Every week brings earthshaking news on health care provider consolidation: national mergers like CVS-Aetna and Cigna-Express Scripts, and, most recently in Massachusetts, Beth Israel Deaconess-Lahey Health and Harvard Pilgrim-Tufts Health Plan. In 2018, total value for health care sector mergers and acquisitions topped $265 billion, a major uptick from $186 billion in 2017 and $182 billion in 2016, according to the Standard & Poor Capital IQ database. Not all proposed consolidations skate successfully past stakeholders and regulators — just last year, Harvard Pilgrim failed to hammer out a deal with Partners HealthCare. But the appetite for consolidation seems unslaked, despite federal challenges and mounting questions about which parties involved realize substantial benefits.

Leemore S. Dafny, PhD, the Bruce V. Rauner Professor of Business Administration at Harvard Business School and a faculty member of the Kennedy School of Government, has done extensive research on health care mergers. She answers our questions about practical implications of provider consolidation, the 2018 CVS-Aetna merger, and how Big Tech might disrupt the basic blueprint for consolidation in health care.

Interview edited and condensed

What does “provider consolidation” mean, and what are its practical implications for patients, doctors, and insurers?

There’s no set definition for the term consolidation, but a reasonable starting place is mergers and acquisitions: that is, joint ownership of multiple providers. Here, I’ll use “provider” to describe any player or individual in the care delivery sector, such as physicians, hospitals, ambulatory centers, and surgery centers.

Consolidation is often described as “horizontal” — a merger among suppliers in the same relevant market sharing product and geographic contours — or “vertical” — along the continuum of delivery, such as an acute-care hospital merging with a post-acute facility. But many transactions can’t be cleanly divided this way, so I usually use “horizontal” and “non-horizontal.”

Consolidation is reshaping the U.S. health care system. Researchers are trying to pin down causes and effects so that we can provide some guidance to parties considering transactions as well as to regulators. So far, the resounding results of research have been that prices increase without much evidence of quality improvement and with some evidence of quality reduction following provider consolidation. Because insurers are on the hook for paying provider prices, they’re not benefiting. Providers are probably benefiting, although I’m not aware of studies that look at this. And the evidence doesn’t show that patients are benefiting.

We’re seeing consolidation in the form of corporate mergers, such as the one between CVS and Aetna, which you’ve written about. What were the hoped-for goals behind this, and how has it played out so far?

I am only aware of publicly stated goals. But from my perspective, some kind of move was necessary on CVS’s part. Their business model includes retail storefronts, prescription drug dispensing, and pharmacy benefit management. As we increasingly buy drugstore items elsewhere and get them shipped to us, often from Amazon — and now possibly get our drugs shipped from Amazon, too — CVS needed to figure out what to do with all that retail space and how to maintain or grow their revenue stream. Meantime, Aetna had been thwarted in its attempt to merge with Humana, which was in the same line of business, i.e., a proposed horizontal merger.

So, there’s a business rationale: we have cash flow from a mature business, and we need to create something new and pivot. That was amplified by a tax cut, so there was even more cash flow to funnel into an investment. And then there’s what you can offer consumers: convenient locations and clinics to directly provide health services, especially to patients who like or need high touch. Potentially Aetna could grow their Medicare Advantage business and become a care provider for other populations, as well. And there is some research suggesting that combining the management of pharmacy and medical services could yield more efficient, better care. For example, it might make sense to use a more expensive drug that results in fewer hospitalizations. You want somebody managing drugs to consider the spillover effect. Managing the entire pool of money and pool of patients might offer a better perspective and the right incentive.

The deal itself only received final approval in September. As a researcher, it’s really too early for me to try to take a look at outcomes.

What’s your perspective on how Big Tech affects health care consolidation?

Providers consolidate partly because they believe it’s going to improve the quality of care they supply and partly because they can’t imagine reinventing themselves without combining so that their cost structure matches what payers want to pay. But the buck stops somewhere. It’s getting really expensive. There’s certainly talk of price regulation: we’re seeing that on surprise billing, but the next iteration will go beyond that. We’re also seeing insurance becoming less affordable. I think that with the next recession, insurance companies are going to see some lower take-up, and providers will see some pressure.

Merging, which can enable providers to maintain high cost structures, can only be successful for so long. Big Tech is trying to use enormous amounts of data, search capabilities, and machine learning skills to figure out which care providers are most efficient and where you get the biggest bang for your buck. Their goal is to direct patients to the services and providers who are the highest value. Ultimately, that will reduce the rewards for consolidation, which is at least partly driven by the desire to gain market power and avoid restructuring.

Also, I think Big Tech might pair with payers or become a payer. If they can break the juggernaut of the strong, dominant provider system with a care alternative — whether it’s Hospital at Home, telehealth or video health, or more ambulatory facilities that they own — they can set their internal transfer prices and may try to cut the expensive providers out of care provision and exert some more painful transformation on them.

Continue the conversation on Twitter by connecting with us @HMS_ExecEd or with Dr. Dafny @LeemoreDafny

— Francesca Coltrera