ROMANCE IS IN THE AIR: MERGERS EVERYWHERE
Is it just me or did the pace of health plan mergers and consolidations move into a higher gear in recent weeks? Anthem is courting Cigna, and Cigna is sweet on Humana. Centene Corp and Health Net announced their betrothal, and Aetna executives disclosed their affection for United Health. On the provider side, the Providence Health and Services and St. Joseph Health marriage announcement dominated the industry news cycle during the last week of July. So, what’s going on?
According to my economist friends, this type of activity is a normal response in diverse markets when strategies to abate unbridled cost inflation threaten bottom lines and market share. The result is the formation of oligopsonies or oligopolies to transform and stabilize such markets. What is happening with the health care industry, though, is different because both trends are occurring simultaneously and at sprint levels, as both buyers (payers) and sellers (providers) seek to strengthen their market positions through consolidation.
To be sure, the health care industry is headed towards an uncertain but radical new future. Our current delivery and financing model will not constrain the growth of health care costs that almost everyone believes is needed. At 5.8 percent –more than double our overall inflation rate– the latest projection indicates that the rise in annual spending on health care has returned to pre-recession (2007) levels and that the percentage of our gross domestic product it consumes will reach 20 percent by 2024. The ever-increasing consumption demands of an aging population all but guarantee this outcome. Over time, these market forces will drive out marginal players, as government officials seek to tame Medicare cost growth with debilitating payment cuts and reform strategies. And, as Medicare goes, so go other market segments. So, if a current player wants to be part of the new health care paradigm, whatever that is, that player must avoid being marginalized during this reboot of the system.
Many industry analysts assert that this consolidation trend serves to retard the evolution of the change needed by creating giants with the power to leverage pricing in the marketplace; that is, the amalgamation of market resources insures that the unsustainable rise in health care spending continues. To that point, a prominent health care executive and mentor provided the following lament: “Our health care markets are driven by supply, demand and two other forces; fear and greed. That makes what’s right to do a lot harder.”