Mergers are sweeping health care, as insurers, hospitals and doctors seek economic shelter from Washington by linking up and getting big.
These merger trends were underway prior to Obamacare. But there’s little question that the law purposely hastened these developments.
The law’s architects saw big insurers, big health systems and big hospitals as the best platforms for delivering medical care. Size, it was wrongly believed, would lead to more efficiency. It would also make medical care easier to regulate from Washington.
While we’ve seen other waves of consolidation sweep the health care sector, most recently in the late 1990s, the current series of mergers and acquisitions is different.
The hookups are bigger and more pervasive. They’re also unfolding in an industry that was already heavily consolidated. As a result, the impact on your medical care will be profound.
When it comes to the mergers in among health plans, the bigger issue isn’t the consolidation of the nation’s five largest insurers into three. It’s the fact that far fewer new health plans are forming to replace the plans that have been acquired. New regulations, many of which were ushered in along with Obamacare, have made it too hard and too costly to start a new plan.
As a consequence, the number of distinct health plan choices people have at work or even on the Obamacare exchanges has shrunk under the Obama presidency.
Only about 50 new health carriers have entered the commercial market since 2008, according to a November analysis from the investment firm Goldman Sachs.
Of that number, at least half of these new plans are the struggling “co-ops” that Obamacare heavily subsidized, on an egalitarian premise that these not-for-profit health plans would be able to channel more of their revenue into medical care, since they didn’t aim to turn a profit.
But today, all of these “co-op” plans are struggling financially. One has already filed for bankruptcy. The concept is widely perceived as a bust.
At the same time, around 40 health plans also left the market over this same stretch of about seven years. Some merged with competitors, but at least 13 were shut down or liquidated.
Working with research staff at the American Enterprise Institute, I developed similar data that shows even fewer new health plans entering the market since 2008.
We defined new entrants as health carriers or provider organizations that sold health insurance plans sometime between 2008 and 2015 and had never before offered coverage in the market. We found only 38 new entrants.
Of these plans, 23 were co-ops, six were provider-sponsored plans being offered by hospital systems, and only seven were new commercial carriers.
The problems aren’t the mergers, but government policies that make it hard for new health plans to enter the market and replace those that are eliminated through the deal making.
For example, startup health plans often must channel more of their revenue into their initial operating expenses to help pay for the high costs associated with launching a new health plan.
But Obamacare has put tight limits on how much of their revenue a health plan can spend on operating costs – and keep for profits. These government rules make it very hard for new plans to get started. The limits on how much money a health plan can keep for profits also deter investors from putting up the capital to start new health insurance carriers.
Obamacare’s planners weren’t blindsided by these outcomes. They readily embraced them. The president’s team saw insurers as costly middlemen. They figured that government subsidized “co-ops,” as well as health plans that would be started by large hospital systems, could easily displace the for-profit insurance carriers. That view is proving naive.
It turns out that marketing a health plan, and managing the medical risk, isn’t such a simple business. Just ask the co-op plans that are circling bankruptcy.
Obamacare tried to re-engineer the rules of medical care and health insurance. Instead, the legislation only served to raise costs, and shrink the choices people have.
Scott Gottlieb is a practicing physician and a resident fellow at the American Enterprise Institute, a think-tank in the nation’s capital. A frequent contributor to The Wall Street Journal, he has served in various capacities at the U.S. Food and Drug Administration including deputy commissioner and senior adviser for medical technology. Readers may write him at AEI, 1150 17th Street NW, Washington, DC 20036.