The life sciences industry is facing challenges, and technology is a critical tool in addressing them. Alliances with startups can fuel innovation.
The life sciences industry is facing challenges, and technology is a critical tool in addressing them. Alliances with startups can fuel innovation.
In July 2015, two mammoth players in the U.S. health insurance market decided it was time to form even bigger entities, similar in size to UnitedHealth Group (which held 17 percent of the market.) First it was Aetna deciding to merge with Humana, primarily consolidating the Medicare Advantage market. A few days later, Anthem and Cigna, with a relatively more complementary membership base, decided to merge.
By the end of 2015, shareholders of all four insurers had approved the deals. However, the Department of Justice and several states (mostly Democratic ones) opposed and appealed against the mergers. In early February 2017, the federal court ruled both anti-competitive and blocked them, citing increased concentration.
Had the mergers been approved, Anthem-Cigna would have led the market with highest share of the entire insured population, followed by UnitedHealth and Aetna-Humana. In Medicare Advantage (MA), Aetna-Humana would have surpassed UnitedHealth to become the market leader.
Let’s take a look at what transpired in both cases.
Aetna and Humana
On February 14, 2017, the two companies mutually decided to end the merger agreement, rather than appeal the antitrust decision. Due to a contractual clause intended to ensure both parties remained encouraged by the merger prospect, Aetna will have to pay Humana a break-up fee to the tune of US$1 billion. This massive financial hit does not include various other expenses Aetna had to incur in order to prepare for the deal, including legal and accounting fees, bonds issuance fees, interest to be paid while repurchasing the bonds, and the premium it has decided to pay for bond repurchases. All told, the total cost of the merger that didn’t happen will be around US$2 billion for Aetna. This is a relatively straightforward scenario, albeit very costly for Aetna.
Cigna and Anthem
This is a much more complicated situation. Since the merger was first announced, a lot of animosity has grown between these two insurers. Cigna has gradually changed its stance from being pro-merger to anti-merger. In fact, Cigna has gone to the length of filing a lawsuit against Anthem, and asking for $13 billion in damages. This does not include $1.85 billion that Anthem owes to Cigna as a termination fee. Anthem, however, appealed this, claiming that the merger deal timeline is valid until April 30 – and it is still hopeful for merger activity.
Unless Anthem and Cigna accept the ruling without appeal and carry on with business as usual, I see two possible scenarios here:
The first option seems less likely. However, since the new U.S. president’s swearing in ceremony, we have seen that extreme events cannot be explicitly ruled out with the new administration. Additionally, Trump’s and Republicans’ plans to repeal and replace Obamacare will require support from the industry…and who better to support this than two of the top three publically-listed payers? Another key element in favor of these mergers being approved is that the new administration is more lenient when it comes to antitrust matters than the previous administration, as evidenced by the possible approval of the Bayer and Monsanto deal.
The second option would result in Anthem paying a hefty amount for failure to be able to complete the deal.
The high termination fees for these deals gone bad will likely negatively impact Aetna and Anthem (if indeed the Anthem/Cigna merger doesn’t happen.) For example, per the latest filings, Aetna’s net margin has declined from ~5.9 percent in 2011 to 3.6 percent in 2016, while Anthem’s was 2.9 percent in 2016, down from ~4.4 percent in 2011. As a result of the lawsuit filed by Cigna, Anthem will end up shelling out even more than Aetna, as even if we the decision is in favor of Anthem, it will still have to pay litigation expenses.
The road ahead for these payers is filled with uncertainty, especially for Anthem and Cigna, since they are embroiled in a legal battle. Yet one thing we can be certain of is that Aetna and Humana are watching from sidelines, potentially resuming merger talks if the Anthem-Cigna deal is approved. While it remains to be seen how the new administration reacts, things should get clearer in the coming months.
Wednesday, February 8 | 12:00 – 1:00 pm ET
Research Partner Jimit Arora will help lead an Optum-hosted webinar titled Addressing Payer Costs through a Comprehensive Model: A Blueprint to Achieving Breakthrough Cost Savings. The webinar will feature key speakers from Everest Group and Optum and will explore how health plans can approach breakthrough cost savings by addressing medical and operational costs together.
Managing IT, process and medical costs separately can be costly. Attend to learn how plans can convert their entire spectrum of costs into a utility-based model, with a best-of-breed service provider that can service these costs on a PMPM basis.
VP, Payer Operations Consulting
SVP, Product Development
Contact Center Outsourcing (CCO) Market for the Healthcare Industry PEAK Matrix
The US is the biggest outsourcing destination with companies like Tata Consultancy Service, Infosys, Cognizant Technology Solutions and Wipro dominating this space.
Two years ago, a report quoting research firm Everest Group said US healthcare related contracts were expected to more than double to about $68 billion in 2020, from nearly $31 billion two years ago, largely due to Obamacare.
The United States healthcare system suffers from systemic issues of cost, access, and quality, providing significant whitespaces for innovation. The key factor driving disruption is the pressure to contain costs and improve care quality amidst rising healthcare expenditures. (In 2014, The United States’ spending on healthcare was 17.1 percent of its GDP, and in 2022 it is expected to touch 20 percent.)
The transition from defined benefits to defined contribution, employer-based purchasing to the individuals market, and fee-for-care to fee-for-outcome are some of the structural changes that are driving cost optimization and better patient outcomes.
Technology: the harbinger of change
However, with the rising adoption of digital services by healthcare buyers, technology is proving to be the biggest catalyst in transforming the entire healthcare ecosystem. Technology enables both cost reduction and consumerization. Most of the modern healthcare doctrines such as remote healthcare, 24×7 vitals monitoring, seamless claims management, and integrated health records are powered by technology tenets such as Internet of Things (IoT), robotics, Artificial Intelligence (AI), mobility, analytics, and cloud computing.
Incumbent players have started providing digital services to meet the demands of customers. However, they are a little hesitant to make huge technology investments as they must balance already thinning bottom-lines, shrinking in-patient volumes, and tightening regulatory controls. Additionally, in-house investments have longer go-to-market cycles, higher risk of failure, and stretched pay-off duration.
Start-ups: catalyzing innovation
Stakeholders have been trying to tackle endemic industry issues through technology use. At the same time, consumer expectations are fundamentally changing from their healthcare experiences. Stakeholders are trying to evolve healthcare’s operating model in the new normal. Start-ups have a fertile ground to reap benefits through innovative solutions that address these challenges.
This is reflected in the differential investment interest in healthcare. While the overall funding climate has begun to show signs of correction, healthcare is witnessing a resurgence in investment activity. Global funding for start-ups went down by more than 20 percent in Q3 2015, whereas funding for digital health companies shot up by nearly 10 percent in 2015.
Uncovering the healthcare start-ups landscape
In order to understand the extent of disruption that start-ups bring to the healthcare market, Everest Group Research conducted an in-depth analysis of start-ups in the healthcare landscape (see Hot-healthcare Start-ups: Dawn of a new world order).
We took a discovery-based approach, and analyzed more than 200 start-ups on three major levers:
Our analysis resulted in five leading investment categories, and five top players in each.
Key findings from the study included:
Access the full report entitled “Hot-healthcare Start-ups: Dawn of a new world order”.
Healthcare is one of the principal areas facing upheaval after Donald Trump’s U.S. presidential win last week. Beyond being a major socioeconomic issue (it does consume close to 20 percent of the U.S.’ GDP, which is ~2x that of any other developed country), it is also President Obama’s key legacy given his championing of the reform through the Affordable Care Act (ACA, dubbed Obamacare). Broadly, Trump’s proposed healthcare plan is likely to feature the following changes:
Here’s how the cards stack up
Any kind of partial repeal or change to the ACA will actually be in line with what leading commercial payers have stated, given how broken and unviable the current HIX model is. Most C-suite execs indicate that such a repeal will make health insurance companies more competitive and more influential. This should bode well for large national payers such as Aetna, Cigna, and UHG, which have been bleeding money. This could provide a spurt to discretionary spend, which had seen a pause following mega mergers in the industry, Department of Justice injunction, and HIX losses. At a broader level, the Trump camp has proposed “following free market principles and working together to create sound public policy…” Some early reactions are calling this a welcome change that will allow free enterprise back into healthcare, and let patients, not government agencies, manage their health.
Medicaid-focused payers (states and managed care organizations)
Another key element will be the decentralization of healthcare, as Trump’s plan focuses on giving more Medicaid and other public spending power to states. Combined with the modularity mandate, (essentially breaking down state’s Medicaid Management Information Systems into smaller reusable components,) this is likely to give state health departments more bargaining power as prices decrease and competition – which in the MMIS market has been restricted to players such as CNSI, CSRA, HP, Molina Information Systems, and Xerox – intensifies. Also, managed care organizations (MCO) will benefit from the continuing shift away from state Medicaid.
Trump has also recommended that Congress break down state barriers to allow insurance companies to offer plans in any state, as long as the plans are in compliance with state requirements. This should increase choices for consumers, and result in more competition. However, such an environment has not found much favor with payers struggling to manage the risk on their books, and will likely not find much with the challenge of entering new markets.
Life sciences firms
Most pharma and biotech stocks have soared in the past week, driven by Trump’s lukewarm stance on price regulation, as compared to Hilary Clinton’s more hawkish position on drug price reforms. Throughout her campaign, Clinton repeatedly vowed to limit the power of drug manufacturers, and suggested introducing monetary penalties to punish price gouging. The industry’s much maligned tax inversion practices have also ranked rather low on the president-elect’s agenda.
The not so good…
Despite the political posturing in the run-up to November 8, Trump/the GOP is unlikely to be able to fully repeal the ACA. It’s more likely that they will pursue a partial repeal through the budget reconciliation process, which allows bills related to spending and revenue to be passed by a simple majority, without being subject to a potential filibuster. Trump is likely to sign a bill similar to the one GOP lawmakers passed earlier this year as a counter-measure to the “failings of Obamacare/ACA.” Broad-based changes are likely to be equally, if not more, unpopular than the perceived problems with the ACA. Most of the market has invested considerable resources in reinventing their fundamental business models, and rolling back the clock is not really an option. The market will be forced into a period of uncertainty as stakeholders evaluate options amidst upheaval. While HIX plans have been value-dilutive for most payers, some such as Molina have made it work as a viable business model. However, the movements toward value-based care won’t be affected as the Medicare Access and CHIP Reauthorization Act (MACRA) and other reform tenets will continue it.
Repeal of the Individual mandate may result in truncated consumer choices for coverage of pre-existing conditions, premium hikes due to reduced competition, and limited-benefit plans.
Any repeal would likely include the elimination of the ACA’s Medicaid expansion, insurance subsidies, individual and employer mandates, and several taxes that help fund the law, effective two years after the bill’s passage (this was vetoed by President Obama after the House and Senate earlier this year passed a partial ACA repeal bill through the reconciliation process.) Depending on how block grants play out, providers could experience a shortfall in government spending, and may need to rebalance their exposure to commercial payers.
If the current GOP plan to transition it to a premium-support plan continues, there is likely to be a rise in financial uncertainty as payers’ reimbursements get linked to average versus submitted bids. This will further sharpen the focus on payers’ cost efficiency and optimization efforts to manage business models.
… and the uncertain
In most of these scenarios, we can only make an educated guess about what the Trump era means for healthcare. The next few months will be crucial in setting the tone for the changes to come – leadership appointments, policy moves, etc. The ACA seems to be the most contentious piece, and likely the first to be tackled by the administration. However, Trump’s public posturing will need to contextualized with the complexities of the legislative process to fully assess the material impact.
We would love to hear your views on how this will play out.
On Friday, October 14, the Centers for Medicare & Medicaid Services (CMS) in the United States released a humongous, 2398-page rule to implement new value-based payment programs under the Medicare Access and CHIP Reauthorization Act (MACRA).
This release is a significant step forward in streamlining Medicare payments, and establishing what “value” will mean in the much debated Value-Based Reimbursement (VBR) programs.
Here’s our initial take on this release, in order of what I liked most about the rules.
CMS is making the right noises: As the CMS acting administrator, Andy Slavitt, put it, “…..changes to the rule were to help physicians focus on delivering care and seeing patients instead of performing administrative tasks.” The term in bold represented the point of conflict between a right thinking, efficiency-focused regulator and unnecessarily overburdened physicians.
How is some of this getting addressed?
Reduces confusion over quality improvement: The new set of rules consolidates three existing quality reporting programs — Physician Quality Reporting System, Value-based Payment Modifier, and Meaningful Use (MU))– and a new performance category into a single system through Merit-based Incentive Payment System (MIPS.) The definition of “merit” or value was never clearer. Here is a snapshot of the scoring model that defines the four performance categories and their weights:
Pick Your Pace (PYP): In order to make the above operational, CMS is allowing providers to pick their own pace, (see Andy Slavitt’s blog for more details), and choose from three data submission options or join an advanced Alternative Payment Model (APM):
Enabling consortiums: CMS now allows MIPS reporting as a group, enabling smaller providers to get a better deal. What this means is that a group of clinicians sharing a common Tax Identification Number (irrespective of specialty or practice site) can group together to receive payments based on the group’s performance. This will foster necessary consolidation in the ambulatory space.
Relaxes exclusion norms through APMs: Providers not eligible for MIPS can still receive a bonus payment for meeting performance criteria through qualifying APMs. The inclusion criteria are clearer than before, and the nervousness caused by stringent exclusion norms is largely addressed.
Last, but not least, provides a further fillip to IT: While use of certified EHR technology will continue to give providers brownie points for performance, the following five required measures that CMS has mandated for providers will further boost technology adoption:
Net-net, this new rules release is a great move forward toward settling the debate on “value,” and will energize the healthcare industry to spend more on technology. As you wade through the 2398 pages, watch this space for more of our explanations and perspectives on this topic.
Life sciences market maturity 2016 based on Everest Group’s PEAK Matrix™ and APEX Matrix assessments™.