Is Blue Cross’ parent company too big, or not big enough?

Crain’s Chicago Business reports:

“In health insurance, as in so many businesses, it helps to be big.

Larger insurers enjoy many advantages over smaller rivals. They have more clout in pricing negotiations with doctors and hospitals, greater economies of scale in back—office operations, broader customer bases that limit risk. “The bigger you are, the better off you are,” says analyst Vishnu Lekraj, who follows the health insurance industry at Chicago-based Morningstar.

Size has paid off for Health Care Service Corp. of Chicago. The owner of Blue Cross Blue Shield plans in Illinois, Montana, New Mexico, Oklahoma and Texas is the nation’s sixth-biggest health insurer by market share. With dominant positions in all its markets, HCSC books more than $20 billion in revenue annually. HCSC’s deep pockets have helped it absorb cost pressures under Obamacare and capitalize on expansion opportunities created by health care reform.

Trouble is, “big” is a relative concept that changes over time. A company that’s large by today’s standards may not seem so big tomorrow.

Industry consolidation can raise the bar quickly, creating giants of unprecedented scale. Megamergers magnify the benefits of size to the detriment of companies that don’t keep pace. Goliaths are forming in the consumer products, technology and telecommunications industries, to name just a few. Sure, we’ve seen some corporate bust-ups, but many of the companies created in those transactions already have been scooped up by larger entities.

Now health insurance appears poised for consolidation: No. 5 Humana is looking for a buyer. A Humana acquisition could lead to more health insurance tie-ups, Lekraj says. If so, HCSC’s base of 15 million customers could start looking smaller.

The extent to which consolidation shifts the competitive balance against HCSC would depend on how much strength expanding rivals gain in local markets. Despite its enormous size, health care remains a largely local and regional business. Few hospital networks and doctors groups operate nationally.

This makes health insurance a local game, too. HCSC has played it exceptionally well, competing effectively with rivals more than twice its size. HCSC plans control anywhere from 50 to 70 percent of their individual markets.

Humana wouldn’t give a buyer the heft to match HCSC in any of those markets. Still, cost pressures have unleashed a consolidation trend that may eventually jump local boundaries. Hospital networks already are expanding across broader geographic areas, which eventually could lead to the formation of national chains. In the process, they’re acquiring physicians groups.

Leemore Dafny, an economist at Northwestern University who studies health care markets, says product capabilities matter, too. Humana, for example, is strong in Medicare Advantage plans, a sector that’s growing as more baby boomers qualify for Medicare. Dafny says an acquisition “could possibly create a more robust competitor to HCSC in the Medicare Advantage space.”

Of course, HCSC could respond with deals of its own. With an accumulated surplus of more than $10 billion, it has plenty of coin. And CEO Patricia Hemingway Hall has shown an appetite for acquisitions—she picked up Blue Cross & Blue Shield of Montana in 2013. A spokesman says HCSC doesn’t comment on possible deals.

Another advantage for HCSC is its status as a private company owned by policyholders. Unlike publicly traded competitors, it’s not subject to pressure from Wall Street analysts and activist investors who often push companies into mergers.

So Hall has plenty of options and can take her time. But the long-term imperative is clear: Keep HCSC big.