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U.S. OKs Aetna-Prudential Deal

Health: Nation's largest plan must sell its Texas HMO. Six states still need to approve the merger.


By the end of the summer, one in 12 Americans will be covered by a single health insurance company, Aetna-U.S. Healthcare, under a proposed merger approved Monday by federal regulators.

The Justice Department's decision gives Connecticut-based Aetna Inc., already the nation's largest health plan, the green light to proceed with its proposed takeover of Prudential Insurance Co. of America's health-care division. Once completed, Aetna's membership would increase by 50% to 21 million nationwide.

As part of the proposed $1-billion deal, regulators are requiring Aetna to sell a portion of its HMO business in Dallas and Fort Worth.

The merger, which still must be approved by six states, including California, would give Aetna 1.5 million members in California and make the company the state's fifth-largest managed-care operator.

The news was met with concern by doctors and consumer groups, who fear that an engorged Aetna would dominate so much of the market that it would be able to hike premiums and depress physicians' pay without fear of competition.

"Five health plans in California have 90% of the market," said Jack Lewin, executive vice president of the California Medical Assn., which represents doctors. "And that means that health plans become like 800-pound gorillas, dictating to doctors in an arrogant fashion."

The question of size is key for companies in today's health insurance market, where finances are stretched so tight that many in the industry believe the only way to survive is to consolidate.

Indeed, Prudential had been one of the last traditional insurance companies to cling to health care as part of its product mix--until the decision to sell to Aetna in December.

However, while Aetna's growth may help it survive in a difficult market, the company's dominance raises significant questions for consumers.

In Texas, for example, the merger would have provided Aetna with 63% of the market in Houston and 42% in Dallas. For that reason, regulators ordered the company to sell its NYLCare HMO in those areas.

"The merger would really have had an impact in those two cities," said Deputy Assistant Atty. Gen. Donna Patterson, who worked on the case. With such huge market share, Patterson said, Aetna would have been able to force doctors to take low fees and impose rate hikes at will on consumers.

In other parts of the country, the merger does not pose a threat to competition, the Justice Department concluded, despite the new company's size.

"They're big, but when you look at the whole industry, health care is relatively unconcentrated," Patterson said.

By comparison, she said, the manufacture of airplanes is dominated by just two companies.

But the federal government's notion of what constitutes monopoly--or even dominance--in a particular market may not be appropriate when it comes to health care, the CMA's Lewin said.

"Health care is not a discretionary business but one which all of us depend on--and indeed is not aerospace or computers," Lewin said.

In addition to allowing the company to raise premiums with impunity, the merger could make Aetna so unwieldy that it would be difficult to monitor the level of care patients receive, said Ken McEldowney, executive director of San Francisco-based Consumer Action.

The company had notoriously bad luck last year integrating its most recent purchase, New York Life Insurance Co.'s NYLCare division, and consumers complained to regulators in several states.

Aetna spokeswoman Patricia Seif argued that the Prudential deal will enable the company to streamline operations, improving care by giving doctors better access to information on everything from pharmaceuticals to treatments to patient history.

"The database that we have helps physicians manage patients, and it helps members manage illnesses," Seif said. "The database gets richer when we increase the size of our company."

By buying Prudential, she said, the company would also increase the size of its physician networks, giving patients greater choice of doctors.

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