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welcome to Mark Paulie he's a professor
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of healthc Care Management here at
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Wharton and he's going to discuss the
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merger frenzy that's going on uh among
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healthc care insurers at the moment Mark
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the top five companies have been talking
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about merging with each other in
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different ways so we have Anthem which
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is a consolidation of Blue Cross
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companies uh talking they're making a
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play for Sigma that's a $48 billion deal
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if it went through United Health is
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talking about picking up Etna that's a
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$40 billion deal and Etna itself is
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talking about picking up human which is
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is a $30 billion deal these are the top
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five players all told and if all of
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these things went through somehow we'd
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be left with the top three instead of
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the top five so um first question is why
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are these merger efforts coming now yeah
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that's a good question I I think one
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answer is that in the period of
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Obamacare uh uh insurers found it
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politic to lay low uh and not do
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anything dramatic that might upset the
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boat because they had to maintain their
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position of of of probity uh uh and now
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it's almost as if somebody has said okay
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it's open season now uh all those things
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that have been bottled up for five years
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Obamacare actually started in
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2009 uh now it's a free-for-all go out
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and do whatever you want to do so to to
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some exent I think the the uh
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Coincidence of uh all of this discussion
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right now is probably because the the
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Assumption the insurers are making is
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that kind of the corks out of the bottle
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and they can get back to doing whatever
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they would have been
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doing uh but there's certainly some
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features of Obamacare that have actually
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led to uh motivation for insurers to try
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to
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merge what are those well so they're
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really two of them uh one is uh the the
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main feature of Obamacare I think that
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most people know about is that it
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reformed the market buying individual
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insurance it's important to say most of
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us don't get our insurance that way we
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get our insurance through our job and if
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we work for a big company our employer
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is really not very much if at all
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affected by these mergers at least not
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directly so most of us can sleep well at
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night regardless of what happens but if
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you work for a small business or if you
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own a small business or if you get your
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insurance as an individual because
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you're self-employed and you're using
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either the Obamacare exchanges or even
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the remaining individual Market uh the
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the of course the per the the goal of
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Obamacare was to try to increase
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competition in the individual Market by
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making it much more transparent about
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what different plans would be and by
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regulating the insurers uh in an attempt
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to cut that profit margins in the
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individual insurance market and this is
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a kind of counter attack I think on the
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part of insurers saying well um if
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you're going to um uh try to uh uh
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stimulate competition uh we're going to
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counteract by reducing the number of
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competitors so at least we won't have to
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worry about our as many um competitors
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stabbing Us in the back by cutting
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prices if we can buy them up or acquire
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them so so that's number one number two
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uh an important part of Obamacare is
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particularly for the Medicare population
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to organize more or organized Delivery
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Systems accountable care organizations
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which are supposed to be entities to
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care for the full set of needs of a
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population of people and that has often
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meant for obvious reasons that since
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people use more than one hospital it
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means all the hospitals in town have an
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incentive to work together and when they
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get together Adam Smith probably could
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have warned us about this they not only
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talk about we suspect how to improve
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care they also talk about how to bargain
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more aggressively with insurers and so
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uh the ACO part of the Affordable Care
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Act has stimulated uh among other
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reasons uh consolidation on the provider
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side and I think what we're seeing here
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is a a reaction to that consolidation by
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insurers saying well if the providers
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are not going to gang up on us we better
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gang up on them so a battle of the
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Titans I guess right in which John Q
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public is probably going to get squashed
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yeah okay at least that's what
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economists say so um and I think that uh
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others have pointed out that um the
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consolidation for hospitals and Doctor
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groups and and for medical devices
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medical device companies has often led
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to higher cost for consumers I mean you
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point out since we mostly most people
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get their insurance through their
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employer that that might not have a big
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effect because the big employers
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especially would have some bargaining
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power and that it could affect consumers
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but can we generally assume that that um
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because of this consolidation were it to
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all happen that this does increase their
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Market power and their pricing power and
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that there will be a substantial effect
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on health care cost overall or is is
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that fair well that's sort of what Eon
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economists traditionally assume that
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that if you reduce the number of sellers
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that's going to uh increase pricing
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power and increase the markup Ratio or
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the markup percentage that a a seller
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can charge in principle there could be
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some reductions in cost if there are
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some economies uh associated with the
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mergers uh and the and the merge merger
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Partners have been talking about
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synergies and all of that but we're
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still worried that even if their costs
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fall whether those reductions get
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transformed into lower prices is
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somewhat up in the air because the
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markup will go up so uh you know it's
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not a foregone conclusion that prices
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are going to rise if you cut costs
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enough but there's still a concern that
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uh that would happen and I think there's
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in the research not only on mergers of
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insurers and even for that matter
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mergers of hospitals but mergers in
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general there's fairly profound
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skepticism that these economies of scale
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actually end up materializing to any
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appreciable extent and if they do
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whether they would trickle down or not
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trickle down now if you if any of these
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firms were the traditional kindly
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nonprofit Blue Cross plan in principle
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owned by its Insurance then you know if
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like Independence Blue Cross that's
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still in principle like that uh if it
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ganged up on uh healthc care providers
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here in town I probably cheer that uh
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but if it was bought out and converted
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to a company that trades on the New York
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Stock Exchange I might get a little more
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worried um not surprisingly there's
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already a lot of uh uh opposition to
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this the American Academy of family
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physicians has already come out they're
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they're reaching out to the Federal
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Trade Commission saying that
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they're not happy about this they're
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going to feel uh physicians may feel at
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a disadvantage if if they're suddenly
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dealing with a bigger Behemoth um so
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what are the odds of something like this
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getting past the Federal Trade
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Commission one assumes there's going to
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be challenges yeah well it would
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certainly be better if the opposition
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didn't come from the providers of
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healthc care who you know have their own
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acts to grind uh and came from consumers
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but I suspect that will happen uh
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certainly I I I personally would sign on
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to that and uh uh but uh but the
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government is in something of a
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compromised position because as I
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mentioned it has incouraged these
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accountable care
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organizations so far the Federal Trade
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Commission though kind of hasn't gotten
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the memo that that they that they should
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be um easy on mergers uh some other
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states in Massachusetts for example the
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Attorney General there Martha kley uh
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drafted a new policy which essentially
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said we will allow these Hospital
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mergers as long as the hospitals promis
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to play nice afterwards uh and and so
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there's a bit of a conflict that the
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Federal Trade Commission traditionally
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has taken the point of view that they
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view any merger with great skepticism
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it's kind of up to the merging Partners
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to prove that they're not doing
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something harmful to the welfare of
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consumers here though there is the
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counterargument well you the insurers
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can say you the government told us that
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uh you wanted the healthc care Market to
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consolidate for purposes of coordination
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of care uh and so we're just going along
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with the program that you outlined so uh
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uh I think the short answer is going to
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be politics and and in a way who's in
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charge who who employs the Attorney
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General at the time uh the uh the when
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and if these things actually uh um come
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to a decisive point so we've talked a
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lot about the sort of the business of
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this and the pricing and and and who who
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has more leverage in that sort of thing
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uh is there anything to be said about
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what this may or may not mean for
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Health outcomes of patients will will
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this have any significant effect or or
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is is that really not in the mix for
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something like well it's in the mix in
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the sense that if the consequence of the
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merger is to raise premiums and that
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frustrates the public policy which is
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intended to encourage people to take
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insurance uh uh the uh the and we think
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having insurance is a good thing for
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your health uh the more it um uh uh
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counteracts the uh existing public
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policy to encourage people to become
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insured the worse it'll be uh so the if
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the high prices discourage people from
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buying Insurance that'll be a bad thing
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for People's Health um otherwise though
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I don't think it's terribly relevant
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even um according to the Wall Street
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Journal uh article on this they've
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actually done some research for us uh
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maybe people there are hoping to get
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tenure I don't know but uh they had an
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interesting study which showed that the
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primary markets that would be affected
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by these mergers was the market for
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private Medicare insurance the so-called
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Medicare Advantage
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plans and uh although that's um and
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those plans cover about a third now of
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all people on Medicare but there is and
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I as you can tell by looking at me I am
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concerned about Medicare uh there is a
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there is a a protection which is that if
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the private insurers get together and
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try to rip off rip off us old folks we
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can still take our Medicare from the
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government plan so there's a protection
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there both in terms of quality of care
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in terms of cost of coverage uh that uh
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probably makes this less troubling than
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other mergers would be for example I'm
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much more troubled about mergers among
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hospitals or large physician groups than
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I am about insurers are there any other
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reasons for mergers other than gaining
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Market power well there are according to
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the research it and it's kind of common
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sense that you will um want to sell out
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or maybe would be a good takeover Target
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if your market value is lower than the
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true value of your company and I am
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intrigued by uh human which whose main
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business is Medicare Advantage put
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itself up for sale I think because it's
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making a lot of money off of Medicare
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Advantage and it thought now was a good
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time to cash in and have somebody pay a
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high price uh um and then my cynical
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side says in part because the salad days
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the gravy days of making a lot of money
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off of Medicare can't go on forever but
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if they can persuade some other insurer
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to buy them out at a relatively high
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price based on their current Good
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Fortune um uh the current stockholders
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can uh you know have a happy walk to the
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bank so there's some of uh some of this
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is probably also associated with
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perception that um that some of these
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firms are undervalued in the market
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relative to the value they would bring
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in a more Consolidated setting
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