Proposed Aetna-Prudential megamerger shows why antitrust is now turf of state regulators

Managed care megamergers have state officials flexing their regulatory muscles, weighing in on matters states traditionally have left to federal officials.

The most recent proposed merger on the radar screen was announced in late December between Aetna U.S. Healthcare and Prudential HealthCare. State officials who were nonplussed by United HealthCare and Humana’s ill-fated betrothal last summer were at attention when Aetna and U.S. Healthcare followed suit in late December.

"My sense is that public concern has gotten greater because the bloom may be off the rose with regard to managed care," says Boulder, CO-based health policy analyst Patricia Butler.

Is bigger better?

After the merger proposal between United and Humana fizzled, the National Academy for State Health Policy responded to a concern about how the trend toward such mergers would affect local health care marketplaces. The Academy’s report, "Is Bigger Better? Legal and Policy Issues in Health Plan Mergers: A Guide for State Health Policy Makers," was published literally within days of the announcement between Aetna and Prudential.

Ms. Butler, the report’s author, chronicled a growing trend of states exercising statutory or common-law oversight over health plan mergers. While some states concentrate on companies incorporated locally, some have a more active tradition of health plan review.

Missouri made antitrust a high priority under former Insurance Commissioner Jay Angoff. During a term that ended in October 1998, Mr. Angoff placed conditions on two HMO mergers and ordered divestiture in a third.

"There’s a bit of momentum because states have gotten what they need in these settlements," observes Ms. Butler.

Although an Aetna-Prudential merger would not create "large areas of concentration in Missouri, the state Department of Insurance probably will hold hearings on the proposal," department spokesman Randy McConnell says.

The Aetna-Prudential announcement is so recent that many states have not yet crafted a response. Traditionally, state governments leave primary state oversight to regulators in which the affected plans are domiciled. In this case, the responsibility falls to Texas, home to Aetna U.S. Healthcare Inc., Aetna U.S. Healthcare of North Texas, and Prudential Health Care Plan. In a state HMO market of about 3.9 million enrollees, the two Aetna plans have enrollments of about 117,000 each and Prudential has half a million, Department of Insurance spokesman Jim Davis says.

State law in Texas follows typical National Association of Insurance Commissioners guidelines and requires approval of a plan merger unless one of six specific conditions are met, says Mr. Davis:

• The newly formed company would not be able to write business in the state.

• The merger would substantially lessen competition.

• The acquiring party might jeopardize the operations of the acquired company.

• The plans of the acquiring company are not in the public interest.

• The competence or integrity of the acquiring party are in doubt.

• The acquisition would violate state or federal law.

While an approval can be issued without outside comment, state law allows a denial only after a public hearing is held.

The response to a proposed merger will vary according to local market conditions, Ms. Butler says. A comparison of responses to the United-Humana and Aetna-Prudential deals bears her out.

The Illinois Hospital and Health Systems Association vigorously opposed the United-Humana merger, but will sit on the sidelines in the latest debate.

"We did oppose the United-Humana merger because of anti-competitive effects," says association assistant vice president Karen Porter, "but we do not believe this one will have such effects."

The Florida Hospital Association spurred a state-sponsored hearing on the United-Humana merger late last summer, but the Aetna-Prudential proposal doesn’t pose enough of a threat to warrant the association’s concern, FHA vice president Kim Streit says. Florida Department of Insurance officials have not yet decided whether to hold hearings on the Aetna-Prudential merger.

Define your terms

States looking for a legal leg to stand on in any potential challenge to the merger must understand how the courts are likely to define the market for health insurance. The courts tend to define the market broadly, Ms. Butler says, thus dampening the perceived anti-competitive impact of any health plan merger.

One of the biggest wild cards is how the courts will treat self-insured plans, estimated by the Washington, DC-based Employee Benefit Research Institute (EBRI) to cover one-third of all people nationally with employer-sponsored health benefits. One of the biggest attractions to self-insurance is exemption from state regulation under the federal Employee Retirement Income Security Act of 1974.

In New Jersey, Aetna U.S. Healthcare and the recently acquired NYLCare Health Plans control about 35% of the state’s HMO enrollees. The addition of Prudential would boost HMO market share by a little less than 5% and bring the company’s HMO enrollment to about 1 million.

Reliable estimates of the impact of self-insurance aren’t available on the state level, but EBRI senior research associate Paul Fronstin suggests New Jersey reaches at least the national average.

The decision of whether to include the huge self-insured market in an antitrust analysis depends upon how readily self-insured employers would give up their plans for a licensed insurance product.

"Part of what we don’t know is how willing employers are willing to switch back and forth," Ms. Butler says. "If they’re willing to switch, they’re part of the market."

Mr. Fronstin argues there’s a huge potential for self-insured employers to switch. He says proposals in the first Clinton administration to cap insurance premiums at 7% had a large number of self-insurance employers considering a switch.

In addition, says Mr. Fronstin, megamerger companies can offer uniform benefits throughout the county, eliminating one reason many companies choose to self-insure.

Contact Ms. Butler at (303) 440-0586 and Mr. Fronstin at (202) 775-6352.