Opinion: Ready, set, consolidate

By Dr. Jay Want

In a long awaited ruling, the Supreme Court of the United States handed down a 6-3 decision in favor of the administration in King vs. Burwell, a challenge to the legality of subsidies for the poor in the federal health care exchange. I am not a legal scholar, so can’t comment on the legal nuances of the case. Nonetheless, there are big implications to the law standing that even I can understand.

Dr. Jay Want

Dr. Jay Want

What this effectively means is that one of the biggest remaining legal challenges to the Affordable Care Act has failed. Future efforts will be harder, including the continued drive of Congressional Republicans to repeal and replace the ACA altogether. Most observers believe that reversal of the ACA became substantially less likely with this decision.

Some of those observers are major health plans, who shortly after the decision was handed down, announced mergers with, or acquisitions of, their peers. Aetna has announced a $37 billion purchase of Humana, and Anthem has offered (and had rejected) a $47 billion price for Cigna. The reason for the timing is that these insurers wanted to make certain that their government lines of business were stable prior to purchasing the membership of their cohorts, i.e., there would be no rollback of the millions that got new coverage as the result of the ACA.

In my last blog, I discussed the incentives for providers to consolidate with one another, and with payers. The reasons for this aren’t solely or even predominantly due to the ACA, although some say that the ACA accelerated that trend. The main reason, in my opinion, is the same one I cited in the post about provider consolidation: big gets you economies of scale. That is, to build a claims processing system, or a care coordination program, or an advertising campaign for the first customer is enormously expensive. But adding the ten millionth customer? Effectively the cost is zero. Computerization has made that number even closer to zero, as you don’t necessarily even have to hire any more people to process that ten millionth customer’s enrollment or claims, just add a little more cheap computing power. Posts I have been reading since these mergers announcements talk about health insurance becoming a commodity, in which there are scarcely any product differentiators. This leaves only one basis for choosing one company over another: price. This is already the prevailing view on the exchanges, that share is predominantly determined by price, as the offerings don’t differ much between companies.

So overall, is this good or bad for consumers? On the one hand, some say that bigger health plans means less cost per enrollee due to the economies of scale just discussed, and that the mandatory medical loss ratios built into the ACA mean that the savings that result are often passed on to the consumer. Others warn, though, that consolidation reduces competition, and allows oligopolies to raise prices without the threat of being undercut by smaller and hungrier competitors. Providers in particular are loathe to face bigger and bigger insurers, even as they consolidate to gain more market leverage of their own. Time will tell, but the incentives are undeniable: big is in, on the insurer side as well as the provider side, and it’s based on pretty simple economics.

 Dr. Jay Want is chief medical officer for the Center for Improving Value in Health Care. Contact him at [email protected].

Opinions expressed in Health News Colorado represent the views of the individual authors.

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One thought on “Opinion: Ready, set, consolidate

  1. It IS pretty simple economics, but I’m skeptical – to a degree – of “economies of scale” being of unusual benefit to health care consumers. “Oligopoly” seems closer to what’s likely to happen: Not monopolies in the original sense, but consolidation carried far enough will leave consumers with little choice.

    Little companies in what passes for a health care marketplace may be able to offer rock-bottom prices as loss leaders to attract customers, but when there are only 2 or 3 companies left, I think it likely that they will quietly communicate with each other so as to arrive at very similar, if not identical, prices for the same treatment regimens. Sure, it’ll be illegal, but investment banks did lots of illegal things to bring on the housing collapse of 2008 that nearly wrecked the economy. None of the perpetrators has been named in a criminal complaint, much less gone to trial, so I think the likelihood of punishment for health insurance executives going to jail over price-fixing are very small, indeed.

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