.

What are regulators worried about?

Less competition and higher prices, mostly. Insurance markets are highly concentrated, and big mergers will make them even more so. If Aetna acquires Humana, for example, the combined company will serve almost 90 percent of Kansas patients covered by Medicare Advantage, the privately run side of the federal insurance program for older adults. It will also control two-thirds of the market for policies covering individuals in Georgia. A union of Anthem and Cigna would create the nation’s largest health insurance company.

What are the insurers’ arguments?

One contention is that mergers would make companies big enough to rival Blue Cross Blue Shield, a nationwide federation of 36 insurers that separately serve a region and do not compete. Blue Cross Blue Shield companies are together the largest insurers of individuals and businesses in most states. They control more than 90 percent of the Alabama market, for example, and cover about 106 million Americans. Aetna and Humana combined, by comparison, would serve only 37 million customers. Yet combining just two of the top five insurers would eliminate one of the two companies that operate nationwide. And those companies already dominate coverage under Medicare Advantage.

What’s more, the argument that a big merger would create competition for an even heftier rival has already failed in other industries. In 2011, for example, Sprint, the third-largest cellphone service provider at the time, defended its plan to buy T-Mobile US, the fourth-largest, as necessary to keep its rivals Verizon and AT&T in check. The Federal Communications Commission and the Justice Department rejected the contention, making clear that shrinking the market to fewer than two nationwide carriers would harm consumers.

Insurers could also argue that a combination would create savings and improvements in technology that would redound to consumers’ benefit. Besides, they may point out, state insurance commissioners would have to approve any rise in insurance premiums. Yet the commissioners have often been reluctant to deny insurers rate increases, and insurance company mergers typically lead to higher premiums, according to a study by Leemore Dafny, former director of health care antitrust at the Federal Trade Commission.

So what might persuade the regulators?

The Affordable Care Act could be the answer. President Obama’s health care overhaul creates online exchanges for buying coverage, allowing insurers to expand into new markets without hiring expensive agents. The companies will still need the approval of state commissioners, but the lower barriers to entry should stir more competition – and, at least in the future, appease regulatory fears. It’s unclear whether that would be enough to counterbalance concerns over the top five insurers’ currently chunky market shares.

If any mergers among those five are to gain approval, the companies will almost certainly have to unload overlapping businesses. Aetna and Humana, for example, together control major slices of the commercial insurance market in Florida and of the Medicare market in Kansas. Trustbusters would probably require the two to sell pieces of those businesses.

How long would it take to seal a deal?

Anthem says it doesn’t expect its purchase of Cigna to close until the second half of 2016. Even that’s optimistic, if recent mergers in heavily regulated industries like telecommunications and banking are any indication.

The odds of approval might improve after the presidential election late next year if a Republican gains the White House. President Obama’s trustbusters have been tough on mergers, and a Republican administration might ease up. With only one, maybe two, big insurance deals likely to get through, however, it’s too risky to wait and allow a competitor to jump ahead in line.