Two Ways for Blues to Prepare for Industry Consolidation

By Ozgur AdigozelSanjay Saxena, and Cary Trainor

Of all the challenges faced by the Blue Cross and Blue Shield Plans, few are as significant as the likely mergers of the big US health care companies.

Players such as United Healthcare, Anthem, and Aetna (“the Nationals”) have grown substantially through acquisitions and will continue to do so if the proposed Cigna and Humana mergers go through as planned. These mergers will produce tough competitors with diversified portfolios, sturdy balance sheets, greater scale, and advanced capabilities, including consumer engagement, provider collaboration and informatics, population management, and digital channels.

With few exceptions, the Blues are less diversified than the Nationals, more focused on slower-growth commercial risk segments, and they have less capital to invest in new capabilities. Yes, their strong, entrenched local relationships, brand, and other advantages will remain relevant going forward. But the Blues will need to act assertively to maintain market relevance and a competitive financial footing in light of the Nationals’ pending mergers. Assuming that the Aetna-Humana and Anthem-Cigna deals are signed later this year, these plans will enjoy advantages over Blues in three main areas.

To begin with, the merged Nationals will benefit from cost synergies. The new plans have promised a 7% to 8% reduction in sales, general, and administrative (SG&A) costs—equivalent to $1 billion to $1.5 billion—which corresponds to a drop of $2 to $4 per member per month. In addition, these players will likely gain share in local markets and win new negotiating power with local providers, which could enable them to secure more competitive rates and ultimately lower medical costs. Second, the National plans will benefit from stronger balance sheets, helping them to invest in new initiatives and capabilities. For example, consolidation will make it easier for them to invest in best-in-class medical management approaches to improve member health outcomes. Third, the National plans will be better placed to capture pockets of market growth. (See Exhibit 1.) One prominent scenario: an Aetna-Humana combination will be geared for big wins in the high-growth government market.

An additional wrinkle is that consolidation is not evenly distributed. Depending on how Cigna and Anthem reorganize their holdings, some Blue plans may face more direct challenges than others. (See the sidebar.)