Payer Consolidation: WellPoint Buys into NYC

That acquisition motivates Group Health and HIP of New York to agree to merge

CEO SUMMARY: Acquisition by acquisition, the health insurance industry is consolidating. Wellpoint, Inc., already the nation’s largest health insurer at 28 million members, is acquiring WellChoice, Inc. and adding another 5 million members to its total. One consequence of this consolidation wave is to concentrate greater negotiating power into the hands of fewer, but larger, private payers.

IN THE LATEST ROUND of consolidation among health insurance companies, New York City has been the regional market of choice.

On September 27, Wellpoint Inc. announced a $6.5 billion-dollar deal to acquire WellChoice, Inc. These two insurance companies are well-known to clients and readers of THE DARK REPORT by other names. Wellpoint, based in Indianapolis, Indiana, used to be called Anthem, Inc. WellChoice is the owner of Empire Blue Cross Blue Shield, which serves members in the New York City metropolitan area.

The WellChoice acquisition adds 5 million members to Wellpoint’s existing 28 million members. At 33 million members, WellPoint remains the nation’s largest insurance company. With this acquisition, WellPoint has acquired 14 Blue Shield Blue Cross plans in 14 states.

Two days after WellPoint’s purchase of WellChoice was announced, another significant merger occurred between two health insurance companies. On September 29, HIP Health Plan of New York and New York City-based Group Health disclosed that they would merge. Essentially a merger of equals, no money will change hands. However, by combining HIP’s 1.4 million members with Group Health’s 2.6 million members, the newly-merged firm and its 4 million members immediately becomes a regional powerhouse in the New York City area.

Both mergers change the competitive landscape in New York City. WellPoint did not have critical mass in this region, which is why it was interested in WellChoice. Analysts see the acquisition of WellChoice as a strategic market response by WellPoint. That’s because last year, UnitedHealth Group, Inc. spent almost $9 billion to purchase Oxford Health Plans and Mid Atlantic Medical Services.

Defensive Response

As health insurance industry heavy-weights bulk up in the northeast market, the merger of HIP and Group Health can be seen as a defensive response. Both are not-for-profit organizations. HIP has been doing its own acquisitions. In March, HIP purchased ConnectiCare, which has 270,000 members. Then, in June, HIP agreed to acquire PerfectHealth Insurance Co., a provider of health savings accounts (HSAs).

For laboratories and pathology group practices in the greater New York City metropolitan area, consolidation of insurance companies will likely lead to lower reimbursement. The large size—and the shrinking number of competitors—gives health insurance giants like WellPoint, UnitedHealth, and HIP–Group Health greater leverage when negotiating contracts with providers.

In fact, that’s the precise prediction of Kenneth Raske, President of the Greater New York Hospital Association. “It’s economics 101: the more consolidated the marketplace becomes, the tougher the bargaining position that insurers take with providers,” he said. “Our hospitals [in New York] are in economic turmoil and these mergers are only going to exacerbate the situation.”

Raske is referring to the deteriorating finances of many hospitals in New York state. In 2003, hospitals in the state lost a combined $277 million. In that same year, health insurers in New York state reported total net profits of $1.5 billion.

The American Medical Association released public statements criticizing WellPoint’s acquisition of WellChoice. The AMA points out that, between 1999 and 2005, health insurers and managed care organizations have done more than 400 mergers. During that same time, it notes that health insurance premiums have increased, but there has been no corresponding increase in benefits. In fact, the Kaiser Family Foundation has published data that documents a 73% increase in the average cost of health insurance premiums since 2000.

More Insurer Consolidation

It was just 15 weeks ago when THE DARK REPORT predicted that consolidation of health insurers would intensify. (See TDR, July 11, 2005.) At that time, we were responding to the acquisition of PacifiCare Health Systems by United Health Group, Inc. That deal was worth $8.5 billion. Post-merger, it makes UnitedHealth the nation’s second largest health insurance company, with 26 million beneficiaries.

The acquisition of WellChoice, along with the merger of HIP and Group Health, is a speedy validation of THE DARK REPORT’S prediction. Consolidation within the health insurance industry is generally unfavorable to the long-term interests of laboratories and pathology group practices.

Concentration of market power makes it easier for health insurers to dictate coverage terms and reimbursement levels to physicians. THE DARK REPORT also believes the current round of consolidation among health insurers is partly a strategy to improve the largest payer’s ability to compete in the Medicare Part D market. That’s the Medicare prescription drug benefits program that takes effect in just a few months.

Some on Wall Street concur. “This is motivated in part by the Medicare Part D plan and the fact that managed-care players will be marketing to seniors— and drug spending is an important part of Medicare Part D,” declared John Farrall, an analyst at National City Private Client Group, who specializes in the healthcare sector.

Tougher Negotiations

The ongoing consolidation of health insurance companies is not a positive trend for the laboratory industry. Concentration of managed care contracting power amongst fewer payers in local communities allows the biggest health insurers to negotiate tough terms with physicians, hospitals, and other types of healthcare providers.

However, emerging market forces, including consumer-directed health plans, have the potential to moderate the negative influence that today’s behemoth health insurers have upon provider reimbursement. In particular, strategic experts like McKinsey & Co. are already predicting that consumer- directed health plans will find rapid acceptance in the marketplace, by both consumers and employers.

Soon To Be Obsolete

As health savings accounts (HSAs) and similar health benefits become more popular, McKinsey believes that today’s business model for health insurers will become obsolete. (See TDR, July 15, 2005.) One early sign of such change is Aetna, Inc.’s decision to post individual physician charges on its Web site and give beneficiaries access to this information. Pathologists and laboratory executives will find much on this subject in coming issues of THE DARK REPORT.

AMA Slams Consolidation Of Health Insurers

EARLIER THIS YEAR, A STUDY WAS PUBLISHED by the American Medical Association(AMA). Titled “Fourth Edition of Competition in Health Insurance: A Comprehensive Study of U.S. Markets,” it analyzed the impact of acquisitions within the health insurance industry.

The AMA is concerned about the concentration of power in regional markets by dominant health insurers. Authors of the study used the Herfindahl-Hirschman Index (HHI). This index is a component of the guidelines, used since 1997, by the Federal Trade Commission (FTC) and the Department of Justice (DOJ), when reviewing the competitive impact of mergers. When a market has an HHI index of 1,800 or higher, that market is considered “highly concentrated” by federal regulators.

In a finding termed “alarming” by the AMA, the study concluded that “for the combined HMO and PPO markets, 86 of the 92 metropolitan areas had an HHI that exceeded the federal threshold of 1,800. In addition, the study found that in 87 of the 92 markets, a single insurer had a market share of 30% or greater and that in 34 of the markets, a single insurer had a market share of 50% or greater.”

In response to these findings, The AMA declared “The AMA is concerned that the United States is heading toward a commercial health insurance system dominated by a few publicly-traded companies that operate in the interest of shareholders, and not primarily in the interest of patients. It is time for the federal antitrust enforcement agencies to reexamine their enforcement priorities which have resulted in minimal scrutiny of health insurers and aggressive pursuit of physicians.”

The AMA, disturbed at anti-trust actions taken against physicians in recent years, is arguing that the consolidation in the health insurance industry has already created anti-trust violations that should be investigated and acted upon by federal regulators.

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