Regardless of how Aetna and Humana fare in their trial against the U.S. Department of Justice, they will continue to face industry pressures toward consolidation, a University of Louisville professor said.
The antitrust trial between the insurance giants and the U.S. government begins today in Washington, D.C. Aetna wants to buy Humana for $37 billion, but the Department of Justice wants to block the deal because it fears reduced competition in the health insurance industry.
Two weeks ago, another trial in the nation’s capital pitted the Justice Department against Anthem and Cigna, which also want to merge.
Insurance companies are saying that they need to get bigger to have enough bargaining power to negotiate good deals with health care providers, such as hospital systems, which also have gotten bigger, said Elizabeth Munnich, assistant professor of economics at the University of Louisville.
Hospital systems have grown in part because of federal regulations. For example, in 2010, the U.S. Department of Health and Human Services began issuing guidelines for the use of electronic health records. The idea was that enabling health providers to more easily share data about patients would reduce duplication of services, improve care coordination and reduce costs while improving health outcomes.
Large health care providers can more easily absorb the costs to invest in the infrastructure and personnel required to collect, store and analyze electronic data, Munnich said, which provides incentives for smaller hospital systems to join larger ones.
The Affordable Care Act intensified some of the consolidation pressures, Munnich said, because it included mandates and provided incentives for health care providers to work together, again to better coordinate care.
And working together is easier, Munnich said, if all health care providers — the hospital, the radiologist, the surgeon, the anesthesiologist, etc. — work in the same organization and use the same software.
As hospital systems grow, they can negotiate for better reimbursement rates from insurance companies — and that has prompted insurance companies to want to consolidate as well.
“I don’t think that’s something that’s going to go away,” Munnich said.
Growth through acquisitions
Indeed, Humana has seen tremendous growth in the last decade, fueled in part by acquisitions.
From 2004 to 2008, Humana spent nearly $2 billion to acquire new capabilities and to expand its geographic reach. It added more than 150,000 customers by buying Ochsner Health Plan for $157 million in 2004, gained another 50,000 members through its purchase of CarePlus Health Plans of Florida in 2005 and another 80,000 by buying Illinois-based OSF Health Plans in 2008.
When Humana spent $369 million in 2007 to buy CompBenefits Corp., it gained nearly 100,000 new customers, but also access to dental and vision insurance benefits that offered “significant cross-selling opportunities with our medical insurance products,” the company said in its annual report at the time. The insurer during that five-year span also spent $27 million to acquire DefenseWeb Technologies Inc., which provides “customized software solutions for the Department of Defense.”
While some acquisitions have not worked well — Humana bought Concentra in 2010 and sold the business in 2015 — it has added companies into its fold that improve the services it already provides. In 2011, for example, the insurer acquired San Diego-based Anvita Health, a health care analytics company whose software helps identify when patients need health care services.
Acquisitions in the last decade have helped boost the Louisville-based company’s balance sheet: Revenue last year was $54.3 billion, nearly four times the revenue the insurer generated in 2005. Income last year was $1.3 billion, more than four times as high as in 2005. Assets that year were less than $7 billion. Last year, they reached nearly $25 billion.
The number of people to whom Humana provides health insurance during that span roughly tripled, to 21.4 million last year.
Aetna has pursued a similar strategy — and also has recorded significant growth in the last decade. For example, it acquired Bethesda, Md.-based Coventry Health in 2013 for $7.3 billion, adding more than five million customers, including $1.5 million on Medicare. Aetna’s revenue jumped to more than $60 billion last year from $22.5 billion in 2005. Net income during that span increased by about $1 billion. The number of people who receive insurance from Aetna increased by about 8.5 million, to 23.5 million last year.
Industry pressures to remain
Munnich said that while the consolidation in the hospital and insurance industries do not generally lower prices for consumers, patients do see benefits from better coordinated care.
Whatever happens with the proposed Aetna-Humana and Anthem-Cigna mergers, Munnich said that the industry dynamics that are pushing insurers to combine are here to stay, and insurers including Humana are likely to seek other companies to acquire.
Humana has made smart decisions in the last decade to acquire companies that have allowed it to improve capabilities, to develop new products and to find new ways to lower costs, such as better coordinating and managing patients with chronic diseases, Munnich said.
“I think they’ll continue to grow,” she said.