“I don’t know that what they’re doing is going to be as transformative as maybe the potential of it is – and it’s going to take time. I don’t know that they’re going to ‘all-of-a-sudden’ leap frog over all the things that health plans have been doing for decades. I think they’re going to learn that this is really complicated stuff…”
Health plan innovation got a makeover this year. What used to look like value-based care models and telehealth visits has transformed. Health plan innovation is sexier – with big-dollar M&A deals like CVS-Aetna and Cigna-ExpressScripts looking to flatten the industry. Meanwhile, brand name collaborations like Amazon-Berkshire Hathaway-JP Morgan may prove that payment model innovation is unexpectedly ‘label-conscious.’
So, how are health plans dealing with this startling new look? And what should health tech startups who want their innovation investment dollars do now??
Walmart (WMT) is in talks with Humana (HUM) about a relationship enhancement, possibly an acquisition. The two already know how to work together in alliances (narrow pharmacy network, marketing collaborations, points programs). If a new structure is needed, WMT and HUM must be considering a major expansion of scope or a set of operating models where contributions are difficult to attribute and reward (e.g. joint asset builds). What is on their minds? Beyond any interim incremental moves, what could be the endgame?
Catching convergence fever
Horizontal combinations among the top five health plans have arguably reached the regulatory “permissible envelope.” But provider combinations continue apace, enhancing ability to execute on value-based care to be sure, but also increasing negotiation leverage relative to payers. Further, Amazon’s (AMZN) interest in healthcare is gaining momentum but the specific goals are still mysterious, leaving many incumbents to imagine red laser dots are on their foreheads.
Accordingly, health plans are seeking defensible terrain in convergence combinations: CS & Aetna (CVS-AET), Cigna & Express Scripts (CI-ESRX), Anthem’s PBM insourcing and growing attention to CareMore (United Healthgroup [UNH] has been ahead of the curve as usual: but their recent SCA and DaVita medical group acquisitions have clarified for the market the scope of its ambitions for OptumCare). Of course, each of these moves just contributes to the uncertainty about the new competitive paradigm, driving more land grabs in response. I view the WMT-HUM discussions as part of these developments.
Last week, pharmacy giant CVS agreed to purchase Aetna this week for an astounding $69 billion dollar sum. The company allegedly plans to reduce health spending by developing an integrated system touted as “a new front door for health care in America.” This merger is actually an acquisition, entailing transfer of ownership. The central aim of an acquisition is to increase market share, expand the scope of services provided, and improve financial stability. CVS hit the jackpot on all three objectives. While Wall Street investors celebrate, many of us knowledgeable in the delivery of healthcare services are wondering who will bear the responsibility for the patients harmed by this experiment?
Aetna has compiled vast amounts of data from 22 million health plan members. CVS provides pharmacy benefits management to nearly 90 million consumers. Together, with 10,000 stores and 1,100-minute clinics already in the CVS network, this acquisition will create a ‘Walmart for Healthcare’. Applying bulk-purchase business strategies to the sale of merchandise is one thing, while providing healthcare services by ‘trial and error’ to human beings is another matter entirely. Bypassing physicians to deliver healthcare by protocol categorically jeopardizes patient safety.
Executives at Aetna-CVS plan to utilize pharmacists and nurses in the evaluation of acute illness and management of chronic disease. If an insurer, drugstore, and pharmacy benefit manager unite as one, it will usher in an era of medical “segregation,” with segregation defined as the isolation or separation of a race, class, or group by enforced or voluntary restriction, by barriers to social intercourse, by separate educational facilities, or by other discriminatory means.
As CVS-Aetna merger talks fill the air this Christmas season and experts weigh in on the impact this will have on the economy and consumers alike, I’m sitting at a little desk in a little office contemplating health insurance.
I run a little shop that’s about as far from CVS-Aetna as you can get in the health care space : a solo practice doctor with four full time employees and revenues a little south of $65 billion dollars. I shouldn’t feel too alone. Small businesses account for 99% of US firms and employ almost half of all private sector employees. But knowing my problem is one shared by many provides only partial solace.
Prior to arrival of the ACA, I provided health insurance to everyone through the company. At the time I had 3 full time employees and the insurance broker I worked with got me a quote for $1300 / month. Now, I really didn’t want to be in the providing healthcare business, so when the ACA arrived with its individual market I was happy to facilitate buying health insurance from the exchanges. So initially, I chose to pay for my employees plans on the individual market. I was quickly told by my accountant that paying for my employees insurance in this manner was running afoul of a three letter entity of the federal government called the IRS.
Apparently the individual ACA market premiums were allergic to being deducted in this pre-tax manner. Fine. So I went ahead and paid each employee $6000 per year extra with the understanding that they would use that money to buy health insurance on the individual market.
Many people have been surprised by the announcement that CVS is interested in purchasing Aetna. Why would a PBM want to own a health plan? There has been speculation that the move by Amazon to get into the pharmacy space may be a reason. But there is another more rationale reason and its based upon a flaw in the Affordable Care Act.
The flaw is known as the Medical Loss Ratio requirement and it reads like this from the CMS website
The Affordable Care Act requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the rate review provisions imposing tighter limits on health insurance rate increases. If an issuer fails to meet the applicable MLR standard in any given year, as of 2012, the issuer is required to provide a rebate to its customers.
This requirement was put in place as a way to ensure that health plans did not make money by underutilizing medical care. But it had the unintended consequence of insuring that costs never went down and here’s why.