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.

Q: Some of the insurers argue their case for a merger by saying the businesses are complementary and don't have a lot of overlap. Do you see any drawbacks to that?

A: Plans might be equal in the type of business, but they might not be equal in the quality of service. The service philosophy of the stronger party in the merger will probably be adopted, and that might not necessarily be of the same quality that the membership of the acquired plan is entirely used to. With new systems and new processes in an acquired entity there will be a significant possibility of dropping the ball when it comes to quality issues. You could see significant fluctuation in their Star Ratings and quality measures after a merger.

You always run the risk of volatility in quality aspects post-merger. If that occurs you will see a flight of membership that might even look to find maybe a smaller, more quality- and member-oriented plan, maybe even an independent plan that's not part of the mega-merger environment. And the big guys on the block may actually even lose on this.

It's all a question of what-ifs. But these are real considerations as many of these plans enter into discussions and obviously have to deal with the whole regulatory aspect. Clearly, the reason they are different plans is that they have different philosophies, different service protocols, different ways in which they are going to market. All that's going to create a lot of uncertainty in these mergers, and as these plans are being evaluated on a quality basis--making sure that everybody is getting value for money--these little "oopses" that could turn into big "oopses" could be highly detrimental to these mega-mergers. You could see a lot of membership shifting until everything stabilizes.

Q: Do insurers' arguments that the mergers benefit consumers or their businesses have merit?

A: There's always merit in a merger. The argument can be made that if it's done right and if they manage to get the cultural differences, systems and processes under control in a timely manner it will benefit the consumer, the shareholders and stakeholders--and should ultimately benefit the healthcare delivery mechanism.

However, one thing is very clear. The bigger the organization, the slower it moves. There's very few giant organizations that move lightning fast.

The trend of bigger and better is important now in healthcare, but I'm skeptical that they'll be able to deliver, certainly in the short term without costing the stakeholders and maybe even the public. The question is whether they'll be able, in the median and long term, to expand what they've decided to engage in. That's when you're going to see failure or success.

It's going to take a little bit of time--and you're going to see a lot of missteps along the way.

Editor's Note: This interview has been edited for length and for clarity.