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Planning for consolidation: The impact of health system consolidation on health plans

Consolidation is a fact of life in American business. In fact, some of our biggest industries – banking, retail stores, airlines – have been fundamentally reshaped by consolidation and the application of more competitive business models.

Driven by changing market and regulatory pressures, that game-changing strategy is gaining momentum in the health care space. In our recent Deloitte study, The great consolidation: The potential for rapid consolidation of health systems, we estimated that only 50 percent of current health systems will likely still be in existence a decade from now. This consolidation among health systems has considerable implications for the health care industry as a whole and particularly for health plans.

There’s a considerable amount of health system fragmentation in the US, with nearly 6,000 hospitals working to secure, or develop, their capabilities. That opens a wide vista of potential care services aggregation and health system mergers.

Additionally, we have approximately 350 managed care organizations nationally. But once you get past the top 25-30, these are usually very small plans, many of them with fewer than a quarter million patients covered.1 These smaller health plans and companies have found it hard to compete against larger national companies. It’s difficult to make the type of investments needed to be competitive and compliant. As a result, many are banding together through affiliations.

It’s a direction that makes sense for many health care delivery systems. For example, if delivery system administrative costs can be reduced by 30 percent by spreading them across a half-dozen systems, that’s a significant value proposition to everyone in that region or market.

Consolidation of a fragmented market could mean streamlining key aspects of the payer-provider interaction, potentially leading to greater downstream efficiency in our health care ecosystem, to promote and sustain population health and improved quality of care.

But challenges also exist for health plans as health systems move toward efficient and profitable mergers, acquisitions, and collaborations.

Hospital consolidation has often resulted in a higher level of bargaining power and higher prices. When hospitals merge, research shows, they are able to ask for higher payment rates. Health plans find it harder to negotiate effectively, since integrated market providers have increased clout. This could mean a bigger threat to health plans, giving them reduced leverage and resulting in more pressure on their margins.

Additionally, on the health plan end, there’s also a legitimate concern about potential disintermediation as providers seek to “vertically integrate”. The number of provider-owned health plans or providers seeking to develop their own insurance product or health plans is on the rise. Many of them are subscale, with fewer than half a million members. But provider-owned plans tend to have more affiliations and establish joint ventures to develop common infrastructure and core customer platforms. This, along with the ability to gain synergies from their delivery system affiliations, provides them with the ability to price premiums competitively low to focus on improving utilization and focus on value-based care. As a matter of fact, many of the accountable care entities today are seeking to grow and expand market share, with this value proposition in mind.

As more consolidated health systems opt to run their own health plans – to grow or diversify income streams or as a structural consideration – the threat to the current class of health plans is likely to grow. This could add a layer of uncertainty as the move toward broader consolidation forges ahead. On the flip slide, this potential threat can also be turned into an opportunity for plans to seek collaborations with providers and offer them a share of premium and increased promise of market share through value-based care contracting.

In the end, both health systems and health plans should be fully aware of what’s occurring in their regions and local market and understand the market forces that will shape them in the years ahead. Understanding local market forces requires examination of price, purchasing concentration, payer dynamics, and customer and purchaser demands and preferences. Once health plans and providers conduct this type of analysis, they should create a “go-to-market” strategy that suits the dynamics of their marketplace. This strategy will capitalize on core and contingent strengths to position the organization for a strong future.

Health plans should consider many issues amidst rapid consolidation. The only option that should be off the table is staying the course, because in a fast-changing world, that’s a prescription for failure.

Source: AIS’s Directory of Health Plans: 2015

 

Author bio

Sonal Kathuria is the value-based care lead for Deloitte Consulting LLP’s Health Plans practice. Her recent work involves helping clients respond to changes through business model transformation. She has led the development of value-based care strategies for a number of leading health plans and health systems, and is one of Deloitte’s leaders in new care models, network and payment innovation, and cross-sector collaborations for improving affordability & outcomes. Sonal joined Deloitte in 2001.