The Quiet Takeover: Insurers Buying Physicians and Hospitals

Payors might provide more than reimbursement in the next few years — they may be signing the check to buy your hospital or the physicians that drive your referrals.

Payors buying physicians
Two related but distinct trends are emerging, and quietly: insurers buying physician groups and insurers buying hospitals. The first development has been subtle. Four of the five largest health insurers have increased physician holdings in the past year, according to a Kaiser Health News report.  Recently, UnitedHealth Group has been buying medical groups and launching physician management companies. The same report said the strategy has stirred little controversy largely because few people know about it. One physician group mentioned in the report learned of United's new strategy only when it received a phone call from company with an offer.

So far, UnitedHealth is the payor with the largest revenue to buy physicians, but it is not the first. CIGNA Medical Group launched its CareToday clinics in 2006, providing "an alternative to traditional [physicians'] offices" in Arizona. Last December, Louisville-based Humana purchased Concentra, an urgent-care system based in Addison, Texas. In early June, Indianapolis-based WellPoint acquired CareMore Health Group, a health plan operator based in Cerritos, Calif., that owns 26 clinics.

"There is definitely a national landgrab over primary care physicians," says Ted Schwab, partner at the Health and Life Sciences practice of Oliver Wyman, an international management consulting firm. This creates a clash between the insurance industry and hospital industry as both fight to control primary care, the epicenter of care management. "We work with insurance companies all over the country, and every single one of them is discussing this in their board rooms. Some are very aggressive, some have decided not to do it," says Mr. Schwab.

The model poses a natural threat to providers, particularly hospitals. OptumHealth, UnitedHealth's subsidiary, has said its physician networks serve all players in a health system, including rival health plans with policyholders who use the same physicians. Still, the CMO of a physician group in Nevada declined UnitedHealth's offer, saying it would compete directly with the group's business model, according the same Kaiser Health News report. Primary care physicians are already in high-demand, and by acquiring them in certain markets, insurers could potentially wrest control of entire health systems by influencing referrals — whether that is an explicit intention or not.  

Payors buying hospitals
A proposed deal in Pittsburgh has proven insurers can take their acquisitions one step further and buy entire hospital systems. While the concept may be making headlines, the unorthodox model is leaving many players in the healthcare industry with cold feet. "Everybody is looking at one another, saying 'I don't mind being second, but someone should go first,'" says Mr. Schwab. "This is a huge chance to take." So far, only a handful of payors and providers have made a move and a transaction has yet to involve a major hospital system, making the proposed merger between Pittsburgh-based West Penn Allegheny Health and Highmark highly significant.

Insurance companies experimented with buying hospitals in the 1990s, a trial-run Mr. Schwab calls "an unbelievable failure." For instance, Louisville-based Humana had to abandon its strategy of jointly operating healthcare plans and 76 hospitals across the country. Industry experts suggested the dual structure would likely lead to internal conflicts and weakened profits. Bond raters said it alienated physicians, who would not refer patients to Humana hospitals if they objected to certain managed-care practices. Humana ended up dividing the hospital operations into a spinoff company called Galen Health Care in 1993.

Nearly 20 years later, a national deficit and sky-rocketing healthcare costs may now play in payors' favor. Providers are already collaborating with payors through care coordination initiatives and accountable care organizations, but acquiring hospitals involves a different set of political, economic and cultural factors. "Every politician and big employer is pointing to healthcare as one of the major reasons the country is going bankrupt," says Mr. Schwab. "Insurance companies believe they can bring efficiencies to the table, and the integration of insurer and delivery system can bring a 20-30 percent reduction to the cost structure."

Keeping an eye on Pittsburgh
Five-hospital West Penn Allegheny, which is the region's second-largest chain, has faced bleak finances for the past five years and reported a $26.8 million operating loss for the first half of fiscal year 2011. Under the proposed transaction, Highmark would buy the system for nearly $500 million and assume approximately $1 billion in liabilities. Rating services are closely watching to see how the deal unfolds — Standard & Poor's quickly revised West Penn Allegheny's credit rating from negative to "developing," indicating the game-changing nature of the deal.

The proposed deal in Pittsburgh involves unique circumstances, such as Highmark's contentious relationship with West Penn's rival, University of Pittsburgh Medical Center. Disagreement over contracts led to a payor-provider standoff, with frustrated employers in the area asking the regional giants to stop bickering and playing games. UPMC finally put an end to negotiations, announcing the cancellation of Highmark contracts by the end of June 2012. After learning of Highmark's plan, UPMC announced it would not sign a new contract after the acquisition in refusal to subsidize competition.

Changes in payor-provider relationships
Unique elements of provider-payor relations combined with regional market conditions make it difficult to predict transactions on a national scale. Short of mergers or acquisitions, some hospitals may form an honest spirit of collaboration with payors through medical homes and bundled payments. Others may remain isolated.

If payors and hospitals are remote enough, though, the latter risks being considered a means to an end in their marketplace. "There are really separate worlds between payors and providers in some markets," says Bill Woodson, senior vice president of Sg2, a healthcare intelligence and information services company based in Skokie, Ill. He names San Francisco as a city with mature physician organizations and IPAs that have been around since the 1990s. "They're sophisticated and able to manage patients and risk. The dynamics between these groups and payors are interesting. If I were a health system, I'd be worried I'd be seen as a commodity over time," says Mr. Woodson.

Payors are acting aggressively to control costs in some marketplaces, calling hospitals out for high-cost care, devising new methods to reduce spending and leaving consumers in the crossfire. In January, Blue Cross Blue Shield of Massachusetts launched its Blue Cross Hospital Choice plan, which limits the use of 15 higher-cost hospitals. Employers that sign up for the plan receive a reduced premium increase, but BCBS members face extra charges if they go to high-cost hospitals, which include prestigious organizations such as Brigham and Women's Hospital, Massachusetts General Hospital and Dana Farber Cancer Institute. "So consumers are being told, 'You can still go wherever you want, but if you go to this particular hospital, your out-of-pocket costs will be much higher,'" says Mr. Woodson. "Some consumers will be caught between brand perception, quality and marketplace power."

A game of finger-pointing
Insurers are not only holding providers more accountable, but are also beginning to tout their management skills and low-costs — a dig to hospitals and physicians. Many insurers point the finger at physicians as the culprits in rising healthcare costs, saying they order too many tests, name-brand prescriptions and implants.

Samir Qamar, MD, stands on the other end of the spectrum. In 2009, he cut insurers out of the equation when he founded MedLion, a direct primary care physician network based in Monterey, Calif. Patients pay $59 a month for discounts on primary care, such as $10 physician visits, up to 50 percent discounts on labs and imaging services, and subsidized medication plans. Patients are referred to non-affiliated health insurance agents that provide plans for catastrophes. Cutting the insurer out of primary care has led to big cost-savings, according to Dr. Qamar.

"For instance, we refer to a GI physician that cuts a $2,000 colonoscopy down to $700. There are a lot of inflated costs because of insurance. If you can promise a physician you'll pay cash upfront, then physicians can give big discounts. It's estimated that up to 35-40 percent of overhead costs in a private practice come from insurance-centric systems," says Dr. Qamar. The MedLion model is friendly with hospitals, acting as a "gatekeeper" and treating patients before they become preventable hospital admissions. "We help hospitals save money by reducing uncompensated care," says Dr. Qamar. "We receive a ton of patients from hospitals."

A conundrum for consumers
Consumer reaction may be one of the most fascinating developments in payor-provider mergers, as the model is likely to create dissonance in attitudes towards quality and price. Historically, consumers have resented limitations on which physicians they can see or where they can receive an operation. "Now, they're looking at their paycheck and thinking, 'Wow, if you tell me you'll give me a break and reduce my cost for limiting my choices, I'm all in,'" says Mr. Schwab.

But, when it comes down to it, how would patients feel knowing the hospital delivering their care is owned by an insurance company? "It would scare the daylights out of me," says Mr. Schwab. "I don't think insurance companies are full of bad people who want to skimp on care, but I think the management competencies are different for what it takes to deliver care."

Related Articles on Hospitals and Payors:
UnitedHealth Fined $1M for Antitrust Violations
Highmark to Acquire Pittsburgh's West Penn Allegheny Health System
Payors in the News: 10 Recent Developments

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