The Power of the Payer

Insurers, pharmacy benefit managers and large healthcare providers have made a lot of press in the past couple of years with their billion-dollar megamergers.

The federal government has blocked some, saying they would create anticompetitive markets. But others have gone through, most notably the Cigna and Express Scripts merger and CVS Health’s purchase of Aetna.

In talking about their plans, many of the acquirers tout, among other things, the affordability that will come to healthcare consumers as a result. For example, when CVS completed its acquisition of Aetna in 2018, the company announced the new organization would provide “unrivaled community-based access to high-quality care while delivering a simpler, more responsive and more affordable experience.”

While it may be too early to see how these deals will shake out, many experts believe one thing they won’t do is lower costs for consumers. But there may be another way.

The History

To better understand how mergers and acquisitions have shaped the healthcare market, a brief history lesson may be in order. Some of the oldest insurers were built by medical professionals expanding their philanthropic roots to create affordable, local health coverage for those who needed it. In Texas, in 1929, low-income patients in communities surrounding Dallas could scarcely afford hospital care. This meant they were putting off needed treatments and hospitals had too many open beds. Baylor University Hospital came up with a win-win plan, allowing Dallas public school teachers to pay for care in advance: 50 cents a month bought 21 days in the hospital each year. From these humble beginnings came Blue Cross.

Over time, employers in other areas created similar programs (known as Blue Shield) offering workers health plans in which they received care from a group of providers for a monthly fee. By the 1940s, the nonprofit Blue Crosses and Blue Shields covered more than 24 million people.

As the companies grew, two California Blue Cross organizations merged in the early 1990s and became WellPoint Health Networks. Shortly thereafter, WellPoint became a for-profit company, all the while buying other small insurers. Another organization, Anthem, was doing the same thing. In 2004, WellPoint and Anthem merged, becoming one of the biggest insurers in the nation.

“We’ve always had acquisitions,” says David Paul, principal at ALIRT Insurance Research, in Windsor, Connecticut. “What’s new is the size of what’s going on now. This movement is about increasing economies of scale.

Breaking Down the Deals

M&A comes in two main forms: horizontal and vertical. Horizontal is when like organizations come together. This is frequently seen on the provider side when major hospitals buy a host of different healthcare provider groups. The rationale is usually that increased scale results in outcomes like better quality of care, reduced costs and enhanced infrastructure.

Vertical deals, where an organization is looking to expand into new business units, are becoming increasingly prevalent among payers. Because a handful of mega-mergers were becoming too anticompetitive, insurers began looking to new spaces. Some have been acquiring providers, like rehabilitation facilities, surgery clinics and primary care groups. More prominently in the past couple of years, insurers have eyed pharmacy benefit managers. “Pharmacy is the second-largest cost for insurers,” Paul says, “so that is a place they are going to want to control costs for sure.”

Though horizontal integration among insurers is not new, it is getting some new attention from industry stakeholders. In late 2018, the American Medical Association released a statement regarding health insurer consolidation urging that “competition, not consolidation, is the right prescription for health insurance markets.”

At the time, Dr. Barbara McAneny, then the president of the AMA, said, “The slide toward insurance monopolies has created a market imbalance that disadvantages patients and favors powerful health insurers. The prospect of future mergers involving health insurance companies should raise serious antitrust concerns.”

A 2016 report by the Altarum Healthcare Value Hub said research shows health consolidation tends to result in price increases. Consolidation in local markets and among organizations spread across different service areas can act as a cost driver, according to the report. Altarum noted that, on the health plan side, premium growth was 8% lower in 2014 among silver plans in the state healthcare exchanges in which there was increased competition.

Insurers + PBMs

Vertical deals, where an organization is looking to expand into new business units, are becoming increasingly prevalent among payers. Because a handful of mega-mergers were becoming too anticompetitive, insurers began looking to new spaces. Some have been acquiring providers, like rehabilitation facilities, surgery clinics and primary care groups. More prominently in the past couple of years, insurers have eyed pharmacy benefit managers. “Pharmacy is the second-largest cost for insurers,” Paul says, “so that is a place they are going to want to control costs for sure.”

Some say the timing makes sense for insurers and PBMs to be joining forces. Assessing the mergers of major insurers and PBMs, 4sight’s Johnson says the insurance companies recognized “the music was going to stop playing.” Because the market is still somewhat opaque, mergers allow them to maximize revenue and profits and increase near-term negotiating leverage, while it is difficult to tell where pharmaceutical dollars are moving through the system. He says they are likely repositioning for a time when transparency will be required.

Leader’s Edge reached out to the major health insurers regarding what they hoped to gain from recent mergers and acquisitions and how they were impacting the markets and insurers’ goals. All declined to comment, save an emailed response from Cigna. In it, the organization said its goal continues to be building “a better, more sustainable health care system that society demands and deserves. We are putting the customer at the center of health care transformation. We are championing a whole person approach and aligning incentives to proactively surround each customer with the support and resources they need to stay healthy and get healthy, when needed.” (For more on insurers’ earnings results post mega deals, see “Follow the Money” below.)

That said, others in the healthcare community are watching these deals closely and working to ensure the results pan out as promised. Scott McGohan, CEO of employee benefits firm McGohan Brabender, in Dayton, Ohio, says the M&A activity has made the market less competitive and more expensive for the people and employers paying the tabs. “It’s Hood Robin…the reverse of Robin Hood; taking from the poor and giving to the wealthy,” McGohan says.

In 2018 testimony to the California Department of Insurance, Robert Burns, professor of healthcare management at The Wharton School at The University of Pennsylvania, argued against the Aetna acquisition. Healthcare markets everywhere, Burns said, are becoming increasingly concentrated, diminishing choice and reducing competition, which is traditionally thought to lower prices in a market. “There is a small number of very big players, and that spells trouble,” Burns said. “They are growth vehicles, and it’s being spun to the public as if there are laudable motives. It’s about gaining size and leverage and growth, and everything else is just corporate spin.”

When large players in a market combine, they often claim it will save money, increase transparency and improve quality. But that’s not what tends to happen, according to Josh Bindl, CEO of National CooperativeRx, a co-op providing pharmaceutical benefits to self-funded employer members. “When they consolidate, we tend to see further limiting of transparency,” Bindl says. “It becomes more difficult to see where the entities are making a profit. We aren’t anti-profit, but we are trying to make sure they are reasonable ones.”

Bindl is beginning to see these kinds of issues with CVS. The chain’s rebates have increased substantially over the past year, which is good for his members, which get 100% pass-through. But for an employer that doesn’t receive that benefit, a significant portion of those funds could be getting funneled somewhere else in the chain.

“Consolidation can enable organizations to start moving numbers around on the spreadsheet,” says Gary Alton, senior vice president of national accounts at The Partners Group, a consulting firm in Portland, Oregon. “It’s tough to ferret that out if it’s all bundled together and they are rolling it up into one price.”Alton says he doesn’t see any downward pricing trend and costs are, in fact, continuing to rise when insurers and PBMs merge in the Pacific Northwest. He has also seen an insurance company that owns a hospital system cut that organization off from other local insurers. The merging parties sometimes claim that narrower networks will lower costs, but Alton says he has not seen costs drop after such transactions

Provider Vertical Consolidation

Because major vertical M&A activity is relatively new between insurers and PBMs, it’s difficult to tell exactly how it impacts markets and payers down the line. There is, however, some research into how provider consolidation impacts quality and cost.

The Altarum report said vertical consolidation between hospitals and health plans raises prices and has been shown to increase administrative complexity in the organizations. Research also shows little evidence that vertical consolidation improves efficiencies in the new business, according to the report.

A 2013 British study, Death by Market Power: Reform, Competition, and Patient Outcomes in the National Health Service, assessed the market in the United Kingdom before and after a pro-competition policy was enacted in 2006. The study found a 10% increase in concentration led to almost a 3% increase in death rates among patients admitted to an emergency room with acute myocardial infarction. They also found that less consolidation slightly reduced length of stay in the hospital and that, as consolidation increased, so did the risk of heart attacks among patients in those areas.

Though it’s the large M&A activity that gets most of the attention, Brian Marcotte, president and CEO of the National Business Group on Health, worries most about intra-market consolidation. “Healthcare is local,” Marcotte says. “When a group dominates a market, we have seen prices and cost go up as a result.”

While health systems also declined to comment, a report commissioned by the American Hospital Association in 2017 and updated in 2019 found:
• Provider mergers lower readmission and mortality rates
• Operating expenses in the merging systems are lowered by about 2%
• Revenues per admission drop by about 3.5%.
The association report found mergers offer financial stability to struggling provider organizations and enable upgrades to facilities, staffing, equipment and technology.

Focus on Pharmacy

Regardless of what insurers and providers say about whether consolidation will benefit the industry, healthcare prices continue to rise. According to the Centers for Medicare & Medicaid Services, costs are expected to grow by an average of 5.5% annually for the next decade, increasing faster than the economy and reaching 19.4% of the nation’s gross domestic product in 2027.

Some in the industry say now is the time for employers to use their significant purchasing power as a force for combatting this trend. One area they point to that could have a significant impact is pharmacy.

Ryan Rice, principal of pharmacy and health strategy at Prism Health Strategists, in Onalaska, Wisconsin, says employers should be demanding greater transparency from their brokers, even trusted ones. Having a transparent PBM contract, Rice says, will help employers understand the relationship between all the different players in the system. Some experts say M&A activity is making contracts more obscure, but employers should at least try for less obscurity. If these massive insurers and PBMs can’t—or won’t—offer information like claims utilization or rebate tracking, it should be a big red flag, he says.

“You don’t get what you deserve,” Rice says. “You get what you negotiate.”

One way to potentially eke out savings with big players in the market is through a pharmacy carve-out. McGohan says carriers used to be more amenable to allowing employers to carve out things like prescription drug benefits or stop loss. Many no longer allow carve-outs or allow them only for organizations of a certain size. If they do allow for carve-outs, there is often a fee attached. Smaller organizations may allow carve-outs, and larger ones, like UnitedHealth, allow carve-outs for some organizations. McGohan says UnitedHealth is more amenable to carve-outs because it merged before the other major carriers and understands it has to be more flexible to remain competitive.

Gary Alton says organizations can request carve-outs through their initial RFP process. If an employer has 500 to 1,000 employees, one requirement for its insurance business can be a carve-out of pharmacy benefits. “That way,” he says, “it’s the carrier’s choice to decide if they are going to allow it or not.”

Specialty medications are another area of frustration that employers and brokers should try to work through with payers. McGohan says many carriers mandate specialty medications (which account for about 2% of prescription volume, but about half of all drug spending) be purchased through their PBM. McGohan says they can often find cost-competitive solutions for clients, but if carriers don’t allow them to go elsewhere, it leads to frustration. Sometimes, the only solution is to leave a plan.

“It forces us to go outside and look at strong independents for our customers,” McGohan says. “Fortunately for the industry, we are seeing a birth of transparent PBMs popping up all over the country, and I see that as exciting news.”

And he’s correct. A quick Google search nets a vast array of organizations claiming to be independent PBMs. Navitas and CapitalRX are both independent PBMs that McGohan Brabender is paying attention to.

A Flip on Consolidation

If providers and PBMs are banding together to create efficiencies and bargaining power, so can employers. One organization using mass to its advantage on the pharmaceutical side is National CooperativeRx, a pharmacy benefit cooperative.

This member-owned and governed co-op leverages buying power when it goes to the market to purchase pharmaceutical contracts for self-insured employer members. It purchases PBM services and then acts as a watchdog to ensure the 375,000 lives covered get the best benefits possible. According to Bindl, National CooperativeRx typically reduces pharmaceutical spend by 20% for new members and up to 40% when there is an outdated plan.

Bindl says organizations such as National CooperativeRx can’t usually be ahead of the pharmaceutical giants but they “are going to be right behind them.” National can react quickly to changes in the industry and provide the kind of oversight of claims that most small to mid-market businesses don’t receive. National can get data out of pharmaceutical claims, analyze the data, find out what is driving spending, and determine how to reduce it. National, for example, can analyze high spenders to see if someone could be using a generic instead of a higher-cost medication or if there is some way to change a plan to reduce that person’s cost. Getting large PBMs to do this can be like turning a cruise liner—largely, Bindl says, because the PBMs are likely making money off the high spend.

Rebates are a major space in which National makes a difference for its employers. In its contracts, 100% of rebate dollars are passed through. The only reason National can get that kind of rate is its mass, Bindl says. While he concedes that rebates have shortcomings, it’s one of the biggest tools his organization can use to lower pharmaceutical prices. On average, National gets 25% of gross costs returned through rebates.

“Until there is a better system,” Bindl says, “I feel like our members are more protected and able to use that element of the pricing equation

Navigating Toward Value

On the provider side, consolidation in a market may increase costs, but consultants say there are a host of ways to manage those costs. One tactic is forcing the issue. Cost and quality information can be culled to determine the best-value providers in a market, and narrower networks can be created using this data. Employers that are willing to exclude costly providers can save money, but it can’t be done in all areas (such as rural towns or cities like Atlanta, where a few players dominate the market).

Where that isn’t an option, employers are developing other workarounds to high-cost providers like telemedicine options or medical tourism, which may just mean encouraging employees to drive an hour or two to another town for care.

Employers can also use plan design to steer employees toward high-value care. Co-pays or deductibles could be waived, for instance, when an employee visits a provider that demonstrates high quality at a lower cost, says Cheryl DeMars, president and CEO of The Alliance, a nonprofit cooperative that helps self-funded employers manage their healthcare spend. If an employer has high-deductible health plans and can’t waive those costs, DeMars says, some are offering employees financial assistance to help pay for designated providers.The Alliance, based in Fitchburg, Wisconsin, has created a mechanism for its members to separate the wheat from the chaff. Its Quality Paths Program works with hospitals and physicians who agree to meet The Alliance’s quality standards and offer a lower bundled price and care warranty to members. Employers, then, agree to offer a strong financial incentive to get employees to use these providers.

“The program is intended to move market share to doctors and hospitals that do a good job and cost less,” she says.

Marcotte, of the National Business Group on Health, says he expects to see employers increasingly using technology, like that from Grand Rounds, to steer employees to better-value providers.

Grand Rounds uses Medicare and other claims data to determine the high-value providers in a market. Then it works with an employer to “overlay” that information on top of an existing network. This way, when an employee searches for a physician in an app, the app highlights the best in the area instead of just providing a list of the 25 cardiologists or orthopedists in the network.

“It’s a way of identifying, through data, the best and most efficient providers and serving them up in a more personalized way to consumers,” Marcotte says.

Marcotte has also seen a rise in the use of concierge services for this purpose. A concierge can work with employees to navigate through the system, understand benefits and steer toward preferred providers.

Primary care groups are another resource for directing patients to high-value specialists or avoiding costly care. Some businesses have begun working with direct primary care, where a per-member, per-month fee helps pay for services. Other employers may use on-site or shared clinics that are comprehensive and well managed. Through these relationships, a lot of downstream dollars can be saved both through referrals and avoidance of more costly care, like hospitals and emergency rooms, DeMars says. “When someone needs a referral, independent primary care clinics can refer to the best-value systems,” she says.

Direct Contracting

Marcotte says about 20% of employers he works with are using plan design and other options to point patients away from high-cost care. And about 10% are steering patients through direct contracting.

In this scenario, employers work directly with health systems or other providers to offer treatment at a lower cost than patients might pay if they pay for care through their insurance plan. Marcotte has seen growth in this space in areas such as orthopedics for back, hip and knee surgeries. And there are several providers available, such as Regenexx, that can reduce costs by avoiding surgeries altogether. A knee surgery might cost $30,000, whereas Regenexx uses a patient’s stem cells to treat the problem for about $7,000, Marcotte says.

The drawback to direct contracting is its market limitations. An employer must be able to provide enough patients to negotiate a discount, and providers must be willing to think outside the box by receiving payment that is value-based and outside the bounds of insurance.

One of the main jobs of DeMars’s organization is direct contracting with area providers, and she says good-value hospitals and clinics can exist in surprising places. Sometimes their designated ones are in an outlying area of a market but have demonstrated good quality at a lower cost. Community hospitals, in particular, can be good partners for employers, as they are sometimes more agile and in need of the business. “When everyone else is going big,” she says, “one good strategy is to go small.”

Marcotte says the days of buying all of a company’s healthcare services through its insurance company are numbered. “We have a lot of customers really curious about this entire healthcare transaction and are really willing to go off the grid for other ways to pay for healthcare,” he says. “And we are pushing them and asking, ‘How far are you willing to go?

One string that runs through the whole consolidation movement is mass. Providers, payers and PBMs merge to increase their negotiating power and raise prices. Employers in a market usually have to create critical mass so they can come to the table to demand better prices. But groups like The Alliance and National CooperativeRx are turning the tide on that. And DeMars says they don’t need to have 70% of a market on board to negotiate with providers.

Generally speaking, providers want commercial business. If they perceive that enough employers in an area are taking countermeasures to fight rising costs, she says, they get noticed. When physicians or hospitals start losing business to nearby facilities, it gets their attention.

“What we need is enough [employers] willing to take bold steps to drive change in their market, and that makes a difference,” DeMars says. “The role of a coalition like mine is to help employers amplify and recognize the power they have in the market. They had that power all along. They just have to learn how to use it.