Blessing or Curse from Health Insurers’ Mergers and Acquisitions? – The Analysis of Group Affiliation, Scale of Operations, and Economic Efficiency

Posted by Social Science Research Network

Blessing or Curse from Health Insurers’ Mergers and Acquisitions? – The Analysis of Group Affiliation, Scale of Operations, and Economic Efficiency

Charles C. Yang (Florida Atlantic University), Xiaoying Xie (California State University), Hong-Jen Lin (Economics Department) & Min-Ming Wen (California State University)

Abstract:     The recent proposed multi-billion megamergers of the top health insurers Aetna/Humana and Anthem/Cigna have raised considerable antitrust concerns for health insurance markets. This research examines the potential effects of health insurance mergers and acquisitions through analyzing the impact of insurers’ scale of operations and group affiliation status on benefits, costs, and the efficiency of all stakeholders, aiming to provide insights to federal and state governments’ antitrust scrutiny and regulations and inform the public debate over mergers and acquisitions in the health insurance industry. Ceteris paribus increasing the scale of operations leads to lower premiums, more profits, and reduced payments to providers and administrative expenses; the affiliation with top groups increases premiums and profits but does not lower hospital & medical expenses or administrative expenses. The stakeholders are inconsistent regarding the impact of the scale of operations and the group affiliation status on their overall efficiency. In compromise, the (sub-)optimal health insurance market may be dominated by medium-sized groups with big-sized insurers, and it might be advisable that health insurance megamergers be carefully crafted to group small members into big-sized insurers and simultaneously reduce the number of members. Additionally, most insurers are not scale efficient, operating with either increasing or decreasing returns to scale. The analysis of scale (dis)economies provides some guidelines regarding the appropriate scale of operations for the scale efficiency.