Insurer mergers mean hospital CFOs should weigh payer options, experts say

With giant commercial health insurers announcing plans to merge, and experts predicting more consolidation, healthcare providers will be weighing their options when it comes to price negotiations.

With giant commercial health insurers announcing plans to merge, and experts predicting more consolidation, healthcare providers will be weighing their options when it comes to price negotiations.

"Historically, consolidated payer markets lead to lower hospital prices. A payer of greater size, representing a high-percentage of commercially insured individuals in the market, has greater negotiating power," said Jim Landman, director, healthcare finance policy, perspectives and analysis at the Healthcare Financial Management Association.

"Uncertainty about the future of the exchanges may have kept merger discussions at bay, but that uncertainty has been resolved by the Supreme Court's decision to uphold payment of subsidies through the exchanges."

[Also: Aetna buys Humana for $37 billion in largest-ever insurance merger]

Hartford, Connecticut-based Aetna in July announced it would buy Louisville, Kentucky-based Humana for $37 billion. Then, just a few weeks later, Indianapolis-based Anthem announced its takeover of Bloomfield, Connecticut-based Cigna in a $57 billion deal. Both of those mergers would essentially take the "Big Five" insurers and reduce them to three.

Phil Kamp, chief strategy officer at Valence Health in Chicago, said the Affordable Care Act contributed to payer consolidation through expanded Medicaid coverage and consumer empowerment to manage their healthcare. "These two realities set the stage for a market shift," he said.

"Payers clearly want to capitalize on the growth in these newly insured populations and find ways to bring greater scale to the number of lives they manage. When payers are less successful in attracting with their own brands, they look to acquire organizations that have a strong brand and ability to manage these newly insured community members," said Kamp, who sees no correlation between increased payer and provider consolidation.

[Also: Anthem to buy Cigna for $54 billion]

"Both are part of the maturation of the healthcare delivery system -- largely a local and regional business. The provider consolidation is a recognition to build stronger and comprehensive provider networks that can deliver improved population health and value-based care," he said. Provider consolidation today is driven by the need to reduce costs as Medicare, Medicaid and commercial payments come under pressure; to spread costs of new infrastructure; and form care-delivery networks, capable of population health management.

Kamp predicts "a time, in the not-too-distant future when these companies will have to solely focus on the complex business of integration. These types of integration efforts can easily take 18 to 24 months to complete. In this period, providers have the rare opportunity to take greater control and offer their own new and, more locally innovative, insurance options," he said.

"Given the payer market is fairly highly concentrated, any proposed merger will be scrutinized closely by the Federal Trade Commission and Department of Justice," said Landman. Of great interest will be the impact on local markets, especially where the two proposed merger partners competed against each other and the merger could significantly reduce competition."

Of course, that all comes back to how it affects hospitals, especially when they are deciding to negotiate prices with these giant payers or go it on their own through provider-sponsored plans.

"Many chief financial officers have been anticipating the downward pressure on payments and working to reconfigure their cost structure to give them greater flexibility on pricing. Some are developing their own health insurance products that compete against national health insurance companies," said Landman.

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He expects negotiations over fee-for-service rates to be to continue and payers and providers to collaborate on new payment models for population health management. "These models create a different dynamic between payers and providers and reduce the emphasis on negotiated rates," he said.

Ultimately, a consolidated payer could be your partner or competitor.

"Chief financial officers should think through how quickly you need to transition from fee-for-service to value-based care and what kind of organizational structure works best in your area."

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