Hospitals, Drugmakers Could Follow Health Insurer Mergers

Anthem Inc’s decision to buy Cigna Corp., forming the largest U.S. health insurer by membership, will likely speed consolidation across the healthcare industry, from hospitals to drugmakers.

Anthem announced its proposed $54 billion purchase of Cigna on Friday, just weeks after Aetna Inc. said it would buy rival Humana Inc. for $37 billion. If both transactions are approved by regulators, the industry will go from five major national players to three.

Larger size – the merged unit of Anthem and Cigna and will have about 53 million members – will give insurers more power in price negotiations, putting pressure on smaller healthcare providers, pharmaceutical companies and medical device makers to increase their own leverage, according to industry experts.

“Scale is going to matter as you get into more risk-sharing,” said Glen Giovannetti, leader of global life sciences at Ernst & Young. “We’ve got an aging population and a growing demand for healthcare. The system is strained.”

President Barack Obama’s healthcare law, passed in 2010, includes provisions that make it harder for health insurers to raise the monthly premiums they charge for coverage, and puts tougher conditions on healthcare providers to get reimbursed for their services.

The hospital sector has already seen a wave of consolidation in recent years in some markets giving them considerable influence over health insurers.

“I would expect hospital companies will accelerate consolidation in response,” said Leerink Partners analyst Ana Gupte. “It will happen at local markets because the hospital industry is pretty fragmented. I expect that publicly-traded companies will be merging with other not-for-profits to increase market concentration, and non-profits will merge with each other to some degree to increase leveraging power.”

Six U.S. hospital chains are publicly traded, including HCA Holdings Inc., Community Health Systems Inc. and Tenet Healthcare Corp.

Dan Mendelson, chief executive of Avalere Health, sees healthcare providers as more likely to seek acquisitions in areas that complement services they already offer, from acute care to physical rehabilitation and skilled nursing facilities.

“You will see providers get very strategic about combining so that they can create integrated networks to serve patients across a continuum of care,” he said.

The pharmaceutical sector has also been a hotbed for deal making in recent years and the prospect of larger health insurers exerting influence over drug pricing will serve as a new catalyst, experts said.

“If you get big payers who get greater and greater scale and cover more and more lives, they have the ability to negotiate for better discounts on drug prices, or maybe even risk-based pricing for drugs,” Giovannetti said. “I would expect pharma to be aggressive buyers of smaller companies” to fill gaps in their development pipeline of new treatments.

Some large drugmakers in recent years have sold off units no longer considered key to their future growth, leaving them with large amounts of cash that need to be redeployed. At the same time, the valuations of promising new drugmakers have skyrocketed, making some executives wary of overpaying.

“The sector that will now be under most pressure to consolidate as a result of this is pharma and specialty pharma,” said one source involved in the Anthem-Cigna deal. “Now the issue is that there is probably one or two deals to be done in Big Pharma before it becomes impossible to do for antitrust reasons.”

(Reporting by Deena Beasley in Los Angeles and Kylie Gumpert in New York; Additional reporting by Greg Roumeliotis in New York; Editing by Michele Gershberg and Alan Crosby)