Mergers Create Two Huge National Health Insurers

Consolidation among payers continues, does not bode well for local laboratories

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ANOTHER ROUND OF CONSOLIDATION among health insurers has created a new “biggest in the nation” company and boosted the size of the second largest health insurance company.

On October 28, in separate announcements that were just 30 minutes apart, Anthem Inc. disclosed it would pay $14.2 billion to acquire WellPoint Health Networks Inc. and United Health Group stated it was paying $2.9 billion to purchase Mid Atlantic Medical Services, Inc.

After completing the acquisition, Anthem will become the nation’s largest managed care company, with 26 million members. United Health Group, formerly the nation’s largest, drops to second place with 19 million beneficiaries, despite adding two million more people with the Mid Atlantic Medical Services acquisition.

Consequences For Labs

This latest round of consolidation among major managed care companies will have long-term consequences for the laboratory industry. Regional laboratories, some with existing contracts to serve patients in the WellPoint and Mid Atlantic networks, will find it more difficult to retain access to those patients.

In contrast, the two national lab companies are comfortably positioned to gradually gain near-exclusive contract access to these same patients. It is common for large national health insurers to sign exclusive or near-exclusive contracts with either or both Laboratory Corporation of America or Quest Diagnostics Incorporated.

There are other dimensions to this round of consolidation among payers that are relevant for laboratory directors and pathologists. First, these two big acquisitions further increase the control and market share held by the nation’s largest managed care companies. Just five companies now provide health insurance to more than 76 million people. That’s one-third of the Americans who have health insurance. (See sidebar on next page.)

Second, the acquisitions by Anthem and United Health indicate that further consolidation can be expected within the managed care industry. For regional laboratories, this will not be a positive development. That’s because larger health insurers tend to exclude local lab- oratories from contracts in favor of the nation’s biggest lab companies.

Third, the need to boost information technology (IT) capabilities within the managed care industry is one reason why these types of acquisitions are taking place. Smaller health insurers don’t have the financial resources necessary to make these investments. Lab directors and pathologists should heed this cue and take proactive steps to beef up the IT capabilities of their labs—in advance of health insurer’s needs and requirements.

The pending merger between An- them and WellPoint has some particularly interesting features. Both companies operate as Blue Cross/Blue Shield licensees. The combined company will have operations in 13 states. Under the license terms of the Blue Cross & Shield Association, each state plan operates under the same guidelines and each state plan has its own CEO.

Well-Managed Insurers

Both Anthem and WellPoint are considered well-managed companies. Since 1990, WellPoint has posted double or triple digit growth in all but two years. It has consistently been ranked as one of the country’s best-performing companies. Anthem has only been publicly-traded since 1996, but has enjoyed three years of similar double and triple digit growth.

For United Health, the Mid Atlantic acquisition strengthens its presence in that region. Mid Atlantic provides health insurance services for two million people in Delaware, Maryland, northern North Carolina, southeastern Pennsylvania, Virginia, Washington, D.C., and West Virginia. With a total of 19 million members, United Health is considerably larger than Aetna, Inc., the nation’s third largest managed care company with 13.2 million beneficiaries.

Expect further consolidation among managed care companies. The economies of scale and the need for considerable investments in information technologies are two reasons which support such acquisitions. However, the flush coffers of managed care companies should not be overlooked as a factor.

As these pages have reported, stiff premium increases in recent years have boosted the profits of almost all health insurers. For example, on October 30, Aetna reported third quarter net income had doubled over that of the previous year. Its net income had climbed to $182.3 million, compared to $81.9 million in third quarter 2002. It is easier to do acquisitions when ample profits are available to fund the deal and support higher share prices.

Consequences For Labs

As consolidation among the health insurance industry continues, local laboratories and pathology group practices will find it increasingly difficult to retain access to patients covered by the acquired insurance plans. However, because local lab testing remains an important part of healthcare, new strategies for preserving patient access are likely to be developed.

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