New Marketplace
New Risk, New Business Models

Good Riddance to Big Insurance Mergers

Article · May 12, 2017

Eighteen months after four of the five largest U.S. health insurers announced multibillion-dollar merger deals, federal judges, siding with the Department of Justice (DOJ), have issued preliminary injunctions halting the two transactions. These decisions will cost the insurers: they spent over $2 billion trying to get the deals done, and the would-be acquirers are due to pay $2.85 billion in breakup fees — and possibly billions more in damages.1-3 Moreover, the parties’ conduct has further damaged the public’s view of the insurance industry.

Having suffered similar defeats at the hands of the Federal Trade Commission (FTC), hospitals are enjoying a moment of revenge. But the decisions actually provide more precedent to support challenges of mergers between competitors in health care markets — whether payers or providers.

The issues at stake in these cases are familiar and general: Did the merging insurers stand to gain market power in one or more “relevant antitrust markets”? And would that gain “tend to lessen competition” among the firms serving that market, in violation of the Clayton Antitrust Act? On the first question, merging parties in health care markets generally argue that the market is large, while plaintiffs argue that it’s small. Generally, the larger the market definition — in terms of geography or which products and services are included — the smaller the combined market share of the merging firms, and firms with less market share are presumed to have less market power.

Aetna and Humana argued that the Medicare managed care plans that they both sell (through Medicare Advantage) are in the same market as traditional fee-for-service Medicare; the government argued that these plans are distinct, competing with one another substantially more than they do with traditional Medicare. The companies’ combined market share in the 364 counties where the DOJ alleged a loss of competition ranges from 1 to 34% of all Medicare enrollees, but 33 to 100% of Medicare Advantage enrollees. If the combined firm raised premiums or cut benefits for Medicare Advantage products, the insurers argued, beneficiaries would opt into traditional Medicare, rendering the action unprofitable.

Judge John Bates of the federal District Court for the District of Columbia didn’t buy it. He ruled that Medicare Advantage plans’ “relevant antitrust market” is distinct from traditional Medicare, citing evidence that Medicare enrollees leaving a Medicare Advantage plan are far likelier to choose another Medicare Advantage plan than traditional Medicare. In most markets, it would be much costlier to replicate the benefits of a typical Medicare Advantage plan (which has limited cost sharing) by purchasing a Medicare supplemental (Medigap) plan plus a prescription-drug (Medicare Part D) plan.

This argument resembles those in hospital-merger cases. For example, in 2016, the FTC alleged that a proposed merger between Penn State Hershey Medical Center and Pinnacle Health System would result in market share exceeding 50% in the Harrisburg, Pennsylvania, area, while the organizations argued that the true relevant market included all hospitals within a 65-minute drive of Harrisburg, so their share would be closer to 20%. The FTC ultimately prevailed: the U.S. Court of Appeals (Third Circuit) overturned a decision by a lower court, affirmed the FTC’s market definition, and ordered a preliminary injunction to bar the transaction.

Market definition is really just a warm-up for the second question: whether the proposed merger diminishes competition in that market. If the merging parties gain substantial market share that enables them to raise prices or cut product features that consumers value, are there potential entrants that would pounce at the sign of less-attractive offerings and “defeat” the price increase or quality reduction? Or are there countervailing benefits of the merger that could result in a net benefit to consumers — such as measurably better quality?

It’s hard to argue convincingly that the threat of new entrants can discipline anticompetitive conduct in the insurance sector. A merger reduces the set of existing insurers that can enter a new region or customer segment. New entries into the insurance market are rare, and most recent entrants have gone belly up or sustained substantial financial losses. So insurers wishing to merge must build the case for merger-created efficiencies, which was the big battleground in the Anthem–Cigna case.

Anthem, a for-profit firm that operates Blue Cross Blue Shield affiliates in 14 states, is far larger than Cigna and, on average, pays significantly lower rates to providers. Anthem claimed that the combined firm would save $2.4 billion a year simply by imposing the lower of the rates paid by the two firms for providers currently contracting with both insurers. These savings could be passed on to consumers, either through lower premiums (for “fully insured” plan members) or lower medical spending (for “self-insured” plan members).

Whether or not providers would accept lower rates, there are at least three reasons to question whether such “savings” would benefit consumers. First, why would these savings be passed through to consumers if the merging insurers would have fewer rivals competing to supply insurance? Why not pocket most savings and return them to shareholders? Second, why is paying a provider less — without any change in their costs or practices — a “savings” rather than merely a transfer of monies from supplier to buyer? Third, paying providers less could compromise the quality of and access to care.

The insurers argued that providers have market power and paying them less would offset it, but Judge Amy Berman Jackson of the federal District Court for the District of Columbia didn’t rule on this point, observing that the trial “did not venture into uncovering the causes” of high provider prices. She concluded that the alleged cost savings were unverifiable and not merger-specific, and hence the sources of the savings became moot.4

Anthem and Cigna also argued that their merged firm could benefit from Cigna’s skill in creating innovative insurance products. But Jackson was not convinced that Anthem couldn’t innovate on its own, and agreed with the DOJ that the lower reimbursements Anthem intended to pay were inconsistent with Cigna’s model.

The judges in both cases not only rejected the insurers’ arguments, they also admonished them for bad behavior. Aetna had attempted to strong-arm the DOJ into approving the merger by threatening to exit from several insurance exchanges if the DOJ filed suit. Its decision to make good on its threat undermined the DOJ’s case, because the merger would no longer reduce the number of competitors in the markets it left. Bates concluded that Aetna exited the exchanges in 17 counties specifically “to evade judicial scrutiny of the proposed merger.” Questions linger about the willingness of one of the largest U.S. insurers to play poker when the stakes are low-income Americans with few options for health insurance. Shortly after Bates’s ruling, Aetna and Humana abandoned their union, declaring “the current environment . . . too challenging to continue pursuing the transaction.”

As for the Anthem–Cigna transaction, Cigna officials undermined Anthem’s arguments in court, even cross-examining their would-be parent’s own expert. Jackson, calling Cigna’s thinly veiled opposition to its own deal the “elephant in the courtroom,” declared that she could not dismiss “the doubt sown into the record by Cigna itself.”5 As of early April, Anthem was still fighting, hoping for victory over both the DOJ and Cigna, which has proven itself a hostile target. Cigna has now sued Anthem for over $13 billion in damages — beyond the negotiated $1.85 billion breakup fee.

To put these figures in perspective, $10 billion was appropriated to the Centers for Medicare and Medicaid Services Innovation Center for 2011 through 2019, for the broad purpose of “testing innovative payment and service delivery models” to reduce expenditures and maintain or improve quality of care. Consumers, who see the need for commercial insurers to work with providers to transform care delivery, are wondering why insurers don’t have better ideas for increasing their value added. If there is any silver lining, it’s that other insurers will consider these precedents and devote more energy to growing by offering superior value, rather than by swallowing rivals.


From the Department of General Management, Harvard Business School, Boston, the Kennedy School of Government, Harvard University, Cambridge, and the National Bureau of Economic Research, Cambridge — all in Massachusetts.

1. Hiltzik M. How Aetna frittered away $1.8 billion on a merger destined to fail. Los Angeles Times. February 14, 2017 (
2. Herman B. Lawyers and bankers reap $1.5 billion from failed health insurance mergers. Axios. February 13, 2017 (
3. Daurat C. Cigna faces off with Anthem, escalating fight by ending deal. Bloomberg. February 14, 2017 (
4. Dafny LS, Lee TH. The good merger. N Engl J Med 2015;372:2077-2079. Free Full Text | Web of Science | Medline
5. Memorandum opinion, U.S. District Court for the District of Columbia, U.S.A. v. Anthem Inc, Civil Action No. 16-1493, filed February 17, 2017.

This Perspective article originally appeared in The New England Journal of Medicine.

New Call for Submissions ­to NEJM Catalyst


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

More From New Marketplace
ED Telehealth Express Care Service Patient Room

Revolutionizing the Delivery of Care for ED Patients

How the NYP OnDemand Emergency Department Telehealth Express Care Service reduced stay times and revisit rates in one year.

Targeting Unconscionable Prescription-Drug Prices — Maryland’s Anti–Price-Gouging Law

Why, in the early 21st century, are so many drugs that were cheaply available in the 20th century becoming prohibitively expensive?

The Economics of Indication-Based Drug Pricing

What would indication-based drug pricing accomplish?

Controlling the Cost of Medicaid

Both political parties should support policies that focus on incentives as a mechanism for improving and sustaining their value.

Resetting the Nation’s Health Care Quality Agenda

Poor measures of care quality have consequences. The National Quality Forum is essential to creating measures that are valid and reliable.

Opportunities for Private-Sector Entrepreneurship in Health Care Transformation

Two veterans of public service say that government can do only so much — which creates attractive business opportunities for entrepreneurs.

Moving Past the EHR Interoperability Blame Game

Why can't EHRs talk to one another? We never created the right incentives, but we pretend that we did.

Emerging from EHR Purgatory — Moving from Process to Outcomes

What's the effect of the mode of physician payment when it comes to EHRs?

Reframing Analytics: Transforming Insights into Action

Centralizing clinical data for an integrated delivery system revealed a surprising lesson: sometimes predictive analytics are not enough.

Infographic: The Effects of Health Insurance on Health and Survival

There is strong evidence that expansions in health coverage have increased people’s use of health care across multiple domains of well-being and reduced deaths overall.


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »


Amazon and CVS: Short-Lived Unicorns in…

Will Amazon–Berkshire Hathaway–JP Morgan and CVS-Aetna change the health care game? To one health care…

Value Based Care

163 Articles

The Adverse Impact of the Physician-Hero

In a value-based world, the sickest patients need the benefit of a comprehensive team to…

Financial Incentives and Vulnerable Populations —…

Understanding APMs’ potential consequences for vulnerable populations is critical if we wish to maximize benefits…

Insights Council

Have a voice. Join other health care leaders effecting change, shaping tomorrow.

Apply Now