Health Insurers Spending Billions to Diversify

Strategist explains how major health insurers are investing to support different visions of the future

CEO SUMMARY: One big development affecting the health insurance business is how four of the nation’s largest health insurers are diversifying in significant ways. Last spring, a healthcare strategist explained how each of these companies has spent billions of dollars in recent years to acquire other healthcare companies that are not part of the traditional health insurance business model. The question now is what affect these acquisitions will have on clinical labs and pathology groups.

Second of Two Parts

IN MAY, HEALTHCARE STRATEGIST AND ENTREPRENEUR TED SCHWAB explained how the five of the nation’s biggest health insurers are actively reshaping their companies, during his presentation at the 24th annual Executive War College on Laboratory and Pathology Management in New Orleans.

In his remarks that day, Schwab outlined how each of the top five health insurance companies was changing its business model in ways that could have a dramatic effect on clinical laboratories and pathology groups.

Largest Health Insurers

The idea that seemed to capture the audience’s attention was Schwab’s assertion that the nation’s largest health insurers have spent billions of dollars on acquisitions, and that they were doing so in an effort to diversify their business models away from relying almost entirely on health insurance premiums to meet their annual revenue goals.

Following his presentation, the editors of THE DARK REPORT interviewed Schwab about his comments regarding the changes health insurers have made and how he expects these changes will affect pathologists and clinical laboratory testing.

EDITOR: Your presentation at the Executive War College generated a lot of conversation among attendees, particularly your description about how health insurers are changing the way they do business. What captured their attention were your comments about how the big health insurers were spending billions on acquisitions because they wanted to diversify away from health insurance as their sole source of revenue, correct?

SCHWAB: Yes, and the diversification moves these insurers have made are a significant development for the entire healthcare system. The biggest health insurers have decided that selling health insurance by itself may no longer be a viable business model. Therefore, they are spending tens of billions of dollars to acquire other businesses in the healthcare sector.

EDITOR: Yet, at the same time, these companies still offer health insurance to tens of millions of people.

SCHWAB: If you look at where Aetna’s business is, Humana’s business is, Cigna’s business is, UnitedHealth’s business is, they’re all in government health programs [particularly the Medicare Advantage program]. They’re all in government programs with both feet. In addition, they decided to go into other businesses. Let me run through the big four. We can start with Aetna. Most of us in healthcare know that CVS, the national pharmacy chain, acquired Aetna last year by paying $70 billion, the largest acquisition price for a healthcare deal to date.

EDITOR: How will CVS integrate Aetna into its business?

SCHWAB: In addition to selling some insurance in the government health programs, the CVS strategy is to create an alternative delivery system in the retail market. Doing so will force beneficiaries into retail settings, thereby reducing costs. For CVS, the strategy is all about the delivery system. It’s about using the CVS drugstores.

EDITOR: What about Humana’s strategy?

SCHWAB: Humana is fascinating. In addition to being one of the nation’s largest Medicare Advantage insurers, it is going in another direction. In December 2017, it bought Kindred Healthcare for $4.1 billion, putting them in the home health business. After the Kindred sale in 2017, Humana ended up with about 40% ownership of the home health, hospice, and community care businesses. It is also noteworthy that the headquarters for both Humana and Kindred are in Louisville, Ky. Humana next created new types of health plans in at least two states.

EDITOR: What is different about these new Humana health plans?

SCHWAB: Humana started new health plans in Florida and in Georgia recently with Doctor on Demand, a company based in San Francisco. It has reduced the commercial premiums for those health plan by 50%.

EDITOR: What allowed Humana to slash the premiums by such a huge amount?

SCHWAB: These new Humana health plans have two conditions. Number one, the patient cannot go to the hospital. Number two, the patient is encouraged to have virtual visits with the plans’ caregivers. The hospital service will be delivered to the patient in the home. Then, Humana will attempt to provide the doctor services online. Now, at Humana’s headquarters, they say, “We own the home.”

EDITOR: You’ve shown how CVS now owns Aetna, and you’ve explained that Humana is moving into home health, hospice, and community care. What is happening with Cigna?

SCHWAB: Last December, Cigna spent $67 billion to acquire Express Scripts, the nation’s largest pharmacy benefit management company. The $67 billion made it healthcare’s second largest transaction.

SCHWAB: Among the strategies these companies are pursuing, Cigna’s is the most straightforward. It now has a 50% share of the market for prescription drugs, meaning Cigna intends to control the cost of prescriptions.

EDITOR: That leaves UnitedHealth and Anthem as the nation’s two largest health insurers. Each covers about 40 million beneficiaries. Is each pursuing similar strategies as Aetna with CVS, Humana, and Cigna?

SCHWAB: One is and one isn’t. UnitedHealth Group is the parent company of the health insurer, UnitedHealthcare, and it’s diversifying. Anthem, on the other hand, is staying the course and sticking with health insurance as its primary business.

EDITOR: What is UnitedHealth doing to diversify?

SCHWAB: UnitedHealth’s diversification strategy goes back almost two decades. When UnitedHealth Group founded Optum 20 years ago, it began to exit the health insurance market as their main business. Optum today is a $100 billion business and has almost half of UnitedHealth’s 2018 revenue of $226 billion. Also, it’s significant to note that Optum employs 47,000 doctors. UnitedHealth’s strategy is to disrupt traditional healthcare and beat the traditionalists at their own game.

EDITOR: That would be worth a deeper dive because clinical laboratory executives and pathologists are watching UnitedHealthcare (UHC) narrow its networks, require preauthorization of many genetic tests, and cut what it pays for lab testing. At the same time, does UnitedHealth have a conflict with its other division, Optum, that employs almost 50,000 physicians, all of whom need access to quality lab test services for their patients?

SCHWAB: There is an interesting tension between UHC’s desire to hold down lab test prices and the fact that Optum’s physicians need quality clinical laboratory testing services. Therefore, it’s likely to take some time for UHC and Optum to sort out those issues.

EDITOR: What’s happening withAnthem? Why do you say it has a different strategy than the other four large health insurers?

SCHWAB: Anthem is lagging behind if we measure Anthem against what the other insurers are doing with mergers and acquisitions. Anthem has not gone out and done big acquisitions of non-insurance businesses. Also, after years of operating their in-house innovation center, it appears that Anthem has either downsized this center or closed it altogether.

EDITOR: Over the past 20 years, health insurers such as Anthem and UnitedHealthcare acquired smaller health plans to expand the number of beneficiaries and regional markets they served. Today, there are not many obvious opportunities for Anthem to grow in that manner. So, what is Anthem’s strategy if it is not diversifying away from offering health insurance?

SCHWAB: Anthem has a solid executive team. But they’re Blue Cross. And, collectively, the Blues plans have made a commitment to remain in the health insurance business. The message from Anthem is that it wants to partner with physicians and providers to add value. The team at Anthem continues to say, “We are going to be a leading health insurance company.”

EDITOR: Thank you, Ted, for sharing these insights about how the nation’s largest health insurers are diversifying.

SCHWAB: You are welcome.

Implications for Labs

Clinical lab executives and pathology group business leaders will want to consider the implications of Schwab’s insights about how four of the nation’s most dominant health insurance corporations have spent tens of billions of dollars to diversify into businesses other than health insurance.

One interpretation of these developments is that the ongoing consolidation of hospitals and physician group practices into ever-larger integrated health networks is a factor. This makes it possible for employers and government health plans to negotiate cradle-to-grave health coverage for their beneficiaries. Reimbursement for these arrangements will probably be per-member-per-month (PMPM). In such cases, why would employers need a health insurer as a middle man?

This model of the integrated health system is used by Kaiser Permanente and Geisinger Health. Both health networks offer their own insurance products directly to employers. Maybe this is the type of handwriting on the wall that the major health insurance companies see in their own strategic planning.

Contact Ted Schwab at 402-618-8154 or ted.schwab@babylonhealth.com.

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