Uptick in health market consolidation

Health Insurance.

While it has been an ongoing trend for years, consolidation is one of the primary strategies being chosen by health insurers and health service providers  in response to the health care reform movement.  Fortune magazine reports that there have been “close to $90 billion worth of health insurance acquisitions since 1996, with about half of those from 2004 and 2005”. (Cyrus Sanati, “What’s next for health insurers”, Fortune, 1/19/11).

24 of the 43 states the two largest insurers had a combined market share of 70 percent or more

The AMA reported that the trend toward consolidation appears to be accelerating in its annual study of the health insurance market.  In an analysis of enrollments in private health maintenance organizations (HMOs) and preferred provider organizations (PPOs) across 43 states and 313 metropolitan markets, the AMA found that 24 of the 43 states the two largest insurers had a combined market share of 70 percent or more.  In 2009 18 of 42 states had two insurers with a combined market share of 70 percent or more.  (AMA.  Competition in Health Insurance:  A Comprehensive Study of U.S. Markets. 2010)

The AMA report offers these additional details:.

• Ninety-nine percent of metropolitan markets are “highly concentrated” according to federal merger guidelines (up from 94 percent metropolitan markets the year before).
• In 54 percent of metropolitan markets, at least one insurer had a market share of 50 percent or greater (up from 40 percent of metropolitan markets the year before).
• In 92 percent of the metropolitan markets, at least one insurers had a market share of 30 percent or greater (up from 89 percent of metropolitan markets the year before).

America’s Health Insurance Plans (AHIP) has expressed concerns about the AMA study methodology and analysis.  AHIP President Karen Ignagni, stated that the study does not include self-insured employers, a group that she contends can comprise more than half the market.  The AMA counters that the majority of self-insured employers are added in their analysis of PPOs.  Self-insured HMO members, however, are not included.

Health care providers and medical suppliers.

The drive towards greater consolidation, however, is also underway among health care providers and medical suppliers.  The AMA has petitioned the federal government to reexamine anti-trust regulations when they are in regard to the establishment of Accountable Care Organizations (ACO).  (See Verity Reports. Can Physicians Take the Lead?  Accountable Care Organizations.  11/1/10 for more information about ACOs). The government response has been favorable.

we can to help you put together a plan that avoids antitrust pitfalls.”

Jon Leibowitz, the Federal Trade Commission chair tells physicians that “If you join together to improve patient care and lower costs, not only will we leave you alone, we’ll applaud you.  And we’ll do everything we can to help you put together a plan that avoids antitrust pitfalls.”  (AMA News.  Accountable care organizations:  How your practice can profit. 9/20/10)

Every aspect of the health care market is a candidate for consolidation.  Bloomberg.com reports that as of February 2011 private-equity firms have “announced 397 pending or completed acquisitions of U.S. health products and services companies in the past five years, with an average size of $449.4 million and a typical premium of 30 percent”.   (Jeffrey McCracken and Elizabeth Lopatto.  EMS Falls After Sale to Clayton, Dubilier & Rice Fails to Meet Expectation.  Bloomberg.com.  2/14/11)

The largest acquisition yet was the 2006 leveraged buyout of hospital operator HCA Inc. for about $33 billion.  Arthur Henderson a financial analyst with Jefferies & Company expects ” to see a lot more consolidation in health services, nursing homes, and long-term care.  The number of competitors is going to get smaller and the ones that survive are going to get bigger.”

Dawn Brock, an analyst with Kaufman Bros, agreed.  “Unless you believe there will be a wholesale repeal of health reform, which I don’t think anybody does, there will be some scenario where there are more covered bodies and more paying customers than you have right now.”   She noted that private-equity firms have raised $50 billion to $80 billion for health industry deals from 2006 to 2010.   They “have very deep pockets right now and will be looking to do more deals in this space”.

Shifting Accountability: The Current State of Bundling Medical Costs

The Center for Medicare and Medicaid (CMS) announced that medical cost bundling may be a valuable tool for reducing medical costs.  The announcement was based on first-year findings from the Medicare Acute Care Episode (ACE) demonstration study.

CMS defines the objective of the study as to test the use of a “global payment for an episode of care as an alternative approach to payment for service delivery”.   (CMS Fact Sheet).  Payment will cover Medicare Part A and B services, including physician services, for inpatient stays associated with certain cardiovascular and orthopedic procedures.

The following hospital systems were selected to participate in the study (click the links to learn more about how each site is implementing the program):   Baptist Health Hospital LLC (Oklahoma City, OK),  Exampla Saint Joseph Hospital (Denver, CO),  Hillcrest Medical Center (Tulsa, OK), Oklahoma Heart Hospital, LLC (Oklahoma City, OK), and Lovelace Health System (Albuquerque, NM).    Medicare reimbursement rates were based on participating hospital competitive bids for each DRG listed for the cardiovascular and orthopedic procedures under study.   The applicable discount was expressed as a discount off the entity’s base DRG payment amount.

CMS established two incentive programs for study participants.   Patients are motivated to think economically when choosing hospital care providers as they can  share up to 50 percent of any Medicare savings realized.   These payments are designed to offset patient cost-sharing.  Hospitals may also offer rewards to clinicians and other hospital study who meet certain measures of clinical quality and service efficiency.   For example, physicians at Tulsa’s Hillcrest Hospital are guaranteed their regular surgical fees and receive  a 25% bonus from Medicare to keep costs down and reduce infection and readmission rates. (USA Today)

While a recent Annuals of Internal Medicine study indicates that surgeons express reservations about bundled payments (Internal Medicine News), the system is already being implemented in the private insurance sector.  Aetna, Cigna, Blue Shield of California and Health Net have signed contracts with a number of hospital systems, including Cedars-Sinai Medical Center and UCLA.   Payors will be charged global fees for the services associated with hip and knee replacements.  Payments will cover  hospital care, physician services, tests, and most other aspects of medical care from admission through 90 days after discharge.   Any savings realized in these contracts will be shared by the hospital facility and clinicians.

Geisinger Health System may have the most extensive experience with a bundled payment system.   Their experience has been cited by the Obama administration.  By managing patient compliance and rewarding staff high quality, Geisigner is being recognized as a possible model.   Geisinger has reduced hospital readmissions by 25%.

Tea Leaves

Everybody Likes a Healthy Wallet

Tea Leaves is the first of an opinion column that will occasionally appear in Verity Reports.

An old insight was confirmed while I was in the process of researching today’s feature article on bundled payments.  I f you want to predict the future of health care policy then simply apply the tenet:  everybody likes a healthy wallet.

One of the goals of Verity Reports is to give readers an edge about how health reform is changing the medical care environment.   Verity Reports targets activities that will create big changes.   Hopefully, our posts will give you the time to prepare for these changes.  Bundling is a perfect topic to illustrate how we are trying to meet this goal. Bundling is a sleeper issue.   There’s not much about it in the news but there is a lot of activity around this concept.   Therefore, bundling may create a lot of change.  It may be the leading factor in driving down  medical costs …..  and solidly securing health reform.

I know that I am making some pretty powerful predictions”.

Bundling is defined by RAND as a payment system that “ would make a single payment for all services related to a treatment or condition, possibly spanning multiple providers in multiple settings”.  (RAND, Overview of Bundled Payment).   The strategy is currently being tested by CMS in a multi-site demonstration study (CMS’ Medicare Acute Care Episode (ACE) study).    I think that bundling is here to stay because, as it is currently defined, it will transform the current model of medical cost accountability.

In the ACE  study, both hospitals and patients will be monetarily compensated for cutting costs.   In effect, bundling creates a dramatic shift in who carries the burden of creating the cost savings.  The burden is shifted away from hospitals and patients to physicians, medical device/supply manufacturers, and pharmaceutical companies.  This gives hospitals and patients more influence than they have ever had on medical cost.   It also strengthens the staying power of health care reform.

Yes, I know that I am making some pretty big predictions.   Bundling is only now being tested as a cost savings strategy.   Even if the results of the ACE study confirms it as valuable, the practice of bundling will not come into full effect until 2018.   In addition, there is no doubt that the campaign against health reform is real.  Next month’s elections could put avowed health reform opponents into power.   Also, putting physicians, medical device/supply manufacturers, and pharmaceutical companies  on the defensive with bundling — three groups with tremendous political power — could create even greater political push-back on current health care reform policy.

Health care reform, however, is not limited to the political arena.   Health care reform will always be tightly bound by a goal that is fundamental to market economics.   That goal is  revenue generation and everybody likes a healthy wallet. Bundling has the potential of saving money.  Insurance companies are already securing bundling agreements with hospitals.   These agreements will be in place regardless of the future of health care reform.   So stop waiting for change to happen.   It’s already here.