According to a recent report from the Health Research Institute at PricewaterhouseCoopers, there were 255 health care merger and acquisition deals in Q2 of 2018. Though this number represents an overall reduction in health care deals over Q1, as evidenced by CVS’s proposed $69 billion merger with Aetna and Cigna’s merger with Express Scripts, the broader trend toward consolidation in health care continues.
Given the potential benefits of consolidation, it is no surprise that merger and acquisition activity is on the rise. A study by Charles River Associates (involving interviews with executives from 20 different hospital systems) indicated that hospital mergers result in reduced costs of capital and clinical standardization, leading to a 2.5 percent reduction in annual operating expenses per admission at acquired hospitals. According to the study, the average annual operating expense of the merging hospitals in the study, approximately $235 million, implied a merger-related annual savings of $5.8 million at each hospital.
Though consolidation offers many benefits, questions remain about whether consolidation, at least in its current form, will lead to lower-cost care for patients. A study analyzing consolidation in California found that consumers in health care markets in Northern California, which are “considerably more concentrated” than Southern California, pay 20 to 30 percent more for medical procedures than residents in Southern California. Even after cost-of-living adjustments, the study found that residents are paying 32 percent more for inpatient care, 28 percent more for outpatient care, and nearly 10 percent more in premiums. Some wonder whether increasing patient costs in these concentrated markets are a sign of what is to come if consolidation continues; as large medical groups become the norm, will it become more difficult for insurance companies to negotiate lower rates?
Perhaps in response to the unintended effects of consolidation in California, states like Washington are taking a proactive approach to protecting patients. The Office of the Insurance Commissioner (“OIC”) is closely monitoring upcoming mergers and acquisitions to “ensure that the financial condition of the companies is sound and consumers are protected.”
During its review, the OIC considers:
- How the consolidation may affect the insurer’s ability to do business in Washington;
- Financial solvency of the companies involved;
- Plans of the acquiring party to make material changes in the insurer’s business, corporate structure or management;
- Integrity of the persons who would control the operation of the insurer; and
- Whether or not consolidation is in the best interest of consumers.
By way of example, the OIC is currently reviewing two significant acquisitions by insurers that could significantly affect providers and patients in Washington:
According to the OIC, CVS filed an application for the acquisition and merger of Aetna in January 2018. The OIC has established a review process to determine “the fairness of the transaction and hear any objections to the proposed acquisition.” Information regarding the proposed CVS acquisition of Aetna can be found here.
The CIGNA acquisition of Express Scripts was approved by the Department of Justice (“DOJ”) on September 17, 2018. Washington received a request for exemption because the state has no domestic insurer related to Express Scripts.
In addition to conducting its own review, the OIC often requests input from the Washington Attorney General’s office, to determine whether consolidation would reduce competition or harm Washington consumers. Earlier last year, Washington Attorney General Bob Ferguson filed a federal lawsuit against CHI Franciscan, alleging that its July 2016 acquisition of WestSound and September 2016 affiliation with WestSound violated antitrust laws. The Washington legislature is taking a similar heavy-handed approach to health care consolidation with HB 1811, which, if passed, will impose additional reporting and disclosure requirements on health care entities considering mergers and acquisitions.
The impact of consolidation in the health care industry is also being contested in Congress. During a recent hearing with the Senate Health Education Labor & Pensions Committee, policy experts explained that provider consolidation and rising health care costs are directly correlated and urged lawmakers to take a more critical look at the consequences of consolidation. Dr. Ashish K. Jha, Director of the Harvard Global Health Institute, recommended that the federal government:
- Encourage greater scrutiny for mergers by lowering the threshold for pre-merger notification;
- Increase funding for staff at the Federal Trade Commission (“FTC”) and DOJ to review, investigate, and where appropriate, challenge mergers that are likely to be anti-competitive and harmful to consumers; and
- Encourage the FTC to develop more rigorous approaches to evaluate vertical mergers, particularly in health care.
Health care companies considering mergers and acquisitions should take notice of efforts to monitor and establish increased regulatory oversight of consolidation in health care. By proactively including benefits to patients and the health care marketplace in planning for a proposed transaction and taking steps to avoid adverse effects on patients, companies can improve their chances of withstanding increased state and federal review and better ensure that patients are protected.