- August 3, 2014
- Posted by: Treadstone Management Partners
- Category: Strategy
The healthcare industry is facing dynamic reforms as regulatory, demographic, and economic factors are forcing health insurers to reinvent themselves. In particular, the Affordable Care Act (ACA) bans medical underwriting and restricts earnings by setting the maximum medical loss ratio (MLR) at 85 percent for large insurers (Burns, 5). In this way, the act requires insurers to put all but 15 percent of revenue into patient care. The largest health insurers are publicly traded companies, have plenty of resources, and are unlikely to go out of business. However by limiting profits, the Affordable Care Act is forcing them to develop new models of care delivery. This essentially signals an end to the current form of insurance companies. The suite of activities of health insurers is built for a business model that’s changing.
Traditionally, insurers contracted with providers for advantageous fee schedules and a national network. That was a win-lose negotiation focused on rates. Five-hospital West Penn Allegheny, which is the region’s second-largest chain, had faced bleak finances for the past five years and reported a $26.8 million operating loss for the first half of fiscal year 2011 (Gamble, 5). Under the proposed transaction, Highmark, an insurance company would buy the system for nearly $500 million and assume approximately $1 billion in liabilities. Rating services are closely watching to see how the deal unfolds — S&P quickly revised West Penn Allegheny’s credit rating from negative to “developing,” indicating the game-changing nature of the deal.
With time, more and more insurers have moved to acquire physician practices (Vesely, 5). In November 2011, UnitedHealth Group’s Optum business closed on its acquisition of California-based Monarch HealthCare, an independent practice association with 2,300 physicians, for an undisclosed sum. The deals are raising eyebrows among physicians and raising the hackles of some competing health plans in affected markets. Although some analysts decline to call it a trend, it is clearly a move by insurers and physicians to gain competitive advantage. Critics agree that a prime factor that is driving this change is the complexities of healthcare finances. Although acquisitions of this nature are aimed at simplifying finances for both companies, insurers who propose to acquire providers must carefully analyze the current financial standing of the provider so that the complexities do not increase any further. In particular, insurers who want to take this move, must be aware of, and analyze the asset holdings of providers to avoid the risk of acquiring toxic assets and uncalled-for liabilities. Furthermore, they must go into extreme details about the provider’s history and stakeholders. In order to achieve the success of incorporating the prescription business with insurance, companies must ensure that information is as transparent as possible.
In addition to United Health Group, other large insurers, including Humana and WellPoint, had announced deals involving doctors in 2011. This was a part of a strategy to curb rising health costs that could cut into profits and to weather new challenges to their business arising from the federal health law (Beaver, 5). “Health care costs are still going to rise,” said Wayne DeVeydt, CFO of WellPoint, which entered the business of running clinics in June with the announcement that it would acquire CareMore, a health plan operator based near Los Angeles that owns 26 clinics. “But the only way to stem those costs in the long term is to manage care on the front end.” Four of the five largest health insurers have increased physician holdings in the last year. In addition to the moves by WellPoint and CIGNA, Humana acquired the urgent care chain Concentra in December 2011. Aetna, the third largest insurer, will not be joining the trend, its chief executive, Mark Bertolini, said in an interview.
Consumer reaction may be one of the most fascinating developments in insurer-provider mergers, as the model is likely to create dissonance in attitudes towards quality and price (Gamble, 5). Historically, consumers have reacted negatively when limitations have been imposed on their ability to choose a particular physician or where they can receive treatment. Insurers must make sure that by acquiring providers they are adding value for consumers and not displeasing them by taking away their wants. The move must not be completely profit-oriented and must pay appropriate attention to the consumer.
One reason why the strategy makes sense now is that the health law could reward such arrangements. The law envisions so-called Accountable Care Organizations (ACOs), groups of doctors and hospitals that take responsibility for patients and the financial risk that comes with them. If they cut spending, they would keep some of the savings. Some observers watching the developments say the health law, which in part was sold as a way to rein in insurers, has had the opposite result, opening the door for the companies to take control of even more parts of the health system.
A major factor that will determine whether an insurer should acquire a provider or play the traditional role of an independent insurer is the amount of time and money the company is willing to invest in change management. Large companies with a flexible and updated organizational structure will face minimum risks in handling the acquisition. However, smaller companies that lack the flexible structure, and investment in change management, should rethink their strategies since they might be better off and more efficient by just playing the role of an independent insurer.
Another factor that insurers must take into account is the risks associated with prescribing medications, and providing healthcare services and products. This business involves extremely strict licensing procedures and great limitations and legal constraints. Often a business that acquires another business, must go through a gestation period before becoming successful and profitable. The business must even be prepared to incur losses in this initial period right after an acquisition. This becomes especially difficult and frustrating for small to medium sized businesses which had been doing very well prior to the acquisition. Health insurers must have the capacity to overcome this periods and comply with such standards and regulations. If they fail to meet standards they can jeopardize their current business standing and face dire consequences including a shut down.
The decision to acquire a provider will ultimately depend on how a company can incorporate this new service to their existing service. The dynamism requires a high degree of flexibility which only a few firms have. Health insurers must realize that move to acquire providers is a trend that only a few firms can utilize. They must not get carried away and give in to the dynamism with the fear of losing competitive advantage to other health insurers. The acquisition of providers will certainly be used as a sustainable competitive advantage for a few firms, but independent health insurers will continue to exist and can still be a profitable business. A rash business decision on the other hand, can result in the end of the firm.
Burns, Joseph. “Reform Forces Health Insurers to Reinvent Themselves”. Managed Care. April 2012. Web. 06.05.2014
Gamble, Molly. “The Quiet Takeover: Insurers Buying Physicians and Hospitals”. Becker’s Hospital Review. 07.11.2011. Web. 06.05.2014
Vesely, Rebecca. “Marriage of convenience”. Modern Healthcare. 01.02.2012. Web. 06.05.2014
Weaver, Christopher. “Managed Care Enters The Exam Room As Insurers Buy Doctor Groups”. Kaiser Health News. 07.01.2011. Web. 06.06.2014