Aetna-Coventry Merger Reflects A Changing Industry After Health Care Reform

Health insurance companies bitterly opposed the health care reform law but, as the merger between Aetna and Coventry Health Care announced Monday shows, the industry knows there's still money to be made.

The $5.6 billion Aetna-Coventry Health Care merger is the biggest in the health care sector since President Barack Obama enacted the reform law in March 2010. The deal will give Aetna, the third-largest health insurer in the U.S., a big increase in Medicare and Medicaid customers , including poor elderly people on both programs, and in the number of people who buy insurance on their own or get coverage from small businesses. Aetna will gain 5 million new customers when the merger is complete and stands to get even more in the near future.

"You've got an arms race going on in health care," said Robert Laszewski, a health care consultant and president of Health Policy and Strategy Associates in Alexandria, Va. Laszewski said health insurance companies, hospitals and other players are merging into bigger entities in hopes of restraining their own costs and grabbing larger shares of the markets as they are reshaped by health care reform. What the Aetna-Coventry Health Care merger won't do, at least in the short term, is lower anyone's health insurance premiums, he said.

The health insurance industry is undergoing a transformation as a result of the health care reform law, which the Supreme Court upheld in June. Twenty-five million people will buy health insurance on the law's regulated "exchange" marketplaces in the states, according to the Congressional Budget Office. Many of those small businesses and people who don't receive health benefits from their jobs will get federal tax credits. Medicaid will also add 11 million poor people and states are expected to contract with private health insurance companies to cover them.

In addition to boosting its Medicare and Medicaid business, the merger also gives Aetna better access to the "lower end" of the health insurance market -- people who will switch between Medicaid, individual insurance, and small business plans, Laszewski said. The health insurance law will expand that pool of customers through the exchanges and subsidies.

The health insurance industry lobbied against the law in 2009 and 2010 and Aetna, at least, has continued to campaign against it. In 2011, Aetna, based out of Hartford, Conn., gave $3.3 million to the American Action Network , a conservative nonprofit organization, and almost $4.5 million to the U.S. Chamber of Commerce, one of the law's strongest opponents, according to Citizens for Responsibility and Ethics in Washington.

That's because although health care reform will expand the insurance market to tens of millions of new customers, it comes at a cost to the industry.

The law establishes unprecedented federal regulations on health insurers. Health insurance companies won't be able to turn away costly customers with pre-existing conditions or charge higher rates to women, for instance, and must cover things like maternity care and prescription drugs that today's plans may not. The law also requires companies to spend at least 80 percent of the premiums they collect on medical care , effectively capping the profits they can earn. Health insurance companies will pay $8 billion in new fees starting in 2014 and more in later years.

Aetna's merger with Coventry Health Care is the latest in a series of moves by big health insurance companies to get bigger in advance of the health care reform law's expansion of health coverage in 2014. The second-biggest health insurance company in the U.S., WellPoint Inc., announced last month it would acquire Amerigroup Corp., a firm that does big business with state Medicaid programs, for $4.9 billion. Cigna Corp. bought HealthSpring Inc. , which specializes in Medicare plans, for $3.8 billion in January.

Consolidation isn't only happening in the health insurance industry. The pace of hospital mergers has accelerated, prompting concerns about bigger hospital chains driving up prices . Hospitals also have been buying physician practices.

Aetna estimates that combining with Coventry Health Care, based out of Bethesda, Md., will save the merged company $400 million a year starting in 2015. Health care reform seeks to cut future health care spending , meaning some companies in the $4.78 trillion health care industry will have to get by on less, Laszewski said. The key question, he said, is: "Who's going to get less? How's that 'less' going be be divided up?"