Get Ready for Consolidation
Like it or not, get ready for major consolidation in the health care space, and be prepared for its effects on the managed care market. Even if the government blocks the proposed health insurance plan mergers that were announced this past summer, consolidation in some form is going to occur.
That was the consensus of experts contacted by First Report Managed Care (FRMC) to discuss the ramifications of the proposed mergers that would essentially create a “Giant Three” out of the “Big Five” health insurers. Aetna’s $37 billion deal to purchase Humana, as well as Anthem’s $48 billion play for Cigna, leaves only UnitedHealth Group without a partner.
The deals are not expected to be finalized until late next year, and many are wondering if state insurance commissioners and the US Department of Justice will even let the deals move forward. Those we spoke with believe that it hardly matters what is decided about these specific proposed mergers.
“The fact is, even if the deals don’t go through as proposed, these companies will find other ways to get bigger,” Anthony Morreale, PharmD, assistant chief consultant for clinical pharmacy services and health services research, Department of Veterans Affairs, told FRMC. “It’s capitalism at work. If there is room for efficiencies and market grab, these companies are going to seize that.”
Gaining Reach and Shoring Up Weaknesses
Gary Owens, MD, president of Gary Owens Associates, a medical management and pharmaceutical consultancy firm, agrees. “It’s not so much a desire to consolidate as much as it’s a necessity. They need to create economies of scale.”
Each insurer offers something unique. Humana is strong in the Medicare space, whereas Cigna serves mostly employers. Aetna is spread across the employer and Medicare/Medicaid areas. Anthem brings the power of the regional Blue Cross Blue Shield plans.
Thus, consolidation ends up being “a way to gain reach into an area where you might not be strong,” noted Dr Owens, who is also a member of the FRMC Editorial Advisory Board (EAB). He pointed to Humana’s large Medicare population as one of the reasons Aetna wants to acquire it. “It’s a business imperative, plain and simple,” he said.
Norm Smith, president of Viewpoint Consulting, Inc., which surveys managed markets decision-makers for the pharmaceutical industry, said he “would be shocked if the mergers don’t go through.” And while he agrees that forces of capitalism are at play, the Patient Protection and Affordable Care Act (ACA) is driving the move, as well.
“The ACA limits profitability of the insurance companies,” said Mr Smith, a member of the FRMC EAB. “Eighty-five percent is supposed to be spent on members and 15% on overhead. These companies are playing by the rules, but making the denominator bigger.”
Effect on Managed Care
Some see the mergers as inevitable, but worry about their effect on managed care. “I certainly hope that something other than what’s been proposed goes through,” said Arthur F. Shinn, PharmD, president of Managed Pharmacy Consultants, LLC, and also a member of the FRMC EAB. The new Giant 3 “will be able to control provider rates and estab- lish specific drug formularies that are restricted. I don’t see such consolidation as being in the best interest of society in general or plan members.”
The payers are insisting that consolidation will be better for members, as it will increase access. But Dr Shinn does not see it that way. “To me it adds up to more restrictions, more utilization control, and more market dominance” he explained. “Eventually I see that spilling over into the employer market.”
Others are also concerned about the impact on consumers. “There are likely to be too few choices, and in some markets no choice at all,” said Barney Spivack, MD, a member of the FRMC EAB “If you are in a managed Medicare plan your choices may be further limited.”
Access to Drugs, But Higher Copays
Mr Smith acknowledged that formularies will become more restricted, but not to the point that consumers will be denied medications outright. “I am hearing that there will be increasingly closed formularies,” he said. “They will be extremely tight, and that will be reflected in lower premiums for those who choose those plans. There will also be plans with more generous formularies offered by the same payers. However, they will be designed with higher copays for the right to access more medications.”
Despite his concerns about consumer choice, Dr Spivack agrees that plan mem- bers should be asked to foot more of the bill for access to certain medications. “Just because a medication is available doesn’t mean it should be provided at no cost to the consumer.”
“It’s more of a political issue,” said Dr Morreale. “Will Congress ever draft legislation that restricts the cost of some of these drugs?” In the meantime, “as payers consolidate they will be in a position to negotiate pricing and secure preferred status. You already see it happening with the hepatitis C medications.”
Net Price is What Matters, Not Wholesale Cost
As for consolidation’s impact on the cost of high-priced specialty drugs, some experts think it is either a political matter, or a non-issue because net cost, not wholesale cost, is what really matters.
Mr Smith seconds this, noting that net price is what counts. “What matters in terms of getting on the formulary is not the WAC [wholesale acquisition cost], but the net pricing, which will continue to be driven down for the more ‘commodity-type’ classes of drugs.” Mr Smith cited medications to treat moderate-to-severe pain as an example. “Prices of those drugs will be driven to within 10% of their margin,” he said. “And access to them will be more restricted.”
Mr Smith stressed that this is nothing new for the industry. “Managed care has always lived by the motto, ‘We don’t pay for convenience’,” he said, adding that he believes the move to lower priced drugs and more restrictive formularies would have occurred without insurance consolidation, “but maybe not as fast.”
Perhaps the best glimpse into the future, offered Dr Morreale, is to look to the past—specifically the evolution of formulary systems over the past 10 years. “Many managed care and PBM’s have been able to get dipartite formularies across facilities aligned into 1 formulary with more consistent criteria for use. At the same time, the number of drugs on our formularies have expanded.” The catch, is that to get on those formularies, pharmaceutical companies have had to compete on pricing and show evidence that the drug deserves to be there, and tolerate the fact that their drugs might be niched to specific patient populations.
“The healthcare systems have become more sophisticated and evidence-based,” Dr Morreale continued. “The review and approval process is more standardized. On the use side systems have focused more on internal academic detailing to provide more education to the provider on evaluating cost and benefit.” These trends continue to advance in nearly all market segments and consolidation will only accelerate the process as insurers, PBM’s and health systems get bigger and carry more clout and negotiating power.
Gird For What Is Coming, With Quality in Mind
The bottom line, explained Dr Morreale, is that so-called virtual managed care networks will continue to emerge. “The ACA created the ability to become a virtual managed care network,” he said. Larger organizations can use heft to impose their will in this new world.
Indeed, one of the reasons behemoths such as Anthem and Aetna feel the need to acquire is that hospitals and other groups are growing and consolidating, as well. Some are even setting up their own insurance plans. As hospitals buy practices and some move to compete with insurers, payers are likely feeling the pressure to get bigger.
As for what those with boots on the ground can do now to gird for what is coming—be it due to payer mergers, hospital consolidation, the ACA, or other market pressures—Dr Shinn advises providers to “look for long-term con- tracts now that you can live with. Also, try to get on top of quality metrics, and position yourself to practice with them in mind. Quality measures are not going away, so get ready for them.”
In fact, Dr Shinn hopes that government approval of the proposed mergers is contingent on more stringent, evidence-based quality measures. “If I had anything to do with it, I would make that a mandate for approval.”—Dean Celia
This is the first article in a two-part series on the effects of health care consolidation on the managed care market. Read Part 2 of this series, "Consolidation's Impact on Quality Analyzed," here.
