Health Insurance Co's Buying Physicians and Hospitals

[Guest guest]

The Quiet Takeover: Insurers Buying Physicians and Hospitals

By Molly Gamble | July 14, 2011

Payors might provide more than reimbursement in the next few years — they may be

signing the checks to buy hospitals or the physicians that drive 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 , 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. "

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