Healthcare Consolidation and Economic Trends

by Adele Allison, www.DSTHealthSolutions.com 

Question:  It seems like I have been hearing a lot about consolidation in the healthcare market – physicians seeking employment with hospitals, EHR vendors merging, and most recently large insurance companies merging.  Is consolidation real and what impact will this have in healthcare and how we pay for services?

 

Answer: 

Since the Affordable Care Act (ACA) was signed in Mar. 2010, the U.S. has seen a growing trend in healthcare consolidation among physicians, hospitals, vendors and health insurers.  Most recently, Anthem Blue Cross and Blue Shield announced its bid to acquire Cigna for $54 billion; and, Aetna is seeking to acquire Humana for $34 billion.  If these deals are approved, these two carriers will cover over 87.7 million Americans, nearly one-third of the U.S. population, including privatized government insurance programs. 

 

Many have had their eye on the provider consolation trend sweeping the nation.  According to the American Medical Association (AMA), since ACA was passed there has been measurable growth in physician and group ownership by non-physician organizations such as hospitals.  The AMA’s 2014 survey revealed that only 35 percent of physicians described their practices as being independent (down from 49 percent in 2012; 62 percent in 2008) and 53 percent reported being employed by a hospital or large medical group (up from 44 percent in 2012; 38 percent in 2008). 

 

In the non-physician sector, Healthcare Financial Management Association (HFMA) reported 346 mergers and acquisitions in the first quarter of 2015 (up 109 percent from 2014), including 23 hospital transactions totaling nearly $700 million; 55 long-term care deals at $1.6 billion; and, 16 home health and hospice contracts equaling $138.5 million.  Deloitte has modeled such trends and is predicting that only around 50 percent of the current health systems will remain intact over the next ten years.

 

 In the provider world we have also seen the proliferation of independent providers (including hospitals, physicians, and non-physician providers) consolidating operations through legal entities such as accountable care organizations (ACOs), clinically-integrated networks (CINs), integrated delivery networks (IDNs), and other models for care coordination and value-based reimbursement.  For example in the ACO realm, there were 10 ACOs that pre-date ACA.  As of Jan. 2015, there were 748 – a 700% increase in just 5 years.[1] 

 

 Provider consolidation has occurred in part as a defensive strategy for providers who just “want to practice medicine,” but also to address short-comings in coordinated care delivery and to increase the power of providers to leverage a collective influence in contract negotiations with payers.  Both the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) have issued a final statement that eases the burden of antitrust for ACOs and provides associated guidance, allowing these models to better flourish.  Now that payers are joining the consolidation fray, argument is being made that mergers in the insurance industry simply level the field from a contracting and payment negotiation perspective.  

 

The recent merger announcements come from several insurance behemoths and have got the healthcare industry contemplating the impact on the ultimate consumer – the patient.  In July, Anthem (a publicly-traded BCBS plan in 14 states earning $73 billion in 2014 with 38.5 million insured members) announced its intent to acquire Cigna (a plan in all 50 states earning $35 billion in 2014 with 15 million insured members).  That same month, Aetna (with $58 billion in revenue in 2014 and 25 million insured lives) declared it was seeking to acquire Humana for $34.1 billion. Humana earned $48.5 billion in 2014 and covers around 12.6 million medical members including nearly 4 million Medicare Advantage members.  What does this mean for Americans?

 

Consider that there were 321.5 million Americans as of Aug. 2015, then: 


(The following is based upon extensive literature review and intended to be an estimate only.)

Americans

(In Millions)

Comments

Total U.S. Population

321.5

According to U.S. Census Bureau

Traditional Medicare

37.4

Medicare Parts A & B; Source: CMS

Medicare Advantage (MA)

17.7

5 Carriers represent 70 percent of the enrollment:

  • UnitedHealthcare and Humana account for 39 percent of all enrollment
  • BCBS affiliates, Kaiser Permanente and Aetna represent another 31 percent
  • More Medicare beneficiaries are moving to (MA) plans; an increase of 50 percent since ACA enactment
  • Medicare Advantage membership has been rounded and removed from individual company calculations below

(Sources:  KFF and CMS)

Medicaid and Child Health Insurance Program (CHIP) (Less Medicaid Managed Care)

39

Enrollment through May 1, 2015; carves out 32.1MM Managed Medicaid (privatized Medicaid) members that would be included in many of the plans identified below.  (Sources:  CMS and KFF)





(The following is based upon extensive literature review and intended to be an estimate only.)

Americans

(In Millions)

Comments

BCBS Affiliate Plans (Less Anthem BCBS)

66.7

BCBS Association is a national federation of 37 independent BCBS companies that collectively cover 106 million members (1 in 3 Americans).  The Anthem BCBS members (38.5 million) have been carved out; and, 811,500 other Blues Medicare Advantage members have been removed.  These are included in other categories.

Anthem BCBS and Cigna

52.5

Based on 2014 statistics, Anthem BCBS covers 38.5 million and Cigna covers 15.0 million.  Also, 1.0 million Medicare Advantage members have been removed (Anthem 515,687, Cigna 499,296).  (Source: AHA)

Aetna and Humana

29.0

Aetna covers 23.7 million medical lives, 15.6 million dental, and 15.3 million Rx benefit members.  Humana covers approximately 8.6 million medical members (includes TRICARE members).  4 million Medicare Advantage lives have been carved out (Aetna 1,265,290, Humana 3,977,946).  (Sources:  Aetna and Humana)

Kaiser Permanente

8.7

Kaiser has membership in 9 states and DC (CO, GA, HI, VA, MD, DC, CA, OR, WA).  Additionally, 1.3 million Medicare Advantage lives have been remove (actual number 1,317,617)

UnitedHealthcare

30.5

Does not include 4.2 million members covered abroad.  Also, 4 million Medicare Advantage lives have been removed (actual number 3,971,007). (Source: UHC)

TOTAL REMAINING

40

Estimate only due to rounding and variation in dates and sources for enrollment data.

 

Our number of health plans is dwindling.  The concern is that health plans are becoming bigger, not smaller and dominance leaves communities susceptible to market power associated with antitrust.

 

The FTC and DOJ assess antitrust risk using the Herfindahl-Hirchman Index (HHI).  This indicator is used by economists to gauge the size of an entity (for instance, Anthem) in relation to its industry (e.g., insurance); simply stated, HHI measures the level of competition and distribution within a defined market.  For example, one study supports that an increase of one standard-deviation in HHI for hospitals resulted in a 4 percent increase in hospital prices and 6 percent increase in payer expenses even though there was no significant change in the number of admissions.

 

The market dominance resulting from these recent bids to merge has placed providers on edge regarding what the future will hold.  On Aug. 5, 2015, the American Hospital Association submitted a letter and detailed analysis to the DOJ’s department of antitrust regarding the insurance plan mergers noted above.  Their analysis shows the Anthem-Cigna merger alone would impact 817 geographic markets.  Of those markets, 600 serving 45 million patients would experience an increase in the HHI to 2,500, meaning it is likely to “enhance market power.”  This increase in control would result in loss of competition to restrain premium price increases and make the barrier to entry for new payers in the market quite difficult.  In other words, it would thwart choice for the consumer.

 

The other trend to watch is growing privatization of our governmental programs – Medicare and Medicaid.  Medicare Advantage enrollment has increased by 50 percent since ACA was enacted and now represents nearly one-third of the total Medicare beneficiaries and growing.  With around 17 million Americans being cared for under a Medicare Advantage plan, federal payments to these private carriers is expected to run around $155 billion in 2015.  Two of the largest players in this space are Humana and UnitedHealth Group doing business as UnitedHealthcare.  Many payers see Medicare Advantage offerings as a solution to a shrink employer-sponsored coverage market given the rise in high-deductible plans.

 

On the Medicaid side, Kaiser Family Foundation (KFF) reports that over half of the beneficiaries nationwide are receiving care delivered by a risk-based managed care organization (MCO) – privatized Medicaid.  KFF further notes that coming into Jan. 2015, 38 states and DC are leveraging around 265 Medicaid MCO contracts in these markets containing over 90 percent of all Medicaid enrollees.  Medicaid MCOs have increased by almost 20 percent since ACA was signed from 150 in 2010 to 182 in 2014 according to a report by Milliman. 

 

The most prevalent form of MCO contracting is comprehensive risk-based managed care.  Under this model, organizations contract with the state for a capitation rate on behalf of each enrolled beneficiary for services including acute care, and in some instances long-term care.  Even though Medicaid revenues to these MCOs nearly doubled from $54.6 billion to $110.6 billion from 2010 to 2014, Milliman notes that 71 MCOs lost money in 2014. 

 

For HIMSS gulf coast states (Louisiana, Mississippi and Alabama in Region 6), the report shows the following MCO performance:

State

MCO

Non-Profit or For-Profit

Gain or Loss

Louisiana

Amerigroup Louisiana

For-Profit

Loss

Amerihealth Caritas LA

For-Profit

Loss

LA Healthcare Connections

For-Profit

Loss

Mississippi

Magnolia Health Plan

For-Profit

Loss

UnitedHealthcare of MS

For-Profit

Gain

Alabama

None Reporting

NA

NA

 

Be aware that in early June CMS released a proposed rule that establishes new requirements for states and MCOs under healthcare reform.  If finalized, this rule would introduce more regulatory oversight while providing states with greater discretion in benefit design and MCO contracting.  The rule attempts to reconcile managed Medicaid with recommendations made by the HHS Office of Inspector General (OIG) and the Government Accountability Office (GAO).  This is an important rule to watch inasmuch as it aligns Medicaid with other federally-regulated, privatized programs and may directly impact the patients you serve.  A good summary of the proposed provisions can be found at Health Affairs.

 

In summary, experts predict these trends to continue as the U.S. seeks new and innovative ways to cover beneficiaries, deliver care and engage patients.  This means community health centers will need to continue monitoring activities in their local markets and encourage the plans in their area to work in collaboration to structure benefits that help patients, minimize disruption to the provider-patient relationship and assist in common goals such.

 

 

[1] Cavanaugh, Centers for Medicare and Medicaid Services, The CMS Blog, ACOs Moving Ahead, Dec. 22, 2014. (Updated with Leavitt Partners data obtained at HIMSS15)