Salt Lake City-based Intermountain Healthcare announced plans to merge with Broomfield, CO-based SCL Health to form a 33-hospital, $11B dollar system working in six states. The combined system will keep the Intermountain name, be based in Salt Lake City, and be led by Intermountain CEO Dr. Marc Harrison.
Harrison said that the merger will accelerate the evolution toward population health and value, and “swiftly advance that cause across a broader geography”—a similar value proposition to the system’s previously proposed combination with South Dakota-based Sanford Health, which fell apart last December after Sanford’s CEO stepped down following his controversial comments about mask-wearing.
Intermountain has long been regarded as a national leader in clinical quality, and its integrated payer-provider approach is often cited as a model for US healthcare. The merger with SCL Health will enable expansion of its SelectHealth insurance plan and integrated care model into Colorado, Montana and Kansas, including the fast-growing Denver metropolitan area, making the combined system a formidable player across the Mountain West.
But as we’ve written before, achieving that vision will require a level of integration not often realized in similar mergers, and the burden of proof is on health systems to demonstrate that the merger will create meaningful value for patients and consumers.
We’ll be watching closely to better understand their plans for lowering costs and improving access and quality for patients across the region.
Optum, a subsidiary of UnitedHealth, provides data analytics and infrastructure, a pharmacy benefit manager called OptumRx, a bank providing patient loans called Optum Bank, and more.
It’s not often that the American Hospital Association—known for fun lobbying tricks like hiring consultants to create studies showing the benefits of hospital mergers—directly goes after another consolidation in the industry.
But when the AHA caught wind of UnitedHealth Group subsidiary Optum’s plans, announced in January 2021, to acquire data analytics firm Change Healthcare, they offered up some fiery language in a letter to the Justice Department. “The acquisition … will concentrate an immense volume of competitively sensitive data in the hands of the most powerful health insurance company in the United States, with substantial clinical provider and health insurance assets, and ultimately removes a neutral intermediary.”
If permitted to go through, Optum’s acquisition of Change would fundamentally alter both the health data landscape and the balance of power in American health care. UnitedHealth, the largest health care corporation in the U.S., would have access to all of its competitors’ business secrets. It would be able to self-preference its own doctors. It would be able to discriminate, racially and geographically, against different groups seeking insurance. None of this will improve public health; all of it will improve the profits of Optum and its corporate parent.
Despite the high stakes, Optum has been successful in keeping this acquisition out of the public eye.Part of this PR success is because few health care players want to openly oppose an entity as large and powerful as UnitedHealth. But perhaps an even larger part is that few fully understand what this acquisition will mean for doctors, patients, and the health care system at large.
If regulators allow the acquisition to take place, Optum will suddenly have access to some of the most secret data in health care.
UnitedHealth is the largest health care entity in the U.S., using several metrics. United Healthcare (the insurance arm) is the largest health insurer in the United States, with over 70 million members, 6,500 hospitals, and 1.4 million physicians and other providers. Optum, a separate subsidiary, provides data analytics and infrastructure, a pharmacy benefit manager called OptumRx, a bank providing patient loans called Optum Bank, and more. Through Optum, UnitedHealth also controls more than 50,000 affiliated physicians, the largest collection of physicians in the country.
While UnitedHealth as a whole has earned a reputation for throwing its weight around the industry, Optum has emerged in recent years as UnitedHealth’s aggressive acquisition arm. Acquisitions of entities as varied as DaVita’s dialysis physicians, MedExpress urgent care, and Advisory Board Company’s consultants have already changed the health care landscape. As Optum gobbles up competitors, customers, and suppliers, it has turned into UnitedHealth’s cash cow, bringing in more than 50 percent of the entity’s annual revenue.
On a recent podcast, Chas Roades and Dr. Lisa Bielamowicz of Gist Healthcare described Optum in a way that sounds eerily similar to a single-payer health care system. “If you think about what Optum is assembling, they are pulling together now the nation’s largest employers of docs, owners of one of the country’s largest ambulatory surgery center chains, the nation’s largest operator of urgent care clinics,” said Bielamowicz. With 98 million customers in 2020, OptumHealth, just one branch of Optum’s services, had eyes on roughly 30 percent of the U.S. population. Optum is, Roades noted, “increasingly the thing that ate American health care.”
Optum has not been shy about its desire to eventually assemble all aspects of a single-payer system under its own roof. “The reason it’s been so hard to make health care and the health-care system work better in the United States is because it’s rare to have patients, providers—especially doctors—payers, and data, all brought together under an organization,” OptumHealth CEO Wyatt Decker told Bloomberg. “That’s the rare combination that we offer. That’s truly a differentiator in the marketplace.” The CEO of UnitedHealth, Andrew Witty, has also expressed the corporation’s goal of “wir[ing] together” all of UnitedHealth’s assets.
Controlling Change Healthcare would get UnitedHealth one step closer to creating their private single-payer system. That’s why UnitedHealth is offering up $13 billion, a 41 percent premium on the public valuation of Change. But here’s why that premium may be worth every penny.
Change Healthcare is Optum’s leading competitor in pre-payment claims integrity; functionally, a middleman service that allows insurers to process provider claims (the receipts from each patient visit) and address any mistakes. To clarify what that looks like in practice, imagine a patient goes to an in-network doctor for an appointment. The doctor performs necessary procedures and uses standardized codes to denote each when filing a claim for reimbursement from the patient’s insurance coverage. The insurer then hires a reviewing service—this is where Change comes in—to check these codes for accuracy. If errors are found in the coded claims, such as accidental duplications or more deliberate up-coding (when a doctor intentionally makes a patient seem sicker than they are), Change will flag them, saving the insurer money.
The most obvious potential outcome of the merger is that the flow of data will allow Optum/UnitedHealth to preference their own entities and physicians above others.
To accurately review the coded claims, Change’s technicians have access to all of their clients’ coverage information, provider claims data, and the negotiated rates that each insurer pays.
Change also provides other services, including handling the actual payments from insurers to physicians, reimbursing for services rendered. In this role, Change has access to all of the data that flows between physicians and insurers and between pharmacies and insurers—both of which give insurers leverage when negotiating contracts. Insurers often send additional suggestions to Change as well; essentially their commercial secrets on how the insurer is uniquely saving money. Acquiring Change could allow Optum to see all of this.
Change’s scale (and its independence from payers) has been a selling point; just in the last few months of 2020, the corporation signed multiple contracts with the largest payers in the country.
Optum is not an independent entity; as mentioned above, it’s owned by the largest insurer in the U.S. So, when insurers are choosing between the only two claims editors that can perform at scale and in real time, there is a clear incentive to use Change, the independent reviewer, over Optum, a direct competitor.
If regulators allow the acquisition to take place, Optum will suddenly have access to some of the most secret data in health care. In other words, if the acquisition proceeds and Change is owned by UnitedHealth, the largest health care corporation in the U.S. will own the ability to peek into the book of business for every insurer in the country.
Although UnitedHealth and Optum claim to be separate entities with firewalls that safeguard against anti-competitive information sharing, the porosity of the firewall is an open question. As the AHA pointed out in their letter to the DOJ, “[UnitedHealth] has never demonstrated that the firewalls are sufficiently robust to prevent sensitive and strategic information sharing.”
In some cases, this “firewall” would mean asking Optum employees to forget their work for UnitedHealth’s competitors when they turn to work on implementing changes for UnitedHealth. It is unlikely to work. And that is almost certainly Optum’s intention.
The most obvious potential outcome of the merger is that the flow of data will allow Optum/UnitedHealth to preference their own entities and physicians above others. This means that doctors (and someday, perhaps, hospitals) owned by the corporation will get better rates, funded by increased premiums on patients. Optum drugs might seem cheaper, Optum care better covered. Meanwhile, health care costs will continue to rise as UnitedHealth fuels executive salaries and stock buybacks.
UnitedHealth has already been accused of self-preferencing. A large group of anesthesiologists filed suit in two states last week, accusing the company of using perks to steer surgeons into using service providers within its networks.
Even if UnitedHealth doesn’t purposely use data to discriminate, the corporation has been unable to correct for racially biased data in the past.
Beyond this obvious risk, the data alterations caused by the Change acquisition could worsen existing discrimination and medical racism. Prior to the acquisition, Change launched a geo-demographic analytics unit. Now, UnitedHealth will have access to that data, even as it sells insurance to different demographic categories and geographic areas.
Even if UnitedHealth doesn’t purposely use data to discriminate, the corporation has been unable to correct for racially biased data in the past, and there’s no reason to expect it to do so in the future. A study published in 2019 found that Optum used a racially biased algorithm that could have led to undertreating Black patients. This is a problem for all algorithms. As data scientist Cathy O’Neil told 52 Insights, “if you have a historically biased data set and you trained a new algorithm to use that data set, it would just pick up the patterns.” But Optum’s size and centrality in American health care would give any racially biased algorithms an outsized impact. And antitrust lawyer Maurice Stucke noted in an interview that using racially biased data could be financially lucrative. “With this data, you can get people to buy things they wouldn’t otherwise purchase at the highest price they are willing to pay … when there are often fewer options in their community, the poor are often charged a higher price.”
The fragmentation of American health care has kept Big Data from being fully harnessed as it is in other industries, like online commerce. But Optum’s acquisition of Change heralds the end of that status quo and the emergence of a new “Big Tech” of health care. With the Change data, Optum/UnitedHealth will own the data, providers, and the network through which people receive care. It’s not a stretch to see an analogy to Amazon, and how that corporation uses data from its platform to undercut third parties while keeping all its consumers in a panopticon of data.
The next step is up to the Department of Justice, which has jurisdiction over the acquisition (through an informal agreement, the DOJ monitors health insurance and other industries, while the FTC handles hospital mergers, pharmaceuticals, and more). The longer the review takes, the more likely it is that the public starts to realize that, as Dartmouth health policy professor Dr. Elliott Fisher said, “the harms are likely to outweigh the benefits.”
There are signs that the DOJ knows that to approve this acquisition is to approve a new era of vertical integration. In a document filed on March 24, Change informed the SEC that the DOJ had requested more information and extended its initial 30-day review period. But the stakes are high. If the acquisition is approved, we face a future in which UnitedHealth/Optum is undoubtedly “the thing that ate American health care.”
Even though signs point to a post-COVID spike in health system mergers, retailers, insurers, and other healthcare industry players already far exceed health system scale. Even the largest of the “mega health systems” pale in comparison to other healthcare companies up and down the value chain, as shown in the graphic above. And with the exception of pharma, these other industry players have seen revenues surge during the pandemic, while health system growth has stagnated.
According to a recent report from Kaufman Hall, hospitals saw a three percent reduction in annual total gross revenue in 2020.The majority of the decrease stemmed from a six percent decline in outpatient revenue, as volumes plummeted during the pandemic.
The largest companies listed here, including Walmart, Amazon, CVS, and UnitedHealth Group, continue to double down on vertical integration strategies, configuring an array of healthcare assets into platform businesses focused on delivering value to consumers.
To remain relevant, health systems will need to increase their focus on this strategy as well, assembling the right capabilities for a marketplace driven by value, at a scale that enables rapid innovation and sustainability.
[Readers’ Note: This is the first of two articles on the Future of Hospitals in Post-COVID America. This article
examines how market forces are consolidating, rationalizing and redistributing acute care assets within the
broader industry movement to value-based care delivery. The second article, which will publish next month,
examines gaps in care delivery and the related public policy challenges of providing appropriate, accessible
and affordable healthcare services in medically-underserved communities.]
In her insightful 2016 book, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore,
Michelle Wucker coins the term “Gray Rhinos” and contrasts them with “Black Swans.” That distinction is
highly relevant to the future of American hospitals.
Black Swans are high impact events that are highly improbable and difficult to predict. By contrast, Gray Rhinos are foreseeable, high-impact events that we choose to ignore because they’re complex, inconvenient and/or fortified by perverse incentives that encourage the status quo. Climate change is a powerful example
of a charging Gray Rhino.
In U.S. healthcare, we are now seeing what happens when a Gray Rhino and a Black Swan collide.
Arguably, the nation’s public health defenses should anticipate global pandemics and apply resources
systematically to limit disease spread. This did not happen with the coronavirus pandemic.
Instead, COVID-19 hit the public healthcare infrastructure suddenly and hard. This forced hospitals and health systems to dramatically reduce elective surgeries, lay off thousands and significantly change care delivery with the adoption of new practices and services like telemedicine.
In comparison, many see the current American hospital business model as a Gray Rhino that has been charging toward unsustainability for years with ever-building momentum.
Even with massive and increasing revenue flows, hospitals have long struggled with razor-thin margins, stagnant payment rates and costly technology adoptions. Changing utilization patterns, new and disruptive competitors, pro-market regulatory rules and consumerism make their traditional business models increasingly vulnerable and, perhaps, unsustainable.
Despite this intensifying pressure, many hospitals and health systems maintain business-as-usual practices because transformation is so difficult and costly. COVID-19 has made the imperative of change harder to ignore or delay addressing.
For a decade, the transition to value-based care has dominated debate within U.S. healthcare and absorbed massive strategic, operational and financial resources with little progress toward improved care outcomes, lower costs and better customer service. The hospital-based delivery system remains largely oriented around Fee-for-Service reimbursement.
Hospitals’ collective response to COVID-19, driven by practical necessity and financial survival, may accelerate the shift to value-based care delivery. Time will tell.
This series explores the repositioning of hospitals during the next five years as the industry rationalizes an excess supply of acute care capacity and adapts to greater societal demands for more appropriate, accessible and affordable healthcare services.
It starts by exploring the role of the marketplace in driving hospital consolidation and the compelling need to transition to value-based care delivery and payment models.
COVID’s DUAL SHOCKS TO PATIENT VOLUME
Many American hospitals faced severe financial and operational challenges before COVID-19. The sector has struggled to manage ballooning costs, declining margins and waves of policy changes. A record 18 rural hospitals closed in 2019. Overall, hospitals saw a 21% decline in operating margins in 2018-2019.
COVID intensified those challenges by administering two shocks to the system that decreased the volume of hospital-based activities and decimated operating margins.
The first shock was immediate. To prepare for potential surges in COVID care, hospitals emptied beds and cancelled most clinic visits, outpatient treatments and elective surgeries. Simultaneously, they incurred heavy costs for COVID-related equipment (e.g. ventilators,PPE) and staffing. Overall, the sector experienced over $200 billion in financial losses between March and June 20204.
The second, extended shock has been a decrease in needed but not necessary care. Initially, many patients delayed seeking necessary care because of perceived infection risk. For example, Emergency Department visits declined 42% during the early phase of the pandemic.
Increasingly, patients are also delaying care because of affordability concerns and/or the loss of health insurance. Already, 5.4 million people have lost their employer-sponsored health insurance. This will reduce incremental revenues associated with higher-paying commercial insurance claims across the industry. Additionally, avoided care reduces patient volumes and hospital revenues today even as it increases the risk and cost of future acute illness.
The infusion of emergency funding through the CARES Act helped offset some operating losses but it’s unclear when and even whether utilization patterns and revenues will return to normal pre-COVID levels. Shifts in consumer behavior, reductions in insurance coverage, and the emergence of new competitors ranging from Walmart to enhanced primary care providers will likely challenge the sector for years to come.
The disruption of COVID-19 will serve as a forcing function, driving meaningful changes to traditional hospital business models and the competitive landscape. Frankly, this is long past due. Since 1965, Fee-for-Service (FFS) payment has dominated U.S. healthcare and created pervasive economic incentives that can serve to discourage provider responsiveness in transitioning to value-based care delivery, even when aligned to market demand.
Telemedicine typifies this phenomenon. Before COVID, CMS and most health insurers paid very low rates for virtual care visits or did not cover them at all. This discouraged adoption of an efficient, high-value care modality until COVID.
Unable to conduct in-person clinical visits, providers embraced virtual care visits and accelerated its mass adoption. CMS and
commercial health insurers did their part by paying for virtual care visits at rates equivalent to in-person clinic visits. Accelerated innovation in care delivery resulted.
THE COMPLICATED TRANSITION TO VALUE
Broadly speaking, health systems and physician groups that rely almost exclusively on activity-based payment revenues have struggled the most during this pandemic. Vertically integrated providers that offer health insurance and those receiving capitated payments in risk-based contracts have better withstood volume losses.
Modern Healthcare notes that while provider data is not yet available, organizations such as Virginia Care Partners, an integrated network and commercial ACO; Optum Health (with two-thirds of its revenue risk-based); and MediSys Health Network, a New Yorkbased NFP system with 148,000 capitated and 15,000 shared risk patients, are among those navigating the turbulence successfully. As the article observes,
…providers paid for value have had an easier time weathering the storm…. helped by a steady source of
income amid the chaos. Investments they made previously in care management, technology and social
determinants programs equipped them to pivot to new ways of providing care.
They were able to flip the switch on telehealth, use data and analytics to pinpoint patients at risk for
COVID-19 infection, and deploy care managers to meet the medical and nonclinical needs of patients even
when access to an office visit was limited.
Supporting this post-COVID push for value-based care delivery, six former leaders from CMS wrote to Congress in
June 2020 calling for providers, commercial insurers and states to expand their use of value-based payment models to
encourage stability and flexibility in care delivery.
If value-based payment models are the answer, however, adoption to date has been slow, limited and difficult. Ten
years after the Affordable Care Act, Fee-for-Service payment still dominates the payer landscape. The percentage of overall provider revenue in risk-based capitated contracts has not exceeded 20%
Despite improvements in care quality and reductions in utilization rates, cost savings have been modest or negligible. Accountable Care Organizations have only managed at best to save a “few percent of Medicare spending, [but] the
amount varies by program design.”
While most health systems accept some forms of risk-based payments, only 5% of providers expect to have a majority (over 80%) of their patients in risk-based arrangements within 5 years.
The shift to value is challenging for numerous reasons. Commercial payers often have limited appetite or capacity for
risk-based contracting with providers. Concurrently, providers often have difficulty accessing the claims data they need
from payers to manage the care for targeted populations.
The current allocation of cost-savings between buyers (including government, employers and consumers), payers
(health insurance companies) and providers discourages the shift to value-based care delivery. Providers would
advance value-based models if they could capture a larger percentage of the savings generated from more effective
care management and delivery. Those financial benefits today flow disproportionately to buyers and payers.
This disconnection of payment from value creation slows industry transformation. Ultimately, U.S. healthcare will not
change the way it delivers care until it changes the way it pays for care. Fortunately, payment models are evolving to
incentivize value-based care delivery.
As payment reform unfolds, however, operational challenges pose significant challenges to hospitals and health
systems. They must adopt value-oriented new business models even as they continue to receive FFS payments. New
and old models of care delivery clash.
COVID makes this transition even more formidable as many health systems now lack the operating stamina and balance sheet strength to make the financial, operational and cultural investments necessary to deliver better outcomes, lower costs and enhanced customer service.
MARKET-DRIVEN CONSOLIDATION AND TRANSFORMATION
Full-risk payment models, such as bundled payments for episodic care and capitation for population health, are the
catalyst to value-based care delivery. Transition to value-based care occurs more easily in competitive markets with many attributable lives, numerous provider options and the right mix of willing payers.
As increasing numbers of hospitals struggle financially, the larger and more profitable health systems are expanding their networks, capabilities and service lines through acquisitions. This will increase their leverage with commercial payers and give them more time to adapt to risk-based contracting and value-based care delivery.
COVID also will accelerate acquisition of physician practices. According to an April 2020 MGMA report, 97% of
physician practices have experienced a 55% decrease in revenue, forcing furloughs and layoffs15. It’s estimated the
sector could collectively lose as much as $15.1 billion in income by the end of September 2020.
Struggling health systems and physician groups that read the writing on the wall will pro-actively seek capital or strategic partners that offer greater scale and operating stability. Aggregators can be selective in their acquisitions,
seeking providers that fuel growth, expand contiguous market positions and don’t dilute balance sheets.
Adding to the sector’s operating pressure, private equity, venture investors and payers are pouring record levels of
funding into asset-light and virtual delivery companies that are eager to take on risk, lower prices by routing procedures
and capture volume from traditional providers. With the right incentives, market-driven reforms will reallocate resources to efficient companies that generate compelling value.
As this disruption continues to unfold, rural and marginal urban communities that lack robust market forces will experience more facility and practice closures. Without government support to mitigate this trend, access and care gaps that already riddle American healthcare will unfortunately increase.
WINNING AT VALUE
The average hospital generates around $11,000 per patient discharge. With ancillary services that can often add up to
more than $15,000 per average discharge. Success in a value-based system is predicated on reducing those discharges and associated costs by managing acute care utilization more effectively for distinct populations (i.e. attributed lives).
This changes the orientation of healthcare delivery toward appropriate and lower cost settings. It also places greater
emphasis on preventive, chronic and outpatient care as well as better patient engagement and care coordination.
Such a realignment of care delivery requires the following:
A tight primary care network (either owned or affiliated) to feed referrals and reduce overall costs through
better preventive care.
A gatekeeper or navigator function (increasingly technology-based) to manage / direct patients to the most
appropriate care settings and improve coordination, adherence and engagement.
A carefully designed post-acute care network (including nursing homes, rehab centers, home care
services and behavioral health services, either owned or sufficiently controlled) to manage the 70% of
total episode-of-care costs that can occur outside the hospital setting.
An IT infrastructure that can facilitate care coordination across all providers and settings.
Quality data and digital tools that enhance care, performance, payment and engagement.
Experience with managing risk-based contracts.
A flexible approach to care delivery that includes digital and telemedicine platforms as well as nontraditional sites of care.
Aligned or incentivized physicians.
Payer partners willing to share data and offload risk through upside and downside risk contracts.
Engaged consumers who act on their preferences and best interests.
While none of these strategies is new or controversial, assembling them into cohesive and scalable business models is something few health systems have accomplished. It requires appropriate market conditions, deep financial resources,
sophisticated business acumen, operational agility, broad stakeholder alignment, compelling vision, and robust
Providers that fail to embrace value-based care for their “attributed lives” risk losing market relevance. In their relentless pursuit of increasing treatment volumes and associated revenues, they will lose market share to organizations that
deliver consistent and high-value care outcomes.
CONCLUSION: THE CHARGING GRAY RHINO
America needs its hospitals to operate optimally in normal times, flex to manage surge capacity, sustain themselves
when demand falls, create adequate access and enhance overall quality while lowering total costs. That is a tall order requiring realignment, evolution, and a balance between market and policy reform measures.
The status quo likely wasn’t sustainable before COVID. The nation has invested heavily for many decades in acute and
specialty care services while underinvesting, on a relative basis, in primary and chronic care services. It has excess
capacity in some markets, and insufficient access in others.
COVID has exposed deep flaws in the activity-based payment as well as the nation’s underinvestment in public health.
Disadvantaged communities have suffered disproportionately. Meanwhile, the costs for delivering healthcare services
consume an ever-larger share of national GDP.
Transformational change is hard for incumbent organizations. Every industry, from computer and auto manufacturing to
retailing and airline transportation, confronts gray rhino challenges. Many companies fail to adapt despite clear signals
that long-term viability is under threat. Often, new, nimble competitors emerge and thrive because they avoid the inherent contradictions and service gaps embedded within legacy business models.
The healthcare industry has been actively engaged in value-driven care transformation for over ten years with little to
show for the reform effort. It is becoming clear that many hospitals and health systems lack the capacity to operate profitably in competitive, risk-based market environments.
This dismal reality is driving hospital market valuations and closures. In contrast, customers and capital are flowing to
new, alternative care providers, such as OneMedical, Oak Street Health and Village MD. Each of these upstart
companies now have valuations in the $ billions. The market rewards innovation that delivers value.
Unfortunately, pure market-driven reforms often neglect a significant and growing portion of America’s people. This gap has been more apparent as COVID exacts a disproportionate toll on communities challenged by higher population
density, higher unemployment, and fewer medical care options (including inferior primary and preventive care infrastructure).
Absent fundamental change in our hospitals and health systems, and investment in more efficient care delivery and
payment models, the nation’s post-COVID healthcare infrastructure is likely to deteriorate in many American communities, making them more vulnerable to chronic disease, pandemics and the vicissitudes of life.
Article 2 in our “Future of Hospitals” series will explore the public policy challenges of providing appropriate, affordable and accessible healthcare to all American communities.
Blue Cross Blue Shield of Michigan became the latest health insurer to announce plans to refund money to its enrollees, as reimbursement for healthcare services dropped in the wake of the coronavirus pandemic, with many hospitals and physicians curtailing operations. The company will return $100M to enrollees, in the form of premium discounts and refunds, and said it might increase that amount later in the year depending on how quickly health spending picks up again.
UnitedHealthcare (UHC), Cigna, and Humana are among the other insurers who have recently announced similar plans, with UHC alone slated to give back $1.5B to purchasers. Under the Affordable Care Act, plans must spend between 80 and 85 percent of the premiums they collect on medical care, depending on the segment of the market they cover, and must return excess profits to purchasers if they do not. Insurers are getting ahead of this requirement by returning money now to their employer and individual-market customers.
Meanwhile, some industry observers have begun to question why insurers, who have weathered the pandemic in good financial shape, are not spending more to stabilize the operations of struggling hospitals and physicians in their networks. For instance, Harvard researchers Leemore Dafny and Michael McWilliams proposed this week that insurers extend a “primary care boost” of 50 percent to their payments to doctors through the end of this year. Getting plans to act in concert to support providers will prove to be challenging, of course, and the temptation to free-ride on others’ generosity and instead “spend” excess premium dollars to return cash to customers may prove too strong for its public relations and loyalty benefits.
Or perhaps there are more Machiavellian motives at play: allowing physician practices to suffer financially could result in lower practice valuations, as insurers set their sights on further “vertical integration” plays in the months to come.
Both vertical and horizontal hospital consolidation is correlated with higher healthcare costs, according to a congressional advisory committee on Medicare, in yet another study finding rampant mergers and acquisitions drive up prices for consumers.
The Medicare Payment Advisory Commission found providers with greater market share see higher commercial profit margins, leading to higher costs per discharge, though the direct relationship between market share and cost per discharge was not statistically meaningful itself.
MedPAC also found vertical integration between health systems and physician practices increases prices and spending for consumers. The top-down consolidation leads to higher prices for commercial payers and Medicare alike, as hospitals have more bargaining heft and benefit from Medicare’s payment hikes for hospital outpatient departments.
Hospital consolidation has become a major point of concern for policymakers, antitrust regulators and patient advocacy groups. A slew of prior studies have found unchecked provider M&A contributes to higher healthcare costs, with the brunt often borne by consumers in the form of higher premiums and out-of-pocket costs.
Since 2003, the number of “super-concentrated” markets has increased from 47% to 57%, according to the MedPAC analysis of CMS and American Hospital Association data. Those markets, with a high amount of consolidation, rarely see new providers enter, which stifles competition, and are rarely reviewed by the government.
There’s been little change in antitrust regulation since the 1980s and, though the Federal Trade Commission has won several challenges to hospital consolidation in the 2010s, the agency only challenges 2% to 3% of mergers annually.
MedPAC also found super-concentrated insurance markets actually led to lower costs per discharge compared to lower levels of payer concentration, deflating somewhat hospital lobbies’ arguments that payer consolidation is driving prices higher.
Committee members called for more analysis of how macro trends like an aging population and federal policy could be driving consolidation and impacting prices, leading some to call for a revamp of the hospital payment framework itself.
“We have to change the way hospitals are paid. I don’t see another solution,” said Brian DeBusk, CEO of Tennesse-based DeRoyal Industries, a medical manufacturer. “Are you going to undo a thousand hospital mergers? Are you going to enact rate setting? I don’t see another way.”
MedPAC also looked at vertical integration, where hospitals snap up physicians practices downstream. According to the Physician Advocacy Institute, only 26% of physician practices were owned by hospitals in 2012, but by last year that number had spiked to 44%.
Since 2012, billing has shifted from physician offices to hospital outpatient departments, especially in specialty practices. In chemotherapy administration, for example, physician offices saw almost 17% less volume between 2012 and 2018, while outpatient centers saw a 53% increase in volume, according to MedPAC.
Physicians in hospital-owned practices also refer more patients to the hospital’s facilities and, despite a common stumping point that integration improves quality through care coordination, its effect on quality is “ambiguous,” MedPAC analyst Dan Zabinski said Thursday at the committee’s November meeting.
Despite the mountain of evidence, the AHA published a widely-decried study in September claiming acquired hospitals see a reduction in operating expenses and a statistically significant drop in readmission and mortality rates. The study was criticized for not using actual claims data in its analysis among other methodological and conflict of interest concerns.
Republican leaders in the House Energy and Commerce Committee asked MedPAC to study provider consolidation in August, and the body’s full findings will be included in its March report to Congress.
The insurance industry appears likely to have another big year in 2020, as growth in government and commercial markets is expected to continue.
But a presidential election and new transparency initiatives could throw some major curveballs to payers.
Here are the top five issues and trends to watch out for in the next year:
Medicare Advantage diversifies
Enrollment growth in Medicare Advantage is likely to continue next year, as more than 22 million Medicare beneficiaries already have a plan. But what will be different is diversification into new populations, especially as insurers pursue dually eligible beneficiaries on both Medicare and Medicaid.
“This is being made possible because of strong support from government,” said Dan Mendelson, founder of consulting firm Avalere Health.
Support for Medicare Advantage “transcends partisanship and that has been true under Trump and Obama,” he added.
Get ready for transparency, whether you like it or not
This past year saw CMS release a major rule on transparency that forces hospitals to post payer-negotiated rates starting in 2021 for more than 300 “shoppable” hospital services.
The rule, which is being contested in court, could fundamentally change how insurers negotiate with hospitals on how to cover those services. The rule brings up questions about revealing “private information for the sake of transparency,” said Monica Hon, vice president for consulting firm Advis.
“I think there is going to be a lot of back and forth,” Hon said. “Whatever the result is that will impact how payers and providers negotiate rates with this transparency rule.”
Don’t expect major rules in 2020
2020 is a presidential and congressional election year, and traditionally few major initiatives get going in Congress. But experts say the same goes for regulations as administrations tend not to issue major regulations in the run-up to the vote in November, said Ben Isgur, leader of PwC’s Health Research Institute.
“What we will end up with is much more change on regulations on the state side,” Isgur said.
But new regulations on proposals that have been floated could be released. Chief among them could be a final rule to halt information blocking at hospitals and a new regulation on tying Medicare Part B prices for certain drugs to the prices paid in certain countries.
Congressional lawmakers are still hoping to reach a compromise on surprise billing, but they don’t have much time before campaigning for reelection in November.
A lot of the healthcare direction will be set after the presidential election in November. If a Democrat defeats President Donald Trump, then waivers for items like Medicaid work requirements and block grants will likely go by the wayside.
“Depending on who takes the White House and Congress, are we going to further repeal the Affordable Care Act and replace it or will we have Medicare for All,” Isgur said.
Insurers continue to go vertical in dealmaking
Insurers certainly weren’t shy about engaging in mergers and acquisitions in 2019, and that trend doesn’t appear likely to dissipate next year.
But the types of mergers might be different. Insurers and providers are increasingly looking at deals that would offer a vertical integration, such as acquiring more pharmacy services or a technology company to enhance the patient experience. Plenty of big-ticket vertical deals, such as CVS’ acquisition of Aetna and Cigna’s purchase of Express Scripts, have changed the industry landscape significantly.
“Deals in 2020 are going to be much more around the identity,” Isgur said. “Five years ago we had a lot of horizontal deals where health systems got bigger and regional payers got bigger.”
Payers continue to push patients away from hospitals
Insurers are going to try to find new ways to push patients toward outpatient services to avoid higher costs from going to a hospital.
For instance, “we are seeing a lot of payers not going to honor hospital imaging,” said Hon. “A lot of payers are saying we want you to go outside the hospital and that is a lot cheaper for us,” she said.
Instead, payers will try to steer patients toward imaging centers or physicians’ offices.
“We are seeing that with imaging and free-standing surgical centers now being able to do a lot more,” she added.
Insurers are also starting to use primary care more proactively to “ensure that they understand the needs of the patient, their needs are being addressed,” Mendelson said.
Private equity investment in healthcare has ballooned over the past decade, and experts say 2019 is poised to be another robust year, with potential ripe targets in orthopaedics and mental health and addiction treatment.
Private equity deals in healthcare in the U.S. more than doubled over the past 10 years, according to financial data firm Pitchbook. In 2008 there were 325 deals (including buyers and sellers) and in 2018 that number swelled to 788, a record number of deals representing more than $100 billion in total value.
One of the largest recent deals was private-equity firm KKR’s nearly $10 billion purchase of Envision Healthcare last year, according to Preqin. Envision provides physician services to hospitals and operates hundreds of surgery centers across the country. Another big deal was the public-to-private takeover of athenahealth by Evergreen Coast Capital and Veritas Capital for $5.7 billion in 2018.
“It looks as though 2018 was a record year for the industry, and overall the trend in deal-making has been one of strong growth — this would suggest that 2019 could be another record year unless we see a change in the underlying conditions,” Preqin spokesman William Clarke told Healthcare Dive.
The Envision deal was among the biggest leveraged buyouts ever at more than $4 billion in debt, according to Pitchbook. The practice is criticized in several respects, including that many are financed by loading a company up with mounds of debt.
Globally, healthcare accounts for about 13% of all private equity buy-out deals, according Preqin, an industry research firm.
The deals come amid a frenzy of consolidation, both vertical and horizontal, in the healthcare industry as hospitals and insurers try to scale up to insulate themselves from a number of headwinds and disruptors such as Amazon and Apple.
M&A began to accelerate after the Affordable Care Act, as many hospitals aligned themselves with physician groups, looking for greater reach into a market. But private equity firms “provide an attractive alternative to the traditional hospital-physician alignment models,” according to a recent report from the Investment Funds team at the law firm BakerHostetler.
Private equity investors are increasingly seeking deals in areas that are highly fragmented or areas that still operate in silos and are undercapitalized, Ben Isgur, health research institute leader at PwC, told Healthcare Dive. Fragmented areas provide an opportunity for private equity firms to come in and align a number of practices on the same platform, which increases size and scale to improve leverage in negotiations with payers.
Potential highly fragmented targets include orthopaedic practices, which are likely to see a number of private equity investments over the next few years, as well as gastroenterology and urology, according to BakerHostetler.
For example, “Only 30 orthopaedic practices in the country have more than 20 physicians in a single practice,” the report notes. Private equity firms’ attraction to these practices may have increased last year after CMS changed the rules to allow total knee replacements to be performed in outpatient settings. Previously, the agency only allowed total knee replacements to be performed on Medicare beneficiaries in an inpatient-only setting.
Orthopaedics, gastroenterology and urology also are ripe with lucrative ancillary services such as surgery and imaging centers and have high use thanks to an aging population, the report notes. There are more than 5,700 ambulatory surgery centers across the U.S. that perform more than 20 million surgeries every year, according to the Ambulatory Surgery Center Association. Medicare alone spent $4.3 billion on ASC services in 2016, according to the Medicare Payment Advisory Commission.
Investing in healthcare is also enticing for private equity investors as they seek to balance their investments. The healthcare sector is likely more insulated from a recession due to the aging population and demand for services, along with the projected increase in healthcare spending, according to a research report from PwC.
Another area experts are keeping an eye on for potential deals is in mental health, Isgur said.
“There is a huge need for these services and many of the providers are in small practices. The opportunity is to consolidate and capitalize and then build shared services around technology and back-office functions to create more value,” Isgur said.
Private equity investment in healthcare is not new; but like politics, healthcare is still very local, he said.
By 2008, private equity was already active in a number of areas including long-term care facilities, hospice, ambulatory surgery centers, acute care hospitals and clinical labs, according to a previous Health Affairs report.
Buying to sell
Private equity by its nature comes with controversy, with a business model based on buying for the purpose of selling for a one-time windfall profit for wealthy investors and for taking on big debt to finance the deals.
That leaves workers and patients last, critics say, and the sector’s forays into nursing homes brought those fears to the surface.
For years, unions have been critical of private equity firms in general. The American Medical Association, the nation’s prominent doctors group, is probing private equity investments into medical practices and its influence on healthcare. The report will likely be available in June, according to an AMA spokesperson.
The health of nursing home patients was put in jeopardy at facilities run by ManorCare, one of the largest nursing home operators in the country, according to a Washington Post investigation. ManorCare struggled financially when it was helmed by private-equity firm Carlyle Group and ended up filing for bankruptcy last year, nearly a decade after it was acquired by Carlyle Group.
A spate of nursing home acquisitions by private equity firms led to concerns about quality of care issues. Private equity bought up 1,900 nursing homes over the course of a decade, from 1998 to 2008, according to a GAO report from the time.
Isgur noted the controversy, pointing to the proliferation of freestanding emergency rooms in some states.
Some freestanding ERs are backed by private equity firms and may be closer and more convenient for consumers, but that convenience comes at a hefty cost. One insurer, UnitedHealth Group, has warned about that, too.