1. The following examples all describe rationales for a merger or acquisition within the health care industry.

In the United States, public health insurance is generally available only to people who are old, disabled, or who earn low incomes. As a result, most Americans must purchase private health insurance.1 Health insurance companies contract with doctors and hospitals to provide care for the individuals they insure.

Question: Which of the following scenarios is most likely to create synergy that results in increased total profits of the organizations involved in a merger or acquisition?

Large, national insurers like UnitedHealth and Cigna have thin profit margins, while hospitals and physician groups (a set of doctors that work together as a single firm) are often highly profitable. Noting the profitability of local physician groups, UnitedHealth has decided to begin purchasing physician groups.

St Luke's and St Al's are competing hospital systems in rural Idaho. Hospitals are large fixed cost organizations that require a meaningful quantity of patients in order to cover these costs. In 2014, St. Luke's attempted to acquire the Saltzer Medical Group (Saltzer) of primary care physicians. St. Luke's believes the acquisition will reduce competition not only in these physician services, but also in hospital services. By controlling the physician group, St. Luke's can reduce admissions to St Al's by Saltzer physicians.

Kaiser Permanente integrates health care providers and insurance. Administrative costs are often cited as a source of waste in healthcare. One substantial source of administrative costs comes about because insurers frequently deny claims for medical services, leading doctors to resubmit them. Kaiser has salaried physicians who are not reimbursed per service.

Many companies who merge combine back-office functions in order to reduce costs. Aetna and Humana both sell private managed care plans to older Americans, which require similar back-office activities. However, they historically operate in distinct geographic areas. Because insurance is regulated by state, they will need to maintain offices in all of the markets in which they operate post-merger.