United States: Healthy Dose Podcast: Unlikely Mergers, Acquisitions And Strategic Affiliations In Health Care (Video)

Last Updated: June 21 2018
Article by Elizabeth Scarola

My name is Beth Scarola, and welcome to a "Healthy Dose."

This is the first episode of what will be a bi-monthly podcast during which I will discuss trends and current events in the health care industry. Whether you are a health care provider, health care administrator, medical device manufacturer, or even an interest patient/consumer, I thank you for joining.

On today's episode we are going to take a look at the market conditions that are causing the previously unthinkable. The unlikely mergers, acquisitions, and other strategic affiliations in health care.

Humana-Walmart. CVS-Aetna. Cigna-Lyft.

Why the urge to merge? Why the new market entrants? And why the previously unthinkable is happening now?

I have a solid hypothesis. The caveat is that it is my opinion alone. Judge for yourself whether you agree.

Here it is. There are three reasons for the recent activity in the health care arena.

  1. The cost of health care is too high. Federal, commercial, private and individual payers are demanding cost reduction. Not only are they demanding cost reduction, they are demanding price transparency as the cost of health care continues to outpace our economic ability to pay. And, you have to remember, baby boomers inevitably are aging into demanding more health care.
  2. The Affordable Care Act shifted what used to be a fee-for-service heath care industry into a value-based health care model. This topic is a little complicated, and we'll discuss throughout this episode. But suffice to say that health care providers and payers are now forced to better manage financial risk and look to larger patient and beneficiary panels.
  3. As consumers – you and me – have more control over our health care spending, we're simply demanding better quality care, and improvements in patient experience. I don't want to wait in a doctor's office for two hours. I want to be seen when I want to be seen, and I want the place to be clean, and I want to feel better. As consumer choice continues to drive health care spending, delivering the type of patient experience that consumers will choose becomes essential to health care providers.

Let's discuss each of these topics one by one.

The first – health care costs are too high. The U.S. government, employers, and consumers are demanding a reduction in health care costs. Here are the stats. There has been an exponential increase in U.S. health care expenditures as a percentage of GDP from 1965 (the year Medicare and Medicaid came out) to 2018. CMS projects that by the year 2020, U.S. health care expenditures will reach 20% of GDP if this trajectory does not change. Meanwhile, as I mentioned before, the elderly population in the U.S. is growing rapidly and living longer. Baby boomers are aging into demanding more health care, and as they are expected to live longer it does not bode well for the health care expenditures in the U.S. The government knows this, and wants health care costs to be reduced. We, the population, know this, and want health care costs to be reduced.

Meanwhile, the Affordable Care Act has changed the way in which hospitals and providers are reimbursed for their services. Whereas, in the past, providers were reimbursed in a fee-for-service model whereby they received compensation for each service that they provided – so, for example, if you go into a hospital because you need a hip replacement, you pay not only for the services of the physician replacing your hip, but also for the supplies of the hip replacement, and your stay in the hospital. The ACA created the Center for Medicare and Medicaid Services – (CMS) Innovation Center, which tested a variety of innovative payment models, including accountable care organizations and bundled payments. Quite simply, whereas in the past you would be paying for each of those services within that hip replacement, now providers and hospitals get paid one bundle and have to allocate the cost for that bundle amongst themselves. These new payment models are primarily value-based payment models which reimburse providers and suppliers for the quality of health care they provide – but in some circumstances there are two-sided risk payment models. That means providers bear financial risk if they don't attain certain cost savings metrics and quality metrics that the government sets out. This is forcing health care providers and suppliers to look at entities that otherwise would have been competitors as new partners in the health care delivery model. In our hip replacement example, in prior years, hospitals and providers would have been competing for the dollars associated in the fee-for-service model. But now if they get paid one bundle, jointly and collectively, they'll look to unite to provide health care together. For if they're going to bear downward financial risk for not achieving certain metrics, they'll weather better with more partners to ease that risk.

Lastly- more of us (the patients) are spending our own money on health care. When we are in control of health care spending, hospitals, health centers, providers, medical device manufacturers, etc. will all cater to our demands – the type of patient experience and high quality care that will earn their business. As evidence of the growth in consumer spending, average annual health insurance premiums (for workers and employers) have increased in the last 10 years – as has the increase in deductibles. The percentage of covered employees enrolled in a health care plan with an annual deductible of $1,000 or more has increased (for companies of all sizes) since 2006.... So has the percentage of covered employees enrolled in high deductible health plans and health reimbursement accounts. Again, we – the patients and consumers – are driving change in the health care industry.

Let's talk deals.

This is the fun part. Picture this – the health care system of the future. This is the world in which you are going to get your prescription drugs with your Amazon Prime account, see a nurse at the Apple Clinic, get your benefits statements from Google, and call an Uber instead of an ambulance when you need to go to the hospital. Something is happening. It's time to look around.

Let's talk provider-to-provider deals first.

Clinically Integrated Networks – have you heard of Clinically Integrated Networks (CINs)? These networks are when providers and hospitals come together to deliver health care in an integrated manner. Traditionally they use one type of electronic health record and standardized clinical protocols to ensure high quality for patients. Interestingly, in certain Clinically Integrated Networks, otherwise competing hospitals and providers will join together to offer standardized types of care. Why are competitors coming together to offer better quality health care? There are a variety of reasons, one of which is preparing for changes in how they are paid in which they assume financial risk for how much it costs to care for patients. They can better manage that financial risk by coming together. They can also better cater to patient experience and our consumer demands when they come together and offer standardized care.

Another example of provider-to-provider deals – have you heard about direct primary care?

Don't confuse direct primary care with concierge medicine. The direct primary care model differs from concierge medicine in that concierge medicine requires patients to pay their physicians for each service they receive, often in cash. You show up, go to the doctor, get an appointment when it's convenient, and pay a certain fee for that service.

In contrast, direct primary care patients pay their provider a monthly, quarterly, or annual fee that covers all or most of their primary care services. Ordinarily, if a provider were to manage health care over a certain period of time, it would have required an application for an insurance license. But direct primary care legislation passed in certain states, including Florida, allows providers to offer that type of care to manage a patient's health over a period of time without an insurance license. Why would the government – why would politicians – enact direct primary care legislation? It's simple. In an effort to reduce health care costs, and increase consumer demands and quality of care provided.

This leads me to the elephant in the room: Amazon. Amazon is forcing existing players to revisit their strategy.

At one point, it was rumored that Amazon was going to start delivering drugs right to consumer's doorsteps. Amazon had acquired pharmacy licenses in at least a dozen states. Arguably, Amazon probably thought it would be able to cater to consumer expectations (who doesn't love Amazon Prime?) and reduce costs with its extensive supply chain experience. However, the company later publicly acknowledged that it has no intention of entering this space (at least as of now). It probably did, however, play a part in CVS partnering with Lyft, Blue Cross Blue Shield, and Walgreens to provide rides to beneficiaries to pick up their prescriptions from these pharmacies. Let's think about this for a second. If you're a pharmacy and you're losing retail space to Amazon, and Amazon is going to start delivering drugs to consumers' doorsteps, you want to figure out a way to get consumers back in your shop. If the pharmacies can't deliver straight to you, they'll attempt to compete with Amazon by getting you into their retail spaces, maybe by partnering with Lyft or Uber.

And what about Amazon-Berkshire Hathaway- JP Morgan Chase? I get this question a lot. No one knows exactly how these companies are going to compete in the health care industry space—but, we can go by what the companies have outwardly indicated in the public. They have stated that they are looking to provide their U.S. employees with "simplified, high quality, and transparent health care at a reasonable cost." Hear my theme? Despite all the conjecture, the companies are certainly looking to reduce costs, improve efficiency in care delivery, and employee satisfaction with health care choices.

Just to highlight and emphasize my point, Warren Buffett once said, "The ballooning costs of health care act as a hungry tapeworm on the American economy."

This brings me to Larry Merlo. Larry Merlo is the CEO of CVS Health. When discussing the Amazon-Berkshire threat, he said, "What [Berkshire-JP Morgan-Amazon] aspire to do, we're going to deliver." Here, Merlo is referring to the CVS pharmacy-Aetna transaction. Will CVS start offering primary care services and medical follow-ups from their walk in clinics? Who knows? Merlo says he wants to create a platform that is "easier to use and less expensive for consumers." My theme, again.

Even payers are looking into acquisitions. Think Cigna-Express Scripts. The completion of that deal would mark the end of Express Scripts as the last major independent pharmacy benefit manager, one that has focused on striking deals with drug companies to lower costs for insurers and employers.

But Cigna and Express Scripts say the acquisition would benefit consumers by allowing the two companies to bring together patients' medical and pharmacy histories to improve treatments and lower costs – fits right in with the theme.

Employers are following suit. Apple is launching primary care clinics for its employees this spring. Why are they doing this? To reduce costs, and offer quality health care to their employees right at work. Google's Alphabet has entered into a variety of initiatives and projects to reduce costs and provide better patient experience, including retinal scans for diabetes, smart watches for prevention, and investing in precision medicine initiatives.

I'll leave you with my prediction.

Is the disruption likely to continue? In the short term, yes. I don't know about you – but, I am not going home to get my prescriptions delivered from Amazon—just yet.

Will things be starkly different tomorrow or next year? No – again, my phone isn't diagnosing whether I am predisposed to diabetes—just yet.

But it is critical to stay tuned and look at the long view.

There is good news and bad news. The good news is that in the short term, the three themes are being emphasized: (1) cost reduction and price transparency, (2) managing financial risk, and (3) focusing on patient experience and consumer choice.

Here's the bad news. Some experts and scholars see these various mergers, acquisitions, and strategic affiliations as potentially harmful. They argue, in the long term, deals could result in restricted choices throughout the marketplace, and that would ultimately lead to higher costs and potentially poorer coverage and care for us, the consumers. As an attorney, I know that the Federal Trade Commission and Department of Justice are closely watching for these types of antitrust concerns.

Only time will tell whether (and how) all of these mergers, acquisitions and strategic affiliations will impact the commercial health market.

However, I think they are already driving change in the industry as existing market players are having to re-think their strategies related to innovation, efficiency, transparency, and consumer choice.

See you next time on "a Healthy Dose" where we will take a deeper look into direct primary care in Florida or elsewhere.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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