Within three weeks of Aetna’s agreement to acquire Humana for $37 billion, Anthem announced its agreement to purchase Cigna for $54.2 billion. If both of these deals go through, the number of major health insurance carriers in the U.S. will drop from five to three: Aetna, Anthem and UnitedHealth Group.
As Fuld + Co.’s SVP Diane Borska pointed out, “merger mania” is often driven by an innate sense among executives that larger companies with deeper resources will be better able to navigate a changing, dynamic market than smaller competitors; i.e., bigger is better.
Greater pricing transparency poses new challenges
One of the challenges facing healthcare insurers since the passage of ACA is greater pricing transparency in plans sold through the state and federal exchanges, which serve as open market places in which consumers can compare plans side by side. This is a huge change from the traditional employer-funded model in which options are typically non-existent or between plan types that are so different, e.g., high-deductible versus co-pay, that comparison on a price basis makes little sense.
On the exchanges the carriers will be selling directly competing plans against each other and competitive pricing will much more important than it was in the pre-ACA healthcare insurance market, so any cost savings wrung out of synergies or scale may be critical, and with these acquisitions the carriers are pursuing scale by buying competitor plan members.
The numbers attached to these deals provides a glimpse into how the market values members. According to the New York Times Humana covers about 9.8 million members, so with the acquisition price of $37 billion, Aetna is paying roughly $3,775 per member. Reuters puts Cigna’s membership at around 15 million, so the acquisition price of $54.2 billion translates into a slightly lower per-member price of $3,613. Obviously these are rough numbers, but I take that they differ by less than 5% as an indication we are somewhere in the ballpark.
Health insurance start-up gets results with a new model
In April an innovative health insurance start-up – Oscar – raised $145 million in equity funding from a group led by VC Wunderkind Peter Thiel. Oscar has been up and running for less than two years and currently operates only in New York State with a membership of approximately 40,000. The equity share purchased in this investment round pegs Oscar’s total valuation at $1.5 billion, or roughly $37,500 per member.
Of course Oscar is getting a sexy start-up valuation, but what makes this company so interesting is its use of technology to not only manage costs but also to provide a positive customer experience that effectively engages its membership. Turning managed care into engaged care could not only create member stickiness but also increase member involvement in wellness and preventative care that further lower long-term costs, increasing the availability of affordable – and profitable – health care coverage.
Size-wise Oscar is a flea on a dog compared to the large carriers, and unlike disruptors Uber and Airbnb, it is not competing in highly fragmented industries. But as the large carriers focus on consolidation and the subsequent integration of vast corporate bureaucracies, innovation at these companies will be hamstrung, leaving Oscar and others like it breathing space to pursue the younger and healthier (i.e., lower cost) segment of the market that demands the greater accessibility and convenience technology like Oscar’s enables.