"Vertical integrations are creating behemoths that limit competition within the health care space, thereby limiting options and opportunities for patients, physicians, and medical practices," according to Ally Lopshire, JD, of the AACU.
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On March 9, Cigna agreed to buy pharmacy benefits manager (PBM) Express Scripts in a $52 billion deal-the latest in a wave of consolidations that is reshaping the already turbulent health care landscape. This merger comes on the heels of the attempted acquisition of Aetna, the nation’s third largest health insurance company, by CVS Health, which operates the PBM giant Caremark.
If the potential Aetna-CVS merger is any indication, the deal between Cigna and Express Scripts is likely to draw scrutiny from policymakers on Capitol Hill. In a Feb. 27 hearing before the House Judiciary Regulatory Reform, Commercial and Antitrust Law Subcommittee, Ranking Member Jerrold Nadler (D-NY) emphasized that “the health care sector is already highly concentrated, and there remains a concern that dominant firms, including a post-merger CVS-Aetna, would have the ability and the incentive to exclude competitors or diminish competition.”
Some believe that these sweeping consolidations come in reaction to not only rising health care costs, but also the possibility of new companies with new business models, like the recent alliance between Amazon, Berkshire Hathaway, and JPMorgan, entering the arena and disrupting the health care market. But while costs and potential disruptions may be partially to blame, these mergers are in part also symptomatic of a wider consolidation trend across the entire health care delivery system, particularly with respect to vertical integration within the industry.
Horizontal mergers vs. vertical consolidations
While horizontal mergers draw fierce opposition, vertical consolidations fail to elicit a similar response.
In July 2015, Anthem, another health insurance giant, announced its intention to buy Cigna in a roughly $48 billion deal, creating a for-profit insurer with annual revenue of more than $115 billion. Nearly 2 years later, however, the deal came to a grinding halt when Anthem terminated the merger following multiple rulings by federal courts that blocked the deal on antitrust grounds. The termination was due, at least in part, to a successful campaign by the American Medical Association and other advocacy groups, including 17 state medical societies, to stop the acquisition and preserve competition in the health care field.
Almost immediately, the Anthem-Cigna merger caught the attention of the AMA, which released an annual analysis of insurance markets a few months after the announcement. The analysis demonstrated that nearly half of all states could see diminished competition in local health insurance markets if the Anthem-Cigna and another potential merger between Aetna and Humana were allowed to proceed. These types of horizontal mergers between health insurers, according to the AMA, would lead to reduced competition and have a negative impact on physician markets and the quality of patient care, an argument that ultimately proved persuasive to the U.S. Department of Justice, Congress, state attorneys general, insurance commissioners, and federal courts.
But while the AMA was successful in preventing this horizontal integration between health insurers, vertical consolidations-or mergers between two entities within a given industry that are at different parts of the supply chain or delivery system and thus not direct competitors, such as the recent PBM-insurer mergers-also raise anticompetitive concerns that could potentially impact physician markets and the health care field in general.
Practice trends demonstrate far reach of vertical consolidation
The effect of vertical consolidation, particularly on physicians, is perhaps best exemplified by the significant increase in hospital acquisitions of physician practices over the past few years. According to one report by Avalere Health, between July 2015 and July 2016, hospitals acquired an additional 5,000 physician practices across the country. What’s more, the Physicians Advocacy Institute recently reported that the number of hospital-employed physicians hit about 155,000 in 2016, up 63% from 95,000 in 2012.
This consolidation has particularly affected independent practices, as noted by Robert Seligson, president of Physicians Advocacy Institute and CEO of the North Carolina Medical Society: “As payers and hospitals continue drive consolidation across the health care system, it is becoming more and more difficult for a physician to maintain an independent practice. Payment policies mandated by insurers and government heavily favor large health systems, creating a competitive advantage that stacks the deck against independent physicians, who are already struggling to survive under expensive, time-consuming administrative and regulatory burdens,” Seligson said.
Vertical mergers pose unique concerns
But even as vertical consolidations like those in the PBM and insurer space continue to draw scrutiny, it is unlikely that they will be addressed any time soon. The AMA has criticized the Aetna-CVS deal, for example, but unlike with the Anthem-Cigna merger, it stopped short of outright opposing the potential acquisition and has yet to ask Congress or regulators to block it.
In reality, however, vertical integrations are creating behemoths that limit competition within the health care space, thereby limiting options and opportunities for patients, physicians, and medical practices. As a result, policymakers and health care leaders need to take a closer look at this continued consolidation before it completely changes the field as we know it.