Urge to Merge: What to Expect from Fewer but Bigger Vendors

More consolidations are likely among insurers, brokers and pharmacy benefit managers

By Joanne Sammer Jul 28, 2015
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When large insurers go shopping for acquisitions, these multibillion-dollar deals invariably grab headlines. Such was the case when Aetna announced on July 3, 2015, that it would acquire Humana, followed closely by Anthem’s July 24 announcement of its intention to acquire Cigna.

These transactions, however, are unlikely to be the last of the mergers and acquisitions (M&A) employers will experience among their vendors. Experts predict more health insurers, brokers and pharmacy benefit managers (PBMs) will be involved in deals in the near future.

“Large national health insurers are seeking to gain market share through acquisition,” said Shandon Fowler, director of product management at benefits services firm Benefitfocus. “This phenomenon, or at least the most recent cycle of it, started several years ago with smaller deals that were large at the time but not the blockbusters that we see now—deals like Aetna buying Coventry, Cigna buying Healthspring and so on.”

Fowler also pointed to PBM activity and deals in the broker/consultant market, including the recent merger of Willis and Towers Watson, that are likely to have an impact on the employee health benefits marketplace.

A lot of this sudden movement could be construed as pent-up activity that was on hold while the fate of the Affordable Care Act (ACA) was uncertain. “The Supreme Court decision [in King v. Burwell] solidified the ACA, which has made health plans a little more comfortable moving forward with M&A to gain market share and consolidate,” said Brian Marcotte, president and CEO of the National Business Group on Health in Washington, D.C. “I would not be surprised if we see some additional M&A activity among the ‘Blues.’ ” The “Blues” is a nickname for Blue Cross/Blue Shield plans, which include Anthem.

Long-Term Implications

If more deals appear to be all but inevitable, what will this changing marketplace mean for employers? The Aetna/Humana and Anthem/Cigna deals, assuming they clear all legal and regulatory hurdles, have the potential to reduce the number of large health insurers in the nation to just three. While the clout these newly formed entities would bring to the marketplace is considerable, they could also reduce competition in many markets.

While employers may not be able to avoid the resulting changes from these deals, they are not necessarily the target market. Marcotte noted that the Aetna/Humana deal would have more of an impact on the Medicare Advantage market for Medicare-eligible senior citizens than it does on the employer market. However, “some value and efficiencies gained in areas like administration, contracting, information infrastructure and standardization could filter into the employer market, but those things will take time because these deals require integration of particularly complex claims systems,” he noted.

These insurers are also looking to build up their market clout, which could benefit employers. “Employers are likely to see the provider networks under these bigger health plans become much more integrated, which could create some advantages,” said Ash Shehata, a partner at KPMG LLP. “Health plans already have similar rates in the major metropolitan areas but these merged plans can move more volume to those providers to potentially get better rates and contracts.”

What will happen to smaller regional carriers in the wake of these deals is less clear. They may be prepping their own deals to gain size in the marketplace. “As the ACA has squeezed their margins, these carriers have been left with fewer options to make up the losses in revenue,” said Fowler. “As the bigger national carriers get bigger, regional plans may be more vulnerable to attacks on market share.”

A Changing Market

An important thing to remember is these deals will take a long time to be consummated. And the resulting entities may look significantly different than expected. “Anti-trust issues are the reason these deals may take a bit of time to be fully digested,” said Shehata.

As these deals unfold, Fowler suggested that employers focus on “what, if any, impacts a merger will have on their carrier’s business in the group market.” He noted that major deals like the Aetna/Humana and Anthem/Cigna transactions must often divest certain overlapping components of their business.

“Such divestitures could mean that companies in certain markets could get letters saying that their existing carrier arrangement will be discontinued or forwarded to another carrier, in which case a new arrangement will be made,” said Fowler. “In this case, it would look very much like a change in provider does today—the company would just be forced into that change rather than going willingly.”

Whether forced to make a change or simply shopping the market, employers may find things different once these deals are completed. “There is still competition on the local market level,” said Marcotte. “However, a large employer that contracts with major multistate insurers may find that the number of those insurers will be reduced to just a critical handful.”

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Whether forced to make a change or simply
shopping the market, employers may find things
different once these deals are completed.

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In other words, employers will find fewer players available to participate in the bidding process, which could limit employers’ leverage and options. “The old way of being able to shop every few years for a better deal by leveraging marketplace competition is certainly going to be limited after these deals close,” said Shehata.

Not Just Insurers

With M&A activity also occurring in the PBM market, employers should be aware of these deals in any bidding process. If employers include a PBM involved in a merger or acquisition in program bidding, there are some ways to protect themselves. “Make sure the bid will be valid when the deal closes,” said Sarah Martin, vice president and senior pharmacy consultant with Lockton Benefit Group. “It might be wise to include a ‘change in control’ clause into your contract that gives you the right to move your business, with 90 days’ notice, if your PBM is acquired and you are not pleased with the acquirer.”

She also noted that any performance guarantees in the contract regarding account management satisfaction “should be specific to your group and have meaningful payouts if you experience service issues during the transition.”

In general, employers should be prepared to take the good with the bad. For example, changes to mail order and specialty pharmacy services may occur following a merger or acquisition. “You need to know when these changes are going to occur, how they will affect your members and how the PBM plans to communicate to your members,” said Martin. On the plus side, a PBM merger may help with pharmacy benefit cost-containment. “The new combined entity will immediately have more clout with the drug manufacturers and retail pharmacies,” she explained.

Buyer Beware

No matter how these deals play out, employers must be vigilant and try to manage the situation as best as they can. After all, these deals are complex and will consume much of these insurers’ focus. If employers find that service and customer issues take a backseat to more pressing integration issues, this could translate into less favorable consumer experiences with these plans and potential drops in customer satisfaction levels.

Of course, employers may not have as much leverage as they did in the past. In addition to less competition in the market, “there could be less competition for performance and service guarantees,” said Marcotte.

Joanne Sammer is a New Jersey-based business and financial writer.

Related SHRM Article:

Employers Split on What Insurer Consolidation Portends, SHRM Online Benefits, July 2015

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