The big insurance news this week was Aetna Inc.’s $35 billion bid to acquire Humana Inc.. There are only a handful of major private health insurance carriers in the United States and #3 wants to buy #4.
It’s the largest deal ever in the insurance industry.
It would create the #2 health insurer after Anthem—at least in terms of membership. In dollar terms, it would be #2 behind UnitedHealthcare.
With the flood of cash coming into payers courtesy of Obamacare and a more robust employment economy, apparently the urge to merge is irresistible.
A week before the Aetna/Humana deal was announced, the Wall Street Journal reported that Anthem was considering a $45 billion takeover of Cigna. And United was kicking around the buyout of Aetna. And Centene Corporation actually announced a $6.3 billion bid to buy Health Net, Inc.
Where are insurers finding all this money? We know health insurance is profitable, but this is ridiculous.
How Profitable are the Health Insurance Payers?
Based on their financial filings with the Securities and Exchange Commission (SEC), here is how profitable the top five payers are.
In 2014, the top five payers booked nearly $6 billion in profits on $71 billion in revenues. To put that in perspective, that is more than $1 million per employee. In terms of profits, that’s more than $88, 000 per employee.
And the most profitable of them all is Anthem. The least profitable on this list, Humana, is being gobbled up by Aetna.
By Contrast, How Profitable Are the Hospitals?
According to their SEC filings, hospitals are less than half as profitable as health insurers. Here is how the top four hospital networks stack up.
On a per-employee basis, the largest and presumably most efficient hospital networks in America earn about $28, 000 (before interest, depreciation or taxes). By contrast payers earn nearly $90, 000 ($88, 088) per employee or 307% more than the healthcare providers.
Treating patients is a whole lot more expensive and labor intensive than paying for patients. Compare Hospital Corporation of America (HCA), which manages 162 hospitals, to Cigna Corporation which manages none. Both companies reported about the same level of sales—$38 billion for HCA and $36 billion for Cigna. But HCA needed 169, 000 employees to gin that up while Cigna only needed 37, 000 employees. In effect, one Cigna employee made as much for their company as four HCA employees.
Executive Pay
As it turns out, insurance executives are paid, on average, more than their counterparts at the hospitals. Which actually isn’t saying all that much. Executives in both groups are making millions in compensation each year.
Here is what the top executives pulled down at the insurers as compared to their counterparts at these large hospital chains.
On average, insurance executive compensation amounted to about 0.25% of the EBITDA of those companies while hospital executive compensation amounted to about 0.23% of EBITDA.
Rate Hikes Coming?
Is the sky blue?
According to the most recent filings with state insurance commissioners, insurance companies are asking for rate hikes in 2016 that could be as high as 20-40% for certain types of policies but will likely average around 5-6%.
Insurance company profits, in other words, are heading even higher.
U.S. Senate Majority Leader Mitch McConnell, of Kentucky, commenting on the proposed purchase of Humana (based in his home state) and Aetna, said: “This morning’s announcement, as I predicted during the debate five years ago, is the inevitable result of Obamacare’s push toward consolidation as doctors, hospitals, and insurers merge in response to an ever-growing government.”
Liberal economist, Robert Reich, kind of agreed saying: “The Supreme Court’s recent blessing of Obamacare has precipitated a rush among the nation’s biggest health insurers to consolidate into two or three behemoths. The big health insurers have money to make these acquisitions because their Medicare businesses have been growing and Obamacare is bringing in hundreds of thousands of new customers.”
In effect, by gobbling up other payers, these insurance giants are buying customers and therefore hundreds of thousands of monthly payments. In fact, the insurers look at each member as an annuity stream. Taken together, these new Obamacare, Medicare or Medicaid members add up to a Mississippi River of cash flow.
Deep, wide and flowing inexorably into the ever larger insurance company coffers.
Bargaining Power and the Golden Rule
Aetna said the combined company is projected to have over 33 million medical members, based on memberships as of March 31. Operating revenue is expected to be about $115 billion this year, with approximately 56% from government-sponsored programs including Medicare and Medicaid. One of Humana’s most attractive attributes is its comparatively high percentage of Medicare enrollees.
Combined, they would have market share of 88% in Kansas, 80% in West Virginia, 58% in Iowa and 51% in Missouri.
Aetna and Humana are also in the same nine states with Medicare Advantage products.
Most analysts agree the triggering event for this mega-merger was the Supreme Court’s ruling in favor of continued subsidies for Obamacare. Subsidized health insurance for lower-income Americans essentially guarantees huge new markets for insurers.
But not everyone is happy with this news. Insurance industry consultant Robert Laszewski was quoted in news reports saying: “I think there’ll be huge opposition from the provider industry.”
And potentially at the state level too.
With, for example, an 88% market share in Kansas, that state would have very little bargaining power with a combined Aetna/Humana. The United States is a patchwork of state insurance regulations, insurance commissioners and legislative bodies.
As insurers consolidate (imagine if Anthem bought Aetna/Humana) the economic and political bargaining power with the states, the hospital chains and certainly the large, consolidated orthopedic companies like Synthes/DePuy, Zimmer/Biomet or Stryker can only grow.
Which brings us back to the golden rule.
Employers Cutting Out the Insurance Middleman
If Wal-Mart were a country, it would be the 25th largest in the world. In terms of revenues, it is 4 times larger than UnitedHealthcare. It is 36% larger than all five of the largest healthcare insurers combined. In terms of employees, it is 13 times larger than the largest healthcare insurer—UnitedHealthcare. With 2.2 million employees, Wal-Mart has bargaining power.
And they’ve decided to start using it.
A couple years ago Wal-Mart, in collaboration with Home Depot, put in place a program that offered a hip or knee replacement surgery, plus transportation for the employee and one other person to and from the hospital, plus hotel rooms and food at no charge if they used one of three designated hospitals for their surgery.
No Aetna, Anthem, Humana or United required.
Last year, Boeing and some of the hospitals in the Seattle/Puget Sound area teamed up to provide healthcare services—also without the benefit of an health insurer in the middle. The mechanism Boeing used to make this happen is the new system of accountable care organizations, or ACOs.
Under this new program, Boeing negotiated its own healthcare service contracts with ACOs in the Puget Sound-area. Their employees started using these providers in 2015. The three ACOS were set up by University of Washington Hospitals, Providence Health and Swedish Heath Services.
When interviewed by the Seattle newspaper about this arrangement, Dr. Elliott Fisher, Director of the Dartmouth Institute for Health Policy and Clinical Practice said: “The advantage for Boeing will be that they can take the middle man out of the equation between the patients and the health system. It may be able to reduce cost, in part because of the simplification of not having the insurance mechanism in the middle.”
The gold, in other words, is with the employers and the largest ones—like Wal-Mart or Boeing—are starting to wake up to that fact.
For sure, the next year or two will bring BIG changes to our industry. By 2017, there may only be two or three health insurers in the United States—but, ironically, they may be insuring fewer and fewer employe
