American consumers aren’t the only ones struggling with higher healthcare costs. CVS Health’s proposed $69-billion purchase of health insurer Aetna is driven in part by the companies’ efforts to get control over more of the costs they face, and to make their operations more efficient. The question for regulators, though, is whether the combination results in a company that uses its clout to help consumers or squeeze more dollars out of them.
Healthcare spending consumes a growing share of the U.S. economy, now accounting for 18% of GDP, or more than $1 out of every $6 spent. Federal actuaries project that every aspect of healthcare spending — on doctors, hospitals, drugs, medical devices, nursing homes — will continue to grow faster than inflation, driven by higher prices, not excessive demand.
You don’t have to be an economist to know that these increases aren’t sustainable for either consumers or the government, each of which picks up almost 30% of the healthcare tab. The healthcare industry is coming under increasing pressure to rein in costs by radically changing how providers and insurers make money, paying for the value of the services delivered by doctors and hospitals instead of the volume. That’s a big, much-needed shift.
One of the challenges in controlling costs, though, is the outsize market power wielded by big players in many segments of the healthcare industry. Ever since the early 1990s, insurance companies, hospitals, physician groups, drug makers and others have been consolidating, seeking to gain leverage against each other. In hospitals, for example, one study found that large holding companies controlled 60% of the facilities in 2013, up from 7% a decade earlier. The number of consolidations across the industry doubled from 2011 to 2015.
Which brings us to CVS, which is a giant in two areas: retail drug sales and “pharmacy benefit management,” in which it negotiates discounts from prescription drug companies on behalf of insurers and big employers. CVS also operates healthcare clinics in some of its stores, where physician’s assistants and nurse practitioners treat patients for minor ailments. By buying Aetna, the company would stretch further, providing not merely walk-in care and medicines, but also a means to pay for one’s healthcare needs.
That’s a similar model to another big insurer and pharmacy benefit manager, United Healthcare. And lo and behold, days after Aetna and CVS revealed their deal, United Healthcare announced that it was expanding its investment in physician services by buying DaVita Medical Group, which operates about 300 clinics, urgent care centers and outpatient surgery centers.
This sort of vertical integration is a direct response to pressure from government and big employers. The new approaches they’ve taken to paying for care — for example, paying a flat price for all the treatments associated with a major surgery, or offering a single fee per enrollee to cover all healthcare costs — demand more coordination and risk-sharing among primary-care physicians, specialists, hospitals and insurers. The obvious way to do that is to bring all those elements under one corporate roof.
Some companies — notably Kaiser Permanente, but also regional powerhouses like the University of Pittsburgh Medical Center — have combined insurers and providers into efficient, high-quality organizations. But that’s not the only way to improve coordination and cut waste. Other major players, such as the Mayo Clinic, have eschewed conglomeration in favor of partnerships.