With Friday’s announcement that Anthem will buy Cigna, the U.S. health insurance market will be controlled by three major companies. What will that mean for the industry? What will it mean for benefit brokers?

Michael Turpin, the former CEO of UnitedHealthcare’s Northeast region who has 32 years of experience as a broker, consultant and health care executive both in Europe and in the U.S., shares his thoughts on the merger. 

What does the merger mean for the industry?

Brokers and consultants obviously get worried when there is not enough competition among carriers. We believe that competition tends to drive efficiencies, reduce excess margins, increases transparency and serve as a sort of sentinel reward those who add value and punish players who underperform or over price.

There is still too much opaqueness in our business. That said, size matters in this arms race of health care where providers and insurers have been wrestling over reimbursement and clinical protocols around care management and quality.

Both Cigna and Anthem have distinguished themselves with specific strengths but also can't compete across the spectrum of products because of lack of market share or systemic limitations.

In the case of Anthem, they have the Blues brand and great unit cost in most markets. They are a force in the individual and group insured market. Cigna has distinguished themselves with strong customer service, an effective strategy to offer self-insured and partially self-insured products to smaller employers (purchase of Great West chassis was a strong highly accretive acquisition). Anthem lacks a well-oiled self-insured strategy for servicing large multi-site employers. They also have had a harder time convincing consultants that they are as relevant as Aetna and [UnitedHealthcare] on the next generation of solutions such as ACOs and value-based contracts. Cigna has very little insured business and has historically lacked the unit cost economics of Anthem. The marriage gives size, service platforms for consumer engagement and infrastructure to handle any sized client. Aside from commercial insurance, a combination gives them 6% market share in Medicare Advantage versus United's 20% and an even bigger share by Aetna (if they are successful in purchasing Humana). Medicare market share will matter to these firms for organic growth.

How will the merger affect competition?

The industry has historically not seen huge dividends from these large combinations because it has not necessarily resulted in lower health care costs and because the barriers to entry (negotiated discounts with providers) remain high for new entrants.

I don't see a flurry of new competitors coming in. I'd love it if Oscar [Health Insurance] took off. However, they lack the discounts that many larger employers with normal claims utilization consider a prerequisite.

If you look at public exchanges, new entrants such as purchasing co-ops lost $375 million in 2014! Not a promising picture of how new competitors can fill the space vacated by a large competitor.

The only hope is more hospitals/health systems take-risk based contracts as accountable care organizations and fill the national void with myriad local fee standing health plans who can give the remaining national carriers a run for their money and keep competition alive.

I'm also still unclear as to how the not-for-profit Blues would react. The Consortia of NFP Blues and Anthem coordinate for serving large, multi-site employers. Not sure whose claims admin systems would be used. Frankly, the existing Blue Card and admin costs associated with coordinating across the confederacy of Blues plans leaves them a little disadvantaged. Their cost position tends to neutralize these concerns with clients. To have seamless national administration would be outstanding, but I'm not sure if this combination can achieve that. 

What does the merger mean for brokers?

Brokers are already in trouble due to shifts toward self-insurance, compensation transparency, greater demand for clinical and technical expertise and a more labor intensive and competitive market. Many will only find themselves further behind the ball.

There will be less negotiation for smaller firms with big insurers and more favors asked. Brokers may become de facto agents of one of the three remaining insurers. When your book of business is over 50% with a single market, you are lashed to the mast of that market. If they decide to improve their loss ratio by 100 bps and increase their block of insured business renewals, you may suffer as you are being asked to sell your clients on renewals that exceed the market.

The problem will be more acute in markets where we already suffer from limited competition. In these markets, the insurers will be viewed increasingly as a utility. Prior approval of rates means insurance commissioners regulating rates. The broker will find it harder to convince the client they are adding value. Clients will not want to pay traditional market commissions for a turnkey renewal with a utility. I can see brokers selling and scrambling to align with other big brokers to stay relevant in a Darwinian landscape where size and resources will matter. 

What could be the long-term effect on brokers’ relationships with carriers?

Some brokers will become de facto agents. They will pick sides and effectively put all their business with one or two firms. If they lose their ability to be recognized as a broker by losing an insurer, I can see insurers revoking the brokerage recognition of certain firms if they do not serve as an effective distribution arm for the insurer. If someone places 80% of their business with Aetna, United may be tempted to not give that broker the ability to distribute their products because that agent is not an effective nonpartisan broker.

In this case, the broker may have no alternative but to sell a single carrier. Brokers may turn more to TPAs and rental networks to try to sell self-insured alternatives that compete with the remaining three insurers but this is hard because all three insurers will have tremendous unit cost advantage in discounts. 

Will brokers lose bargaining power now that there will be just three major health insurance companies in the U.S.?

It's only been four for some time, as Humana has not been a relevant commercial insurer for some time. I think brokers’ book of business reflects their bias as to which carrier they believe is most complimentary to them and to their clients.

I do think consolidation may create parity in unit cost around discounts, which means more opportunity to conduct analysis around other areas of each carrier — clinical programs, efficacy of population health and administrative performance. Three very large utilities will be slugging it out for every client still gives brokers room to help clients leverage a competitive market.

However, the carrier's all know each other's pricing and margin formulas. I don't think we will see wild fluctuations in pricing. Pricing will remain disciplined and the insurers will continue to behave as they always have — as large financial institutions —  averse to risk taking, not always transparent and focused on maximizing shareholder returns.

A good broker can still use the market to help a client blunt some of those concerns and create enough competitive behavior to preclude an oligopoly from destroying free market behavior. 

How could the deal impact brokers’ business approach?

I think it will accelerate the already rapid consolidation in the industry. Brokers will require intellectual capital, resources, the leverage of a very large book of business and a distribution system of offices to understand the uneven evolution of each health care market in the U.S. California will revolve differently than Texas. A small regional Midwest broker will find it hard to advise a large multi-site Midwest employer with individuals across the U.S. You need boots on the ground. 

Insurers don't like broker consolidation the same way they don't like hospital consolidation. The real middleman is the insurer — not the broker. We represent the employer, who is the payer. Contrary to industry perceptions, the employer is the payer. They are not a very engaged payer and rely heavily on intermediaries to help them maximize the value for their spend.

The employer trusts us to serve as an aggressive sentinel to be sure their design, pricing and program financing optimize the performance of all their vendors. Hospital systems and clinical integrated networks represent the future from the provider side. A good adviser will remain relevant. A bad broker will slowly die.

What changes will brokers need to make?

I think the notion of traditional "brokerage" is dead. I think out of the ashes of the hyper-responsive transactional renewal centered broker will rise an adviser who brings the best of both worlds — the resources and expertise of a national consultant and the intimacy, proximity and service commitment of a local agent. The value yard stick will focus less on the renewal and more on the myriad activities and services required by the employer to manage their health care spend.

Whether the employer chooses to deliver health benefits through a traditional single carrier model or a multi-vendor private exchange, the next five years will create huge opportunities for the informed and the well-resourced adviser and will be the death knell for the small shop trying to get by on personal relationships and handshakes. Those individuals may survive, but only as agents. 

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