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Vertically integrated payer-provider groups raise antitrust concerns

More commercial insurers are overhauling their business models in response to changes ushered in by the Affordable Care Act.

The ACA’s cap on the amount of revenue payers can pocket—through medical loss ratio requirements—and the rise of Medicare Advantage have prompted private payers to purchase physician practices and employ thousands of doctors. UnitedHealth Group, Humana and Aetna are the largest Medicare Advantage carriers in the nation and have been the most active in blurring the payer-provider line.

The rise of privatized Medicare also piqued more hospitals’ interest in starting health plans. Sixty percent of health systems expect to enter the Medicare Advantage market this year, either by launching plans or partnering with outside payers, according to a survey by Healthcare Financial Management Association. These strategic shifts have increased vertical consolidation across the healthcare industry, leaving observers and regulators to weigh the impact on access, quality and cost, and question what will be appropriate antitrust oversight.

“Everyone is trying to shift from either just being an insurer or just being a system to being a healthcare organization,” said Bryan Komornik, a partner at the healthcare and life sciences division of consultancy West Monroe. “With shifts in strategy, and these types of announcements, come shifts in organization. But I think it’s less about the organizational structure and more about the operational model that needs to be modernized and how everyone plays in the sandbox for the common goal.”

Who’s the biggest buyer?

While private equity groups captured headlines for the billions they invested in care delivery in 2021, health plans made the lion’s share of physician practice acquisitions over the past year, said Gary Taylor, a managing director and senior equity research analyst at consultancy Cowen and Co. The valuation drop of the buzzy, primary-care startups like Agilon Health, Oak Street Health and Cano Health will continue to drive investment in this area, further blurring the lines between payer and provider, he said.

“Over the long term, if you’re an insurance company, care management will have to become a core competency,” Taylor said. “I think a lot of these value-based care entities ultimately are going to end up residing inside large insurance companies who are building, buying and consolidating.”

Insurers that fail to invest in care delivery assets will ultimately lose members to competitors, he said.

“It’s a reversal of the model we’ve used in the past, and it’s an opportunity for us to lift our growth ambitions.” Andrew Witty, UnitedHealth Group CEO

CVS Health, which owns the $82.1 billion insurer Aetna, added 10,000 pharmacists and primary-care professionals to its rolls last year. Humana claims to be the largest operator of primary-care clinics for older adults, ending last year with 206 centers that serve more than 200,000 patients. UnitedHealth Group spent 2021 snapping up 10,000 physician practices, growing to become the largest employer of physicians in the country with more than 60,000 providers under its $155.6 billion Optum healthcare services arm. Anthem invested so heavily in care delivery and health tech in 2021 that the insurer changed its name to Elevance Health to reflect its expanded suite of healthcare services.

“It’s a reversal of the model we’ve used in the past, and it’s an opportunity for us to lift our growth ambitions,” UnitedHealth Group CEO Andrew Witty said during the company’s December investor day, noting that making Optum the patients’ “front door” to the brand allows the organization to get in front of the 330 million people in the U.S., compared with the approximately 50 million patients UnitedHealthcare serves today. UnitedHealth Group is the parent of the nation’s largest insurer, $222.9 billion UnitedHealthcare.

While some integrated models have worked well, the jury is still out on whether the latest iteration of the payer-provider will produce long-term success, said Tim Gary, a healthcare attorney for Dickinson Wright and CEO of Crux Strategies.

“The big issue is that you have got oil and water trying to mix, with one side focused on cost and the other on quality,” he said. “I don’t think the two are as interrelated as much as they like to think they are.”

Is integration integral?

Unlike hospitals that launch health plans with the goal of becoming integrated systems, insurers are building up clinical practices to sell their services to other insurers. They look to get their health plans in front of more consumers, accelerate clinic profitability and speed up adoption of value-based care.

From 2016 to 2020, Humana increased the number of patients it has taken on a portion of risk for by more than 1 million members. Two-thirds of its 4.9 million Medicare Advantage members are involved in some form of shared risk, with 20% engaged in a global capitation model. The $88 billion insurer’s primary-care clinics serve patients from a variety of payers—not just Humana—and help all of its insurer clients share risk with providers.

At the end of last year, Humana announced plans to invest $1 billion in its Medicare Advantage footprint—particularly through primary care. The company could be interested in acquiring primary-care wraparound startups like Oak Street Health, which offer services such as transportation and mental healthcare to seniors with complex conditions to stem complications and ultimately avoid hospital stays.

In addition to investing in care delivery, Humana is building a “longitudinal human record” so both affiliated and unaffiliated providers have the individual medical information they need to coordinate care while avoiding duplicative testing, said chief medical officer Dr. Will Shrank. The insurer will never own every provider that its members see, and Medicare Advantage members have the choice about whether they want to make a Humana clinic their primary-care provider, he said.

“The goal is to integrate with better technology—to integrate with a team-based orientation,” Shrank said. “We’re not going to integrate everything.”

UnitedHealth Group has likewise spent the last year building out its care delivery arms and investing $100 million to help Optum clinicians take on risk through advanced training, new technology and network coordination. Optum providers now care for 4.5 million patients in risk-based relationships—2.2 million of whom were fully capitated—and the company said these new payment models helped grow revenue generated per consumer 33% in 2021 from a year earlier.

The financial imperative is clear, said Joe Connolly, founder and CEO of virtual care startup Visana Health. Under the ACA’s medical loss ratio policy, health plans must spend 80% of individual and small group premiums and 85% of large group and Medicare Advantage plans on quality improvement and healthcare services. Otherwise, they must repay consumers the difference. Insurers have figured out that they can expand their margin by sending cash not spent on medical and quality improvement expenses to clinicians they own, as a move to “capture more of the premium dollar,” Connolly said.

“That means the insurance business drives revenue and care delivery assets drive margin expansion. In short, it’s a way to skirt MLR requirements,” he said, noting that financial incentives also drive lines of business with risk adjustment.

Federal regulators called out this practice at the end of 2021, with CMS noting that the incentive to shirk the rebate requirement through inappropriate provider bonuses was particularly high for “integrated medical systems where the issuer is the subsidiary, owner, or affiliate of a provider group or a hospital system.” The Biden administration aims to crack down on illicit expenses through proposed regulations.

Like Humana’s insurer and primary-care businesses, Optum and UnitedHealthcare don’t automatically contract for every service because they have the same parent company. OptumHealth clinicians see patients from 100 different payers, and UnitedHealthcare partners with doctors who compete with Optum—although UnitedHealthcare is the biggest customer of every Optum business, including its pharmacy benefit manager, claims data insight service and clinician arm, Taylor said.

The company insists that a strong firewall exists between the two entities. UnitedHealth Group has rarely encountered resistance from regulators over the years as it has assembled one of the nation’s largest PBMs, insurers and network of owned and affiliated doctors, although in 2019 the Federal Trade Commission forced the company to divest some providers in Las Vegas before approving a broader deal.

But that may be changing.

At the end of February, the Justice Department sued to block UnitedHealth Group’s $13 billion acquisition of data broker and claims clearinghouse Change Healthcare, arguing “that either they don’t believe in that firewall or that, in and of itself, it can’t be used as an antitrust defense,” Taylor said.

If the merger goes through, UnitedHealth would control more than 75% of the claims clearinghouse market, giving the company unparalleled insight on how rivals manage their networks and leaving other insurers unable to avoid the healthcare giant’s grip, senior justice officials said.

UnitedHealth is challenging the lawsuit and disagrees with the claims.

New look, new regs

Federal regulators are reworking their merger guidelines to broaden the scope of their oversight.

Generally, vertical integration is assumed to be pro-competitive, although that consensus may be shifting.

Market definitions should be adjusted as insurers, providers, pharmacies and others continue to join forces, regulators said. Separating the vertical and horizontal guidelines may be a good start, Assistant Attorney General Jonathan Kanter said, noting that the bifurcation may have limited oversight.

“The antitrust division shares the FTC’s substantive concerns regarding vertical merger guidelines. Those guidelines overstate the potential efficiencies of vertical mergers and fail to identify important relevant theories of harm,” he said in a statement linked to the FTC’s and Justice Department’s request for public comment on antitrust reform.

The FTC is taking a close look at labor market impacts, reviewing factors beyond wages, salaries and financial compensation that could measure anticompetitive effects.

Health systems, private equity firms, payers and pharmacy chains could reduce labor market concentration as they compete for physicians and other clinicians, said Susan Manning, senior managing director at FTI Consulting. That may sway regulators, she said.

“The key, however, has to do with exclusivity in circumstances where there are market power concerns,” Manning said, adding that regulators would closely scrutinize contracts that limit healthcare professionals’ referrals outside of their employers’ operations.

Generally, antitrust law works best in concentrated markets. But the vertical merger regulatory framework does not lend itself to overseeing more fragmented markets, said Gary, the attorney at Dickinson Wright. UnitedHealthcare held 15% of the overall insurance market in 2020, according to the most recent market survey by the American Medical Association. “That isn’t a concentrated market,” Gary said. “Antitrust law is a blunt instrument for fixing this. I am not convinced the government is going to do a good job. They are trying to fix a problem that, to a great extent, doesn’t exist.”

Provider-owned payers

Providers have long operated payer arms, with the promise of reducing administrative friction related to billing, boosting population health initiatives, taking on more risk and adapting in times of crisis. Their model can serve as blueprint for the rising number of insurers growing their clinician arms through acquisition and partnership.

When a HealthPartners-insured patient fills a prescription, for instance, the integrated health system’s insurance arm receives a claim. If the patient doesn’t pick it up, HealthPartners’ care delivery side is notified and intervenes, identifying the disconnect and working to connect the patient with their medication.

“Being an integrated health system allows us to connect the dots for the consumer and link care and coverage together to produce better outcomes at a more affordable price,” said Andrea Walsh, president and CEO of the Bloomington, Minnesota-based organization. “We need the combination of the EHR and the claims data to complete the picture and know what patterns exist beyond our care delivery system.”

Being an integrated system also smoothed the shift to telehealth at the Sioux Falls, South Dakota-based Sanford Health, said Matt Hocks, the health system’s chief operating officer. Even though moving low-acuity care from the emergency department or urgent care dented the clinical side’s revenue, it saved patients, employers and Sanford’s health plan money, Hocks said.

“Early on there was a lot of apprehension about how much care we would move to virtual and if we could move costs as fast as revenue would chip away. As an integrated system, we weren’t seeing hemorrhaging of revenue out of the system, it was more of a trickle,” he said. “We philosophically agree that we shouldn’t do what is right for us at the expense of the patient.”

San Diego-based Sharp HealthCare was insulated from the intermittent shutdowns of non-urgent services, in part, because of its integrated model, CEO Chris Howard said. “When you consider half of Sharp Health Plan is managed-care revenue, you had not only insulation but protection from within if you will,” he said, noting that about 35% to 40% of the health system’s revenue is fully capitated. “It ensures that you are treating the totality of the population to reduce the cost of care.”

“Antitrust law is a blunt instrument for fixing this. I am not convinced the government is going to do a good job. They are trying to fix a problem that, to a great extent, doesn’t exist.” Tim Gary, healthcare attorney for Dickinson Wright and CEO of Crux Strategies

Albuquerque-based Presbyterian Healthcare Services has eliminated a large number of prior authorization requirements over the past four years. Physicians and health plan executives got together to discuss the benefits of eliminating the administrative hoop that’s often a sticking point between providers and insurers, Presbyterian President and CEO Dale Maxwell said.

“They were able to explain how eliminating prior authorizations would reduce costs down the road,” he said. “But we also found out that maybe the health plan is right—if they are trying to implement a prior authorization, that means they are not fully comfortable with the care protocols. We can agree on the right care plan and move forward together instead of putting the patient in the middle.”

Provider-owned health plans also contract with physicians outside of their parent organization, executives noted. Presbyterian’s health plan, for instance, has 25 different types of value-based payment arrangements with 2,600 providers. In total, its network includes more than 17,000 providers across 500 locations in New Mexico and neighboring communities.

“We have certainly seen providers struggle mightily with setting up their own plans, taking on value-based arrangements and risk.” Wayne Gibson, senior managing director at FTI Consulting

Healthy competition is key

Just because a health plan and physician group are owned by the same parent does not mean the two always see eye-to-eye.

While there can be conflict when the two sides discuss physician preference items, reducing clinical variation, administering expensive drugs or other endeavors, that discourse can be helpful, health system executives said.

“We want to play in that tension because that tension ultimately becomes the friction for the patient,” Maxwell said. “Each individual entity alone isn’t going to solve it 100% correctly, but if we come together we could have better and more seamless care.”

While management structures vary, integrated health system executives all agreed that they plan to use their operating model to increase their risk-based revenue. Alternative payment models and risk-based contracting have largely stagnated nationwide, with just 10% of healthcare companies’ revenue generated through risk-based contracts, according to a 2021 survey from consultancy Numerof & Associates.

Bureaucracy can stifle change in these large multibillion-dollar organizations, said Melissa Smith, executive vice president of consulting and professional services at HealthMine. She has worked in both the provider and insurance sectors.

“Provider-sponsored health plans often try to replicate the health insurance model of the past and do not capitalize on opportunities to streamline the process and gain efficiencies,” Smith said. “It’s astonishing how often we see these conflicts, where the health plan is trying to get people healthy enough to avoid hospital admissions and readmissions while a lot of clinical decision-makers are still figuring out how to fill beds because that is how they have made money.”

An underinvestment in integration has led to the dismantling of some health systems’ insurance arms, said Wayne Gibson, senior managing director at FTI Consulting.

“Traditionally leadership leans much more clinically—physicians and clinicians like to hear from other physicians and clinicians,” he said. “We have certainly seen providers struggle mightily with setting up their own plans, taking on value-based arrangements and risk.”

Still, the drivers of consolidation are not going away, experts said. Competition, heightened regulatory scrutiny and reimbursement cuts will likely spur more vertical integration. With these new operating models, payers and providers will need to look to the lessons of the past to design the future of their healthcare organization.

“Everyone wants to be in everyone else’s business so they are not leaving money on the table and to have greater control of their destinies,” said Dr. Harry Greenspun, chief medical officer at Guidehouse. “The challenge for many on the provider side is having the critical mass to be a real payer.”



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