Nearly everyone knows that the US health care system is the most expensive in the world—consuming 18 percent of GDP, more than any other developed economy. And yet, the system generates health outcomes that lag those of many of its developed-economy peers. (See “Health Reform Should Focus on Outcomes, Not Costs,” BCG article, October 2010.) The basic challenge facing the US health care system is to simultaneously reduce costs (or at least slow their increase) while also improving health outcomes—in short, to improve health care value by delivering cost-effective, quality care. How might payer consolidation contribute to this goal? There are three ways.
More Efficient Operations. In the short term, consolidation will make possible the elimination of considerable administrative costs, as new combinations render current systems and operations redundant. Aetna expects to achieve approximately $1.25 billion in annual cost savings by 2018 as a result of the Humana merger. And Anthem has estimated that it can reap annual synergies of some $2 billion from a Cigna acquisition. These are big numbers, to be sure, but the likely acquirers are already of a size and scale that savings on administrative costs are unlikely to represent the major source of value in consolidation.
Stronger Bargaining Power. Larger entities will also be able to leverage their scale to reduce the unit cost of health care. In some local markets, consolidated national insurers with a greater proportion of lives covered relative to leading local players may attempt to shift the dynamics of rate negotiations with providers. Beyond across-the-board rate reductions, however, increased local scale will make it easier for insurers to assemble dedicated networks of providers that combine additional price discounts with a reasonable degree of choice among providers—an attractive combination for consumers. The initial impact of increased bargaining power will be felt by provider facilities and physicians but may eventually affect other categories, such as pharmacy and diagnostics.
Better Clinical Management. Over the long term, however, payer consolidation won’t definitively move the needle on health care value unless the newly combined health insurers use some of the savings provided by greater scale and increased efficiency to invest in and extend their clinical capabilities. The big innovation in private health insurance in recent years has been a new model characterized by three organizational mechanisms designed to encourage the delivery of cost-effective quality care: a selective network of providers with strong investments in primary care, financial incentives such as risk-based contracting that are aligned with clinical best practices, and active care management that emphasizes prevention in an effort to minimize more costly acute care.
Research has shown that this alternative care-delivery model is less costly than traditional fee-for-service medicine. What’s more, a study BCG conducted in 2013 demonstrates that it delivers better health outcomes as well. In an analysis of claims data for some 3 million Medicare patients, we found that on three internationally accepted dimensions of health care quality—single-year mortality, recovery from acute episodes requiring hospitalization, and sustained health over time—patients enrolled in private Medicare Advantage plans who used this new model had better outcomes than those participating in Medicare on a traditional fee-for-service basis. (See Alternative Payer Models Show Improved Health-Care Value, BCG Focus, May 2013.)
Creating the capabilities required by this new model involves considerable investment. Payers need to develop (and, in some cases, actually acquire) the right kind of provider networks. They must build sophisticated IT platforms that support the secure sharing of sensitive patient data, predictive modeling to identify and manage higher cost members, and the systematic collection of health outcomes data to identify best practices for delivering cost-effective quality care. Finally, they have to create new tools to engage members in the management of their own health and wellness.
All these represent important new sources of competitive advantage. Some players in the industry—in particular, Humana—have already developed valuable assets in these areas. Over time, consolidation and the savings it generates will allow private insurers to invest even more in such capabilities, accelerate the adoption of this value-based model for care delivery, and benefit from new incentives for outcomes-based medicine that have been put in place as part of the Affordable Care Act.