Health insurers' vertical integration strategies will pressure hospitals, but the formation of a generic drug company should lower their costs.
Health insurers' strategies of acquiring physician groups and other non-acute care providers will put further pressure on the volumes and margins of hospitals, says bond rating agency Moody's in a quarterly report.
Other mergers that seek to add a large pharmacy chain to a health insurer and one that will combine an insurer with Kindred's home health and hospice business will also pressure hospitals' margins. But hospitals' plan to band together to form a generic drug company would reduce pressure on hospital margins at the same time.
Moody's, which rates bonds issued by hospitals and health systems, couches these developments in the terminology of "credit positive" and "credit negative." Overall, hospitals need to continue to seek to differentiate themselves via their market presence, quality reputation, breadth of services, and cost profiles, the agency says.
The bad
- CVS/Aetna: Hospitals will have to compete directly with CVS's 1,100 Minute Clinics in certain outpatient services, some of which already provide diagnostic and primary care services such as blood draws and diabetes care. Both CVS and Aetna have committed to expanding those services if the deal closes, but there are still some questions about whether it will.
- Humana/Kindred: Instead of directing patients to hospitals that have home health and hospice units, should the acquisition succeed, Humana will redirect patients to the 40% of Kindred's home health and hospice business that it plans to acquire, says Moody's. Humana, which is also in the process of being acquired itself by Walmart, will use the Kindred facilities it purchases to directly affect outcomes for patients with chronic illnesses, meanwhile reducing expensive emergency room visits and hospitalizations.
- Optum/DaVita: Optum's planned acquisition of DaVita Inc's medical group, delayed at the moment because of FTC questions, will further pressure hospitals because physicians hold the majority of the influence over where patients will be treated. This has always been the case, of course, but Optum's affiliated health plan, UnitedHealthcare, should be able to carve out more hospitals or certain from its contracts, putting further pressure on margins, Moody's says. By owning more physician groups, Optum should be able to move more quickly to a full-risk, population-based model that would put full control of the premium dollar in the hands of physicians instead of hospitals.
The good
- Generic Drug Company: Several large nonprofit health systems, including Intermountain Healthcare, Ascension and SSM Health have announced plans to jointly develop a generic drug company in consultation with the Department of Veterans Affairs. Hospitals have been struggling with the high cost of so-called hospital-based generics, which have weakened their margins. The plan is for the company to gain U.S. Food and Drug Administration approval and it would either make certain drugs or subcontract with contract manufacturers to make them, though which drugs it would manufacture and when they would come to market is uncertain, according to Moody's.
Philip Betbeze is the senior leadership editor at HealthLeaders.