Payers and providers race to consolidate
Most consumers are aware that healthcare in America is broken into two parts — health insurance and health services. The two sectors are often referred to as “payers” and “providers,” and they negotiate with each other to determine healthcare prices. In order to gain more negotiating power, and to remain profitable in a changing healthcare economy, both sides of the industry have been engaging in rapid consolidation. This means mergers and acquisitions have been making headlines for years, and healthcare business deals aren’t expected to slow down anytime soon.
According to analyst reports from Deloitte and Irving Levin Associates, provider deals have increased 14 percent every year since 2009. On the payer side, two of the country’s largest insurers — Aetna and Anthem — are in the process of buying two other large insurance companies, Humana and Cigna, respectively.
Both payers and providers are in a race to consolidate, growing their businesses through buying peer companies. The impact on consumers, however, could be drastic and expensive.Understanding payer and provider deals
Payer consolidation is fairly straightforward. As previously mentioned, Aetna is trying to buy Humana, and Anthem is trying to buy Cigna. The companies say consolidation will reduce their administrative costs, allowing them to offer more cost-effective health plans to consumers.
Provider consolidation, however, is a little more complex. There are many types of deals contributing to the rapidly consolidating provider industry.
It was once the standard for doctors to operate their own businesses. But now that healthcare has become more complicated, more physicians are preferring to be employed by a hospital or large physician practice.
A recent example in Nashville is the February acquisition of Sumner Medical Group, a 32-doctor and four-location practice in Sumner County, by Saint Thomas Medical Partners. Saint Thomas’ medical group is a good representation of provider consolidation — the system has 360 physicians and 89 practice sites across Middle Tennessee.
Another type of provider deal is hospital consolidation. Companies like Middle Tennessee’s HCA Holdings, Community Health Systems and LifePoint Hospitals are three of the biggest hospital operators in the country. Their business model is all about consolidation — buying up independent hospitals and growing their network into more markets and states.
Many stakeholders say provider consolidation is good for consumers, because it leads to better coordinated care. In such a system, a patient could visit a primary care provider, get a referral for a diagnostic test, have an MRI performed and then visit a hospital for surgery, all in the same health network.
However, both payers and providers are generally opposed to the other sector consolidating. Both sides are consistently trying to out-leverage each other, and consolidation on either side can negatively affect the other. The bigger the hospital, the more likely it can negotiate higher payments from insurance companies. Likewise, the bigger the insurer, the more negotiating power it has to provide “take it or leave it” rates.
So with more deals on the horizon, what can consumers expect?
1. Neither payers nor providers are going down without a fight
Both sectors are flexing their influence and trying to convince regulatory agencies that the other group’s consolidation will negatively affect consumers. America’s Health Insurance Plans, a lobbying group that represents insurers, released a report in 2015 that said hospital consolidation would result in higher premiums for consumers. The organization argued that provider market power results in higher payments that trickle down to the consumer via their insurance costs.
The American Medical Association however, has reported the opposite. The AMA argued that greater health insurer consolidation leads to price increases, and that the pending insurance mergers are occurring in markets where there has already been a “near total collapse of competition.”
2. A lack of competition is bad for consumers
Both payers and providers argue that consolidation of the opposite sector will raise prices for consumers — and they are probably both right. Competition in any industry typically leads to lower prices, and as healthcare continues to consolidate on all sides, stakeholders have less incentive to provide increasing value, or better services for lower cost.
A Congressional Budget Office report released in February supported providers’ claims on this issue, saying that a lack of insurance competition was a cause of rising premiums across the country. On the other hand, the Federal Trade Commission blocked a hospital merger in Chicago last December, saying the deal would hurt competition and drive up healthcare costs.
3. Federal agencies will be watching
Both the Department of Justice and FTC have made healthcare consolidation a priority in recent years, as the dismantling of the Chicago deal shows. In just the last two months of 2015, the FTC also blocked similar hospital mergers in West Virginia and Pennsylvania.
The agencies are expected to make a decision on the insurance mergers sometime this year. The AMA has formally asked the DOJ to block the deals, saying they would violate competition standards in several states, including Tennessee.
Even with regulatory agencies watching, these deals are likely to continue in their many forms. It will be interesting to see how the market — and healthcare consumers — will react.
This column originally appeared in the March 9th edition of The Tennessean.
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