Healthcare M&A Rethink: Unique Risks of Integrating Health Plans and Hospital Systems

Discover the impact health insurance acquisitions can have on the overall business.

As US healthcare reform causes payers to seek payer-provider hybrid business combinations through mergers and acquisitions, companies must understand the risks and rewards of integrating health plans and hospital systems.

Given the highly regulated nature of health insurance and the fundamental differences between the business models employed by health Insurance and hospital systems, a workable short-term approach will likely keep these two business models separate. As a result, a payer’s newly combined enterprise will maintain the two corresponding operating models, but with selected modifications to address integration opportunities and/or challenges.

Beyond this, there are numerous opportunities to employ a shared services model for corporate functions of the two entities. There are also opportunities for creating ‘wins’ for communities and patients. Trumpeting these efficiencies can help cement a rationale while easing community concerns. Areas of interest could include procurement, facilities, real estate, technology infrastructure and finance, all of which can reduce administrative overheads.

In the past, US payer acquisitions tended to remain within the core health insurance space. Now, however, Accenture research shows that looming healthcare reform has caused many payers to rethink their merger and acquisition strategies and build capabilities beyond the payer core. This new emphasis is an effective way for payers to find new growth opportunities, but without careful planning it can result in missed opportunities and needlessly complicated business models.

Successful integration programs create new types of synergies through cost avoidance or revenue uplift and seek to align member experience across the payer’s expanded portfolio of new and core capabilities. Beyond these elements, other considerations include the potential impact on the health plan network, new administrative challenges and governance and leadership issues.

When a health plan acquires a hospital system or integrated health delivery system, there is always the chance that participating providers within the plan’s existing network could perceive a threat to their own hospitals or medical practices. Unchecked, this situation could have a negative impact on the health plan’s existing revenue streams. Likewise, it remains to be seen what (if any) “defensive” measures competing health insurers might impose on acquired hospitals and medical practices to neutralize the acquiring payer’s competitive advantage.

Such moves have the potential to undercut the existing revenue streams of the acquired provider. This phenomenon is already evident in the recent discord between some health plans and hospitals/providers. Managing member perception and anxiety will help reduce these concerns in the future and is closely related to the second integration challenge.

The ownership of hospital systems can enable payers to participate more readily in the risks and rewards of so-called accountable care organizations (ACOs). Formed by groups of coordinated healthcare providers, ACOs seek to tie provider reimbursements to quality metrics and to generate reductions in the total cost of patient care. Furthermore, access to historical healthcare data combined with the necessary actuarial skills can make health plans a valuable asset for hospital systems interested in becoming ACOs.

A payer’s administrative capabilities will also be tested by the industry’s new M&A strategy. Acquiring companies need to create greater transparency between care management functions within health plans (such as utilization management and case management) and their counterparts within the acquired hospital system. Doing so can improve the system’s quality of care, enhance the consumer/patient experience and reduce overall costs for the combined enterprise.

Regardless of who funds the deal, the combined enterprise would be well served to acknowledge that the skills and leadership needed for a successful health plan are different from those required to run a successful hospital system and vice versa. As a result, successful leaders will place a premium on working cross-functionally and involving all key stakeholders in critical decisions.