Medicare Cuts and Reform May Lead to Insurance Mergers

The Obama Administration's 4.5 percent pay cut to Medicare Advantage plans for 2010, while a bit less than expected, is helping to fuel rumors that some major health insurers will merge. Aetna is said to be interested in taking over Humana, and United is reportedly eyeing Coventry.

Such mergers would greatly concern health care providers, especially physicians. Many hospitals have formed larger systems that can hold their own with insurers, but most physician groups have little leverage with the big plans, and a further consolidation of insurers would place them at an even greater disadvantage. According to the AMA, a single health plan already has at least a 70 percent market share in one of six markets.

While there's no solid indication that any of the plans will merge, they may have no choice. Congress could chop Medicare Advantage rates again this year, as it tries to figure out how to postpone a 21 percent physician payment cut without throwing Medicare's budget out of whack. And if the plans try to make up for the shortfall in their own reimbursement by raising senior members' premiums, many might drop out. As it is, the government recently prohibited the private insurers from charging sicker, poorer patients more than traditional Medicare does.

Another factor in the insurers' thinking is the possibility that a public plan might be included in the health reform package that Congressional leaders are promising by the end of the summer. A recent report by the Lewin Group predicts that if all employers and individuals could join the public plan, and it paid Medicare rates, about 131 million people would enroll in it, greatly shrinking the market for private insurance. Even if the public plan were open only to small firms and individuals, as part of an insurance "connector," it would probably enroll about 43 million individuals, according to Lewin. Because the public plan would be able to charge much lower premiums than private plans, it would still siphon off much of their business.

Without a public plan, however, it's hard to see how Congressional reformers could achieve their goals. The only way to reach near-universal coverage is to require everyone to buy insurance, many reform advocates believe. But to offer decent benefits, an individual mandate would require massive government subsidies. Until someone figures out how to restructure the healthcare delivery system, the only way to lower those subsidies is to create a public plan that dramatically reduces the cost of individual insurance.

Jacob Hacker, whose ideas helped shape the Democratic health care platform during the election campaign, recently authored a study that lays out the arguments for having a public plan compete with private plans. He believes that private insurers could vie successfully with a Medicare-like entity through limited networks or direct coordination of care. But the Lewin report raises some serious questions about that.

What's not in doubt is that the insurance companies view the idea of a public plan as a mortal threat. If such a plan were included in health care reform legislation, some plans might feel compelled to merge in order to extract major concessions from health care providers. If they could lower their provider payments enough, they would be able to compete with the government plan.