The United States Department of Justice sues four health insurance companies to prevent them from merging.
The US Department of Justice announced Thursday that it intends to file an antitrust lawsuit against four of the ‘big five’ health insurance providers to ensure that they do not merge and drop to three. Insurance company Anthem intends to acquire Cigna at $54 billion, and Aetna proposed a $37 billion acquisition of Humana.
The reason behind the case is that the State feels the mergers would negatively affect consumers by reducing competition, which is one of the golden rules of a free market. The state fears such acquisitions would be at the detriment to customers, who would have ordinarily benefited from the choice between five different national insurance plan schemes as opposed to the possible three.
During the announcement of the lawsuits, Attorney General Loretta E. Lynch gave a statement reflecting her concern: “Competitive insurance markets are essential to providing Americans the affordable and high-quality health care they deserve.”
How will the merger affect consumers?
The health insurers announced their proposed acquisitions last year and had argued that the mergers would provide scale for the negotiation of better agreements with hospitals and physicians. The companies believed that provider consolidation had given hospitals the upper hand in negotiating power.
According to an article published by Vox, in theory, if big insurers had to merge, therefore increasing the number of customers, it would bring about the negotiations for a better deal with hospitals; which would result in lower premiums for these said, customers. However, according to studies conducted on the matter, although insurers manage to obtain better deals from hospitals, in the end, customers still do not feel the benefits of lower premiums. Instead, they pay more.
According to the study economist at Northwestern University, Leemore Dafny, conducted on Aetna’s acquisition of Prudential in 1999, Aetna gained bargaining power that leads doctors’ salaries to drop by 3% by 2006; simultaneously, premiums still increased by 7%. This means that although consolidation does occur, it does not reach customers but rather kept for the insurers themselves.
The Affordable Care Act was signed into Congress in 2010 and was intended to make health insurance more affordable for low-income earning Americans since it is required that they belong to one. The Act stipulates that employers put at least 80% of subscriber premiums toward medical costs which would stop health profits from soaring. Ideally, it would ensure that insurers like Anthem and Aetna do not manage to pilfer money from customers, although health economists are skeptical as to whether the policy would lead to lower rates.
— Justice Department (@TheJusticeDept) July 21, 2016
The insurance companies are optimistic about the effects their merger would bring to the industry. One of the ‘big five’, Anthem, referred to the lawsuit as “an unfortunate and misguided step backward for access to affordable healthcare for America”. The company believes that the Department of Justice’s analysis on the merger is flawed and that the state misunderstands the healthcare industry, which the insurer perceives as dynamic, competitive and highly regulated.
In a statement, Cigna revealed the earliest it would close a deal would be in 2017, if at all. In a separate statement, Aetna and Humana both said they would “vigorously defend” their pending transaction. If the two mergers proceed, Anthem will insure 53 million members, and Aetna would cover 33 million.
Regulators are concerned with the deal because it would not allow enough competition in Medicare in more than 35 counties in 21 states affecting more than 1.5 million customers.
News of the lawsuits initially saw shares in the four companies fall. However, they bounced back, and now Humana shares have increased by 5,2 percent, Aetna by 2,3 percent, Anthem gained 2,9 percent, and Cigna rose by 1.9 percent.
DAAG Pfaffenroth: Aetna-Humana deal bad for seniors using Medicare Advantage and families getting affordable insurance on exchanges
— Antitrust Division (@JusticeATR) July 21, 2016
Many low-income earning Americans have difficulty obtaining health insurance because of high and increasing rates. Although individual policies such as the Affordable Care Act have been put in place to challenge such a reality, there are still numerous customers who cannot afford insurance. Of these Americans, those who are mostly affected are African-Americans who make up about 27,4% of the nation’s poverty and Hispanics 26,6%.
History has shown that mergers of such a large scale and especially in such important industries like health insurance end in creating a sort of monopoly where the 1 percent have such a great impact on the livelihoods of the rest. The capitalist economy is based on free trade, competition, and innovation.
These are three principles that are often associated with ‘the American dream’ and should, therefore, uphold the opportunities that come along with it. Notwithstanding, it is because of instances such as these that a demonic picture of capitalism has been reflected, because the system has the tendency to keep rewarding the rich at the detriment of those who already do not have.