The health care industry is experiencing a tremendous amount of merger and acquisition activity right now, which is impacting hospital systems, providers, insurance carriers, health care advisors, and ultimately, consumers. While stakeholders are taking sides, the recent spate of activity should not come as a major surprise as it has been occurring for many years. Do these facts sound familiar?
- Health care markets have seen waves of collaboration, integration, and outright merger these last few years.
- There were 62 HMO mergers and acquisitions this year, up from 28 last year.
- There were 128 independent Blue Cross or Blue Shield Plans 23 years ago. Now, there are only 58.
- Two heavily publicized examples are the acquisition of U.S Healthcare by Aetna Health Plans, and the acquisition of FHP by Pacificare Health System.
- Hospitals have changed ownership frequently. 41% of the 5,200 non-federal hospitals in the U.S. were involved in transactions involving changes in asset ownership. Over the last 10 years, the number of hospitals fell by 9%.
- Physician markets have also undergone tremendous restructuring. Just over a quarter of all practicing physicians remained as solo practitioners, down over a third. There were over 218 mergers and acquisitions of physician practices last year, up from 126 the prior year.
Although they read like headlines in today’s newspaper, they actually are excerpts from a National Bureau of Economic Research white paper done in 19981.
The deals of 10-15 years ago certainly were newsworthy, but they did not garner as much attention outside the industry as the current level of activity. Like it or not, the Affordable Care Act (ACA) has been the catalyst for industry change in many ways, including the recent pace and scope of consolidation. It has led to the current merger and acquisition activity as the various stakeholders rush to gain market share and economies of scale to compete in an increasingly more regulated environment. Additionally, its contentious nature from a political standpoint and potential impact to consumers has resulted in daily news stories and sound bites, moving a once little understood industry into the mainstream.
Similar the publication from 1998, there are two current examples of this consolidation making big headlines: Anthem’s acquisition of Cigna and Aetna’s acquisition of Humana. It may appear as though these deals will stifle competition and increase costs to consumers, but it makes sense to look at the deals with some perspective. First, both deals will face tough governmental review and likely will not be approved for 12-18 months. Assuming both transactions are approved, it will take the new entities months and maybe years, to integrate systems. So, while we certainly should pay attention to the status of these acquisitions, they will not impact most employers and consumers for another two or three years.
Second, it is possible that the reduction in competition will have a short-term impact in the market segments that typically have fully-insured policies, such as the individual and small group markets. However, as the industry becomes more mainstream and transparent, it also is increasingly possible that resilient market forces will drive new and different competition. Innovative companies will bring new products and services to the market, employers will look for different ways to balance great benefits for employees at manageable costs, and a new generation of consumers will demand more personable and affordable health care options. Some positive trends already are emerging from the reduced competition:
- Network contracting focused on quality outcomes for patients
- New funding mechanisms aimed at active cost management by employers
- Health and wellness programs
- Convenience care clinics and tele-medicine
- Public and private exchanges
Lastly, and this is another current trend, self-insuring the risk on an individual (high deductible health plan) and group (small and large employers) basis will continue to pick up steam. Being self-insured eliminates some of the potential anti-competitive practices of the aforementioned insurance carrier mergers, as the underlying claims drive much of the overall health care cost. Individuals can establish a high deductible health plan at a reasonable price, set up a tax-advantaged Health Savings Account (HSA), and track and manage claim payments on their own.
On the other end of the spectrum, these days employers of all sizes can self-insure their health care liability. Since 80-85% of the underlying cost to the employer is actual claims, they need to have the best provider network in place to mitigate costs, preferably one that focuses on quality outcomes for patients. Additionally, employers who self-insure their liability generally take greater control of plan management, putting in place initiatives such as employee education, communication, incentive health and wellness programs, and other value-based plan designs. These initiatives can increase the knowledge-base and accountability level of consumers in an industry that has not been widely understood by the masses. Even with the mergers of Anthem/Cigna and Aetna/Humana, there should be sufficient competition to keep administrative fees – the other 15-20% - in check. Examples include three national insurance carriers, local health plans, third-party administrators, captives, etc.
In conclusion, the current consolidation of hospitals, providers, insurance carriers, consultants, and brokers has been happening for years. The ACA has been a catalyst for change in the industry, speeding up the pace and scope of the consolidation and bringing health care into the mainstream. While it is possible that competition might be stifled to some degree, it is equally possible that resilient market forces will drive an ongoing evolution of the industry. The industry will begin to evolve from one that is not well understood by most consumers to one that is innovative, personalized, and transparent to most. One way to avoid potential anti-competitive practices is to shift from fully-insured policies to some form of self-insured program, which will remove most of the dependence on the insurance carrier and empower individuals and employers to take charge of their own destiny.
1Gaynor, Martin; Haas-Wilson, Deborah (1998) “Change, Consolidation, And Competition In Health Care Markets,” National Bureau of Economic Research, August Working Paper.