Businesses consolidate for a variety of reasons, ranging from increasing competition to economic necessity. In the past several years, we’ve seen major consolidation in the healthcare industry. The challenge: How should employers and their employees navigate this changing landscape?
Healthcare Consolidation Everywhere.
Insurance Brokers are Consolidating. For example, Arthur Gallagher, Marsh McLennan, USI, Alliant, One Digital are all growing by acquisition.
Benefits Consultants are Consolidating. For example, Towers Perrin merged with Watson Wyatt, then Towers Watson merged with Willis to become Willis Towers Watson.
Insurance Carriers are Consolidating. For example, CVS Caremark is buying Aetna, Cigna is buying Express Scripts, Aetna bought Coventry, Cigna bought Great West.
Hospitals are Consolidating. For example, Baylor and Scott & White merged in Texas, Columbia and Cornell Hospital Systems merged in New York City, Advocate Health Care in Illinois is merging with Aurora Health Care in Wisconsin, Dignity Health and Catholic Health Initiatives are merging.
Physician Practices are Consolidating: The private equity firm KKR bought the nation’s largest physician practice, Envision Healthcare, for $10 billion (including debt). By the same token, Envision has aggressively purchased a number of physician practices.
The Harvard Business Review published an article entitled “The Consolidation Curve” that looks at the four stages of industry consolidation. The article is based on an analysis of 1,345 mergers. While published in 2002, the article is still relevant today.
Stage 1: Opening
Combined market share of top three companies is between 10 percent and 30 percent
- Example: Local general law firms, sit-down restaurants
Stage 2: Scale
Combined market share of top three companies is between 15 percent and 45 percent
- Example: Insurance brokerage, physician mergers today
Stage 3: Focus
Combined market share of top three companies is between 35 percent and 70 percent. There are 5 to 12 major players
- Example: Benefit consulting and hospital system mergers (i.e. top three hospitals have between 35 percent and 70 percent of their local market)
Stage 4: Balance and Alliance
Combined market share of top three companies is between 70 percent and 90 percent
- Example: Insurance carrier/pharmacy benefit managers (PBM) mergers
The article has a very telling sentence:
“They [State 4 companies] must find new ways to grow their core business in a mature industry and create a new wave of growth by spinning off new businesses into industries in early stages of consolidation. They must be alert to the potential for industry regulation and the danger of being lulled into complacency by their own dominance.”
An example of the first sentence is UnitedHealthcare’s (UHC) growth of its healthcare services division Optum, which has made more than 50 acquisitions in the last year.
An example of the second sentence is the Affordable Care Act.
Interestingly, the “platforms” i.e. the carriers and hospitals, are further along in their consolidation and the “professional services needed to serve customers on the platforms” i.e. insurance brokers and physicians are earlier in their consolidation stages.
While I do not have a crystal ball, these trends allow us to predict the future:
- We will likely see more regulation of insurance carriers
- We will likely see growing regulation of hospitals (e.g. Medicare reimbursement changes)
- Consolidation of insurance brokers and physicians will likely continue and even accelerate
Implications for Benefits Professionals
Employers will likely see their choices in brokers and consultants decrease, and employees and their families will likely see their choices in doctors and hospitals decrease.
Unfortunately, these decreases in choices will NOT necessarily lead to lower prices and better service.
A major disruption will be needed to create an entirely new offering that is 10x better, faster, cheaper for things to improve for employers, employees and their families.
Only a handful of railroads dominated transportation in the 18th and early 19th centuries until the invention of the car and the plane.
We will likely need something that dramatic.
To learn how Compass is helping employee benefits thrive in this environment, visit www.compassphs.com