Health insurers (payers) and health care providers have had a curious relationship since their respective beginnings. They need each other and, yet, the relationship can sometimes be adversarial.
As the consumer moves to the forefront of the discussion, the two sides are increasingly blending together.
It is useful to understand their shared beginnings, as it may point to where the cycle returns to. If you look at total assets, the largest health insurer is Kaiser Permanente, which dates from the 1940s and is still controlled by affiliated physicians today. If you look at it by member months, Anthem is the largest Blue Cross Blue Shield plan, which is now run by a former hospital CEO. (Dental and vision firms, and other specialty health care insurance writers, are not included here).
Meanwhile, Blue Cross traces its history back to 1929, under academia. It was associated with the American Hospital Association until 1972. Blue Shield was developed by employers, to pay fees to physicians, starting in the 1930s.
UnitedHealth started under a physician group, and Humana started in the nursing home business.
Medicare turned 50 years old in July 2015. Medicare's fee-for-service model, the current claims process, the labyrinth of rules, and many of Medicare's other quirks are the result of the program's 1960s approach to payer-provider management.
Note the recent boom in new entities, primarily health system driven, in the chart below:
Source: NAIC filings and Merchant Medicine analysis; red line = No. of active entities; blue line = No. of filings.
How current trends are forcing change
Many shifts are creating opportunities for providers to be payers, and vice versa. Consumers have moved to the forefront of both payer and provider strategy as they look to access and influence the end recipient. The demands of the retiring baby boomer generation are driving a wave of provider and payer activity with Medicare Advantage growth.
Then there are the Aetna-Humana and Anthem-Cigna mergers, which appear to create efficiencies of scale and expertise, assuming that these behemoths can merge successfully. The large brokers and benefits consulting firms are also merging, creating fewer choices with greater scale and pricing power, while also creating new entry points with private exchanges.
Within all of this is the intersection of changing demographics, consumer expectations, the Affordable Care Act (ACA) and recent shifts in patient deductibles, all of which create uncertainty.
It would appear that both sides recognize that one way to reduce the uncertainty in their business is to vertically integrate with an eye on the consumer. Several recent notable shifts include UnitedHealth’s Optum division acquiring one of the largest urgent care chains in the U.S. and Highmark’s integration of Alleghany Health.
CVS, known for its retail pharmacies and benefits management, operates over 1,000 MinuteClinics, many of which are affiliated into local systems. Incidentally, its Part D drug program also makes it one of the largest insurers. Likewise big systems provider like Harvard-Pilgrim and Presbyterian (NM) continue to push into the payer space. We are beginning to see the effects of the shift, as the following net total asset ranking highlights either provider ownership, or being owned by a provider (system).
Over 60 percent of “health insurance” for employer-sponsored coverage is now delivered under administrative-services only contracts, transferring the risk to the employer and positioning the “insurer” as the network and claims processor. Boeing, for instance, has gone around BCBS networks to directly contract with providers. Consumer-centered primary care and urgent care organizations are primed to tackle the influence-able cost drivers – acute and chronic care, network steerage and pharmacy expense – and we expect these firms to be acquired and integrated in coming years by payers and providers.
The Highmark and University of Pittsburg Medical Center scenario, both large payers with provider affiliates and walk-in medicine operations, is an example of two payer-provider unions in the same geography competing with one another. Other organizations may take a less integrated approach. One example is when payers make investments in health care operators, to provide network options, steerage and cost-of-care management (FastMed, CareMore).
For health systems accustomed to break-even results year after year, generating $100M+ pre-tax incomes on insurance can be a game changer, as margins that went to payers can now be captured:
Another unique payer-provider union combines the strengths of each side, such as Aetna’s strategy to become the “back office” to health systems such as with Inova in northern Virginia. Aetna built the product line and services the back office, while the health system promotes its complete service offering.
A joint profit motive should facilitate coordinated cost containment efforts, rather than gamesmanship between the entities. Contract negotiations are different when the plan and provider are working together within an ownership structure, tending to focus on how to strategically work together.
Not if, but how
There are several critical aspects of merging payers and providers that must be done right such that the quality of care provided remains high, but unnecessary costs are eliminated to keep the entire system efficient.
The growth of many health systems has reached a point that they have sufficient geographic spread and capital mass to challenge the traditional payer control of provider networks. With vertical integration, larger health systems should be able to aggressively compete with plans on a local or regional price basis for contracts with large employers given their ability to control the entire patient flow from start to finish.
Governance is a challenge for systems, where influential groups may want increased pay or new facilities, in direct opposition to holding down cost for employers and consumers. Whether health systems have entrepreneurial and competitive strengths remains to be seen.
Larger systems have intrinsic competitive advantages, assuming they can build new businesses and get beyond the in-patient mindset. They control large primary care groups across a large geography, and control significant in- and outpatient access points. They have administrative scale and carry political influence.
The number of hospitals continues to decline, while costs per admission increase. Community hospitals will close as they fall behind technology and regulatory standards, consolidating routine procedures to systems. Simpler procedures will migrate downstream to the out-patient setting and more complex in-patient episodes will go to fewer central hospitals. Both payers and large systems are looking to consolidate volume to where it can economically and safely be performed.
Bringing payers and providers together isn’t without risk. Not least of which is the culture shift for both sides that a good union requires.
For providers, it will require more aggressive use of information technology and new incentives for practitioners and institutions to promote prevention and primary care to reduce reliance on acute and specialty care. For payers, it means learning a new language, delivery alignment and cutting overhead. Sophisticated analytics and technology will be the core competency. Payers may end up running the front-end consumer walk-in medicine business better than the providers (systems) themselves can, effectively “book-ending” the market by controlling the gatekeeper and premiums.
Providers will be looking to new margin sources and to leverage their regional influence. As the health systems become less in-patient centric, the opportunity for these ACA-inspired health plans will expand.
The next 10 years in health care will likely not look like the last 20. Look for payer-provider unions to grow and develop into organizations that innovate, produce greater profits (through cost effectiveness) and better serve patients.
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