Daily Briefing Blog

Aetna and Humana are planning to merge. Here's how to think about it.


Dan Diamond, Executive Editor

After weeks of speculation, Aetna and Humana on Friday consummated their long-awaited deal: $37 billion, the largest-ever merger in the insurance industry.

Together, the combined company would cover more than 33 million people, and be the nation's second biggest insurer by revenue.

It's huge news, and there are a few ways to think about it.

On a broad level, it would be the latest major merger in health care's increasingly frenetic marketplace. (High-level M&A activity tends to feed on itself, as organizations that feel left behind look to partner up.) There's rampant speculation that another insurer deal is coming—maybe United Healthcare moving to acquire Cigna, which is also in talks with Anthem.

And the potential rise of super-sized insurers has real implications for hospitals, who worry about losing market power in a world where the Big Five insurers are trimmed to the Big Three.

"We believe that consolidation of large commercial insurers is the root of higher prices for consumers," said Melinda Hatton, general counsel and senior vice president of the American Hospital Association said in a statement. 

Hospitals are worried about insurers' merger talks. Here's why.

The deal isn't done. (Aetna and Humana still need Department of Justice approval.) 

But in the meantime, Aetna's interest in Humana is also a clear sign that Medicare Advantage—a program that was thought to be doomed, just a few years ago—is an increasingly hot market.

Why Medicare Advantage?

As a quick refresher, Medicare Advantage (MA) is the private health insurance option for Medicare beneficiaries. Commercial health plans contract with CMS to offer various types of insurance products to enrollees. The majority—95% in 2014—of MA enrollees choose HMO or PPO plans.

"Medicare Advantage is particularly appealing because it's expected to double in enrollment over the next decade," my colleague Hamza Hasan tells me. Hasan co-authored a Heath Care Advisory Board white paper last year on why providers "must include" MA in their population health strategies.

The surge in MA enrollees is somewhat surprising given that the program was targeted for significant cuts during Affordable Care Act negotiations. Between the health law and other pressures, Medicare Advantage reimbursement rates have been reduced by more than 20%, when considering the compounded effects and the cost of medical inflation, Moody's noted last year. 

The Congressional Budget Office predicted that Medicare Advantage enrollment would fall about 35% by 2019, thanks to the ACA's changes; instead, the program's enrollment has surged 42% since 2010.

One driver of MA's continued viability is that it remains popular among seniors, who enjoy MA's wider range of benefits compared to traditional Medicare. Another reason is that CMS has regularly reversed some proposed cuts to the program.

"At least so far, CMS hasn't cut [Medicare Advantage] rates to the extent they were expected to when the ACA was passed," Hasan adds. "So for the moment, it's a rapidly growing market, and none of the major payers want to be left out."

And Aetna's acquisition of Humana was clearly driven by a desire to ramp up its Medicare Advantage business. 

Aetna has about 7% of Medicare Advantage market share, compared to 19% for Humana, according to the Kaiser Family Foundation. Humana also is one of the top three firms for MA market share in 30 states. (You could argue that Humana is mostly a MA company at this point; about two-thirds of Humana's 2014 revenue came from Medicare Advantage, Drew Altman noted in the Wall Street Journal last week.)

Other insurers also are going after the MA market. In a relatively smaller but also hugely important deal, Centene acquired Health Net for $6 billion-plus last week, partly to expand its Medicare Advantage business. (Health Net has about 8% of the MA market in California, for instance.)

Implications of mergers

More consolidation in the Medicare Advantage business has unclear effects for patients and providers—especially because the MA market has been fairly concentrated for years, KFF's Tricia Neumann told me. She co-authored a KFF brief that found that one company controls more than half of all Medicare Advantage enrollment in 15 states. 

"If the Humana-Aetna deal goes through, the new entity will go to number one in the marketplace, leaping over United," Neumann said. "Then the market becomes even more concentrated, [which] raises even more questions over whether its as good for consumers as it seems to be for shareholders." For example, more MA market power could help plans aggressively negotiate with hospitals and doctors—but also allow them to hike the price of premiums for seniors.

Regardless of what happens next, Hasan says that the Aetna-Humana deal is a reminder for providers: Medicare Advantage needs to be part of executive planning, especially given the increased push toward value-based reimbursement. He notes that many hospitals that have tried Medicare Shared Savings Program ACOs are pivoting toward MA plans, finding the program to be much more appealing for structuring risk-based contracts.

"Medicare Advantage is a growing business," Hasan stresses. "And that's why it's especially important for providers to consider how it fits into their population health strategy."

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