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August 1, 2014

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Insurance merger faces tougher obstacle: Justice scrutiny

A state regulator's approval of a monumental health care merger asks Nevadans to accept many things on faith - including whether a national insurance giant will fulfill promises to look out for local interests.

The decision by Insurance Commissioner Alice Molasky-Arman did little to sooth the concerns of critics, who do not trust UnitedHealth Group, the national giant that's poised to take over Sierra Health Services, Nevada's largest health insurance provider . In fact, the commissioner inflamed some critics by merely requiring the companies to abide by promises they had already made, which basically consist of not passing costs of the merger on to consumers and health care providers.

Among the critics: No less than Nevada Attorney General Catherine Cortez Mastro, who told the Sun she was "troubled and disappointed" by Molasky-Arman's ruling.

"She appears to not have addressed many of the concerns expressed by consumers and the medical community," Cortez Mastro said.

Her remarks send a strong signal that the merger's toughest hurdle is still to come. The merger is being reviewed by the attorney general's office - which has been skeptical of the merger and could intervene - and investigated by the U.S. Justice Department, which must sign off on the deal.

The $2.6 billion deal would directly affect about 630,000 patients covered by Sierra Health, as well as their doctors and other service providers. Critics predict the merger will deliver United an insurance monopoly that the company can use to shortchange patients and providers in order to deliver bales of cash to investors.

Outside of the conditions Molasky-Arman placed on the approval, her decision reveals an informed overseer's perspective on issues that have been debated by the opposing sides with decidedly vested interests. Molasky-Arman's Aug. 27 ruling scored points for and against the merger plans and could be a harbinger of things to come from the Justice Department or attorney general's office.

Characterizing United's potential market concentration has been one of the primary points of contention in the takeover debate. Merger opponents say United would have a virtual monopoly in Clark County, where it would control 95 percent of the health maintenance organization (HMO) market, which would stifle competition and consumer choice. They arrive at this percentage by differentiating between HMO plans and preferred provider organization (PPO) plans.

In contrast, United and Sierra Health officials lump all HMO and PPO plans together to show they only have a 35 percent combined share of the commercial market in Clark County, which arguably gives consumers many insurance options.

Molasky-Arman sided with the companies on this point, saying it would not be in United's best interests to raise HMO rates because the overall insurance market is diverse enough to give consumers other options.

This decision put the commissioner at odds with comments on the merger made by the attorney general's bureau of consumer protection in July . The attorney general's office assumed that HMOs are a separate market and said "health care costs for consumers, especially those enrolled in HMOs in this state, may rise as a result of the merger." The attorney general's office urged the commissioner to "take all actions," including adding conditions to the merger, to ensure consumers enrolled in HMOs are not adversely affected . Molasky-Arman took no such actions.

The commissioner similarly dismissed one of the primary concerns voiced by doctors, saying the combined companies would not have enough market share to unilaterally lower reimbursements to providers. Again, this contradicted the view of the attorney general's office, which had concerns that lower physician and hospital reimbursements would lead to higher patient volume per doctor, which would lower the level of service to consumers and their access to care.

But the commissioner's opinion of the Medicare Advantage market, if echoed by the Justice Department or attorney general's office, could present an obstacle to the merger. Medicare Advantage plans are versions of Medicare, the federal government's insurance for people who are permanently disabled or over 65, that are offered by insurance companies. Molasky-Arman determined Medicare Advantage provides consumers with more benefits for a smaller premium compared with other Medicare plans, and that, because Sierra Health and United are significant players in the market, the merger raises competitive concerns.

"The acquisition might substantially lessen competition or tend to create a monopoly in the Medicare-related markets," Molasky-Arman ruled.

However, the commissioner decided not to intervene because the Justice Department will be in a "superior position" to determine and quantify the concerns.

Gov. Jim Gibbons said the commissioner was restrained by Nevada law from "acting more forcefully to curb these potential threats." Molasky-Arman wrote in her decision that Nevada law required her to approve a merger or acquisition unless it would violate one of seven requirements - only one of which related to maintaining a competitive market.

But the attorney general's office and Justice Department are focused on the antitrust aspects of the proposed merger and have taken unusual interest in the deal. Regulators from the Justice Department or the Federal Trade Commission routinely review mergers larger than $50 million. They can allow a merger, sue to block it or file decrees requiring the companies divest some of their holdings to loosen their control of the market.

It's rare for the federal regulators to move beyond the review into a full-fledged investigation of the proposed acquisition, as they have in this case. Investigations took place in 3 percent of the 1,695 reported mergers in 2005, the most recent year for which statistics are available.

Antitrust experts who are not affiliated with the Sierra-United merger said they would not be surprised to see the Justice Department take some type of action.

If the Justice Department and attorney general's office take no action, the insurance commissioner's conditions will expire within two years of the acquisition. At that point critics of the merger, Sierra patients and Las Vegas health care providers would discover whether United can be trusted with its dominant market position.

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