- - Thursday, October 1, 2015


The planned mergers of four of America’s largest health insurers — Anthem with Cigna, and Aetna with Humana — has triggered a vigorous debate in academic and policy circles.

On the one side are those who argue that fewer, larger health insurance companies will reduce competition, limit consumer choice, and harm Americans in the pocketbook. On the other side are those who argue that the bigger health insurers will be able to negotiate better rates and provide a needed counterbalance to the growing power of local and regional physician medical groups and hospitals, which are virtually free to dictate prices in many communities because they’re the only game in town.

Caught in the crossfire of this debate is the Medicare Advantage program, a growing insurance market that is seen, at least in part, as the rationale for these mergers.

Though Medicare Advantage (MA) may have its detractors in academic circles, the 16.8 million seniors currently enrolled in the program — some 31 percent of all Medicare enrollees nationwide, according to the Kaiser Family Foundation — are typically not among them. Survey data consistently show that satisfaction rates (more than 90 percent, according to a February 2015 survey, are consistently high, even greater than the satisfaction levels of luxury car owners.

The traditional Medicare program existed for decades before government introduced a competitive alternative in 1997: Medicare + Choice, renamed Medicare Advantage in 2003. From its inception, the private program has operated under strict rules, including requirements that cost savings get passed back to beneficiaries through lower premiums, reduced co-payments or increased benefits. Insurers also are now required to spend a minimum of 85 percent of all premiums on patient medical care. Put another way: administrative overhead and profit combined can account for no more than 15 percent of all costs.

Despite this — or in our view because of it — Medicare Advantage providers have become some of the leading innovators in health care. With the need to provide medical services more efficiently and effectively than the fee-for-service program, MA insurers developed a different care model, predicated on active, hands-on management of patients’ medical needs.

With improved outcomes, lower co-pays, and a variety of extra benefits, such as gym memberships and prescription drug, dental and vision coverage, it’s easy to see why Medicare Advantage plans increased enrollment more than 50 percent in the last five years, from 11.1 million in 2010 to 16.8 million today.

If quality and cost are not major concerns, how about choice? Are the health insurance mergers likely to reduce consumer choices?

Our experience with the Medicare Advantage program argues against such a conclusion. First, there is always competition. Those who aren’t happy with their Medicare Advantage plan can always select another plan or choose traditional Medicare.

Second, competition in the Medicare Advantage market has continued to increase, even as market conditions, including funding cuts and provider consolidation, have deteriorated. In 2006, for example, Medicare beneficiaries in only 45 percent of U.S. counties had a choice of at least three Medicare Advantage plans; last year, in 2014, three or more plans were available in more than 65 percent of all counties.

Medicare Advantage also faces a new competitor, the so-called integrated healthcare providers. You know them as large group practices, many of which are affiliated with local hospitals. These providers, who have longstanding relationships with patients and the resources to develop and implement local and regional care programs, believe they can beat MA insurers at their own game. In 2013 and 2014 alone, 23 integrated providers launched new Medicare Advantage plans, including North Shore-LI Jewish Health System, Inc., Catholic Health Initiatives, and New York City Health and Hospitals Corporation. Intermountain Health Care, Inc. in Utah entered the market just two years ago; today it is the second largest Medicare Advantage provider in the state.

What this suggests is that the insurers’ main competition in the future may not come from other traditional insurers, but from provider groups offering health coverage. To compete, Medicare Advantage plans will have to show that their medicine is as good as their perks. This will require continued clinical innovation, one of the stated objectives of this new round of consolidation.

Ultimately, Americans will vote with their wallets. If Medicare Advantage continues to flourish, we’ll know the insurance companies made a wise decision.

Jon Kaplan is a senior partner at The Boston Consulting Group and leader of the firm’s Health-care Payers and Services team in the Americas. Daniel Gorlin is a BCG principal specializing in health care. They are both based in Chicago.

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