THE SILENT TAKEOVER OF AMERICA'S HEALTHCARE DOLLARS

A quick look into healthcare systems’ profitability shows a disquieting? trajectory.? These institutions, central to patient care, generate 3-5% profit margins in good years and back-to-back losses in tougher times.? In contrast, insurers, Pharmacy Benefit Managers (PBMs), pharmacies and other intermediaries, generate significant profits without ever treating a patient. According to the Economist, the revenues of the top nine middlemen accounted for 45% of America’s healthcare bill in 2022 vs. 25% in 2013. And these intermediaries include eight of the top 25 largest S&P companies.

UnitedHealth Group, the largest of the big health companies, is the fifth biggest company in the U.S. in terms of total revenue. CVS, another giant, dispenses 25% of all drugs, while three PBMs handle 80% of all prescription claims. Given the high level of power concentration, these companies find limited growth opportunities in their primary markets. As a result, they have pursued an aggressive diversification strategy, further cementing their prominence. When ACA capped the profit margins of insurers to between 15-20% of premiums, it added more fuel to the fire and pushed these companies to look elsewhere for profits. ??

Between 2013-2023, the nine health giants spent $320B in over 130 M&A transactions. CVS’s $87B acquisition of Aetna, Cigna’s acquisition of Express Scripts, a PBM, for $67B, and Change Healthcare’s acquisition by United for $13B, are some prime examples. Now this group is buying companies in the provider space. United has spent $23B in the past six years buying providers and currently?looks after 20M patients through a network of 2,200 clinics.

The outsized profits margins of the big health have naturally attracted several newcomers whose impact has been relatively muted.? These include the Big Tech as well as tradition-busters such as Mark Cuban, who is building a cost+ online pharmacy. Unfortunately, the entrenched nature of the big health who have built their complex businesses over decades, makes it unusually difficult for the new breed to make meaningful progress.

The stark contrast between struggling healthcare providers and the flush intermediaries raises concerns about the future of patient care. While there is no straightforward solution for dismantling these oligopolies, a combination of antitrust enforcement, regulatory reforms, and the persistent efforts of new market entrants might offer a glimmer of hope.