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The Patient Protection and Affordable Care Act's impact on competition
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The healthcare sector is undergoing a secular consolidation as payers and providers assume a historic level of mergers and acquisitions. These trends were underway prior to implementing the Affordable Care Act. But there’s little question that ACA hastened them.
While we’ve seen other waves of consolidation sweep the health services sector, (most recently in the late 1990s); the current series of mergers and acquisitions is different. It’s wider, and more sustained. It’s unfolding on an industry that was already heavily consolidated. As a result, the impact on patients is more profound and enduring.
I want to focus on the consolidation underway in the market for physician services. By some estimates, care delivered by doctors accounts for 20% of national health spending in the United States and 3.6% of GDP (representing more than $515 billion in 2010, a figure that’s equivalent to a third of the economic activity of the entire Canadian economy ).
The consolidation of physicians at the local level has served to reduce competition. In the end, most healthcare delivery is local. Once an institution has monopolized most of the providers in its market, it renders market-based reforms hard to achieve, and reduces the ability of competition to be used as a tool for improving quality and holding down costs.
To give a full measure of the scope of consolidation that’s underway, I’ll briefly recount some of the recent trends in the hospital and managed care sectors as well. I’ll discuss how these developments also factor into the trends underway when it comes to physicians.
It’s important to remember that the scope of consolidation that we’re seeing in healthcare is not a response to market factors. Rather, it’s a deliberate function of recent policy choices.
Even if some of these mergers and acquisitions were inevitable, and some of these trends were underway prior to passage of the ACA, that law envisioned that providers would consolidate. The ACA was predicated on the kinds of changes unfolding in the way healthcare is delivered. They are a necessary precursor to many of the ACA’s constructs.
The same policy prerogatives driving consolidation in the market for physician services are also stoking mergers and acquisitions in the hospital and health plan sectors. In the hospital sector, 100 merger deals were completed in the sector in 2014 — up 14% from the previous year, according to Wall Street research firm Irving Levin Associates. For 2015, there is likely to be even more deals closed. These trends are up sharply from 50 to 60 deals that were announced annually in the pre-ACA years of 2005–2007.
The consulting firm Booz & Co. predicts that 1,000 of the nation’s roughly 5,000 hospitals could seek out mergers in the next five to seven years. What’s particularly notable about the recent transactions is that the deals are both “horizontal” and “vertical.” In other words, the hospitals aren’t just buying other hospitals. In many cases, they’re purchasing physician practices, rehabilitation facilities, nursing homes and other ancillary healthcare providers.
In the managed care sector, there are similar trends underway, with some large merger deals announced in just the last few months. But the impact of this consolidation is being experienced differently across the different segments of the insurance industry. What’s happening in the commercial space is not the same as what’s unfolding in Medicare.
In the commercial market for private coverage, there’s been a contraction in the number of carriers offering health plans. The problems aren’t the mergers per se, but policies that make it difficult for new health plans to enter the market and replace those that are eliminated.
For example, startup health plans often must channel more of their revenue into their initial operating expenses to help pay for the costs associated with launching a new health plan. But controls placed on the operating margins of health plans, limiting how much money they can spend on administration, has made it more difficult for new health plans to get started.
As a consequence, there has been very little investor capital entering this space, and little new de novo plan formation. Under the entire Obama presidency, there has been no net new plan formation. Only about 50 new health carriers have entered the commercial market since 2008, according to a November analysis from the investment firm Goldman Sachs. Half of these are the struggling not-for-profit co-op plans that the ACA subsidizes. At the same time, around 40 health plans have also left the market over this same stretch of time. Many of these plans merged with competitors, but at least 13 were shut down or liquidated.
Working with research staff at the American Enterprise Institute, I developed data that shows even fewer new health plans entering the market since 2008. We defined new entrants as health carriers or provider organizations that sold health insurance plans sometime between 2008 and 2015 and had never before offered coverage in the market. We found only 38 new entrants. Of these plans, 23 were co-ops, 6 were provider-sponsored plans being offered by hospitals or health systems, and only 7 were new commercial carriers.
The market for commercial plans, however, stands in contrast to what’s unfolding in the Medicare Advantage market. There, despite consolidation that has concentrated more plans in the hands of a smaller number of very large carriers, there is still new plan formation and new capital being invested behind the creation of brand new health insurance carriers.
In large part, this more vibrant economic activity is being driven by secular trends that are growing the market for Medicare Advantage plans. As a consequence, according to a new analysis released by the consulting firm Avalere Health, at least 28 new parent organizations entered the MA market from 2012 to 2014 and currently offer coverage. Together, these new entrants offer 104 plan options to more than 13.6 million beneficiaries in 24 states. Medicare beneficiaries in 2015 can choose from an average of 18 MA plan options.
This activity is notable in part because the MA plans have been a focus of the recent acquisitions. Observers worry that the consolidation of large health plans will lead to too much concentration of the Medicare business, and fewer choices for beneficiaries.
There’s no indication that the Medicare Advantage market is suffering the same stagnation as the commercial plan space. On a relative basis, investors have perceived Medicare plans as a more attractive market in recent years. Secular trends that are growing the MA market are a big factor, as is the relative value of Medicare business when compared to traditional commercial plans, where there is increasing unpredictability and shrinking profitability.
Medicare enrollment is projected to grow organically to 66 million by 2021 from 54 million today, owing to an aging population. The Medicare Advantage program has been attracting a growing proportion of these new-to-Medicare beneficiaries. Moreover, I believe that the recently enacted “doc fix” is going to continue to drive more beneficiaries into MA plans.
The complexity that the new law creates for providers that see Medicare beneficiaries as part of the program’s fee-for-service schedule is going to grow significantly as a result of the provisions in the new law. I predict that more providers are going to opt to see most or all of their Medicare patients under the auspices of one or a few Medicare Advantage plans. While consolidation is shrinking options in an already contracting commercial market, the contours of the Medicare market are different. There is still new investor capital coming into the MA space, new Medicare plans being formed, and a net expansion in the number of offerings.
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