Editorial: Will mergers stifle healthcare reform?

The 2010 healthcare reform law was supposed to promote competition among insurers, and for many policyholders it’s done just that. These days, though, the insurance industry is going through a wave of mergers that threatens to leave consumers with fewer choices.

There’s no single motivation behind the mergers, although they all reflect the changing economics of healthcare. In some, the buyers are seeking bigger stakes in privately run Medicaid and Medicare plans, whose ranks are burgeoning because the 2010 law extended Medicaid to more low-income Americans and because the baby boom generation has reached retirement age. Two examples are Centene’s $6.3-billion purchase of HealthNet, combining two big players in Medicaid managed care, and Aetna’s $37-billion purchase of Humana, the second-largest provider of Medicare Advantage policies. Others, such as Anthem’s pursuit of Cigna, seek to consolidate power in the market for employer health plans.

The Affordable Care Act encourages insurers to scale up in part by requiring 80% to 85% of the premiums they collect to be spent on patient care, limiting profit margins. As a consequence, the quickest way for some insurers to increase profits is to buy another insurer’s customers and spread costs over a wider base. Having a bigger share of the market also helps them negotiate lower rates with doctor groups and hospital chains; hospitals have been consolidating for the same reasons. This race to consolidate among providers and insurers has been developing for years, but the 2010 law kicked it into a higher gear by offering higher payments for better coordinated care.

The obvious risk posed by the current merger wave is that the Medicare Advantage and Medicaid HMO markets in some states could become dominated by a single insurer, raising prices for consumers and potentially driving doctors out. Such problems can be addressed to some degree by ordering the merging companies to sell some operations to rivals in states with too few competitors. The subtler but no less important issue is the threat that consolidation poses to innovation. History has shown that upstarts and underdogs are the primary engines of change in an industry, and healthcare clearly needs some breakthroughs to rein in costs.

The 2010 law launched a number of experiments aimed at slowing the growth of healthcare spending, particularly in Medicare. What it did not do, though, was fundamentally change the incentives that the system provides for doctors, hospitals and drug manufacturers to push treatment costs in one direction only: up. Aside from consumers, the one segment of the industry that has a powerful interest in fixing those incentives is insurers. And simply pressuring doctors and hospitals to take less money per treatment isn’t the answer. As insurers consolidate to chase market share and profits, it’s imperative that they not lose interest in the difficult work of changing the system to end the cycle of ever-rising costs.

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