Health insurers poised for merger mania

The growing fortunes of health insurance companies since Congress passed the federal Affordable Care Act is driving the insurers to expand, industry analysts say.

That has fed widespread expectations that some of the nation's biggest insurers will soon announce that they will buy other companies.

The consolidation rumors started flying less than a month ago. They were verified over the weekend when Anthem, the nation's second-largest health insurer, went public with a $47 billion offer to buy Cigna, the fifth-largest health insurer. So far, Cigna has rebuffed the offer.

But other companies appear to be weighing mergers. Citing unidentified sources, The Wall Street Journal reported that Minnesota's UnitedHealth Group, the nation's largest health insurer, has approached Aetna, the third-largest insurer, about an acquisition. UnitedHealth officials are not commenting on the report.

All of the activity can be explained by the desire of insurance company leaders to put the huge financial resources they have accumulated in recent years to work, industry observers say.

Under the Affordable Care Act, many people must buy insurance or pay a penalty. As a result of the law, insurance companies have gained new customers. They now want to leverage their fortunes to lock in future revenue, said Christopher Koller, president of the Milbank Memorial Fund, a foundation that aims to improve health policy.

"They have been accumulating assets and reserves that allow them to be more active and I think they're taking advantage of their financial strength to look for chances to increase their size," said Koller, a former Rhode Island insurance commissioner.

Jason McGorman, a health care analyst for Bloomberg Intelligence, said although UnitedHealth Group is rumored to have acquisition ambitions, the company may not execute a deal. He said the consensus among industry observers is that the action is likely to be among relatively smaller players. They include Anthem, Aetna, Humana and Cigna.

UnitedHealth has by far the most revenue of any health insurer in the nation. The Minnetonka-based company already has bought other firms, most recently paying $12.8 billion for the pharmacy benefit manager Catamaran.

McGorman said other insurers are trying to catch up.

"They've got a lot of the exposure that they feel they need and ... don't have to do an acquisition in order to grow," he said of UnitedHealth. "They [have] relatively diverse exposure across their portfolio, whether you're looking at commercial insurance or Medicare and Medicaid."

Although UnitedHealth is far and away the leader when it comes to revenue, a lot of the money it generates has nothing to do with selling health insurance. According to insurance company filings, Anthem is the leader when it comes to members. UnitedHealth ranks third.

"When you look at UnitedHealth, you've got to see them as being much more than an insurance company," University of Minnesota Professor Dan Zismer said.

Zismer, an expert in health care administration, said UnitedHealth has diversified in recent years. More than one third of its 2014 revenue, or $47.7 billion, came from its fast-growing Optum operation. Optum offers numerous services that combine data and technology to improve health care. Its revenues grew at 25 percent last year, more than triple UnitedHealth's overall revenue growth.

Zismer said UnitedHealth may see more opportunity growing its Optum business than selling more insurance policies.

"When you look at really their revenue flow and their business plan, one would suggest they're actually moving away from the insurance business into the health care services business," he said. "They're in the business of acquiring the providing side as well."

Earlier this week, UnitedHealth announced it would leave America's Health Insurance Plans, the industry trade association. Company officials said the association no longer best represents the interest of UnitedHealth and its customers.

While consolidation may be good for the insurers, there's no guarantee consumers will benefit from it, said Leemore Dafny, a health care economist at Northwestern University. She said any mergers deserve close scrutiny by federal regulators.

"If you have a consolidated market that is becoming more consolidated," Dafny asked, "what is going to induce you to pass on those lower costs if you have less competition?"

Investors clearly see health insurance as a money maker. Stock prices of the five biggest companies rose an average of 55 percent over the past year.