shutterstock_312263933.jpgJust weeks ago, a looming merger between two major health insurance companies threatened to alter the health insurance market’s competitive landscape. The $54 billion deal between Anthem and Cigna was blocked by a federal judge in early February, on the same grounds as a $37 billion deal between Aetna and Humana that was blocked in January. According to the judges’ rulings, both deals would have reduced competition and increased prices. 

The successful completion of these deals would have resulted in three commercial insurers covering about half of the U.S. market. Many stakeholders, including providers and life sciences companies, expressed concern about the mergers’ impact. In line with the court rulings, they feared that these mergers would reduce competition for consumers while increasing the insurance companies’ bargaining leverage. 

Central to the court decisions was the impact that the proposed mergers had on insurance offerings within what we call Local Healthcare Markets. The court found that the Aetna/Humana merger would have substantially reduced competition between Medicare Advantage plans in 364 counties. For example, according to AIS Health Data, Aetna/Humana would have had a combined Medicare Advantage market share of 63% in Broward County in the Miami Local Healthcare Market. 

Despite the mergers’ collapse, health insurance companies will continue to identify opportunities to scale their business, in part to increase their negotiating leverage with providers and suppliers. Two specific motivations for the original deals are expected to influence the future of the health insurance market. 

First, the Medicare Advantage market was one of the major drivers of both mergers, as this market continues to have a healthy profit margin and, over the past six years, has achieved an attractive annual membership growth rate of 8%, according to data from the Kaiser Family Foundation. In the current political landscape, it’s possible that Republicans will increase Medicare Advantage payments to pre-ACA levels. Precedent from the recent merger rulings will limit insurance companies’ ability to aggressively expand in this market through large acquisitions. Instead, we anticipate that insurance companies will expand through organic growth or smaller acquisitions to avoid legal scrutiny.                                                                                                                          

Second, insurance companies will continue to diversify their business, moving into the services space in an attempt to emulate UnitedHealth Group’s success with its Optum business unit. These adjacent services have experienced higher earnings growth than traditional insurance and, by enabling better health management and collaborative care, can reduce the cost of patient care. 


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For example, OptumInsight offers health information technology services to provider organizations. These services help providers control costs and improve outcomes, indirectly benefiting their insurance business. This service line also carries a higher operating margin of around 20% compared to UnitedHealthcare’s roughly 6%. 

The breakdown of the two mega-mergers prevented an even more concentrated payer landscape, which is a good thing for manufacturers. Since both providers and suppliers have negotiated separate rates with each payer, these mergers would have exposed the “best” rate that each provider or supplier offered the two payers. Leaving the impact on the supplier’s bargaining leverage aside, the exposure of the lower rate alone is a significant cost to those who negotiate prices. 

Yet life sciences companies would be remiss to only focus on market share, rebates, and the continued management of pharmaceuticals and medical products. They need to start becoming more strategic about their relationships with payers, and will have to work to meet payers’ evolving needs as these customers diversify their business. 

For example, Optum recently acquired Surgical Care Affiliates, a 200-facility outpatient surgery center. This purchase increases Optum’s ability to move a variety of surgical procedures from inpatient to outpatient settings, and gives Optum direct influence over the medical products and services that are employed at these locations. 

Success for life sciences companies in this environment will require increasingly sophisticated national account management strategies to meet both payers’ and providers’ evolving needs. Programs that increase patient testing or adherence, for instance, have successfully provided value to the integrated payer and provider while also returning value to the manufacturer. To develop such programs, manufacturers will need to collect better customer insights on these integrated organizations. 

While the collapse of the payer mega-mergers was a positive outcome for patients and manufacturers alike, the future of the health insurance market will remain very dynamic. As payers continue to diversify their business and move away from historical offerings, life science companies need to research developments within Local Healthcare Markets diligently, and proactively develop strategies to connect with and serve their ever-evolving customers. 


Topics: health insurers, Pharma, Life Sciences, Humana, healthcare ecosystem, Paul Darling, payers, Anthem, Aetna, Cigna, mega-mergers, UnitedHealth Group