Recognized by SIPA for Analytical Reporting

Recognized by SIPA for Analytical Reporting

 

Note: The following appeared in the September and October 2015 issues of First Report Managed Care. www.firstreportnow.com. The series was recently recognized in the Specialized Information Publishers Association's annual awards competition, taking second place in the best health care analytical reporting category.

Get Ready for Consolidation

Big insurers are not the only ones trying to get bigger. Smaller firms, health systems, and others are grabbing for a bigger slice of the pie. Here's what it means for managed care ...

Like it or not, get ready for major consolidation in the health care space, and be prepared for its effects on the managed care market. Even if the government blocks the proposed health insurance plan mergers that were announced this past summer, consolidation in some form is going to occur.

That was the consensus of experts contacted by First Report Managed Care (FRMC) to discuss the ramifications of the proposed mergers that would essentially create a “Giant Three” out of the “Big Five” health insurers. Aetna’s $37 billion deal to purchase Humana, as well as Anthem’s $48 billion play for Cigna, leaves only UnitedHealth Group without a partner.

The deals are not expected to be finalized until late next year, and many are wondering if state insurance commissioners and the US Department of Justice will even let the deals move forward. Those we spoke with believe that it hardly matters what is decided about these specific proposed mergers.

“The fact is, even if the deals don’t go through as proposed, these companies will find other ways to get bigger,” Anthony Morreale, PharmD, assistant chief consultant for clinical pharmacy services and health services research, Department of Veterans Affairs, told FRMC. “It’s capitalism at work. If there is room for efficiencies and market grab, these companies are going to seize that.” 

Gaining Reach and Shoring Up Weaknesses

Gary Owens, MD, president of Gary Owens Associates, a medical management and pharmaceutical consultancy firm, agrees. “It’s not so much a desire to consolidate as much as it’s a necessity. They need to create economies of scale.”

Each insurer offers something unique. Humana is strong in the Medicare space, whereas Cigna serves mostly employers. Aetna is spread across the employer and Medicare/Medicaid areas. Anthem brings the power of the regional Blue Cross Blue Shield plans.

Thus, consolidation ends up being “a way to gain reach into an area where you might not be strong,” noted Dr Owens, who is also a member of the FRMC Editorial Advisory Board (EAB). He pointed to Humana’s large Medicare population as one of the reasons Aetna wants to acquire it. “It’s a business imperative, plain and simple,” he said.

Norm Smith, president of Viewpoint Consulting, Inc., which surveys managed markets decision-makers for the pharmaceutical industry, said he “would be shocked if the mergers don’t go through.” And while he agrees that forces of capitalism are at play, the Patient Protection and Affordable Care Act (ACA) is driving the move, as well.

“The ACA limits profitability of the insurance companies,” said Mr Smith, a member of the FRMC EAB. “Eighty-five percent is supposed to be spent on members and 15% on overhead. These companies are playing by the rules, but making the denominator bigger.”

Effect on Managed Care

Some see the mergers as inevitable, but worry about their effect on managed care. “I certainly hope that something other than what’s been proposed goes through,” said Arthur F. Shinn, PharmD, president of Managed Pharmacy Consultants, LLC, and also a member of the FRMC EAB. The new Giant 3 “will be able to control provider rates and establish specific drug formularies that are restricted. I don’t see such consolidation as being in the best interest of society in general or plan members.” 

The payers are insisting that consolidation will be better for members, as it will increase access. But Dr Shinn does not see it that way. “To me it adds up to more restrictions, more utilization control, and more market dominance” he explained. “Eventually I see that spilling over into the employer market.”

Others are also concerned about the impact on consumers. “There are likely to be too few choices, and in some markets no choice at all,” said Barney Spivack, MD, a member of the FRMC EAB “If you are in a managed Medicare plan your choices may be further limited.”

Access to Drugs, But Higher Copays

Mr Smith acknowledged that formularies will become more restricted, but not to the point that consumers will be denied medications outright. “I am hearing that there will be increasingly closed formularies,” he said. “They will be extremely tight, and that will be reflected in lower premiums for those who choose those plans. There will also be plans with more generous formularies offered by the same payers. However, they will be designed with higher copays for the right to access more medications.”

Despite his concerns about consumer choice, Dr Spivack agrees that plan members should be asked to foot more of the bill for access to certain medications. “Just because a medication is available doesn’t mean it should be provided at no cost to the consumer.”

“It’s more of a political issue,” said Dr Morreale. “Will Congress ever draft legislation that restricts the cost of some of these drugs?” In the meantime, “as payers consolidate they will be in a position to negotiate pricing and secure preferred status. You already see it happening with the hepatitis C medications.”

Net Price is What Matters, Not Wholesale Cost

As for consolidation’s impact on the cost of high-priced specialty drugs, some experts think it is either a political matter, or a non-issue because net cost, not wholesale cost, is what really matters.

Mr Smith seconds this, noting that net price is what counts. “What matters in terms of getting on the formulary is not the WAC [wholesale acquisition cost], but the net pricing, which will continue to be driven down for the more ‘commodity-type’ classes of drugs.” Mr Smith cited medications to treat moderate-to-severe pain as an example. “Prices of those drugs will be driven to within 10% of their margin,” he said. “And access to them will be more restricted.”

Mr Smith stressed that this is nothing new for the industry. “Managed care has always lived by the motto, ‘We don’t pay for convenience’,” he said, adding that he believes the move to lower priced drugs and more restrictive formularies would have occurred without insurance consolidation, “but maybe not as fast.”

Perhaps the best glimpse into the future, offered Dr Morreale, is to look to the past—specifically the evolution of formulary systems over the past 10 years. “Many managed care and PBM’s have been able to get dipartite formularies across facilities aligned into 1 formulary with more consistent criteria for use. At the same time, the number of drugs on our formularies have expanded.” The catch, is that to get on those formularies, pharmaceutical companies have had to compete on pricing and show evidence that the drug deserves to be there, and tolerate the fact that their drugs might be niched to specific patient populations.

“The healthcare systems have become more sophisticated and evidence-based,” Dr Morreale continued. “The review and approval process is more standardized. On the use side systems have focused more on internal academic detailing to provide more education to the provider on evaluating cost and benefit.” These trends continue to advance in nearly all market segments and consolidation will only accelerate the process as insurers, PBM’s and health systems get bigger and carry more clout and negotiating power.

Gird For What Is Coming, With Quality in Mind

The bottom line, explained Dr Morreale, is that so-called virtual managed care networks will continue to emerge. “The ACA created the ability to become a virtual managed care network,” he said. Larger organizations can use heft to impose their will in this new world.

Indeed, one of the reasons behemoths such as Anthem and Aetna feel the need to acquire is that hospitals and other groups are growing and consolidating, as well. Some are even setting up their own insurance plans. As hospitals buy practices and some move to compete with insurers, payers are likely feeling the pressure to get bigger.

As for what those with boots on the ground can do now to gird for what is coming—be it due to payer mergers, hospital consolidation, the ACA, or other market pressures—Dr Shinn advises providers to “look for long-term contracts now that you can live with. Also, try to get on top of quality metrics, and position yourself to practice with them in mind. Quality measures are not going away, so get ready for them.”

In fact, Dr Shinn hopes that government approval of the proposed mergers is contingent on more stringent, evidence-based quality measures. “If I had anything to do with it, I would make that a mandate for approval.”

 

Part 2

Consolidation’s Impact on Quality Analyzed

 

Big insurers, regional health systems, small and mid-sized plans, and hospitals appear to be gobbling up all that is within reach. Clinicians are expanding too, forming accountable care organizations, patient- centered medical homes, and independent practice associations.

It is all in the name of growing and competing in a rapidly-changing health care marketplace.

What effect is this chain reaction of growth and consolidation expected to have on quality care? And what will become of the smaller and regional players?

Experts contacted by First Report Managed Care (FRMC) generally agree that the focus on quality and outcomes—although still in its infancy—is here to stay. Some think that it may be necessary to stop straddling reimbursement methods so that metrics-based care can finally grow up. Whether consolidation will facilitate that remains to be seen. Finally, they believe there is a place for local and regional groups, but, alas, only the strongest are likely to survive, let alone thrive.

Our panel of managed care authorities began analyzing the ramifications of the proposed health insurance plan mergers in our September 2015 issue. They agreed that even if the Aetna-Humana and Anthem-Cigna deals are not approved as-is, like water seeking its level, consolidation and growth will find a way.

Virtual Managed Care Organization

As for how these and other mergers might impact pay models that have begun shifting away from fee-for-service (FFS) to pay-for-performance (P4P), one expert thinks that the focus on quality is driving the need for consolidation.

“When organizations start paying for quality, what they are actually doing is creating virtual managed care organizations,” Anthony Morreale, PharmD, assistant chief consultant for clinical pharmacy services and health services research, Department of Veterans Affairs, told FRMC. “The Affordable Care Act is pushing organizations to network. It is telling them, ‘We are no longer going to let you be a standalone and make a lot of money’ [for lesser quality outcomes],” he explained. One way to build networks is to acquire competitors. “It’s easier to get everyone to play nice in the sandbox if you own them.”

Dr Morreale said this dynamic extends beyond big insurers to health plans such as Kaiser and even retail pharmacies. “Mini-clinics are popping up all over the place. Will bigger entities try to buy them?” CVS’s $1.9 billion acquisition of Target’s clinic business is one such example. Though dollar-wise it pales in comparison to the bigger insurance plays, it points to the coming trend.

Arthur F. Shinn, PharmD, president of Managed Pharmacy Consultants, LLC, notes that the larger entities that come out of consolidation will be in a position to demand quality care and base reimbursement on that. “But what will happen to the dollars gained from such efficiencies?” asked Dr Shinn. “Will they be passed onto members or pocketed as profit?”

Straddling Fee-for-Service and Pay-for-Performance

The answer is the latter, believes Jennifer Christian, MD, chair, work fitness and disability section, American College of Occupational and Environmental Medicine. “I think part of our problem is that both insurance companies and providers pay themselves out of the revenue they get to care for patients. That’s why performance metrics are so critically important as safeguards.”

“The problem,” she continued, “is that health care delivery organizations are still too pre-occupied with getting themselves organized administratively and economically to focus much attention on actually changing the way care is delivered and improving the population’s health and outcomes of care.”

“Insurers and big providers are straddling [FFS and P4P] pay models—and they’re skirmishing primarily on metrics and economic issues,” explained Dr Christian, who is also president of Webility Corp. “I am not sure how much actual progress can be made to transform care delivery and actually improve episode outcomes in that kind of environment.”

She said today’s evolving market reminds her of the early 1990s, when true capitation was in vogue. “A California colleague told me of a practice that had patient charts identified by blue and red dots to distinguish the capitated from FFS patients,” she said, the implication being that the physician’s approach to the plan of care was being influenced by the payment arrangements.

True advancements in quality improvement will probably require more radical changes in the system, noted Dr Christian. She explained that in New Zealand, where the government contracts with local health organizations for primary care, providers have a budget to spend on patients–kept separate from their own salaries/income. The primary care delivery organization does not get to use unspent clinical money to pay itself. “The budget that pays the provider is separate from the budget that takes care of the patient,” she said. “I find that quite remarkable.”

While the US is unlikely to adopt that kind of system, she believes that the 2 bucket concept, or something similar, would help move the quality care needle more rapidly. “It would garner trust and make negotiations easier if stakeholders knew that unspent money was going to go into a charity fund, back to the taxpayers, or count toward a premium rebate,” noted Dr Christian.

A Living Laboratory

Gary Owens, MD, president of Gary Owens Associates, a medical management and pharmaceutical consultancy firm, agrees that the quality care movement in the US is at an immature stage. “Right now it is a living laboratory that I think will go through many more iterations,” he explained. Consolidation may help bring things along more quickly. “Bigger organizations have more dollars to allocate to a payment methodology. If that doesn’t work, they can try another.”

Insurers with more heft will be in the driver’s seat, added Dr Owens. “If a big payer wants to change its approach to cancer care, can providers afford to say no? With consolidation, insurers are gaining leverage that will enable them to drive change faster.”

But for some, it may not be that easy, noted Charles Karnack, PharmD, a faculty member at Duquesne University’s Rangos School of Health Sciences. “Some hospitals are barely hanging on, and others are going out of business. Those in the red cannot afford to produce good quality metrics.”

Regional Dynamics and the Developing Market Structure

How will consolidation affect smaller and regional players, as well as specific geographic regions? To get a glimpse, Dr Karnack suggests looking to areas where current competition is light. Take West Virginia, where Highmark BCBS controls 75% of the market. The insurer also has a presence in Pennsylvania, but does not have as high of a market penetration.

“The same exact plan from Highmark is $200 to $300 more per month in West Virginia,” he explained. “They have a corner on the market, and charge what they want. You might see more of the same thing as big insurers join forces.”

In a capitalistic market, the bigger swallowing the smaller is inevitable, added Dr Morreale. “Smaller players will continue to be snatched up when the bigger guys think it makes sense to do so. Even if they don’t buy smaller entities outright, they can have a stake.”

And the trend is not just limited to insurers. “If you’re a health system like Sharp or Scripps, how do you grab more market share in San Diego?” he asked. “You buy practices. And you get so big that payers are compelled to get bigger too. I think this is the beginning of the creation of an oligopoly. Ten years from now you’re going to have just a few giants dominating the market.”

More Health Care Bang for Fewer Bucks

Norm Smith, president of Viewpoint Consulting, Inc., which surveys managed markets decision-makers for the pharmaceutical industry, said that even in the face of powerful national players, certain regional entities will survive. “Those who are aligned with larger provider hospitals with wider networks will do just fine,” he said. “Look at the regional Blues plans [that are independent of Anthem]. Not many people will move from them to national players.”

As for the fate of regional health systems, Dr Owens used the automotive industry as an example. Just as small to midsized carmakers operate successfully amongst behemoths like GM and Ford, so do organizations such as Intermountain Health Care, Sutter Health, and Geisinger Health System.

In the end, Mr Smith hopes that continued consolidation will result in improved communication, which will hopefully translate to more efficiencies.

To facilitate the effort on the provider/ health system side, Dr Christian believes that getting the right people in the right positions is crucial. “I suggest looking for physicians with an MPH degree and population health skills.

She also suggested looking for professionals with medical leadership experience in the military, the VA, companies that run employers’ onsite clinics, and public health sector facilities.

“Try to recruit professionals with experience running programs to deliver care to an entire population—who are accustomed to being held accountable for keeping total costs low, within a budget, or producing specific health outcomes,” continued Dr Christian.

“Learn how they think and what they do. They are familiar with working with finite budgets and limited resources, so they have the skills required to deliver the most health care bang for the least buck.”—Dean Celia 

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Get more managed care news and analysis at  www.firstreportnow.com

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