While most of us don’t spend our time reading about insurance industry news — since we’re mainly concerned with the question “where the heck do we get the cheapest rates” — you may have missed what Cigna Corp. has been up to. The company acquired the Medicare carrier HealthSpring Inc. for $3.8 billion. And why do we care about this?
The acquisition is a sign of how health insurance companies are changing the way they’re doing business as federal health care reform moves forward. A progression of changes will take place through 2014 that are geared toward achieving universal, cheap health care as well as a more fair relationship between insurance companies and their customers. With its acquisition, Cigna is responding to major demographic shifts in the American population — in what is likely a positive way for the insurance / consumer relationship as a whole.
Cigna and the Baby Boomers
Cigna has basically focused its business on employers in the past — and employment-based health benefits have long been the number one source of cheap health insurance for more than half of Americans. But now, Cigna will become a big supplier of a burgeoning customer base: Medicare prescription drug plans and Medicare Advantage coverage.
Every day for the next 10-15 years approximately 10,000 Americans will turn 65. The graying of the Baby Boomer generation and their need for cheaper insurance products is driving companies like Cigna to re-think where their profit base will be over the next decade. With this deal, Cigna picks up 340,000 Medicare Advantage customers in 11 states and about 800,000 stand-alone prescription plan policy holders.
Currently, about 46 million Medicare beneficiaries have Advantage plans, with the biggest players in the sector being UnitedHealthcare and Humana. Cigna’s move could mean that some of the smaller Medicare providers could suddenly look ripe for profitable takeovers, notably Universal American and WellCare. (Stocks in both of those companies went up with the news of the Cigna acquisition was made public.)
Acquisitions Should Help to Stabilize Rates
While any insurance premium rates are initially based on risk profiles, cheap prices disappear fast when companies are having to protect their profit margin by getting more from their customers. Since federal health care reform now requires companies to spend a greater percentage of premiums on actual benefits and services, the companies have been fighting back with fees, dropped or altered coverage — pretty much any tactic to keep their profits in line with past numbers.
If products like Medicare drug and Advantage policies get consolidated among the major players in the industry, the rates will naturally be kept at cheaper levels because those companies will have a broader profit base to sustain their overall bottom line, plus they’re diversified in other sectors like auto, home, and life.
Now, granted, tracking industry news and really understanding the potential ramifications of events like the Cigna acquisition can be pretty headache inducing. However, it is important to realize that the insurance industry is going to change in big ways between now and 2014, and those changes will effect everyone’s ability to find and maintain cheap insurance rates.