What CEOs really think about the dizzying pace of dealmaking

Hospitals and physician groups have been combining at a dizzying tempo, but many of the country's top healthcare leaders are more concerned about the financial impact of the pending health insurance megamergers.

The mood underscores the general worry when markets and industries have fewer competing parties and turn into oligopolies. Yet, the wheeling and dealing is not expected to abate anytime soon.

Nearly 4 out of 5 CEOs who responded to Modern Healthcare's most recent CEO Power Panel survey believe the rapid-fire rate of consolidation among hospitals, doctors, insurers, medical-device makers and drug companies will continue or accelerate in the years ahead.

“I don't hear one person who's not actively working on that,” said Cathy Jacobson, CEO of Froedtert Health, a Milwaukee-based health system that bought a stake in an insurance plan in 2014. “Whatever mode that takes, full consolidation or acquisition or a partnership, all providers are working on that.”

The CEO Power Panel included the leaders of 100 hospital systems, insurance companies, large physician practices, trade groups and not-for-profits. Eighty-four healthcare leaders responded to the February survey, and about three-quarters of them are involved with hospitals or other provider groups. To be sure, that distribution is reflected in the lopsided anxiety expressed over health plan deals.

The number of healthcare transactions has exploded in the past five years, just as the Affordable Care Act has expanded insurance coverage and altered the way providers are paid. However, there has been a steady drumbeat of healthcare deals dating to the 1990s.

Physicians have sold their practices to hospitals. Large hospital chains have snapped up small hospitals that have been in desperate need of cash and new information technology. Health systems have merged with other systems to create regional or national behemoths. Pharmaceutical firms and device companies routinely buy and sell.

Now, massive health insurance mergers are redefining the landscape.Anthem is buying Cigna Corp. for $54 billion, and Aetna is pursuing Humanafor $37 billion. Medicaid-centric insurer Centene Corp. absorbed Health Net in a $7 billion deal.

If the U.S. Justice Department approves the Anthem and Aetna deals, those two companies would create a powerful triumvirate withUnitedHealth Group. Together, the annual revenues of the “big three” insurers would easily surpass $400 billion.

Executives of provider organizations are most concerned that bigger national carriers will bludgeon payment rates, especially in local markets where they have a lot of market share. Approximately two-thirds of CEO Power Panel respondents said the proposed megamergers “always” or “usually” will give insurers greater bargaining power that will lead to lower provider payments.

“Look at any market where an insurer has 50% to 60% market share or more,” Jacobson said. “You'll see lower reimbursement in those markets without question.”

Another two-thirds said insurance mergers will “rarely” or “never” result in lower premiums, lower deductibles or lower out-of-pocket costs for consumers. Only 25% said they will “usually” or “sometimes” lead to reduced member costs.

Insurers say they are bulking up partially for the same reasons as providers: to eliminate excess costs and boost their margins where they can. Some Power Panel respondents believe the ACA has pushed insurers to team up so they can counteract other large hospital mergers and so they can thrive in a regulatory environment that caps their bottom line.

“The insurers' hand was forced to consolidate by Obamacare,” said Dr. David Brailer, CEO of private-equity firm Health Evolution Partners and former federal health information technology official under President George W. Bush. “This is about scale and about the ability to take costs out of their business when the profit pools have been demolished.”

Some policy experts and economists find health-system and physician-group mergers just as worrisome as insurance mergers. Providers, after all, set the initial prices for private negotiations. Martin Gaynor, a Carnegie Mellon University health economist and former federal regulator, wrote in a recent Health Affairs article that because so many local healthcare markets are already concentrated, the result “isn't good for patients and their families, either for their pocketbooks or for the quality of care they receive.”

At least some of the Power Panel CEOs acknowledged those concerns. Almost half (46%) said horizontal provider consolidation, such as when hospital systems buy other competing hospitals, “sometimes” reduces competition and leads to higher prices for insurers, employers or patients. Twenty-eight percent said it “always” or “usually” does.

Their responses were similar when they were asked about vertical provider consolidation or when hospitals buy physician practices, for instance. Just less than half said those transactions “sometimes” result in higher prices, while 20% said price hikes “usually” or “always” follow.

Dr. Ram Raju, CEO of public systemNYC Health & Hospitals, said better care management is the long-term endgame of most provider transactions. But he was one of a few respondents who said vertical and horizontal consolidation always leads to higher prices because organizations will undoubtedly leverage their new market power.

“I'm not going to damn someone because they are consolidating to get a better rate,” Raju said. “That is an unavoidable outcome.”

More than half of the survey respondents said provider transactions also create more coordinated care and efficiency, which many said should be guiding principles of today's deals.

“Big isn't better. Better is better,” saidJoel Allison, CEO of Baylor Scott & White Health in Dallas, a system that formed in 2014 from the merger of Baylor Health Care System and Scott & White Healthcare. “Scale does have some value, but you just have to do it for the right reasons.” (See the story: Allison to step down as CEO at Baylor Scott & White)

In some instances, the right reason is saving a hospital from going belly up and forcing people in rural and minority communities to travel much farther for care.

“They can step in and help support institutions that may be in trouble,” said Dr. Bruce Siegel, CEO of the trade group America's Essential Hospitals. Siegel pointed to a recent acquisition in the West, where Phoenix-based Banner Health bought the University of Arizona Medical Center, a distressed academic system.

But, Siegel added, “Health plans and hospitals cannot use mergers as an excuse to shirk their social responsibility.”

Joe Fifer, CEO of the Healthcare Financial Management Association, said consolidation should not muddy the industry's aim right now, which is to improve clinical care and reduce costs to individual consumers, employers and government payers. “What is the ultimate cost to the purchaser? That's the issue,” he said. “All the other stuff is just noise behind the scenes.”

Federal antitrust regulators are putting more payer and provider deals under the microscope. The Federal Trade Commission challenged three major hospital deals in Illinois, Pennsylvania and West Virginia over the past four months. Although 72% of the surveyed healthcare leaders said they believe government scrutiny will grow regardless of who wins the White House, it won't deter executives from pursuing transactions they deem beneficial.

“The market forces, quite frankly, have been unleashed, and they are going to move regardless of what happens in the presidential election,” Jacobson said.