The wave of megamergers involving health insurers could place the greatest pressure on both not-for-profit and for-profit hospitals, according to a report from Moody’s Investors Service, if these new combinations steer patients away from hospital-owned facilities.
The Moody’s report looked at the credit impact of major transactions already announced—such as the $69 billion acquisition of Aetna by CVS Health or Cigna’s $67 billion purchase of Express Scripts—as well as less-specific initiatives like the hospital-run generics company involving Intermountain and Ascension and the curious partnership between Amazon, JPMorgan and Berkshire Hathaway. All subsectors will be affected by these planned combinations and new entrants into the healthcare space, but hospitals will see the biggest impact if these deals place additional pressure on their already decreasing volumes and tight margins.
“These strategies would place insurers in direct competition with hospitals, which offer the same services and are also seeking to align with physician groups,” the Moody’s report said. “Insurers engaging in vertical integration would be able to provide preventive, outpatient and post-acute care to their members at lower costs than acute care hospitals, which are saddled with high-fixed overhead costs. To some degree, insurers have engaged in these strategies in the past. But as the pace and magnitude of these initiatives increase, they will be increasingly disruptive to hospitals' credit quality.”
The report flagged three recently announced transactions as especially worrisome for hospitals: the CVS-Aetna deal, Humana’s investment into Kindred Healthcare and the rapid expansion of UnitedHealth Group’s Optum into patient care.
By buying Aetna, CVS could direct the insurer’s members into its own clinics for low-acuity, outpatient care and therefore reducing visits to hospital-owned urgent care or other outpatient centers. Humana could similarly redirect home health and hospice patients to Kindred over services owned by hospitals.
Optum’s acquisitions of physician groups (like DaVita Medical Group) and ambulatory surgical centers (like Surgical Care Affiliates) are far scarier for hospitals, Moody’s said. The more providers Optum owns, the more it will carve out hospitals and other services from insurance plans from its affiliate, UnitedHealthcare.
“By owning physician groups, Optum, along with its health plan clients, would be better able to move toward a full-risk, population-based model that covers all care, including hospital and sub-acute services,” the report said. “A physician-centric, full-risk model would put control of the full premium dollar and expenses in the hands of physicians instead of hospitals. Physicians would have greater incentives to shift care to less-expensive settings, which would further reduce the use of inpatient and other hospital-based services, which would further hurt hospital margins.”
The response from hospitals will be even more consolidation, Moody’s said, to try and make their provider networks “indispensable” in the eyes of insurers.
There were smaller positives for hospitals to find in the Moody’s report. The Intermountain-Ascension-SSM-Trinity generics company could lower prices for those drugs by its mere existence, the report said, and remove a consistent pressure on hospital margins. Another credit positive could come if Amazon makes a stronger move into distributing medical devices.
In other sectors, the announced mergers will largely have a smaller impact. The Aetna-CVS and Cigna-Express Scripts deals would be credit negative for medical device companies and the insurers themselves due to increased debt and the risks of integration. Branded pharmaceutical companies, however, could see a major threat from these combinations as the united insurers-pharmacy benefit managers place a greater emphasis on controlling drug spending using the wealth of data at their disposal.
“With more analytics, these entities are likely to seek greater ways to target pharmaceutical use to the most appropriate patients, and reduce use in patients less likely to benefit from particular treatments,” the report said. “This too will dampen overall drug use. We anticipate a growing move toward ‘value-based’ pharmaceutical reimbursement.”
John joined TriMed in 2016, focusing on healthcare policy and regulation. After graduating from Columbia College Chicago, he worked at FM News Chicago and Rivet News Radio, and worked on the state government and politics beat for the Illinois Radio Network. Outside of work, you may find him adding to his never-ending graphic novel collection.