Some Insight Into The Anthem/Cigna Merger Proposal

Sept. 26--A confidential document filed this weekend in federal court -- and then withdrawn on Monday -- gives some insight into how Anthem believes combining with Cigna will give it more market power.

The U.S. Department of Justice, which is seeking to stop the nation's second-largest health insurer from buying Bloomfield-based Cigna, argues that more leverage at a larger Anthem could hurt doctors and hospitals, and therefore hurt the quality of health care available to consumers.

Anthem is asking antitrust lawyers at the Department of Justice to produce facts supporting the claim that a merger would give the new larger Anthem monopolistic purchasing power.

Saturday, the Department of Justice filed a white paper Anthem had given it during the investigation as part of its response.

In the paper, Anthem estimated it could save $2.35 billion a year by requiring that providers in Cigna's networks in California, Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri, Nevada, New York, New Hampshire, Ohio, Virginia and Wisconsin reduce their rates to match Anthem's payments.

In those states, the company wrote, "it has generally negotiated larger provider discount than Cigna due to its superior scale."

The reduction in billed charges would be about 5.6 percent for Cigna customers and 0.7 percent for Anthem customers, the document estimates.

More conservative ways of estimating those savings -- for instance, assuming that all Cigna networks switch to Anthem rates, but that Anthem doesn't achieve any further discounts -- still produce at least $1 billion in annual savings, the document says.

The medical cost savings can feasibly be realized in a short time, the document says, because Anthem's provider contracts say that the rates apply to any affiliates, and after the merger, Anthem can designate Cigna as an affiliate.

"Alternatively, the combined company may choose to renegotiate new rates that reflect the increased value to the provider due to the greater scale of the combined company either immediately or when the provider contract expires in the ordinary course," Anthem said.

The Cigna brand would continue in Connecticut and the other 13 states above, "but the combined company will create incentives for customers to switch to the Anthem brand," the document says.

These estimates are about medical costs, but Cigna has dental customers, too. "The parties are also exploring potential savings in expenses to dental providers. These savings would occur through the same mechanism, i.e., shifting common providers to the lower of the two current firms' rates. Preliminary estimates indicate potential savings in the range of $196 to $228 million annually."

Anthem argues this additional leverage will not harm doctors, hospitals, dentists or other health care providers.

"Contrary to the complaints of hospital and physician trade associates, these lower provider reimbursement rates will not result in any competitive harm, and, in particular, will not lead to a reduction in the quality or quantity of health care services supplied," Anthem said.

Anthem argued that since customers will benefit directly from the contracts, they will be freer to seek medical or dental care.

About 75 percent of the combined company's membership work for, or are dependents of, large companies that self-insure and use Anthem or Cigna for administration. Because they will have to pay less for services, Anthem predicts the corporations will pass that on to employees through lower premiums or lower deductibles.

Anthem's document says: "There is nearly universal agreement that the rapidly escalating cost of health care in the U.S. is unsustainable, especially since it has not led to commensurate improvements in the health of Americans."

It says there are two ways to bend the cost curve -- by reducing prices paid for drugs and to providers, and by encouraging more efficient utilization, often by changing the way providers are paid.

Anthem notes that moving toward medical management, and away from fee-for-service arrangements with providers, is an explicit goal of federal government health policy.

Anthem says it has been successful in seeking to improve medical management to reduce unnecessary care, but added, "Cigna's approach, which integrates clinical programs, wellness programs, specialty (e.g. behavioral and dental) coverage, and other medical management into its offerings can drive further improvements in the total cost of care."

Anthem says a key rationale for its $48 billion purchase of Cigna is to gain this kind of expertise, and that buying Cigna would improve Anthem's "competitiveness by using and enhancing Cigna's highly-integrated provider collaboration and its clinical, wellness, and specialty abilities."

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