Vertical Health Care Mergers: Innovation or Just Less Competition?

The recent wave of mergers could truly shake up the health care marketplace. CVS purchasing Aetna? Cigna acquiring Express Scripts? What will happen when a health care company can meet almost all of a patient’s needs within one organization?

It wasn’t long ago that federal regulators blocked two major health insurer mergers — Anthem-Cigna and Aetna-Humana. These companies are now getting more creative and looking to grow alongside a changing, consumer-driven health care environment.

Instead of growing larger just through consolidation, insurers are looking to pair up with non-traditional companies — pharmacy benefit managers, home health companies, ambulatory care providers and smaller insurers — to grow in scale.

The cost of health care is a major political issue, with annual premiums rising for almost all Americans. U.S. regulators will look at whether the combined companies would lead to lower out-of-pocket costs and more choice.

CVS Health announced its intention to buy Aetna for $69 billion in December, and Cigna announced it will acquire Express Scripts, a pharmacy benefit manager, for $54 billion in March.

CVS-Aetna and Cigna-Express Scripts are both vertical transactions where companies try to add new lines of business, instead of combining two similar companies for market leverage. For example, If CVS gets the nod to buy Aetna, it will obtain an insurer to integrate with its existing pharmacy chain and PBM.

Supporters of the CVS-Aetna merger believe that a combined entity would minimize total health spending through better coordination of medical and pharmacy benefits. It could also eliminate markups that occur along the supply chain. An internal PBM would not have an incentive to accept high list prices and high rebates.

Opponents of the mergers say that steering may take place. For instance, one effect could be Aetna policyholders using only CVS to fill their prescriptions or CVS Minute Clinics for health care. Regulators will have to closely review whether Aetna’s competitors have the same access to CVS pharmacies after the transaction or whether a combined entity would withhold PBM services.

Horizontal mergers will continue but are likely to be smaller in size moving forward.  After the government blocked two mega mergers in the insurance space last year, larger insurance companies may look to expand membership by acquiring smaller companies. One case in point: WellCare announced in late May its bid to buy Meridian, a small privately held insurer that focuses on government programs.

It remains to be seen how federal regulators will view these vertical mergers. The companies expect a decision by the end of the year.

For decades, vertical mergers have received less scrutiny by federal regulators.  Behavior commitments — such as access conditions — were used to resolve competitive problems with vertical mergers.

However, the current antitrust leadership may object to the regulatory nature of behavioral commitments that impose government oversight, monitoring and compliance enforcement on free markets.

President Donald Trump also signaled a tough stance on health care consolidation in an executive order last fall. He said, “My administration will also continue to focus on promoting competition in health care markets and limiting excessive consolidation throughout the health care system.”

What is driving vertical integration in the health care sector? A number of factors are playing into the recent merger wave including the drive to control utilization and costs through data, new contracting models such as accountable care organizations, and the exodus of insurers from the Affordable Care Act.

CVS is not the only company looking to disrupt the market. Amazon, Berkshire Hathaway and JPMorgan Chase announced a venture to provide health care benefits to their employees. The consortium has been slow to start with little details on its mission.

The Centers for Medicare and Medicaid Services is considering shaking up health care delivery by allowing physicians to contract directly with the elderly seeking care in Medicare. Under direct provider contracting, CMS would pay a per beneficiary per payment directly to primary care providers. DPC is essentially an upfront subscription payment for services where seniors would have unfettered access to their physician, and providers would be responsible for cost and quality, in theory driving better outcomes.

Other novel mergers in the insurance space include Anthem purchasing Aspire Health, a palliative care company. Humana bought part of Kindred Healthcare’s home health, hospice and community care business and Curo Health Services, a hospice provider.  UnitedHealth Group has purchased or announced plans to purchase a number of physician groups this past year, including DaVita Medical Group, Reliant Medical Group, American Health Network, and Surgical Care Affiliates. While these aren’t household names for consumers, they are further evidence that vertical consolidation is happening between payers and providers of all stripes.

In addition, a Walmart acquisition of an insurer could provide one-stop shopping for consumers. Rumors of a possible Walmart-Humana deal in early spring have fizzled, but an acquisition of an insurer could facilitate Walmart’s efforts to develop in-store clinics and become a formidable rival to CVS-Aetna.  

It seems verticalizing health care is becoming a matter of “when” – not “if.”

Ipsita Smolinski is managing director of Capitol Street, where she advises clients on national health care policy and emerging trends.

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