Anthem’s recently proposed purchase of Cigna is expected to create the largest health insurance company in the US. If the transaction goes through, it will cap a dramatic episode in the continuing consolidation of the payer market. Certainly, it is no surprise that the FTC has asked for additional time to review the proposed merger. Many organizations including the American Hospital Association have voiced concerns. For its part Anthem has aggressively defended the potential acquisition. Clearly, a lot’s at stake.
To analyze what the FTC should do, we asked the following 2 questions:
- Will the acquisition give Anthem-Cigna a significant increase in market share within the commercial market?
- How will the increased market power impact consumer choice, plan affordability, and a potential value obtained in return for the premium dollars?
Market Share Analysis
We analyzed health plan market share data across all counties within the commercial segment. For the purpose of this analysis, we calculated market share as a % of the total commercial Rx lives within each county. Data analysis suggests that the merger is likely to consolidate the health plan market and diminish competition, albeit to varying degrees within each county:
- Within the 15 counties (860k Rx lives) where Cigna is the current market leader, the combined entity will enjoy a 150% increase in its dominant market share position (from ~34% to ~50%)
- Within the 725 counties (15.1 Rx lives) where Anthem is the current market leader, the combined entity will enjoy a 14% increase in its dominant market share position (from ~50% to ~57%)
- Within the 51 counties (5.5 Rx lives) where the combined entity will win market leadership from another company, the new market leader will see a 16% increase in dominant market share (from ~30% to ~35%)
- Finally, there are ~2400 counties (82M Rx lives) which will see no impact from the merger given that both Anthem and Cigna have very low market share within these geographies.
- In summary, the market share consolidation due to the merger is likely to impact ~20M Rx lives potentially representing 12.5% of the commercial market.
In summary, the market share consolidation due to the merger is likely to impact ~20M Rx lives potentially representing 12.5% of the commercial market.
Impact on Consumer Choice
To understand the impact on consumer choice, we first performed a baseline regression analysis that measured the causation between the market share of the dominant plan within a county and the diversity of plan choice available to consumers (total # of plan offerings across all benefit designs)
- Our analysis shows that growth in market share of the market leader reduces the total number of plan offerings within the market (p-value = 3.8E-09)
- Within the 15 counties (860k Rx lives) where Cigna is the current market leader, we expect at least 15% plans to exit the market. Here plan refers to individual products and not the health insurers themselves
- Similarly, within the 725 counties (15.1 Rx lives) where Anthem is the current market leader, we expect 12-14% plans to exit the market.
- And finally, within the 51 counties (5.5 Rx lives) where the combined entity will win market leadership from another company, we estimate about 9-10% plans to exit the market
As a result, we believe that the Anthem-Cigna acquisition will indeed reduce consumer choice either because small plans will leave these markets or plans will start trimming their product portfolio in order to compete better.
Impact on Consumer ROI on Premium Dollars
Now let’s look at what’s likely to happen when competition diminishes in the health plan marketplace. Theoretically, a contraction in the total number of plan offerings could impact the value consumers get for their premium dollars. To evaluate this, we leverage the premium and benefit design submitted by health plans to CMS specifically to meet the needs of the federal exchange reporting requirements.
Using the data available for the 27 states that participate in the federal exchange, we analyzed the relationship between consumer choice (# of plans available in the market) and consumer value
- To measure consumer value we first calculated the total expected pharmacy benefit actuarial value for an average consumer based on average number of Rxs filled and the average cost of a prescription
- We then calculated the total pharmacy benefit dollars paid by an average consumer based on plan premium, pharmacy deductible, and drug co-pays
- Finally, we calculated a Consumer Rx Coverage Value Index as a ratio of the expected actuarial value and the anticipated pharmacy benefit dollars paid by the patient
- The higher the index, the higher the value to the consumer
Statistical analysis showed no meaningful relationship between consumer choice and the anticipated ROI on consumer premium dollars. (p-value = 0.39; R2 = 2%).
Does this mean that the FTC should approve the Anthem-Cigna acquisition given that there is no value impact to the consumer as a result of the merger? Not necessarily. There are many reasons why the FTC is right to be careful about approving the proposal:
- First, there is clear evidence that the acquisition will diminish the level of competition in the marketplace even if the impact is isolated to a small proportion of the market
- Second, the merger is likely to create irreversible impact (even if the level of impact is unknown) and in some ways goes against the stated intent of the affordable care act: to increase competition, and improve health plan quality and affordability
- Third, the merger is likely to reduce plan reimbursement to providers both for services and buy-and-bill drugs. This reduction can give the license for other plans to follow suit, and providers will have to resort to larger patient volumes and other profit-boosting measures
Ultimately, the FTC has two choices: approve the merger with a potentially irreversible downside to consumers (or) reject the merger until at least the impact of some of the other smaller mergers (Centene-HealthNet) provides an analog for likely post-acquisition market events. We believe the choice is clear.
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