The number of health insurers competing for your business almost certainly will decrease in coming months as the big for-profit firms merge or acquire each other. The companies insist that the results will enable them to operate more efficiently through the elimination of redundancies. But don't expect your premiums to go down when the dust settles. In fact, if the past is prologue, premiums will go up.
The biggest beneficiaries will be the shareholders and a handful of top executives; they'll make tens of millions of dollars on the day the transactions become final. Among the losers--in addition to the people enrolled in the insurers' health plans--will be many of the employees of the acquired companies, and taxpayers in the cities that come out on the short end of the stick when the combined companies decide where the corporate headquarters will be.
Every one of the big five--Aetna, Anthem, Cigna, Humana and UnitedHealthcare--either is in play, is rumored to be in play or has gone public with its intentions. Published reports late last week indicated that Aetna had agreed to buy Humana for $34.1 billion in cash and stock. Anthem Inc., the largest by membership, has offered even more, $47 billion, to buy Cigna. If approved, it would be the biggest deal in industry history. UnitedHealthcare would like to have Aetna and could still make a bid for it.
We've seen this movie before, and the ending can be predicted with some certainty. In almost every case, the rich get richer and the poor get poorer.
One of my jobs at Cigna was to help manage communications when the company bought another insurer, as it did in 1997, acquiring Healthsource, based in Hooksett, N.H., for $1.45 billion. Among the winners in that transaction: Healthsource's CEO, Norman Payson. As part of the deal, Payson got a $100,000 a month--yes, a month--as a consultant with Cigna, in addition to $94.2 million for tendering the stock he owned in Healthsource.
Over the next several months, almost all of Healthsource's employees were laid off. And Hooksett lost a boatload of high-paying jobs when all the administrative functions of the combined company were eventually moved to Cigna's offices in Philadelphia and Bloomfield, Conn., a Hartford suburb.
Other deals in the years before and after the Healthsource acquisition had the same result. In 1995, many Metropolitan Life and Travelers employees in New York and Connecticut and elsewhere were given pink slips when those companies sold their health insurance operations to UnitedHealthcare for $1.6 billion. The next year, Hartford-based Aetna completed an $8.8-billion merger with Philadelphia-based U.S. Healthcare. Then in 1999, Aetna bought Prudential's health care operations for $1.6 billion. In every case, the executives and shareholders of the acquired companies made out like bandits. Thousands of rank-and-file employees, meanwhile, found themselves unemployed. In just the Aetna-Prudential deal, as many as 2,000 jobs were axed.
In the current round of consolidations, the two men likely to gain the most if their companies get bought are Cigna CEO David Cordani and Humana CEO Bruce D. Broussard, both of whom hold hundreds of thousands of shares of their respective companies' stock. Other big winners: the big institutional investors that own most of the companies' shares. At Cigna, 87.5 percent of its shares are own by institutional investors like the Vanguard Group and State Street Corporation. At Louisville, Ky.-based Humana, the ownership is even more concentrated. Almost 95 percent of Humana's shares are owned by Capital World Investors, JPMorgan Chase and several other huge investors. Those investment firms stand to reap hundreds of millions of dollars if the deals are approved by regulators.
But if I were a regular nine-to-fiver at either Cigna or Humana, I'd be spending a lot of time on LinkedIn. And if I were mayor of Bloomfield (where Cigna is now based) or Louisville, I'd be plenty worried about the loss of both headquarters bragging rights and hundreds of millions of dollars in taxes.
As for health plan premiums, researchers who've looked at previous mergers and acquisitions found that they typically went up, even as the "redundancies" (jobs) were eliminated. As Hartford Courant reporter Dan Harr reported last week, a 2012 analysis of the Aetna-Prudential deal, published in the American Economic Review, found that that merger actually raised premiums by an average of 7 percent by 2006.
Not only that, but millions of Aetna's newly acquired health plan enrollees were soon scrambling to find another insurer because Aetna considered them "unprofitable." The company said it "shed" 8 million of its 21 million health plan enrollees as part of its strategy to return to profitability after all its M&A activities.
Let's hope that regulators examine that historical record--especially what has happened to regular folks--when they consider whether to approve or reject the deals that will likely be announced in the coming weeks.