Health Insurers Grilled Over Merger

The wary and aggressive tenor of questions at a state hearing set a high bar for approval of the proposed $6.8 billion purchase of health insurance company HealthNet by Centene.

The hearing Friday in the Capitol Building convened by the California Department of Insurance lasted six hours. It delved into the esoteric details of the large financial transaction and it also hit on some of the broader questions about what might happen to market competition and premium costs when health insurance companies consolidate.

“I have a question of the witnesses,” said Insurance Commissioner Dave Jones. “I’m wondering if there are any recent peer-reviewed studies which demonstrate that consumer prices for health insurance or managed care went down after a health insurance or managed care merger.”

No one on the panel of academic experts and insurance executives could recall one.

“Conversely,” Jones said, “are [you] aware of any peer-reviewed studies that indicate prices have gone up after a health insurance merger?”

“Yes,” said Brent Fulton, a professor of health economics and policy at UC-Berkeley, a study did use the 1999 Aetna-Prudential health insurance company merger to analyze health insurance premium rates.

The general conclusion of that study, he said: “Higher market concentration leads to higher health insurance premiums.”

The representatives at Centene and HealthNet insisted premiums were more likely to go down than up, based on efficiencies of uniting the two companies.

“There is a strong pro-competitive rationale for Centene’s proposed acquisition of HealthNet,” said Lawrence Wu, an economist testifying on behalf of HealthNet. “If benefits from the acquisition are realized, the combined companies are likely to be a more efficient and more effective competitor in California and elsewhere, which ultimately will benefit consumers in the form of lower prices or better health benefits.”

Jones also was concerned about Centene pulling out of a portion of the health insurance market.

“I’m unable to find any enforceable guarantee to make sure Centene remains in the individual and small group market in California,” Jones said. “Is there anything binding in these documents?”

Industry executives answered that there isn’t anything in the contract documents that spells that out, but that they have committed publicly to remaining in that market.

Wu went a step further, saying the hypothetical withdrawal could actually be good for competition in that market.

“Exit is what creates opportunities,” Wu said. “And across California the health plans that are close competitors, that’s what creates the opportunity for them to expand. If that was the case … and their enrollees were to go to these smaller players, that opens up the possibility for more competition.”

Jones bristled at that.

“So you would like me to believe then,” Jones said, “that if HealthNet did exit the individual and small-group market in California, [as] the fourth-largest provider of managed care in the commercial market, that that would not reduce consumer choice?”

“I would urge you to consider what opportunities that that presents [for smaller carriers],” Wu said.

“Isn’t it more likely that the three largest carriers — Kaiser Permanente, Anthem Blue Cross and Blue Shield — would move into that space?” Jones asked.

“Well, I’m not so sure,” Wu said. “It goes back to an economic analysis that’s more than just counting noses and assuming that a bigger firm is naturally going to get all of the share. It really goes back to an analysis of who are the closest competitors. That will determine whether there will be more concentration or less concentration for the marketplace.”

Jones found that argument specious.

“I have a hard time believing that less is more,” he said.

The deadline to submit comments to the Department of Insurance about the proposed acquisition is Jan. 29.

Jones did not give a time frame for making his decision about approving or rejecting the sale of HealthNet to Centene.

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