What Big Health Business Cares About
The Washington Post business page recently carried a story about why Aetna purchased Coventry (http://www.washingtonpost.com/business/aetna-coventry-and-the-arms-race-...): Excerpts:
It is one of the country’s 10 largest health insurance companies, but Coventry is not very active in the national conversation about health policy, nor is it known to be on the cutting edge of industry innovation. It is not particularly well-loved by its customers, who give it below-average quality ratings. Among industry insiders, its reputation is for paying its bills late, saying “no” as much as it can get away with and offering lower-price policies in less-than-competitive secondary markets.
What Coventry Health has been superb at is caring for Wall Street, growing steadily through acquisition, posting some of the highest margins in the industry and maintaining a single-minded focus on share price through lavish, stock-based compensation for its top executives and directors.
In early 2009, after Coventry stock had fallen nearly 75 percent and net profits fell 40 percent, Chairman Allen Wise didn’t even wait for the year-end figures to be announced before forcing out his hand-picked successor, Dale Wolf, as chief executive and taking back the reins. Wise arranged a $5.5 million signing bonus for himself, while sending Wolf away with $9 million in compensation for his career-ending performance in 2008, along with a $4 million severance payment, vesting for his unvested stock options and an early retirement with full pension.
Now, with the health insurance industry near the top of its profit cycles and Obamacare about to add tens of millions of new people to the insurance pool and another wave of consolidation hitting the industry, Wise has decided it’s time to do what he meant to do all along: sell Coventry to an industry giant for a 20 percent premium over the market price.
Besides delivering a bonanza for Wise and his tight-knit crew of directors and executives, the $7.3 billion purchase makes lots of sense for Aetna. The Hartford-based insurer is one of the four dominant players in the market for managing health plans for large and medium-size businesses, but it has had trouble breaking into the markets where Coventry does business: the individual and small group market plus managed-care plans under Medicare and Medicaid — the very markets that are expected to grow rapidly in coming years.
But a deal that is a boon to Coventry and Aetna shareholders is bad news for the rest of us, reducing the potential for greater competition in the health-care sector at the very time that the country is looking to competition to improve the quality of care and bring runaway costs under control.
Because there are often hospitals in each region that insurers must have in their networks to attract subscribers, dominant hospital chains are able to demand monopoly-like prices for their services. Insurers have responded by merging with other insurers in the hope of gaining negotiating leverage by becoming as indispensable to the hospitals as the hospitals are to them. To maintain their leverage, hospitals in turn have consolidated into bigger and bigger chains.
This arms race has produced repeated waves of consolidation that, rather than having led to lower prices, have led to higher prices, declining quality and less competition.
The Center for Studying Health System Change found that in seven major metropolitan areas, these dominant hospitals are able to negotiate prices that are 50 to 100 percent higher than those paid by Medicare and Medicaid.
And a study by the Kaiser Family Foundation found that in 30 states, competition is so one-sided that the largest insurer — usually a present or former Blues plan — has more than 50 percent of the individual and small-business market. Nationwide, the average number of serious insurers competing in a state is four, making for the kind of cozy market that discourages vigorous price competition.
All of which should be reason enough why the antitrust cops at the Justice Department need to step in and stop the Aetna/Coventry and Wellpoint/Amerigroup deals. By giving too much credence to the efficiency rationale for proposed mergers, the department has been an unwitting enabler to the consolidation arms race between hospitals and insurers. But in a speech earlier this year, the then-acting head of the antitrust division, Sharis Pozen, warned that future deals would be reviewed with “some skepticism,” due to the almost insurmountable difficulty faced by new competitors trying to break into these markets.
There is, however, another reason to be skeptical about these mergers, not so much because they will reduce competition in today’s insurance market, but because they foreclose potential competition in an evolving health-care market in which one organization will provide both health care and insurance.
In the old days we called these health maintenance organizations, such as Kaiser Permanente. Under the new health reform law, they are called accountable care organizations, or ACOs. The principle is the same: A group of doctors and hospitals and other providers agree in advance to provide most of the medical care that a person requires for x-dollars a year. Such “capitation” gives the providers the incentive to keep people healthy and provide all the really necessary care, or risk losing the patient during the next open enrollment. But it also gives the providers the incentive to keep costs down and eliminate unnecessary or marginal care just to run up the bill, which is what often happens under the current system.
This is such a compelling idea that both Democrat and Republican health policy makers envision relying on such a restructuring of the industry to lower the cost and improve the quality of care under Medicare and Medicaid. It is the rare example of bipartisan policy consensus.
Instead, these proposed acquisitions are nothing more than an end-run around competition by allowing these giants to pay a premium price for existing contracts, customers and market share. They will add little or no efficiency to our inefficient health system while allowing the shareholders and executives of Coventry and Amerigroup to withdraw billions of dollars in needed capital from the sector. If Justice fails to draw the line here, then it will be merely giving the green light to another round in the consolidation arms race that has already helped to produce the most expensive health-care system on the planet.
Mergers are bad news, but not because they reduce competition. Both Republicans and Democrats have for years pursued the same health system 'reform' strategy. This is not a 'rare' example of bipartisan policy consensus. It is the universal and consistent policy consensus of both parties that the business of health care is business. Policies that underscore 'markets' have a bipartisan basis, including the continual drumbeat for competition. And the bipartisan consensus never brings us anything new, just recycles the old, such as renaming the HMO concept, now calling it an ACO. The heart of this business model is well described here: health insurers don't care about improving health care delivery but they do care about saying "no" as much as they can get away with it. They pay their bills as late as they can and ignore 'consumer' ratings about poor quality. They offer cheap underinsurance to people who have no other alternatives. They grow by acquisition, not by actually doing business well and acquiring new customers. And they only care about one thing: share price. And what is the response of the Affordable Care Act to all this? Give them more of the taxpayers money.
We can do better than this. The health insurance business model is the most wasteful way to pay for health care. We can do better.