Could Managed Care Companies Help Offset Rising Healthcare Costs? by Harlan Sonderling, Columbia Threadneedle Investments
- The managed care industry is consolidating, with three mergers announced this summer and intensive scrutiny due for at least the two largest.
- Congressional hearings provide insight into the political climate surrounding the pending mergers, but are unlikely to affect the actual competitive reviews.
- We believe that regulators will approve the mergers and that managed care stocks may reward those investors patient enough to endure the interim price fluctuations.
The House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law just held the first of a series of hearings on healthcare competition and its impact on consumers. These hearings follow the rapid rise in managed care merger announcements and the ongoing consolidation of hospitals and physician practices. Three additional fall hearings will focus on insurer, hospital and physician practice mergers. The Senate Antitrust Subcommittee will hold a hearing next week on health plan mergers. The House hearing was essentially a platform for hospital and physician groups to oppose insurer mergers and criticize one another, as each constituency circled the wagons to protect their own interests.
Insurance merger opponents testified that mergers would eliminate two of the five largest national insurance companies and threaten to reduce competition by creating narrower provider networks and inhibiting new entrants. The subcommittee Chairman questioned whether Medicare reimbursement rates have driven hospitals to buy physician practices, which has led to reduced competition and higher costs for the same services in a hospital setting rather than in a doctor’s office. The American Medical Association (AMA) wants physicians to have the ability to remain independent if they choose and called for clear antitrust rules so physicians can avoid ‘financial integration’ with hospitals. The AMA also asked to rescind the ban on physician-owned hospitals to enable more hospital competition. The AMA said that disparate payment systems make it difficult for independent physicians to compete with hospitals which are in a better position to negotiate with insurance companies and can obtain supplies and services at lower costs. Hospitals say competition is robust, that hospital costs are legitimately higher and that insurers are pressuring their reimbursement rates.
Finally, the insurance lobby, America’s Health Insurance Plans (AHIP), said insurance mergers can have pro-competitive effects and should be looked at on a case-by-case basis. AHIP said consolidation could facilitate new and better products and services while enabling operating cost efficiencies that reduce premiums. AHIP said the industry will offer more high-value products, bundled payments (reimbursements on an episode-of-care basis rather than traditional ‘fee for service’), and accountable care models tailored to meet the needs of patients. Naturally, AHIP blamed of rising prices on providers and hospital mergers.
Our view is that all three groups make valid arguments. Healthcare service consolidation – among hospitals, physician practices, insurers, as well as branded and generic biopharmaceutical manufacturers, drug distributors, and device makers – is a result of inevitable competitive forces and the incentives of the Affordable Care Act (ACA). Patients, in fact, stand to benefit both clinically and financially from the market and regulatory forces at work leading to a continuum of care that requires providers’ and payers’ clinical and financial integration. What is needed now are reasonable antitrust reviews driven by an understanding of clinical integration, and clear financial incentives and payments based on efficiency and quality. In fact, managed care mergers may offer the best hope of curtailing the drug makers’ and hospitals’ pricing power, particularly as managed care medical cost margins are largely regulated. Recently, the head of California’s public health insurance exchange, the largest state exchange under ACA, stated that insurance industry consolidation “could lower prices for consumers by offsetting the bargaining power of healthcare providers.”
We believe that antitrust regulators will examine all sides of the pending insurance mergers. This means hearing from state insurance commissioners and CMS, the federal agency that runs Medicare, especially in connection with the Medicare Advantage managed care program through which more than one-third of Medicare beneficiaries get their health coverage. While managed care investing is never for the faint of heart (especially now under the merger reviews), uncertain outcomes can lead to risks well worth taking. Managed care offers largely domestic revenue exposure, strong cash generation, reasonable debt levels and investment income offsets to interest rate increases, as well as no exposure to China’s economic slowdown or critical Supreme Court decisions. Stay tuned.