Healthcare megadeals may have major long-term impact, Moody’s says

Image result for mega deals

Dive Brief:

  • CVS Health’s plan to buy Aetna could have a significant impact on hospitals, health insurers and pharmacy benefit managers (PBMs), according to Moody’s Investors Service’s Healthcare Quarterly.
  • Payers’ vertical integration strategies are credit negative for hospitals, but hospitals’ plans to make generic drugs and other new strategies are positives, Moody’s said.
  • On the payer side, Moody’s said mergers between health insurers and PBMs are credit negative in the short-term because of increased debt and risk associated with integration. However, in the long run, these deals may lower costs.

Moody’s said hospitals may feel the impact of UnitedHealth’s Optum buying DaVita Medical and Humana investing in Kindred Healthcare. However, Cigna’s purchase of Express Scripts won’t have much of an effect on hospitals.

Payers’ vertical integration strategies, such as buying physician groups and non-acute care providers, are credit negative for nonprofit and for-profit hospitals and put more pressure on hospital volumes and margins, Moody’s said.

The issue comes from payer vertical integration being able to offer preventive, outpatient and post-acute care for lower costs than acute care hospitals. These initiatives will have an increasingly disruptive impact to hospitals’ credit quality, according to the report.

“These strategies would place insurers in direct competition with hospitals, which offer the same services and are also seeking to align with physician groups,” Moody’s said.

On the payer side, two recently announced megadeals, CVS-Aetna and Cigna-Express Scripts, are both designed to control rising medical costs and target drug prescriptions, which now account for nearly one-fifth of total health spending. While payers have been able to limit growth in utilization, medical inflation and sources of medical care, prescription drug costs continue to rise, Moody’s said.

Though Moody’s expects both deals to be credit negative in the short-term, they have the potential to turn credit positive in the long run, especially CVS-Aetna. “The combined company has the potential to lower medical costs as Aetna will be better able to engage with its members as they purchase drugs at CVS retail pharmacies or through its prescription drug programs,” Moody’s said.

These deals will result in most payers having to contract with a PBM owned by a competitor. Moody’s expects PBM competition to remain high. Payer-owned PBMs must still offer the same cost savings to competitors to keep customers.

Out of the recent megadeals, only CVS buying Aetna is expected to have “more significant impact” for payers. The other announced transactions aren’t expected to cause many problems for insurance companies, Moody’s said.

Looking at initiatives that are in development, Moody’s said none of the big-name plans are expected to have much of an impact on the healthcare segments. These include the Amazon, Berkshire Hathaway and J.P. Morgan Chase’s partnership, Apple opening medical clinics and entering the medical record business or nonprofit hospitals forming a generics company.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.