If the economics of running a health plan require the big to get bigger, it also seems that new models for services, risk and profits are needed.
For some investment banks on Wall Street, it could be a summer of deal-making in the managed care sector, with recent speculation about acquisitions of Humana, Cigna and others. Already, around 60 percent of the health insurance market is now served by ten plans. But another post-ACA wave of consolidation may be on the horizon and could encompass both for-profit and nonprofit insurers--and new attempts at vertical integration that try to solve U.S. healthcare's value problems.
"Debt is cheap and well-positioned health plans are evaluating the landscape for consolidation opportunities as a means to strengthen market position and preserve existing profit pools," said Oliver Wyman partners Terry Stone and Todd Van Tol in a presentation at America's Health Insurance Plans' 2015 Institute.
With the ACA's medical cost ratio effectively capping profits on health insurance, for-profit insurers can be expected to seek membership growth through takeovers, especially in Medicaid plans, said Ashraf Shehata, a partner in KPMG's healthcare center of excellence. "I think you're going to see a massive shakeup in the Medicaid plan space" if the proposed 85 percent cost ratio is finalized, he said.
Across all public and private health insurance segments, "the investments it's going to take to really sustain the IT and operational capabilities can't really be done anymore with a population of three, four, five million members," argues Shehata, a former executive at Cisco and Anthem when it was WellPoint. "The numbers need to be more like 15 to 20 million people."
Growth and evolution
Stone and Van Tol from Oliver Wyman see a "a multitude of consolidation strategies" arising, from the traditional horizontal mergers and takeovers to what they call "to bolder, strategic vertical plays" that come with the most potential financial gains--10-25 percent.
Horizontal consolidation can bring administrative and efficiency benefits in the near-term, although as the Harvard Business Review found in 2004, some 50-60 percent of such deals end up without the "synergies" initially envisioned. And horizontal consolidation does not necessarily "enable consumer value transformation as vertical integration can," Stone and Van Tol argue.
These vertical deals include the more radical insurer-provider integration, as in Highmark taking over the West Penn hospital system, now the Allegheny Health Network, and UnitedHealth Group's investment in a giant retail clinic network. Many insurers, though, are wary of becoming direct care providers, 13 years after Cigna sold off New Mexico's Lovelace Health System. Insurers are definitely more cautious about making that leap than health systems who are launching their own health plans.
This is partly why "strategic vertical alliances," or collaborations of payers and providers, have become popular, usually in the form of a joint venture, said Stone and Van Tol.
One example is Aetna's accountable care collaboration with Virginia's Inova Health System to offer Medicare Advantage and self-insured group plans.
Another is Anthem's Vivity network with seven major Los Angeles health systems, including Cedars-Sinai and UCLA Health. The joint venture relies on a capitation model where all partners pool premiums and share risk and gains, and use care management and data sharing. Anthem CEO Joseph Swedish believes this network could be "game changing" for Los Angeles.
There's also a primary care-centered model for collaboration--one that could address problems in both the patient and physician experience. In greater Philadelphia, Independence Blue Cross and DaVita HealthCare Partners jointly own Tandigm Health, a risk-based primary care and hospital network.
Diversification and the Blues
Despite these efforts, in the next wave of M&A and in the next few years generally, "the real challenge is going to be what happens with the Blues," said KPMG's Shehata.
Shehata worked in corporate shared services at WellPoint in the early 2000s, as the new for-profit company was growing its Anthem plans, and he thinks there'll probably be a resurgence of for-profit conversions. "The regulators are going to have to get comfortable with that. If they're going to be faced with double digit rate increases, the regulators will begin to look for those kinds of concessions and will probably allow a more open environment for M&A."
There is the diversification and entrepreneurship strategy that nonprofit Blues could take in consolidation, growing across state lines or in a few regions within a state. "The western region is a good example of moving towards that model," Shehata said.
Nonprofit Cambia Health Solutions runs the Regence Blues in Idaho, Oregon, Washington and Utah, while managing a small venture capital business in health technology and services startups, including the direct primary care company Qliance. Premera Blue Cross operates plans in Alaska, Oregon and Washington, although Premera has explored a for-profit conversion before. Highmark's bid to improve and redesign healthcare through the Allegheny Health System is another model, if a more audacious bet in a unique market.
There are also benefits in the more mundane, though still important use of shared services. Highmark is lending some of its administrative support to Independence Blue Cross (an alternative to a proposed merger that was rejected by regulators in 2009), and Blue Cross Blue Shield of North Carolina and BCBS of Kansas City jointly run the Topaz Shared Services LLC to share administrative functions.
The Blues brand, including for the independent nonprofit companies, can be "critical enabler" and draw for consumers, Shehata said. "I think that's one thing the Blues network always had, and they're normally highly aligned with the regulators in the state. Those are all attractive things."
But if they can't get buying power, "something is going to have to give on the regulation side." To stay profitable, some of Blues have stayed away from high-risk markets like Medicaid managed care and narrowed their portfolio's elsewhere. "The problem is if you do that, is that enough?" Shehata asked. "The sustainable Blues are ones that are going in multiple directions."