The Bridge

4 ways recent payer-provider M&A activity is reshaping health care

by Brandi Greenberg and Jessie Goldman

The health care industry is no stranger to mergers and acquisitions, but in a span of roughly two weeks last month, we saw three huge acquisition announcements that were anything but typical. CVS plans to buy Aetna for $69 billion in cash and stock; UnitedHealth Group's Optum unit will acquire DaVita Medical Group for $4.9 billion in cash; and Humana, along with two private equity firms, has agreed to buy Kindred Healthcare for $4.1 billion (Humana will pay $810 million for a 40% stake in Kindred's home health care business).

Many members have asked us about the potential implications of these massive deals, both individually and collectively. And while many health care journalists and market analysts (including our own experts) have commented on specific deals, our goal here is to look across these events and offer some thoughts about how these acquisitions, in aggregate, may signal much larger shifts in the health care landscape.

Below are four insights we believe have the most far-reaching implications.

Editor's note: The Bridge is published by Advisory Board, which is a division of Optum.

1. Ambulatory providers and sites of care are health care's hottest commodities

The CVS/Aetna, Optum/DaVita, and Humana/Kindred deals spotlight the expanding universe of organizations interested in acquiring physician practices, home health services, and ambulatory facilities (e.g. retail clinics, ambulatory surgery centers). This universe—historically limited to hospitals, health systems, and large medical groups—now includes national physician aggregators, health plans, and private equity firms. While some may argue that Optum's acquisition of DaVita's physician group is no more than an asset transfer from one capital partner to another, it's important to contextualize it as one part of Optum's larger ambulatory network aggregation strategy.

Providers eager to sell now have more options than ever. But that choice may not translate into flexibility: Any party actively buying physicians or other care team members is almost certain to dial up financial incentives and operational controls to reduce unnecessary cost and quality variation. At the same time, these new buyers are not legally limited in what they can pay for physicians, potentially making it harder for hospitals and health systems to attract local physicians. As the competition for ambulatory assets heats up, systems may end up in bidding wars they can't afford.

2. Mergers are expanding delivery networks to reduce the cost of care

All three deals aim to boost consumers' access to lower-cost, non-hospital health care options. We’ve previously seen efforts to reduce the cost of care by curating narrow provider networks. Now, Aetna, Humana, and Optum are taking the opposite approach, broadening the availability of ambulatory and home-based service providers.

Time and again we find ourselves talking about health plans' efforts to shift care to lower-cost, lower-acuity settings (including the home or virtual realm). Just last year, Anthem announced that they would no longer pay for certain hospital-based imaging procedures that could otherwise occur in outpatient settings. These deals aren't just restricting access to unnecessary higher-cost settings (like Anthem did), they're also looking to more seamlessly coordinate with the providers and care settings they want consumers to use.

3. A new kind of integrated delivery network (IDN) is emerging—and it doesn't include hospitals

Taken together, these mergers represent a clear break from earlier headline-grabbing attempts at horizontal integration (e.g., Aetna/Humana and Anthem/Cigna). Instead, they signal a new strategic bias toward a new type of vertical integration and ultimately point to the birth of a new kind of IDN (integrated delivery network) that’s distinct from the IDNs of the 1990s and 2000s in two important ways.

First, these networks don't include hospitals, which unquestionably served as the anchor of first-generation IDNs. Health system leaders built out extensive networks of physicians and outpatient sites in order to funnel volumes into their hospitals. These new IDNs turn that older model on its head. Aetna, Humana, and Optum are building networks of low-cost, ambulatory and home-based services designed to keep patients out of hospitals. If these models take hold, hospitals risk becoming commoditized sub-contractors with network providers steering patients to the lowest cost acute care options that meet their quality requirements.

Second, these networks are national, not just regional, in scope. CVS blankets the country with more than 10,000 retail pharmacies and clinic locations. Kindred at Home will offer home health and hospice services through their 40,000 caregivers. DaVita Medical Group includes nearly 300 medical clinics in six states and is joining an OptumCare network that already boasts 30,000 affiliated physicians.

Despite such broad market coverage, it will be interesting to see how these new IDNs manage the total cost of care without ownership over a fully integrated care continuum. Instead of cross-continuum control, they're focusing on high-cost settings (e.g. post-acute care) and system entry points (e.g. CVS clinics, physician offices). Moreover, it remains to be seen whether these networks can replicate medical group cost control and population health management strategies across different regions.

All this to say, these new integration models are certainly intriguing, but it’s still too early to know if they’ll be more successful in lowering total cost of care than their predecessors.

4. Return on data is rapidly becoming a favored metric of success

These deals don't just integrate people and assets. They combine massive amounts of financial, clinical and consumer data. With claims data, EHR data, pharmacy data, and even (in the case of CVS) retail shopping data, these massive health care organizations are well on their way to becoming Big Data companies. Success will be defined less by the resultant revenue-per-patient or lives-under-management than by the return the parties can generate from all of these data. Corporate executives are likely asking:

  • How can we use these data to identify best practices and reduce unnecessary care variation?
  • How can we use these data to help consumers make better health care decisions?
  • How can we use these data to shape meaningful outcomes-based partnerships with drug, device, and services companies?

Although the data aggregation advantage received less press than other aspects of these mergers, it may ultimately prove to be the most transformative aspect of all.

The ripple effects on provider-supplier relationships

While we anticipate the greatest near-term impact to be on physician practice acquisition activity and ambulatory network design, the implications of the CVS/Aetna, Optum/DaVita, and Humana/Kindred mergers will ripple across the health care ecosystem.

  • They will impact where, how, and by whom medical products are evaluated and used;
  • They will bring data analytics to the forefront of clinical, operational, and investment decisions; and
  • They will fuel renewed interest in innovative ambulatory facility design and top-of-license staffing models.

If nothing else, these mega mergers are a good reminder that traditional boundaries between payer and provider, and between care analytics and care delivery, are blurrier than ever.

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