March 21, 2018
Why the AT&T-Time Warner Case Matters for Healthcare
by Chas Roades
1. With healthcare entering another era of vertical consolidation, the AT&T-Time Warner case will be an important bellwether
Consolidation in healthcare has traditionally been horizontal—hospitals buying hospitals, health plans rolling up smaller insurers, physician groups employing independent doctors. Much of the M&A activity in healthcare has been driven by our third-party payer framework, and the drive to gain negotiating leverage against others in the value chain.
By this logic, a hospital system can negotiate lower prices from suppliers, and higher prices from insurers if it controls more beds in the market, leading multi-system hospitals to dominate the provider landscape. According to the Agency for Healthcare Research and Quality, 69.7% of all US hospitals are now part of a multi-hospital system, accounting for 91.6% of all discharges in 2016.
But this kind of consolidation appears to be reaching a limit. On the provider side, most major markets are dominated by a handful of local hospital systems. On the payer side, most markets are controlled by the local Blues plan and one or two of the national insurers. Attempts at further horizontal consolidation are increasingly running into antitrust challenges: witness the demise of the national-level Anthem/Cigna and Aetna/Humana mergers, or the prolonged saga of the Advocate/NorthShore merger in Chicago. (It’s worth noting that the payer/provider battle for negotiating leverage is a local affair—the Advocate/Aurora merger does not raise the same concerns, because their markets do not overlap, and each side negotiates with a different Blues plan.)
Healthcare now seems headed toward vertical consolidation—similar to the kind of deal that AT&T and Time Warner are proposing. The new logic of consolidation, in theory, is about integrating care for the consumer. Facing pressure to reduce the total cost of care for consumers, employers, and the government, many in healthcare are now looking up and down the value chain to create new combinations that can capture savings by eliminating middlemen and shifting consumers to the “right” level of care consumption.
When a hospital employs a physician, it’s like Comcast buying NBC to attract viewers. But in this case, the viewers are patients
For years now, hospitals have been “acquiring” physicians—either by employing them directly or by purchasing their practices. Between 2007 and 2013, according to the Government Accounting Office, the number of “vertically-consolidated” physicians roughly doubled. At the same time, insurance companies have been buying physician practices, along with other care assets (surgery centers, urgent care clinics, and the like). And with the advent of “accountable care”, delivery systems have begun moving upstream to acquire health plan functions as well, through partnership or purchase, or by starting from scratch in the insurance business.
Meanwhile, a new wave of merger activity has kicked off elsewhere in the value chain, with CVS Health looking to acquire Aetna, Cigna proposing to acquire Express Scripts, and Humana buying a large chunk of the postacute chain Kindred Healthcare.
Many of these deals bear striking similarities to what’s going on with AT&T and Time Warner. In that deal, a distribution network is seeking to combine with a content provider—the theory being that bringing those two assets together will enable broader, more efficient distribution of content at a lower price to consumers. (At least, that’s what they’ll be arguing in court.) The healthcare deals share the same logic: think of hospitals and health plans as “networks”, and doctors and drugs as clinical “content,” and the parallel becomes clear. When a hospital employs a physician, it’s really just like a cable network (Comcast) buying a content provider (NBC) to attract viewers. But in this case, the viewers are patients.
2. Policymakers and economists are (rightly) worried about the potential negative impact of vertical integration—in healthcare and beyond
So, where’s the harm in that? Economists worry about two potential problems when vertical consolidation happens: higher prices and reduced choice for consumers. In the case of AT&T/Time Warner, the worry is that a lot of the content consumers want will be tied up by networks they may not have access to. I’m currently not an AT&T subscriber. How will I be able to catch up on Game of Thrones if AT&T decides to restrict streaming the show to only its subscribers? Or more likely, what if AT&T decides to allow other networks to carry Game of Thrones, but only for a higher price? As a consumer, I suffer either way.
The same kind of concern exists in healthcare—with good reason. When hospitals acquire physician practices, very often the price of physician services increases. It’s well known that the price Medicare (and thus commercial insurers) pays for a hospital-based services is higher than the price paid for the same service performed by an independent doctor. Getting access to hospital pricing is one of the key motivators for physicians to enter into vertical arrangements.
Further, hospital systems often encourage those newly-acquired physicians to send their patients to hospital-owned services, measuring “keepage” and “referral integrity”—metrics that indicate how much of an employed physician’s business stays in-system. A whole army of consultants armed with analytic tools exists to help move those metrics in the right direction—within the bounds of what’s legally permissible.
By the same token, when a health plan acquires a primary care practice, often their first strategy is to narrow the referral networks of those physicians, steering business to lower-cost specialists and hospitals in order to generate savings. Even better, from the insurer’s perspective, is to channel those patients to lower-cost access points like ambulatory surgery centers and urgent care clinics—thus the recent moves by UnitedHealth Group into those parts of the delivery system. All of this saves the insurer money (which may or may not get “passed along” to the consumer) but restricts consumer choice.
The key test for vertical consolidation in healthcare will be the impact on price and choice of services for consumers
The proposed acquisition of Aetna by CVS has raised similar concerns about consumer choice. Economists worry that CVS will have a strong incentive to steer Aetna’s health plan enrollees to CVS to get their prescriptions filled. And having access to CVS’s MinuteClinics could enable Aetna to generate savings by diverting patients away from traditional care providers.
As we’ve pointed out elsewhere, the scale and scope of the CVS-Aetna merger makes it worth monitoring closely, as do all of the boundary-blurring deals we’re now seeing in healthcare. The key test will be how they impact the price and choice of services consumers enjoy in the market. Depending on the outcome of the AT&T/Time Warner case, the Justice Department could be emboldened to scrutinize these kinds of vertical combinations much more closely.
3. For vertical integration to work in healthcare, it must entail real clinical integration that benefits consumers, not just financial integration that raises price and restricts choice
For all the hand-wringing of economists about the potential evils of consolidation in healthcare, there’s actually not great evidence that vertical integration is all that bad, at least compared to traditional, horizontal M&A. Even the best academic work on healthcare competition recognizes this important shortcoming in the literature.
We don’t need academic literature to know that if consumers are to benefit from vertical combinations, these new entities must move past the mere financial integration that enables them to raise price and restrict choice. What’s needed is true clinical integration—combining the different pieces of the healthcare continuum in ways that enable delivery of better care at lower prices to consumers. We should ask (at least) five questions of every proposed vertical merger:
- Does it enable the delivery of a better care outcome?
- Does it facilitate better coordination of care and management of consumers across transitions of care?
- Does it enable care to be delivered at an appropriate level, in an appropriate setting, with maintained or improved access?
- Does it produce a lower total cost of care, and how will consumers share in the benefit of lower cost?
- Could a partnership arrangement have achieved the same goal, without running the risk of creating undue market power?
At a moment of rapid change in our industry, it’s natural that we’re seeing new mergers and combinations that are unlike what we’ve become used to in the past. Just because consolidation has meant higher prices and less choice in the past doesn’t mean that’s an inevitable outcome. But as merger activity continues to accelerate in our industry, we should hold those involved to a high standard of proof that their increased scale and scope will truly deliver better care for us as consumers.