Health insurer mergers under the microscope: Will the deals benefit the companies? [Q&A]
There's been no shortage of debate over the two pending health insurance mega-mergers, both in the halls of Congress and in the press. But largely that debate has centered on the assumptions that the Aetna-Humana and Anthem-Cigna deals are good for the merging companies and--depending on whom you ask--either good, bad or not likely to affect consumers and healthcare providers.
But what if notion that the mergers are good business for the insurers isn't necessarily true? Many a news report has likened the deals to marriages--an apt analogy considering the lengthy, drama-filled courtship of the two pairs of companies. So it stands to reason that the mergers, just like in a marriage of two people, are sure to encounter challenges once the honeymoon phase wears off.
To explore some of those roadblocks, FierceHealthPayer spoke to Steven Shill (right), a national leader of the BDO Center for Healthcare Excellence & Innovation and co-leader of the firm's healthcare practice.
Q: What do you see as the "next shoe to drop" should these mergers get approved?
A: In many markets you're going to see the less powerful party to the merger having to eject its weaker plans. Clearly, it will be a great opportunity for investors; however, I think that many of these divestitures are going to be failures.
Invariably, when you spin something out of a large organization, the organization typically has a large infrastructure. In the payer environment, your infrastructure and your systems are going to be very important. Many of these plans that get spun out are going to be lacking the infrastructure or will not have the core infrastructure that the parent plan had.
That will set them up for quality issues, which might even impact their Star Rating if they're Medicare Advantage, result in flight of membership and a round of business failures. For every successful spinoff, you're going to see an equally unsuccessful failure.
Q: So although merging insurers want to cut overhead, they may actually need to add more infrastructure?
A: Obviously mergers get done for good reasons--to add economic mass or economies of scale or to diversify the acquirers' businesses. In one case I was involved in, a predominately commercial insurer with some Medicare Advantage business diversified and was looking to access the managed Medicaid market. The reason you don't get these immediate economies of scale is that in many of these insurance markets, the infrastructure and services that are required to service the different segments of the population are quite different.
So instead of resulting in synergies--at least for a while or until the acquirer understands the business of the acquiree--there's going to be a significant amount of duplication of efforts and duplications of costs. In this specific instance, the acquirer is not integrating the acquiree into their existing organization. They're running it as separate organization with separate management and even maintaining separate advisers just because of the vast differences in the types of business they are in, which is quite an alarming trend.
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