Three bombshell announcements in the health care sector this month — including Humana’s planned acquisition of Kindred Healthcare — mark an evolution in the “arms race” between insurers and providers, two industry experts told Insider.
The month began with an announcement by CVS Health that it would acquire Aetna, the soon-to-be New York-based health insurance company that earlier this year had tried — and failed — to merge with Humana. A day later, nonprofit health systems Advocate and Aurora said that they planned to merge. Three days after that, San Francisco-based Dignity Health and Denver-based Catholic Health Initiatives, the parent company of KentuckyOne Health, said that they had signed an agreement to combine their systems.
CVS said its deal would “redefine access to high-quality care in lower cost, local settings.” Aurora said its transaction was “poised to transform the industry.” Dignity Health said its expansion would “accelerate the change from sick-care to well-care.”
That may sound like the kind of hyperbole that typically accompanies such announcements and which companies employ to excite their stakeholders, but a 30-year veteran of the industry said the deals would be nothing short of “transformative.”
“The week of Dec. 3 is a week that the health care industry … will never forget,” said David Cyganowski, managing director of Skokie, Ill.-based consulting firm Kaufman Hall. Cyganowski runs the firm’s New York office and advises health care organizations nationwide, including in Louisville.
The announced deals represent an escalation of the traditional health care “arms race” in which insurers merged with other insurers and health care providers merged with other providers as both sought to leverage their greater heft in reimbursement negotiations.
Now, insurers are encroaching upon territory traditionally occupied by health care providers — and hospital systems are trying to expand to the point where they can bypass insurance companies altogether and negotiate directly with large employers.
The escalation is occurring in part because of an industry shift toward value-based care, but also in part by federal regulators preventing insurance giants from growing even larger. The U.S. Department of Justice early this year blocked the mergers of health insurers Aetna and Humana on antitrust grounds, but in doing so, it set the stage for the companies’ recent announcements that saw each find a new partner in related industries.
‘Natural next step’
When horizontal mergers — with companies in the same industry — are not available, vertical mergers — with partners in a related industry — are the “natural next step,” said Daniel W. Sacks, assistant professor in the department of business economics and public policy at Indiana University’s Kelley School of Business.
One way or another, the companies are looking to gain greater control over their industries. But when federal regulators blocked the $37 billion Humana-Aetna and $54 billion Cigna-Anthem mergers this year, the companies had to change their strategies. They couldn’t simply look for other insurers to acquire, as they risked more regulator scrutiny — and more lost time and money. Aetna and Humana worked for more than a year to plan the integration, and Aetna had to pay Humana $1 billion after the merger failed.
Sacks said that after its failed attempt to merge with Humana, Aetna looked for a different kind of partner, and in CVS it found a retail pharmacy operator and pharmacy benefits manager. The deal would reduce pharmacy costs for Aetna because the company now is paying a premium to CVS’s PBM subsidiary, CVS Caremark, that it would not have to pay after the merger.
Sacks said that at least part of that cost reduction probably would be passed to consumers — and that could put pressure on other insurers, including Humana, to lower their prescription drug benefits as well.
The deal also might inconvenience some Aetna customers who are buying their drugs at pharmacies other than CVS. Under the merged company, those pharmacies likely would be out of the Aetna network, which would mean consumers would have to pay a premium to continue to do business there — or go to the nearest CVS.
Sacks acknowledged, however, that the impact of such a deal is difficult to predict because little information is available on what happens after vertical mergers. In horizontal mergers, when insurers merge with other insurers, costs for consumers typically go up.
Humana’s plan to buy a hospital and rehab center operator also represents a vertical merger, Sacks said, but, much like the Aetna-CVS deal, it also reflect the insurers’ continued drive to get people less expensive care.
“I think both these deals we’re seeing (are) a move away from hospitals as a main source of care,” he said.
Cyganowski said the planned hospital system mergers also reflected the providers’ desire to become more serious players in entering value-based reimbursement contracts with commercial insurers.
And, he said, these “super regional” health care systems can negotiate directly with employers, without the need for an insurance company. Many large employers with multiple locations contract with an insurance company that has a larger network that covers many of its employees — rather than having to negotiate with multiple regional health systems. However, if they can negotiate with one super regional health care system, they may be inclined to bypass the insurance company.
The announcements from early December, which also included UnitedHealth Group subsidiary Optum planning to acquire a medical group of kidney care provider DaVita, coupled with planned health care forays of Amazon and Apple, represent “a tipping point” in the industry and have pushed many not-for-profit health systems to abandon their reluctance to merge, Cyganowski said.
Many regional health systems and clients of Kaufman Hall previously hesitated to find merger partners over worries about issues including governance, headquarters and leadership. Since Dec. 3, the conversations have changed, Cyganowski said. Now, the systems are more willing to compromise to get over the formerly difficult issues.
“No one wants to get left behind,” he said.
Correction: The article was updated to correct information about Optum’s planned acquisition.