by Bill Darling
For over a year, the health industry has watched the Centers for Medicare and Medicaid Services (“CMS”) develop rules for the development of Accountable Care Organizations or ACOs. For a variety of reasons the ACO final regulations have not proven to be the system integrator that was envisioned by those who created it.
Federal Payment Program Initiatives
Like so many government-led program reforms, there have been some successes. However, in this case, political influences, a lack of coherent program design in PPACA’s statutory provisions and an inability of CMS to develop rules that inspired the industry to participate have lessened the initial impact of the ACO program. The result has been that the prime health systems that were touted as the models for the program are not participating. As of yet, the federal government has not shown itself nimble enough to implement a successful collaborative effort to bend the cost curve. The recently announced Comprehensive Primary Care Initiative represents an attempt to integrate the governmental payment programs and private payors into a more coherent system, but the program has not yet begun.
On November 14, 2011, the CMS Innovation Center unveiled an additional program called the Health Care Innovation Challenge. The program will award grants to applicants who implement the most compelling new ideas to deliver better health, improved care and lower costs to people enrolled in Medicare, Medicaid and the Children’s Health Insurance Program--particularly those with the highest health care needs. The program is open to providers, payers, local government, community-based organizations, public-private partnerships and multi-payer collaboratives. CMS says that the Innovation Challenge will support projects that can begin within six months of receiving a grant award. Each grantee project will be evaluated and monitored for measurable improvements in quality of care and savings generated.
Large Payors Fill the Gap?
Large payors are seeking to fill that vacuum through creation of a variety of integration systems that they expect to manage costs and outcomes. Payors have tried a variety of indirect methods to control costs, such as disease management programs, without major success. The payors’ strategy now appears to be direct control of patient care through acquisition of physicians and health systems.
If the Medicare program is not exactly leading the way to develop a new health system, are these payor models changing the way health care in the U.S. is delivered? If recent trends in the consolidation of the players in the health care industry hold true, it certainly would appear so. The payor-driven consolidation models will continue to bring pressure on the remaining independent private physicians. The future of solo practitioners and group practices is further clouded by the extraordinary number of practice and health system consolidations. Another question that must be addressed is how these consolidations may affect the care delivered in these new practice models.
A large number of the recently reported health care transactions involve acquisitions of health care professionals and facilities by payors. This fact gives credence to what some fear is the possibility of a complete take-over of the health industry by health insurance companies. Health care expenditures make up a surprisingly high percentage (17.9%) of the Gross Domestic Product of the U.S. The health industry has operated as a cottage industry with various independent professionals, hospitals and insurance payors providing services on more or less a piece goods basis. No one would deny that there is much inefficiency in the system.
Payors and employers have major stakes in reducing the cost of health care. A coherent system can only be created by players that have the capital to integrate the system and the ability implement new payment and practice models. Payors not only have the capital, but the data derived over years of claims payment and adjudication to accelerate the change. One must wonder however if this sudden quickening of payor acquisitions is predicated on the assumption that the health care system will ultimately be a single payor system with large payors selling the services of its owned or controlled physicians and health systems to that single payor.
The health industry has periodically been the target of acquisition fever—not always with positive results. For example, the physician practice management (“PPM”) companies of the 1990’s came and went leaving large swaths of litigation and upside-down physician capitation risk pools in their wake. The PPM industry at that time did not have to ability to efficiently manage health care costs.
So is there something different about the latest round of acquisitions? The answer is clearly yes. In these rarest of times, multiple players are seeking to control the way that health care will be delivered in a wide variety of ways. The traditional lines between the ownership and control of physician groups and health systems have become hazy. Venture capitalists, health insurers, hospitals and physician groups have become involved with equity positions in elements of the health system that they have not traditionally owned. The large amount of venture capital invested in the consolidation efforts in 2011 will likely change the face of health care forever.
Big Box Stores and Health Care
Along with the acquisitions discussed below, there has been a sudden uptick in “retail” medicine (e.g., provision of traditional physicians’ services by physicians and mid-levels in big box stores, payors and big box stores offering low cost generic drug plans). In some instances payors are reimbursing pharmacies and YMCAs to manage control of diabetes care.
The announcement this week that Walmart is seeking to identify opportunities to expand its health care retail footprint is potentially earth-shaking. Walmart’s RFI provided to potential venture partners is the most dramatic of notions. Walmart’s RFI sets out categories of services it would like to explore with the potential partners and leaves the details as to how that venture would be accomplished for the partners to address.
There are clearly as many regulatory issues (e.g., facility/professional licensure, anti-trust, etc.) as there are business questions wrapped up in Walmart’s proposal. Does Walmart provide the services in its existing stores or are there separate “health facilities? Do the Sam’s member stores affiliated with Walmart offer an “enhanced” experience or lower cost for its members than Walmart? What does Walmart do with its extensive and prominently displayed alcohol and candy products? Do diabetic patients have to wade by these product racks on their way in and out of their visit for diabetes testing? Will the product representatives be schooled to not offer that tasty sample burrito to patients in-store for health testing? Will the training for that job, that we all seem to covet—the Sam’s Club greeter--now include providing the customer (patient?) a request for a signature on a HIPPA consent form?
Walmart has shown itself to be the most nimble of retailers. These questions are not designed to denigrate Walmart’s efforts; they only represent a surface discussion of the issues that will constantly be confronting the whole health industry as the business model is turned on its head. Walmart has already issued a statement that the RFI may be overly broad in certain elements. Regardless of any reduction in the scope of the Walmart RFI, its potential to change health care is enormous.
Another issue that cannot be lost in all of this is the independent judgment of those in whom we place our faith to make health judgments for us. This potential new model does not involve a simple consumer question--does a shopper want diet or regular soft drinks. If a liquor store proposed to provide diabetes counseling and testing I suspect there would be a loud guffaw from the public. As I say, I am not denigrating the RFI, I am just asking some questions that I am sure that many potential Walmart partners are diligently considering in their response to Walmart.
Physician/Patient Relationship Changed?
With each of these changes to the health care delivery system there has been a corresponding weakening of physicians’ control over patient care. Some of the changes are brought about by free market forces that seek to consolidate historically fragmented markets that operated inefficiently. There have been legislative changes that have weakened corporate practice of medicine prohibitions. The most important factor in this latest episode of market consolidation is that physicians (except in rare cases) do not have access to capital to finance the every increasing cost of delivering care and are restricted by federal regulation (e.g., Stark Law and Anti-Kickback Statute). Likewise, hospitals have experienced difficulties in integrating physicians into the hospital structure because of difficulties in integrating existing medical staff personnel into employed positions in the hospital and the staggering cost and regulatory issues that accompany the integration process. It has been reported that the bond ratings of at least one hospital system have been downgraded as a result of physician integration issues.
What is the Current State of the Acquisition Market?
Examples of recent acquisitions give a better view of their potential to have substantial impact on how physicians provide service and the substantial potential changes on the physician-patient relationship. Understand that the following are only anecdotal and are in no way a compendium of these acquisitions. They do, however, cumulatively demonstrate a pattern that is far reaching.
Recent Acquisitions of Physician Practices/Health Systems by Payors
Highmark/West Penn Allegheny Health System
Perhaps the most dramatic of these acquisitions was the Highmark, Inc., a Pittsburgh insurer, purchase of the West Penn Allegheny Health System.
- Highmark acquired the second-largest hospital chain in the Pittsburgh, PA region.
- West Penn Allegheny Health System has a 19-hospital network and employs 2,881 physicians.
- Highmark has agreed to invest as much as $475 million in West Penn Allegheny Health System, which has not recently shown a profit.
- UPMC, the other health system in Pittsburgh, has announced that it has entered into a provider agreement with Aetna and plans to terminate its agreements with Highmark for commercial patients at the end of the existing contracts. Highmark filed for an injunction against UPMC to prevent the system from advertising the termination of the agreements and for other relief. The court did not grant an injunction.
West Coast Payor Acquisitions
The acquisition activity on the west coast has highlighted another route that large payors are taking to develop their own systems of integrated care. The following are examples of how payors are partnering with physician groups which are capable of delivering coordinated care.
WellPoint/CareMore Health
WellPoint purchased California-based CareMore Health. An important aspect of this acquisition is that CareMore Health operated a Medicare Advantage plan supported by a large existing integrated physician/mid-level staff.
CIGNA/CIGNA Medical Group
An acquisition by CIGNA of a mature multi-specialty practice founded in 1968 in Phoenix is another example of a payor acquiring physician practices. CIGNA has now expanded CMG to 32 locations.
United Healthcare/OptumHealth
United Healthcare has created a subsidiary called OptumHealth. OptumHealth has four divisions. One of theses divisions, Collaborative Care is focused on the development of projects that integrate care through physician groups.
- OptumHealth is building physician practice management capabilities.
- The company has physician practice management activities in California, Arizona and Nevada.
- OptumHealth purchased the management arm of Monarch HealthCare, an Irvine, California association that includes approximately 2,300 physicians in a range of specialties.
- OptumHealth’s Collaborative Care unit has acquired the management arm of AppleCare Medical Group and Memorial Healthcare IPA in California.
- Collaborative Care acquired an 80% stake in WellMed Medical Management, which manages a medical group with clinics in Texas and Florida focused on chronic care and Medicare Advantage.
- OptumHealth has developed NextDoor Health, which partners with local physicians in Texas and elsewhere to open retail clinics in Walmart stores.
- OptumHealth launched LifePrint, a physician network in Phoenix to serve United HealthCare’s private Medicare plans, including: AARP® MedicareComplete® from SecureHorizons®; SecureHorizons® Group Retiree Plan; and Evercare® DH.
OptumHealth says it will serve rival health plans whose policyholders use the same physicians. It is unclear whether this strategy will work as intended. Only if competitors (other payors, physicians and hospital systems) of all types see OptumHealth as a partner and not a competitor is it likely to work smoothly.
Humana/Concentra
- Humana bought Concentra, a chain of walk-in urgent-care and work-site clinics, in December 2010.
- Humana has also launched a Medicare Part D prescription drug plan (PDP) with Walmart Stores, Inc. to provide Medicare beneficiaries including seniors and the disabled.
Payor-controlled Networks
Payors are seeking to sell core management services to the health industry. The acquisition of physician groups appears to be the main strategy of some of the large payors to consolidate the health system, maximize its efficiencies so that they can sell the services of these efficient physician groups to self-funded employers and other payors. The Walmart RFI is another reason that payors are trying to consolidate the health market. Clearly, the large payors have been transitioning out of the insurance risk business for some time. If the ultimate result of health reform is a single-payor system these payor acquisition strategies make even better sense.
The consolidation of health care is moving rapidly. It is difficult for the remaining independent physicians and health systems to know what their strategy should be. The most important element of a strategy must start with a local analysis of the market place. However with players like Walmart potentially entering the market a national focus cannot be ignored.
Really appreciate your insight into this health care market consolidation and the impact each purchase has on other segments.
Especially thought provoking questions regarding the precious physician-patient relationship. Anti-trust issues as well as the movement away from its core business (risk) for insurers is worth pondering.
All-in-all, where will competition and choice (the "market")end up in relation to these new health care conglomerates?
Many thanks!
Posted by: Jerry Malooley | November 15, 2011 at 07:03 AM
Thanks it is a wild ride
Sent from my iPad
Posted by: William Darling | November 15, 2011 at 08:24 AM
Good artilce. It raises interersting public policy as well as free market issues not to mention how we align health providers interest with the need for lower cost/affordable and high quality healthcare. Currently "they" say that a third of healthcare provided is harmful, a third is not necessary and a third (or maybe as much as 40%) is beneficial. I am not sure having the large payors control large segments of the industry is condusive to the interests of the larger population.
Posted by: Buddy Steves | June 26, 2012 at 11:37 AM