Healthcare Business

Is Too Big to Fail Coming to a Health Care Sector Near You?

That some banks are too big to fail is not news. The acronym TBTF has become part of pop investment culture since 2008, though systematized bank bailouts have been in practice since the 1930s with the founding of the taxpayer-backed Federal Deposit Insurance Corporation. The fact that government policy is to not allow banks to fail, with few exceptions, leads to smaller banks being absorbed by bigger banks until too big to fail becomes the norm.

The same thing may now be happening with health insurance. It was last year when Aetna Inc. (NYSE: AET) announced plans to acquire Humana Inc. (NYSE: HUM) and Anthem Inc. (NYSE: ANTM) revealed its intentions to buy Cigna Corp. (NYSE: CI). Only now though are concrete moves being made to cement these mergers, as Reuters reports that two companies are making competing bids for assets that Aetna needs to shed in order to gain merger clearance from the U.S. Department of Justice.

The fact that major mergers were announced at the same time that the Affordable Care Act began to take full effect is no coincidence. Also, the fact that the largest health insurance provider in the country, UnitedHealth Group Inc. (NYSE: UNH) announced its own plans to abandon almost all of its Obamacare business in back in April will put more pressure on the four remaining big insurers to stick with the program. Finally, the fact that these big four will soon be the big two puts them in a very precarious position, especially considering that UnitedHealth already pulled out for financial reasons – reasons that surely apply to Obamacare’s remaining chief insurers as well. If these soon-to-be two providers are tempted to pull out of the public exchanges like UnitedHealth has, Obamacare will have lost its legs.

Though the big health insurers won’t become too big to fail in the interconnected mutually dependent credit-line sense of banks, they may very well become too big to fail from the perspective of the federal government, which cannot afford to have any more major providers pull out of Obamacare. Sandwiched between the government’s need to keep them in and the public pressure not to raise premiums too aggressively (it’s called the Affordable Care Act after all), Aetna and Anthem could easily be caught between a rock and a hard place and eventually be on the receiving end of some form of taxpayer-funded bailout to salvage the system.

Investors need to watch the earnings of the remaining players in the industry carefully in order to see if that’s the direction in which we are headed. If so, health insurance stocks could easily start to look like bank stocks after a financial crisis.

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