Winners From The Anthem-Cigna Mega Deal

The bottom line is that while the number of insured people has risen significantly – generally a good thing – many of these newly insured aren’t actually using their insurance because the deductibles are so high!

You see, these people were required by law to purchase insurance – insurance that had to cover just about anything, even if the customer didn’t want or need certain kinds of coverage. But to keep prices down, even after government subsidies, insurance companies were allowed to market plans with very high deductibles.

So many of these people never expect to use the coverage they were forced to buy unless they have a catastrophic illness or injury, even though the plans “cover” a variety of conditions. That’s a pretty high profit proposition for the companies providing such “coverage.”

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On the other side of the equation, many who were previously denied coverage because of pre-existing conditions finally received coverage under Obamacare. This is undeniably a good thing.

But the costs those patients incur are passed on to the rest of the insured population, making those high-deductible plans an even better deal for insurance companies – and worse for customers.

Another big outcome of Obamacare is the acceleration of a trend that was already happening in healthcare: squeezing healthcare providers…

In theory, this trend should lower costs, even if it pains some doctors and hospitals. But by focusing on unit pricing instead of outcome-based pricing, doctors are forced to work harder to keep the same incomes, but patient outcomes and overall costs don’t improve.

Further industry consolidation will speed up this trend. After all, if just three companies are paying the bill for 40% or more of your customers, you pretty much have to do what they say.

This impacts Medicare, too – specifically, Medicare Advantage.

This is the government’s plan to get seniors into “private” healthcare systems by paying the premiums. Rather than paying for services, Medicare Advantage pays the insurance company a monthly fee, just like companies and individuals do with their health insurers.

This is a high-profit outcome for insurers. Indeed, the reason why UnitedHealth has larger revenue than the proposed Anthem/Cigna combination is that United has more Medicare Advantage customers. Plenty of the recent merger activity among healthcare insurers has centered on acquiring these customers and being positioned to grab even more of them in the future.

Either way you slice Obamacare, most of the benefits end up going towards either large health insurance companies or large pharmaceutical companies.

But in the wake of increased consolidation among healthcare insurers, the market is asking whether these proposed mergers will go through. Or will they be killed due to antitrust issues, just like the Comcast (NASDAQ:CMCSA)-Time Warner (NYSE:TWX) deal was scrubbed?

The answer is “no.” Lowering competition is a goal of the current administration, no matter what it says to the contrary. In fact, the big goal that you still hear from more honest Democrats is “single payer.” And for some, the big dream is that the single payer will be the government.

However, cannier policymakers who believe in single-payer systems know that it’s actually easier to assert control over private companies than it is the bureaucracy-laden federal government. So for them, the goal is a very small number of private companies that are highly regulated, in exchange for modest, but nearly guaranteed, profits. Utilities, basically.

So with this in mind, you can expect antitrust regulators to approve the mergers with some amount of token rhetoric that will make big headlines, but which won’t overly influence the general direction of the health insurance industry toward just a few giants.

And it certainly won’t hurt that one of the Obama administration’s biggest champions – someone who ran the Centers for Medicare and Medicare Service and was partially responsible for the disastrous initial rollout of healthcare.gov – recently agreed to take a job as the chief executive of the health insurance’s lobbying group.

So what will this mean for consumers?

In the near term, not much. There are rumblings of big increases coming for private plans in many states, but with Obamacare having already taken away so many ways for health insurance companies to compete, any increases would be equally likely with a lot of companies as with a few.

The long run is more complicated – and more consolidation like the Anthem-Cigna deal is what the government wants. Fewer companies generally mean less competition and higher prices. But again, there isn’t much room for real competition in the Obamacare environment. As I mentioned, the government’s goal in encouraging mergers is to increase the high control it already has over the industry.

There’s a danger here, though. Those politicians rely on votes, and if the climate gets too bad, those voters will make their voices heard. This could be a case where the health insurance industry scoops big benefits early on… but in the long run, it ends up regretting that it got what it wished for.

Written By: Wall Street Daily