Larger companies will provide better information systems.

UNITEDHEALTH Group Inc.'s recent $9.2 billion acquisition of California's PacifiCare Health Systems Inc. is part of a trend of consolidation in the health insurance industry that's beneficial for Californians.

This deal creates one of the nation's largest private health plans, with about 26 million subscribers and follows the even larger merger of another California based health insurer, Wellpoint Health Systems (the corporate parent of Blue Cross of California) with Indiana-based Anthem. Both deals were similar in that they paired California-based companies with large insurers that had little or no presence in California.

Why should Californians care if these insurance companies merge? The answer is that these larger companies offer Californians the potential for significant benefits at very little cost. As we all know, health care costs are increasing at alarming rates once again. One of the primary causes is a structural weakness in our health care system--the lack of good information on health care prices and quality that could be used by consumers and employers to demand better value and greater efficiency from health care providers.

Computerized information systems make such information routinely available in almost every other aspect of our economy but not in health care. The main reason such systems have not been developed is the high cost of developing the needed systems to handle complex processes in our fragmented health care system.

The proposed merger offers the promise that the new, larger companies, with large insured populations, could undertake the development of the next-generation health care information systems, which will cost billions, but when spread across millions of members become more feasible.

Based on economic grounds, both deals were held up by regulators and are subject to post-merger, regulatory oversight. As it turns out, these concerns were misplaced. The competitive marketplace will protect consumers. The concern, raised by regulators and consumer groups, is that Californians will have to pay higher premiums to help finance these mergers. The truth is, all health insurance companies try to get the highest price they can at all times--with or without a deal. But health insurance premiums, like other prices, are set in a competitive marketplace. So if, post merger, the companies tried to raise their prices while their many competitors didn't, they would lose market share and have less revenue, not more. A study of health insurance in California by the University of California, Irvine showed that a mere $10 per month difference in premiums caused 25 percent of members to switch health plans.

In both mergers, the acquiring companies have very little presence in California. If they did, then the merger might contribute to higher prices, but since they don't, competition in California health insurance markets remains strong, making unilateral price increases unsustainable. In other states, however, the combined company may have a higher market share (although Federal regulators have required some divestitures) and thus, premium rates could rise there--in which case Californians would get a subsidy.

The net result of these mergers going forward is that Californians get the benefit of having access to new, badly needed information systems that could help to control health care costs and improve quality without having to pay substantially higher prices since the cost will be spread across all members.

Like it or not, we are moving in the direction of consumers playing a much greater role in both paying for their health care and in making decisions about which services to use and where. But, without information, health care consumers cannot be "informed consumers." These new companies offer the promise of such information becoming readily available for the first time in health care. We should all hope that they can pull it off.

Glenn Melnick directs USC's Research Center for Health Financing, Policy and Management.