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