US health insurers: ripeness is all

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“Ripe for consolidation”: A hackneyed phrase that can mean that mergers are needed, or that they will come, needed or not. In US health insurance, the phrase is true only in the second sense.

Consolidation is mainly a solution for fragmentation or overcapacity. In industries (say, funeral homes) that are made up mostly of mom-and-pop operations, there is replication of overhead costs and weak bargaining power with suppliers. Others have either too much production capacity (memory chips), or falling demand (personal computers). Mergers help arrest the decline in profit.

Health insurance is not fragmented. Five companies — UnitedHealth, Anthem, Aetna, Cigna, and Humana — dominate the industry and provide coverage to 130m people. Nor has demand for private insurance been sapped by Obamacare or anything else. On the contrary. A look at the big five’s results after healthcare reform became law in early 2010 shows double-digit average revenue growth, mid-single digit membership growth, and steady margins. Business is good.

The case for consolidation turns on two premises. Hospitals have consolidated, so insurers must match bulk with bulk to secure savings for clients. Commercial (non-government) insurance is hardly growing, so only merging and cutting overheads can increase profits there.

Remember that bulk is just one way to wring rebates from doctors and hospitals — another is for insurers to limit provider networks. If customers will accept less choice, costs come down (as they did in the HMO era). Low commercial growth is nothing new and has not prevented the insurers from thriving thus far.

Yes, insurance is a scale business. Combining, if done right, can lower cost ratios. But this alone is a weak reason for taking all the risk involved in merging businesses that are already huge. A more likely cause of deal fever: good, old-fashioned growth-chasing.

Email the Lex team at lex@ft.com

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