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ObamaCare’s Oligopoly Wave

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Bigger insurance, bigger medicine, and a health consolidation frenzy

The five largest commercial health insurers in the U.S. have contracted merger fever, or maybe typhoid. UnitedHealth is chasing Cigna and even Aetna Humana has put itself on the block; and Anthem is trying to pair off with Cigna, which is thinking about buying Humana. If the logic of ObamaCare prevails, this exercise will conclude with all five fusing into one monster conglomerate.

“The danger is that ObamaCare is creating oligopolies, with the predictable results of higher costs, lower quality and less innovation.

This multibillion-dollar M&A boom is notable even amid the current corporate-financial deal-making binge, yet insurance is only the latest health-care industry to be swept by consolidation. The danger is that ObamaCare is creating oligopolies, with the predictable results of higher costs, lower quality and less innovation.

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“More important, the economics of ObamaCare reward scale over competition. Benefits are standardized and premiums are de facto price-controlled.”

The business case for the insurance tie-ups among the big five commercial payers, which will likely leave merely three, is straightforward. Credit is historically cheap, and the insurers have built franchises in different areas that could be complementary. As for antitrust, selling coverage to employers doesn’t overlap with, say, managing Medicaid for states. (Expect some of the Blue CrossBlue Shield nonprofits to hang for-sale signs soon for the same reasons.)

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More important, the economics of ObamaCare reward scale over competition. Benefits are standardized and premiums are de facto price-controlled. With margins compressed to commodity levels, buying more consumers via mergers is simpler than appealing to them with better products, to the extent the latter is still legal. Read the rest of this entry »

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