Tag: healthcare

Break-ups are Painful, Difficult, and Costly; The Current Insurance Payer Merger Saga | Sherpas in Blue Shirts

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.

Insurance payer mergers

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:

  • Convince the new administration that the deal will have a positive impact on consumers, and get it approved with the help of the new head of the Justice Department
  • Accept the ruling, and use the money (planned or already raised) to fund acquisitions of smaller payers without triggering the antitrust regulations

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.

Insurance payer mergersThe 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.

Addressing Payer Costs through a Comprehensive Model | Webinar

Wednesday, February 8 | 12:00 – 1:00 pm ET

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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.

Speakers

Jimit Arora
Partner, Research
Everest Group

Donna Holmes
VP, Payer Operations Consulting
Optum

Zahoor Elahi
SVP, Product Development
Optum

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Obamacare Repeal could Hurt Indian IT Industry | In the News

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.

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Hot Healthcare Start-ups: Dawn of a New World Order | Sherpas in Blue Shirts

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.

healthcare-start-ups-image

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.

Healthcare start ups

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:

  • Technology disruption
    • To what extent has the start-up addressed existing challenges through technology?
    • To what extent has the start-up created new channels via technology?
  • Business disruption
    • To what extent has the start-up transformed existing business functionality?
    • To what extent has the start-up created a new market?
  • Market buzz
    • How much trust have investors shown in the start-up?
    • What kind of market recognition has the start-up received?

Our analysis resulted in five leading investment categories, and five top players in each.

Hot healthcare start ups

Key findings from the study included:

  • Given the valuations and impact they create, start-ups have the potential to unseat some of the incumbent companies. Therefore, it is imperative for payers and providers to partner with them or acquire them to remain relevant in the healthcare value chain.
  • Associations with start-ups will significantly reduce time-to-market as they provide ready-made plug-and-play solutions. This can also convert capital expenditures to operating expenditures and maintain a leaner cost structure.
  • Start-ups have built the agility required to withstand changing industry dynamics, as they have tried and tested multiple use-cases. Hence, association with them will be helpful to mitigating competitive rivalry and adapting to regulatory changes.

Access the full report entitled “Hot-healthcare Start-ups: Dawn of a new world order”.

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