Industry experts share their insights into recent headlines of acquisitions, mergers in healthcare.
“Stop making sense.”
The title of the afore-mentioned 1984 Talking Heads movie comes to mind when trying to interpret this winter’s flurry of healthcare-related announcements:
- CVS Health to acquire Aetna (Dec 3).
- Advocate Health to merge with Aurora Health Care (Dec 4).
- UnitedHealth Group to acquire DaVita Medical Group (Dec 6).
- Dignity Health to merge with Catholic Health Initiatives (Dec 7).
- Ascension rumored to be talking merger with Providence St. Joseph (Dec 10).
- Humana Inc./Kindred at acquire Home Division of Kindred Healthcare (Dec 19).
What do these events mean for physician practices? Retail clinics? Healthcare systems? Long-term-care and home care providers? Health insurers? Distributors and manufacturers of medical products and equipment?
The Journal of Healthcare Contracting asked the following experts and observers to try to do so for us, and our readers:
- Mark Dixon, president, The Mark Dixon Group LLC, Edina, Minnesota.
- Ted Almon, chairman, Claflin Co, Warwick, Rhode Island.
- Blair Childs, senior vice president of public affairs, Premier Inc.
- John Pritchard, publisher, Journal of Healthcare Contracting (supply chain publication from Share Moving Media, publisher of Repertoire).
- Tom Charland, founder and chief executive officer, Merchant Medicine, a management consulting firm (who passed to Repertoire an article from the company’s January 2018 “January ConvUrgentCare® Market Report.”)
- Melinda Hatton, general counsel, American Hospital Association.
The ‘asset-light provider’
“The CVS/Aetna agreement is all about consumerism and redefining where care will be delivered in a more convenient way and at a lower cost,” says Mark Dixon. “Much of healthcare is organized around doctors and hospitals, and this transaction will appeal to younger consumers and redefine where people receive their care.”
The United/DaVita deal is “another very fascinating merger,” he adds. United/Optum has quietly hired 30,000 physicians over the past several years in the U.S., he points out. “This acquisition doubles that and dramatically increases their provider footprint. This has the potential of also redefining insurers as asset-light providers. They can purchase, on a fee-for-service basis, the hospitals and other expensive services as they need them. It has the potential to lower costs and also redefine/possibly diminish the role of large health systems due to their leverage as both insurer and physician provider.”
Insurers such as UnitedHealth “have not built up a large asset base of hospitals and operating room suites that need to be filled to make them profitable,” says Dixon. “Thus, they are asset-light in comparison to large IDNs. And, they are the insurer, so they presumably can direct more of their appropriate patient volume to those physicians and contracted facilities. Thus, keepage is higher (or leakage is lower).”
Chaotic
“Certainly, this level of consolidation in all segments of the industry is unprecedented, and it is taking place not only among players in various segments of the vast industry, but across some seemingly significant barriers, and between players of all sizes and types,” notes Ted Almon, chairman of Claflin Co. “It certainly defies any simplistic analyses of singular changes in the market. In fact, while individual deals all have apparent rationales behind them, collectively, the activity could best be described as chaotic.”
“Without any political editorializing at all, it is hard to avoid the coincidence of the Trump election and all this activity,” says Almon. “There is no doubt that profound uncertainty over the direction of health policy in the country has provided much of the energy driving the merger mania. Some of it may be a perceived opportunity to set policy direction in the seeming void that exists, but that much of it arises out of fear seems at least as likely. In the final analysis, a single question still looms: Are the new and much larger players who arise from the combinations going to be more capable of integrating and organizing healthcare in a new and possibly more efficient way, thus possibly creating some savings opportunities? Or are they merely going to create pricing leverage over a payment system no longer capable of contracting around them, possibly driving up costs even further?
The CVS/Aetna combination is worth watching, continues Almon. “Certainly, it is the vertical aspect of the deal – CVS being a giant pharmacy retail chain, Aetna a health insurance company – that is most interesting. In wake of the failed Aetna/Humana merger (attempted in February 2017), such business combinations have historically not drawn much regulatory attention. But what is the strategy behind the deal? Where is the potential synergy? One must take a pretty high-level perspective to guess where this combination is going. Remember that CVS voluntarily exited the presumably profitable business of selling tobacco products over a year ago, announcing its intention to become a ‘healthcare company.’ Assuming this move follows on that, and combining it with the company’s industry-leading 1,100 MinuteClinic locations in its stores, could a whole new model of delivering care be the vision?
“Or how about a health plan that integrates the retail clinics into its primary care coverage, avoiding some more expensive sites in the traditional model? With the seemingly endless assault of Amazon, could one imagine that CVS plans for the day when their prime real estate locations could be used for something more profitable than selling paper towels and greeting cards? For now, we will just have to wait and see.”
Closer to the patient
“The CVS/Aetna deal and other mega deals are all sending a clear message: A new form of healthcare competition is emerging, and providers need to take note,” says Blair Childs, Premier Inc. “The CVS/Aetna merger is based on the belief that the combined company will be able to disrupt the system with a retail, pharmacy and e-enabled high-value provider network.
“These mergers and acquisitions are being driven by a need for scale and vertical integration. Healthcare leaders see that the movement to value-based care and population health is here to stay in the public sector, and private companies are now getting on board. Companies are seeking to 1) find more cost-effective, convenient and high-quality ways to manage a population, 2) organize high-value providers networks, and 3) attract, engage and retain their patient population. All of these companies are trying to get closer to the patient, a position hospitals already enjoy.
“Health systems are also seeking scale and vertical integration, and are increasingly partnering with private payers and other health systems to continue to develop high-value provider and financing networks. These will be organized and run by competing health systems, insurers, physicians, and retail establishments.
“To ultimately succeed, healthcare leaders need to, above all else, excel at using data to cost-effectively manage a population, and create systems to attract and engage patients and consumers,” says Childs. “It is important that Washington not impede the development of this new era of competition through zealous antitrust regulation or harmful policies.”
Who wins?
The potential mergers among the six large IDNs (Dignity Health/Catholic Health Initiatives, Advocate Health Care/Aurora Health Care, and Ascension/Providence St. Joseph) bring to mind the question, How big is big enough? says John Pritchard of the Journal of Healthcare Contracting. “Whatever constitutes true scale must be ever-rising,” he says.
But these IDNs aren’t pursuing scale in order to gain leverage and purchasing clout, Pritchard says. That may be an unintended consequence, “but that’s not why they’re doing it. They are absolutely merging to gain greater negotiating power vis a vis payers.”
The supply chain implications of such mergers are fascinating, says Pritchard. As they come together, IDN leaders have to make big decisions: Will one of the system’s supply chain processes prevail? If so, whose? Will they run autonomously for a period of time? How long? And then what?
“The other question I would ask is, ‘Who is all this good for?’” he says. “Is it the shareholder? The patient? The payer? As the healthcare systems, in particular, merge, will their larger footprints allow them to scale up world-class healthcare? I’d like to think so, but that may be tough to do for a period of time.”
Retail clinics
“One line of thought, highlighted by most articles on the subject, is the prospect that Aetna and CVS intend to leverage the MinuteClinic platform to deliver lower-cost healthcare,” writes Charland in his January report. “Two aspects of the MinuteClinic footprint would indicate that this has nothing to do with the merger.
“First, CVS has more than 8,000 stores. Only 1,104 of them have a MinuteClinic, and those are concentrated in the largest 100 metro areas in the United States. It will take a much greater footprint of MinuteClinic locations and a much wider scope of services to pull off a full court press on lowering costs using this strategy.
“Second, there was no evidence of MinuteClinic expansion in 2017 to go along with this merger.
“What is more likely is that CVS Health is aiming to compete directly with UnitedHealth Group in terms of the integration of pharmacy and medical benefits.”
Regarding medical benefits integration, Charland suggests comparing the CVS/Aetna proposed merger with that of UnitedHealth Group and Da Vita Medical Group.
“This company (that is, UnitedHealth Group) has an insurance arm – United Healthcare – which looks a lot like Aetna; and a healthcare services arm – Optum – that has a [pharmacy benefit management provider] that looks a lot like CVS’ Caremark subsidiary. Optum also has a clinic/provider network that is significantly larger than what CVS has right now.
“If we were to predict what happens from here, it would be that CVS Health begins to expand its clinic and provider network well beyond the retail clinic space, i.e. urgent care, primary care and specialty care expansion. The next big wave in healthcare will be the move to at-risk payment models sold directly to employers and government.
“CVS Health, Aetna, Optum and UnitedHealthcare are extremely adept at selling to those channels. As their provider networks expand, this will be a major threat to hospital systems across the country. These companies will nip away at the profitable ambulatory care services while leaving hospitals with their not-so-profitable inpatient services. Notice Optum is not acquiring hospitals!”
Hospitals and health systems are prepared
“Rapid changes in the healthcare field are leading many hospitals and health systems to explore new ways to improve quality, reduce costs, and provide more convenient access to care to meet their patients’ needs,” says Melinda Hatton, general counsel, American Hospital Association. “Hospitals aren’t alone: The decision by CVS to acquire health insurer Aetna is being defended on the grounds that it will build a care system closer to consumers that is more responsive to their needs.
“Those same goals are driving some hospitals and health systems to join together. According to a 2017 economic study from Charles River Associates, hospital mergers result in significant cost savings and appreciable quality improvements that cannot be replicated by looser affiliations. They can also expand the types of services available to patients and communities, and provide a stable foundation on which to deliver more comprehensive, coordinated, and convenient care. In some communities, mergers may be the only practical way to preserve services and enhance quality. As hospitals and health systems realign to meet these goals, they have been leaders in controlling costs, with hospital price growth, as measured by the Hospital Producer Price Index, just 1.2 percent in 2016, the second-slowest rate since 1998 and down from 3.5 percent in 2007.”
Fast and furious
The merger and acquisition announcements came fast and furious in the weeks leading up to Christmas.
December 3: CVS and Aetna. CVS Health and Aetna announced the execution of a definitive merger agreement under which CVS Health would acquire all outstanding shares of Aetna for a combination of cash and stock.
A “personalized healthcare experience” will be delivered by connecting Aetna’s provider network with greater consumer access through CVS Health, according to the two companies. This includes more than 9,700 CVS Pharmacy locations and 1,100 MinuteClinic walk-in clinics as well as further extensions into the community through Omnicare’s senior pharmacy solutions, Coram’s infusion services, and the more than 4,000 CVS Health nursing professionals providing in-clinic and home-based care across the nation.
December 4: Advocate Health Care and Aurora Health Care. Chicago-based Advocate and Milwaukee-based Aurora announced their intention to merge. The new organization would operate 27 hospitals, more than 500 sites of care, and employ more than 3,300 physicians and 70,000 associates and caregivers.
December 6: UnitedHealth Group and DaVita Medical Group. Optum, part of UnitedHealth Group, announced its intention to acquire DaVita Medical Group, one of the nation’s leading independent medical groups and a subsidiary of DaVita Inc., for approximately $4.9 billion in cash. DaVita Medical Group serves approximately 1.7 million patients per year through nearly 300 medical clinics, 35 urgent-care centers and six outpatient surgery centers.
“With medical groups in California, Colorado, Florida, Nevada, New Mexico and Washington, DaVita Medical Group will expand the market reach of Optum’s strategic care delivery portfolio, including Surgical Care Affiliates, MedExpress and HouseCalls,” the companies said.
December 7: Dignity Health and Catholic Health Initiatives. Englewood, Colo.-based Dignity Health and San Francisco-based CHI announced their intention to merge, creating a system encompassing more than 700 care sites and 139 hospitals across 28 states.
December 10: Ascension and Providence St. Joseph. The Wall Street Journal reported that the two hospital systems were discussing a merger that would create an entity encompassing 191 hospitals in 27 states and annual revenue of $44.8 billion. Ascension operates across 22 states and the District of Columbia, including Texas and Washington, where Providence also operates. Providence also has hospitals in Alaska, California, Montana, New Mexico and Oregon.
December 19: Humana and Kindred Healthcare. Humana Inc. announced it signed a definitive agreement to acquire a 40 percent minority interest in the Kindred at Home Division of Kindred Healthcare, Inc., said to be the nation’s largest home health provider and second largest hospice operator, for approximately $800 million. Currently, nearly 40,000 caregivers serve approximately 130,000 patients daily in Kindred at Home with annual revenues of approximately $2.5 billion.