Anthem-Cigna discounts wouldn't be deep enough to force service cuts, Anthem economist says

Author: Curtis Eichelberger
1 Dec 16 | 23:30 GMT

IN BRIEF
If Anthem and Cigna are allowed to merge, the combined insurer could improve its provider discounts but not enough to force doctors and hospitals to cut back on their services, an economist for Anthem testified in the trial over the US Justice Department's antitrust challenge.

If Anthem and Cigna are allowed to merge, the combined insurer could improve its provider discounts but not enough to force doctors and hospitals to cut back on their services, an economist for Anthem testified Thursday.

Mark Israel, a senior managing director at economics consultant Compass Lexecon, told a Washington, DC, federal court that the merged company's increased bulk would allow Cigna to improve the discounts on fees it pays to healthcare providers by 4 to 6 percent, and Anthem to improve a half percent on its discounts.

"The merger is procompetitive and will enhance the welfare of buyers," Israel said. "It's not a close call."

Israel testified as Anthem's key economic witness as the trial on the US Justice Department's suit to block the deal nears the end of its second week. For the first time during the trial, he detailed the insurer's economic justification for the $54.2 billion merger.

The economist compared the merged companies to a discounter who buys in bulk. Anthem-Cigna could force hospitals and doctors to accept lower reimbursement rates because they are delivering a large number of patients, he said, passing along most of the savings to large corporate customers and their employees.

Israel, working independently from Anthem's employees, said the merger would save $2.4 billion in medical costs and $515 million in variable administrative expenses.

The Justice Department has argued that with the Cigna purchase Anthem would have so much market power that it could dictate what prices it would pay for clients' healthcare services, forcing hospitals and doctors to cut services and innovative programs to make up for their loses.

Israel said he couldn't find evidence that this so-called "monopsony," in which a customer exerts market power, would happen, or that healthcare quality would be reduced. He said that when hospitals and doctors face lower payments, they usually respond with greater efficiency.

— Medicare comparison —

The anticipated discounts the merged company could get wouldn't be as deep as the discounts the government gets under the Medicare insurance program for older Americans, Israel said.

In comparing Anthem's commercial rates against Medicare rates, Israel said he found that Anthem's premium reimbursement is 191 percent above the Medicare rates. He estimated that post-merger, the reimbursement would be about 188 percent above Medicare rates — far more than doctors and hospitals would need to run a healthy business, Israel said.
 
The economist has had some recent experience examining national corporate customer markets, which is the focus of the Justice Department's case against the merger. A year ago, he testified on behalf of the government to stop food distributor Sysco from buying its chief rival US Foods, arguing the two companies would have too big a share of the market for delivering a variety of foods to large corporate clients (see here).

— McKinsey view —

Testifying before Israel, Shubham Singhal, a senior partner at consulting firm McKinsey, said that the merger would lead to $2.8 billion to $3.77 billion in medical cost savings and $2.2 billion to $2.36 billion in general and administrative cost savings.

On cross examination, Singhal acknowledged that he consulted on just one other merger that closed in the past 10 years and was working part time on this deal. He also admitted he didn't review any of the inputs or spreadsheets, and didn't calculate the estimated savings from the deal. He confirmed that Anthem has paid McKinsey about $70 million to date for work related to the Cigna acquisition.

It will be up to US District Judge Amy Berman Jackson to determine which side has the most convincing evidence during a two-part trial that's scheduled to span more than a month. In the first phase of the trial, the US has attempted to prove that the combined company would hurt large national employers and their workers by giving them fewer insurance choices.

In the second phase, set to start Dec. 12, the trial will focus on the proposed tie-up's effect on local markets.

The merger is the largest and most complex in the industry's history. Anthem said it believes it can wrap up its defense some time Friday afternoon. Berman Jackson said she wants a draft version of the findings of fact and conclusions of law by the end of Friday.

After the testimony ends, the judge wants a question and answer session so she can ask attorneys specific questions on subjects she's still unsure about. She doesn't know if she wants to start phase two of the trial immediately. Some of the second phase may run past Christmas, she said.

Berman Jackson told attorneys the trial schedule for phase two was too long given what she's learned from phase one, and she wants them to provide revisions Friday.