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Source: Aetna.

In the wake of high-profile mergers that will reduce competition and give insurers greater pricing power, supply and demand in the insurance industry may soon tilt in favor of big insurers -- and at the expense of their customers.

Surely, the merger of titans Anthem (NYSE:ANTM) and Cigna (NYSE:CI) and the marriage of Aetna (NYSE:AET) and Medicare Goliath Humana (NYSE:HUM) will reshape the industry, but are consumer advocates right to cry foul?

First, a bit of background
The first of this summer's insurance megamergers was Aetna's announced $37 billion acquisition of Humana.

Aetna already generates plenty of business selling health insurance plans, including Obamacare plans in 17 states. It also has businesses targeting group life insurance, disability, and long-term care. Overall, Aetna expects those business to produce operating revenue of $60 billion to $61 billion this year.

For its part, Humana is one of the biggest providers of Medicare Advantage products, and it has recently gotten into the individual market by offering plans on the Obamacare exchanges. For the full year, Humana's projected revenue eclipses $54 billion. By acquiring Humana, Aetna broadens its product line to create a mammoth with about $115 billion in revenue and boosts its market share in the commercial market to 13% from 11%, according to Decision Resources.

The second of these megadeals is Anthem's $48 billion merger with Cigna.

Anthem's expected full-year revenue of $78 billion already makes it the nation's second-largest health insurer behind UnitedHealth Group. That revenue comes from providing insurance to employees through employers, managing state Medicaid programs, selling Medicare products, and pitching Obamacare plans in 14 states.

Cigna is smaller, but it's a bit more diversified than Anthem: In addition to health insurance plans, it sells supplemental insurance plans, group disability plans, and life insurance plans. Last quarter, $6.7 billion of the company's $9.5 billion in consolidated revenue came from its global health insurance business, while its supplemental-benefits business hauled in another $749 million and its group disability and life business raked in $978 million. Thus Anthem's purchase of Cigna creates another giant with total revenue of around $115 billion and commercial market share of 21%, according to Decision Resources.

Why these deals are happening
Because of mandated insurance coverage and Medicaid expansion in 31 states, including D.C., courtesy of Obamacare, the health insurance industry is in the midst of a good old-fashioned gold rush.

Historically, the health insurance industry's slow sales growth and anemic single-digit margins made the industry somewhat stodgy. Now, with millions of new customers signing up for insurance and premium revenue being leveraged across fixed costs, health insurers are anything but stodgy.

Since the implementation of Obamacare in late 2013, net income at these four insurers has, with the exception of Humana, climbed steadily:

AET Net Income (TTM) Chart

That profit growth is pretty remarkable in light of all the media attention focused on rising healthcare costs, but insurers argue that in order to remain on solid financial footing, they'll need to offer more products to more people and squeeze even greater costs out of their businesses. Consolidation is a perfect way to do just that.

By eliminating overlapping jobs and technology systems, these companies think they can shave billions in expenses over the coming years. Aetna pegs those annual "synergies" at $1.25 billion by 2018, while Anthem estimates it will be free up nearly $2 billion per year within two years.

So what's the problem?
That potential profit growth may be well and good for these companies and their shareholders, but it will likely draw ire from employers, who will now have fewer insurers to pit against one another to lower costs; doctors and hospitals, which will see their bargaining power diminish; and customers, who are paying increasingly higher monthly premiums.

Insurers argue that by combining, they'll be able to keep a better lid on price hikes, because they'll be leaner and better able to absorb costs. But the jury is out on whether past consolidation in healthcare has done much to save patients money.

For example, the hospital industry has long made similar arguments that mergers benefit patients by reducing costs, but it's not clear that has happened. In 1997, the average charge per stay at a U.S. hospital was $15,100, but by 2011 it had more than doubled to $35,400. And according to the Kaiser Family Foundation, adjusted hospital expenses per inpatient day increased from less than $1,200 in 1999 to $2,157 in 2013.

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Looking ahead
The responsibility of ensuring that monthly health insurance premiums don't get too far out of whack rests with state insurance regulators, not the Federal government, but the White House has become increasingly vocal in asking states to take a hard look at planned premium increases. Although data isn't available for every state yet, the Kaiser Family Foundation has evaluated planned price increases for Obamacare plans in 10 states and found that on average, premiums are going to rise 4.4% in 2016 and that increases in some places could be much greater, such as in Portland Oregon, where average plan costs could climb 16.2% next year.

Those health insurance premium increases could prove to be a hard pill to swallow, given the soaring profitability of insurers. And that's unlikely to change until there's proof that combining insurers will lead to lower insurance prices for everyone.

 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.