This morning two big mergers in the health plan world.  The two biggest (ex-)Blues merge (Anthem and Wellpoint), and United buys MAMSI, the big commercial HMO on the mid-Atlantic states.  In the Blues case the market has marked down the acquirer and upped the stock of the target, suggesting that they are paying too much. United’s stock price is dipping too as MAMSI’s has gone up.

So why are they buying now?  Health Plans, as evidenced by results released today from Anthem, Wellpoint and Humana, are banking in the bucks.  We can expect profits in the insurance business to start to slowly fall from this high point of the underwriting cycle. One possible explanation for the timing of the merger is that Anthem and Wellpoint have been acquiring smaller Blues plans at a rapid clip, and of course have been bidding up their price. Now there is only one major buyer for smaller Blues, so you can expect this to be the last time that Anthem pays too much!

One last comment–there is now a national for-profit Blues organization with some 26 million members in one organization, roughly one third of all Blues members. As a national force the Blues have never really existed, but individual Blues have been very strong in individual states. As so many individual Blues will now be controlled from Indianapolis, we might expect some slow changes, but health care is still a local good.

There’s been plenty written elsewhere about the influence of Wal-Mart in America’s economy. For instance, this about Wal-Mart and the recording industry and this critical view of its influence on local communities. Somewhat under the radar Wal-Mart has been growing in scale as grocery store and a pharmacy chain. It’s now the number 3 pharmacy chain in the US, behind Walgreens and CVS. Jane Sarasohn Kahn has written an excellent article about Wal-Mart’s influence on the health care business.

One of the best known aspects of Wal-Mart’s presence is what it does to suppliers.  It forces them to cut costs and pays them later than they’d like, so Wal-Mart makes more of the "float" than other retailers.  In fact I was once told that Sam’s Club (its discount "club" store) actually makes zero margin on goods sold but turns over its inventory every 7 days and pays its suppliers in 90, giving it nearly 3 months to collect interest. Donald Johnson at The Business Word has written a fairly complimentary article about Wal-Mart’s employee health benefit program, particularly the emphasis on cost control and catastrophic care insurance, but he neglects to point out that it takes 6 months for an employee to be eligible for health benefits and that Wal-mart has 40% employee turnover a year. So great swathes of Wal-Mart employees are uninsured. (It could be worse–they could offer no health insurance).

One example of Walmart’s power over suppliers happened this morning.  It pulled out of a flu vaccination program is was going to offer with the FluMist product from MedImmune.  MedImmune’s stock price is off over 5%.

This Reuters report shows major healthcare M&A deals this year.  I found this after looking at GE’s further incursions into the health care business.  Most recently GE last week bought Amersham. Amersham makes reagents and fits in with GE’s MRI and other scanner business.  Meanwhile GE has also decided to to get further into medical IT, with its purhcase of the old Medicalogic EMR system from Medscape. Add to that Siemens purchase of SMS a couple of years back, and its apparent that the world’s biggest companies are starting to scrutinize the US’ biggest industry, and also see if there are opportunities on the information and medical technology side, as well as on the pharmaceutical side.

Note: Amersham’s interesting historical footnote is that it was the first company privatized by the Thatcher government in the 1980s, and possibly the first privatized company ever

Hewitt Associates report on their annual survey on health costs for employers. They found that the 2004 premiums will be up an average of 12.6% next year as opposed to 14.7% in 2003. They also note that HMO costs continue to rise a little more than PPO and POS plans (13.5% vs 12%) which is one reason that HMO enrollment has been declining (although HMOs and POS are pretty similar these days). Don’t forget that these costs are for employers and are not really the same as overall health costs which are also paid by government and consumers. Employers are continuing to respond by imposing more costs onto their employees, which is leading to contentious labor relations in many industries, such as retail and public services (via The Bloviator). Hewitt expects some of the following tactics:

In other words pay more and probably get less.

There are a couple of implications here for health plans serving the commercial market. One is the slow but steady emergence of the "consumer-directed health plan".  While this doesn’t appear to be any more than another fancy benefit-set such as the HMO, PPO or POS were in their day, it is making an appearance as this news from Siemens suggests. Expect consumer directed plans to mean employees choosing between a diminishing set of benefit options.

The other implication is that the slight reduction in cost increase may translate into lower revenue increases and therefore lower margins for health plans. Health plans (and insurance companies) ride out something called the underwriting cycle. Simplisticly put they charge more in some years to make up for losses in past years and they make big profits in those years–so big premium increases as we’ve seen in the past few years equal big profits for insurers.

Two of the biggest insurers, United and Wellpoint, have seen their stocks rise over 50% in the past 2 years, and beat the S&P500 by way more than that. This may not continue for much longer if costs are coming slightly more under control, which may have consequences for the vast amount of money with which United’s senior management have been rewarded, mostly with the approval of an exceedingly compliant board led by ex-New Jersey governor, Thomas Kean .

I’ve commented (perhaps too much) about the Healthsouth affair and how the vagaries of Medicare reimbursement led many different types of for-profit (and probably also non-profit) providers to go well over the top in attempting to cash in. The difference between the for-profits and the non-profits is that Wall Street demands continual growth in the numbers for the for-profits, and once the initial savings an ancillary company makes moving care out of hospitals to lower overhead facilities are assumed, growing "same-store" revenues and profits is very hard. See my earlier synopsis of that problem here.

The reason I bring this up again is that yesterday Richard Scrushy went on 60 Minutes to defend himself. Remember for a second that this wasn’t just a case like at Tenet of unnecessary upcoding (although they were billing group sessions as individual sessions so Healthsouth was doing that).  This was straight fraud–telling investors and the world that revenues and profits were one number while knowing that in reality they were lower, and changing thousands of documents so that the lies added up. Scrushy’s story is that all FIVE of his CFOs and a bunch of other senior staff lied directly to him about the numbers, and are lying now when they say Scrushy told them to alter them. Furthermore, he say that his stock sales at 3-4 times the current market price, netting him around $100 million, were mere coincidence, even though they did happen a month before the numbers finally started to tell the truth. (Actually this reminds me a little of another southern CEO’s protestations).

How will he do in court? Well, the fact that he hired a former actor from The Wonder Years who was 29 years old and had no corporate experience as his Chief Marketing honcho, and allegedly funded a series of Christian rock groups (see the third story down here!) and his wife’s habadashery company with Healthsouth money does look a touch suspicious. Meanwhile he was suing not only one poor sap on the Yahoo message board who claimed to have had an affair with his wife (he lied), but also Kim Landry, an ex-employee who suggested that Healthsouth’s stock would collapse.  Sounds like she had it about right! However, OJ Simpson is still walking the streets.

About the only thing I can think of in Scrushy’s defense is that there doesn’t seem to have been anyone prepared to go to the Feds to become a protected whistleblower.  I guess one of those CFOs wishes he’d thought of that now! Anyway, enough from me on this whole appalling issue, even if it is quite funny.  There’s a whole lot more here. 

Disclaimer: I had surgery at a Healthsouth ASC facility in San Francisco in March 2002, everyone treated me very well, there was no sign of the Wonder Years or any Christian rock at any time, and the drugs were great!

In an article on CBS Marketwatch, titled Only the poor pay full price, Michael Collins points out from a business point of view, the crazy pricing scheme in the U.S. healthcare "system". I had a similar experience last year when I had knee surgery.  I bargained heavily with my surgeon who wouldn’t take managed care contracts.  For the facility charge, the bill I saw was $20,000 but the facility only collected around $8,000.  Meanwhile a surgeon billed me over $100 for a second opinion, but the PPO only paid $43. I remember this back in 1990 in Alain Enthoven’s class.  Several hospital representatives in the class used to complain about being forced to give managed care plans "discounts".  Enthoven called hospital billing a "fiction".

Collins makes the obvious point that if you do not have insurance, you will be charged the full price.  The provider may not expect to get their money, but if you have any assets, the hospital/clinic will come after you for the money–and you’ll be paying at the full rate, which no insurer pays. 

In fact it may be worse.  If you do have insurance and you pay 20% of the fee, your insurer may make you pay them 20% of the full fee, while they get the negotiated discount that my classmates complained about.  Several Blues plans had plenty of legal problems when they were caught doing this practice in the mid-1990s, including Trigon (Virginia) which in essence was forced to pay large fines several times over in order for the state Attorney-General to allow it to turn for-profit. (I can’t find a reference to this but it was a big deal before they could get their S1 registration out in 1996).

Transparent pricing would appear to help everyone.  But for historical reasons (the need for cross-subsidizaton within providers from rich to poorly insured patients) it hasn’t emerged. Now for business reasons, no one wants to reveal their "deal". This is as true for hospital and physician care, as it is for drug rebates, and it gives the lie to health care being a "free" market.