Consolidation is the future of health care

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WASHINGTON — The big news in health care last week was the disclosure that CVS Health Corp. — owner of a vast network of drug stores — is considering buying Aetna Inc., one of the nation’s largest health insurers, for roughly $66 billion. It’s undeniably important, but why?

Clearly, economic concentration in health care is growing. The possible CVS-Aetna hookup is just a gigantic example. Hospitals have been consolidating; so have physician groups. A study published recently in Health Affairs, a journal of public policy, reported that hospitals were “highly concentrated” in 90 percent of the country’s metropolitan areas.

The consequences, warns Alan Weil, Health Affairs’ editor, include a “narrowing of [consumer] choices” and “outsized market power” of hospitals and physician specialists. But are there also benefits? Could we be glimpsing the future of health care? Could the changes ultimately overshadow the significance of Obamacare?

To make some sense of all this, I turned to Dan Mendelson, the president of Avalere, a health care consulting company that he founded in 2000. I submitted questions to Mendelson; his replies, edited for brevity, are printed below.

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Q: Why is a major retail drug chain (CVS) thinking of merging with a big insurer (Aetna)?

A: Health care is increasingly about the ability of medical enterprises to deliver improved patient care through technology. All insurers are interested in developing a strong presence in data analytics. This in turn encourages mergers and acquisitions. Why? CVS is a diversified health care company with operations in pharmacy benefit management, post-acute care and a strong network of health care clinics — it’s not just a drug store chain. By merging with CVS, Aetna gains access to these rich data sources to drive better health care practices. The same is true for CVS in reverse. It gets to tap Aetna’s databases and discover, say, which of its policy-holders haven’t received their flu shot and could be solicited by CVS.

Q: Do you expect more big mergers and acquisitions?

A: Yes. The pace of big combinations will accelerate in coming years. All health care companies will need to reposition themselves to accommodate the fundamental trends of the health care system — which will continue irrespective of political change.

Q: What are those trends?

A: First, payers — private insurers and government through Medicare and Medicaid — are paying more for value (good patient outcomes) as opposed to the volume of services (the number of tests and procedures). Medicare and Medicaid have led the way, but private insurers are catching up. This has driven consolidation in the provider sectors (hospitals and doctors), because it’s easier to measure and improve quality as a system as opposed to influencing sole proprietor or small group practices. This has also driven the acquisition of providers by insurers, because the key to improving quality is getting a better alignment between the interests of patients and providers.

A second major trend is related: the increasing role of information technology and data analytics in improving patient care. A lot of the basic wiring of the health care system is now complete — a result of federal investment and lower technology prices. The need now is to harness the power of analytics to improve care. As noted, this drives mergers and acquisition.

A final trend that seems likely to continue is the looming threat that some of the large tech firms — Amazon, Google and the like — will enter the health care markets. The existing health care providers and payers think they need to get larger to compete with these mega-firms.

Q: Will consolidation help cost control by eliminating duplication and by creating new economies of scale? Or will the loss of competition and the market power of the survivors boost prices and health care spending?

A: Of course, regulators will scrutinize proposed combinations to answer that question. But the increasing focus on patient outcomes also has the possibility of controlling costs. We’ve seen this in the Medicare Advantage program, where quality-based payments have also improved patient well-being with lower cholesterol levels and better blood sugar readings for diabetic patients. There is no question that increased consumer access to health care and new technology have a tremendous potential to take inefficiencies out of the system. Still, we should not be naive. At the local level, regulators need to ensure that provider networks remain competitive. A hospital with monopoly power can be expected to raise costs for consumers.

Robert Samuelson is a columnist with The Washington Post.

Robert Samuelson

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