If regulators approve the recently announced mega-deals in which Aetna, Inc. would buy Humana Inc. and Anthem Inc. would buy Cigna Corp., will consumers benefit? Or will the winners be limited primarily to the executives and shareholders of the companies involved?
If history is guide, the big winners will be — you guessed it — company executives and shareholders. The companies’ customers, on the other hand, likely will have the privilege of paying more, not less, for their coverage.
A new study on the effect of health insurance market consolidation and dominance published earlier this month should be required reading by the folks at the Justice Department, who will decide whether the deals should go forward. The study’s conclusion: Insurers that bulk up to the point that they can dominate a given market raise rates considerably more than their smaller competitors.
The findings in the study, published in a Harvard-affiliated peer-reviewed journal, are consistent with previous research that has found that consumers usually come out on the short end of the stick when insurers merge. It’s an entirely different outcome, though, for the few executives who make the mergers happen.
Even in relatively small deals, executives can engineer jaw-dropping fortunes for themselves. As I wrote last month, while I was still at Cigna, Healthsource CEO Norman Payson pocketed $94 million when Cigna’s $1.45 billion acquisition of Healthsource was completed in 1997.
Seven years later, a few WellPoint executives got golden parachutes worth far more than Payson’s going-away gift when WellPoint and Anthem merged.
California’s insurance commissioner at the time, John Garamendi, now a congressman, blocked the acquisition for a while when it was disclosed that the WellPoint executives would walk away with $600 million from the deal.
He eventually gave the green light to the $20.9 billion transaction when the companies agreed to reduce the compensation package for WellPoint CEO Leonard Schaeffer and a handful of other executives to $265 million. Anthem CEO Larry Glasscock was rewarded with a $42.5 million bonus for closing the deal. When Schaeffer left the company a few months later, in January 2005, his retirement package was valued at $337 million.
To get Garamendi to drop his opposition, the companies said they wouldn’t raise their customers’ rates, at least not right away. But in 2010 Anthem made national headlines when it hiked premiums as much as 39 percent for thousands of its individual customers in California.
News of the rate hike came just as the congressional debate on health care reform was winding down. At the time, reform advocates were worried that what ultimately came to be known as Obamacare would go down in flames. Some of the Democrats they had been counting on to vote for the bill indicated they were leaning against it. But when news of Anthem’s rate hike reached Capitol Hill, many of the wavering Democrats were so outraged they came back into the fold. Had it not been for what was perceived by lawmakers of both parties as Anthem’s greed, the Affordable Care Act probably would not have made it to President Barack Obama’s desk.