Mergers and acquisitions activity in the health insurance sector took a big jump with two recently announced multi-billion dollar deals. UnitedHealth Group announced its intent to buy Mid Atlantic Medical Services for almost $3 billion, while Anthem Inc. has agreed to purchase WellPoint Health Networks for $16.4 billion. These merger announcements are driving speculation of further consolidation within the insurance industry, and raising questions about competition in the sector.

According to a survey conducted at KPMG’s 14th annual Insurance Industry Conference, a majority of insurance companies expect the industry to see an increase in merger and acquisition activity. Of the companies surveyed, 59 percent said they expect to see an increase in merger and acquisition activity over the next year, while 11 percent said they expect it to decrease and 30 percent said they expect the M&A activity to remain at its current level.

Some industry experts claim that the movement of regional insurance carriers to merge into national companies is a tactic to combat the rising costs of medical care while struggling to keep premiums at reasonable levels and still see profits. “The insurance industry is still ripe for further consolidation,” said Scott Keller, president of DealAnalytics.com. “Given the fact that the major players are consolidating, it will put pressure on smaller regionals to get up to scale.”

Insurance companies grow by either gaining new members or through mergers and acquisitions. When the recent economic downturn caused an increase in unemployment, insurers lost members whose insurance was carried by their employers. Many employers are also fighting for lower rates. According to an employer survey conducted by the Kaiser Family Foundation, nearly two-thirds stated they had shopped for a new health plan or carrier in the last year. In response, growth minded companies have sought to expand through acquisitions.

The desire to remain competitive may be another factor contributing to M&A activity. Three years ago, insurance executives said that they saw international finance firms as their greatest competitive threat, but in this year’s KPMG survey they said that their major competitors were other major insurance carriers. Anthem’s proposed acquisition of WellPoint would create the nation’s largest health insurer. According to industry analysts, other large industry companies such as Aetna, CIGNA, and UnitedHealth Group could feel more competitive pressure as a result of the Anthem merger. The perception of banks as a competitive threat has also increased over the past few years, according to the KPMG survey.

Large-scale consolidation in the industry may have some positive benefits. Investments in improving quality of care, customer service, and general operating efficiency require capital outlays that only large corporations can afford. A recent Wall Street Journal article stated, “The Anthem and UnitedHealth deals represent the latest steps in a decade-long consolidation of health plans, doctors, and hospitals. Over time, the moves could lead to greater standardization and simplification of an enormously complex system.”

Not everyone agrees that such consolidation would be good for the nation’s health care system. According to American Medical Association president Dr. Donald J. Palmisano, the Anthem deal “will create a giant company on a scale not seen in an industry where competition has already been reduced.” Dr. Palmisano also said that the recently proposed industry deals “should raise concerns that the country is headed toward a health care system dominated by a few publicly traded companies that operate primarily in the interest of their shareholders.”

While the consolidation of top managed care companies might improve customer service over time, it isn’t likely to solve the national problem of rising health-insurance premiums because consolidating the large corporations reduces competition. “There’s a real worry that these big national networks will make it harder and harder for smaller, local insurers to operate,” said Joe Martingale, a senior consultant at Watson Wyatt Worldwide, an employee-benefits firm. The decrease in competition means it is more likely that health care costs will rise, since competition is one of the factors that keeps prices low.

Regardless of whether industry consolidation ultimately benefits our nation’s health care system, it seems likely that M&A activity in the industry will continue. Driven by competition and the need for capital to deal with the rising costs of medical care, companies in the health insurance sector will continue to see mergers as a useful business tool.