Double-digit premium increases, double-digit earnings growth, increased government spending on health care and a government that wants the major players to compete and succeed—what’s not to like about the managed care industry?

Many analysts have been quite bullish on the managed care sector, and investors have been listening and bidding up share prices to levels that have given option holders an early Christmas present. And as a new surge of consolidation hits the industry, it will be difficult for anyone to claim that competition is getting stiffer. Although rarely an issue in managed care, if one rumored deal goes through, antitrust problems will certainly arise, and they should.

Late last year, when Anthem (NYSE: ATH) announced its $16.4 billion acquisition of WellPoint Health Networks (NYSE: WLP) and UnitedHealth Group ((NYSE: UNH) its $2.95 billion deal for Mid Atlantic Medical Services (NYSE: MME), consolidation was on everyone’s mind. But the reality was that the urge to merge was not as great as expected, with mostly small deals announced in the subsequent five months, many of which focused on the Medicaid and Medicare sub-markets. There was not even a whisper about antitrust concerns in the two largest deals last year.

But in the first week of April, various announcements and rumors in the managed care industry put the spotlight on this sector once again. On April 5, Oxford Health Plan’s (NYSE: OHP) shares jumped by more than 10% on speculation that WellChoice (NYSE: WC), a New York-based Blue Cross and Blue Shield health insurer, would make a bid for the Connecticut-based company. The two companies obviously can’t comment, but there are several reasons why this would be a difficult deal to consummate, not the least of which is antitrust concerns.

The combined company would have more than $11 billion in revenues this year, but more importantly, more than a 30% market share in the New York metropolitan market. This would certainly get the attention of New York Attorney General Eliot Spitzer, who the prior week threatened to punish health insurers in New York if they are not more forthcoming in providing patients with information about how they decide which procedures are medically necessary.

His office released results of a survey which apparently showed that virtually all health insurers violated the law by failing to disclose the criteria they use to determine payment eligibility. As Wall Street now knows, when he sets his sights on something, Mr. Spitzer is like an unleashed pit bull (and proud of it).

On the same day that the WellChoice/Oxford news hit the market, Cigna (NYSE: CI) announced that it was raising its first quarter and full-year earnings expectations, citing cost-cutting efforts and better management of medical costs. Mr. Spitzer would most likely contend that the latter effort was the result of paying for fewer medical procedures, necessary or not. But Cigna did not just bump up its first quarter estimate by a few pennies; rather, first quarter estimates were increased by a whopping 40% from February’s estimates to a range of $1.75 to $1.95 per share, excluding certain items. Not only did Cigna’s shares jump by more than $7.00, but the news sent the entire sector up.

A week later, UnitedHealth Group reported a 37% increase in first quarter earnings and raised expectations slightly for the entire year. Now, investors have it both ways, as share prices are rising either because of potential acquisition premiums or higher earnings. Either way, investors win.

Merrill Lynch came out with an investment brief in March stating that consolidation should continue in the managed care sector, with regional players the obvious targets as they come under increasing competition from the large insurers. Oxford was one of the companies mentioned as a potential target (they may have gotten that one right), but so were Coventry Health (NYSE: CVH), Health Net (NYSE: HNT) and First Health Group (NASDAQ: FHCC). A WellChoice/Oxford merger is interesting because it is seen as somewhat defensive for both companies. Once it settles its legal problems concerning the company’s IPO, WellChoice would be a logical target for Anthem, and for years, Oxford has been mentioned as an attractive candidate for anyone interested in the New York metropolitan market.

The problem with further managed care consolidation is that the amount of competition will decline from an already negligible level today. The Bush Administration’s Medicare prescription drug benefit, with unusually generous "bonus" payments to the managed care sector, assumes competition among the health plans will keep costs from soaring beyond what we can’t pay for anyway. That may hold water in theory, but with the structural flaws and lack of real competition (at least with regard to pricing) in today’s managed care environment, that dog just don’t bark.

Increased size and market share is supposed to give health insurers the power to bargain for lower prices with providers, especially hospitals. But that was the news of the mid-1990s, and no one seems to be willing, or able, to keep prices down today. Employers lost the desire to fight premium increases several years ago, and even with the economic slowdown in 2001 and 2002, insurers were able to pass on double-digit premium hikes.

Hospital consolidation is supposed to give them bargaining power over managed care companies to keep prices from falling, managed care consolidation is supposed to give insurers bargaining power over hospitals to keep prices from rising, and the consumer is supposed to start price shopping for the best quality health care at the best price in a market that is really not too interested in consumers poking around for information. When was the last time you or your neighbor price-shopped for a hospital or a particular physician?