- May 6, 2018
- Posted by: JPFarley
- Category: Affordable Care Act, Healthcare Reform
The latest wave in healthcare business mergers is said to be the result of the Amazon/JP Morgan/Berkshire Hathaway announcement that they will jointly pursue a new approach to healthcare benefits and its ever-increasing cost. We have now heard of mergers with CVS/Aetna and Express Scripts/Cigna.
There is a fundamental difference between these types of mergers and the press seems to be missing that difference. Last week there were reports about a Humana/Walmart combination. It would appear to be closer to the Amazon approach than the other two.
Pharmacy benefit managers like CVS and Express Scripts and insurers like Aetna and Cigna have spent the last 50 years attempting to constantly increase margins from multiple apparent and hidden sources. It is virtually impossible to read their underlying agreements that are their sources of revenues and understand what portion of their charges is attributable to actual cost and margin. No customer including the federal government can actually figure it out. Insurers through their provider network agreements have done exactly the same thing. Opaqueness and obfuscation have been their goals. The goal of these mergers is to continue to keep that going and even expand their ability to do that.
Jeff Bezos of Amazon has a famous quote: “Your margin is my opportunity”. Walmart is famous for “Everyday low prices”. The Amazon and Walmart organizations both have their primary focus on the customer and driving down prices by squeezing out excesses through effective supply chain management. What they will do is no different than companies have been doing in every aspect of their business except health care benefits.
Just the opposite of the Aetna and Cigna that have been primary drivers and beneficiaries of medical excess for decades. The fact that their lobbyists heavily influenced the codification of the 85% minimum medical loss ratio into the Affordable Care Act so that their revenues increased as medical costs increased is a great example.
It will be very interesting to watch these two competing models develop over the next years.
I would put my money on Amazon and Walmart in the end. However, in meantime, the entire hospital industry, pharmaceutical industry, and health insurance industry, likely with significant support from governmental regulation resulting from lobbying, will do everything they can do to oppose it.
There will be one other aspect to consider. The most conservative estimates that exist say that 30% of all health care rendered in the US is unnecessary. However, there are a lot of well-paying jobs associated with that unnecessary 30%. Add to those technology improvements that are well underway and we are going to see a lot of disruption in employment in the coming years. Fortunately, there are plenty of other needs that are currently unfunded which these dollars can easily be diverted to. Think of what the family of 4 earning a mean income of $72,000 could do with decreasing current health care plan plus out of pocket costs of $25,000+ per year could do with an extra 30% of that number ($7,500).