Pru-Aetna merger latest to hop on industry consolidation bandwagon
Pay cuts for Pru providers likely if merger proceeds
Merger mania continues to strike the managed care industry, with the proposed Aetna U.S. Healthcare-Prudential HealthCare affiliation as the latest evidence of a trend that strikingly mirrors the airline and banking industries of a decade ago. The question consultants and practice leaders are pondering: Is bigger necessarily better, or will health plan mergers precipitate the same one-two punch of higher prices and fewer choices that has plagued the airline industry in its deregulation years?
The collective verdict from most practice leaders and consultants interviewed by Physician’s Managed Care Report is that, despite objections from the Chicago-based American Medical Association (AMA), the pending Aetna U.S. HealthCare-Prudential merger is not necessarily bad news for physician practices.
"The concern is that as the number of payers decrease, they become a dominant force in the marketplace. To the extent groups have to contract with these payers, they become very vulnerable to the whims of these payers as they change policies," says Robert Wright, Jr., FACMPE, chairman of the board of the Englewood, CO-based Medical Group Manage ment Association and president and chief executive officer of University Health Associates at West Virginia Health Sciences Center in Morgantown.
"It creates a position in the marketplace that will certainly reduce some options for contracting," says T.J. Borschel, administrator for The Heart Institute of St. Petersburg (FL). However, Borschel says he believes his practice — which has participated with a local independent practice association in a risk contract with Prudential for a number of years — actually may gain some contracting strength if the Aetna U.S. Healthcare-Prudential merger goes through. That’s because of the increased patient base the practice might gain due to the addition of Aetna U.S. Healthcare members.
"If you take a market with 75 cardiology practices and you’re part of [a provider network of] 20 practices, you have a market share that could be enhanced if the same contracts stay in place," he says.
But does a merger mean changes are in store for practices that traditionally have contracted with Prudential? At least two managed care consultants think so.
"The most onerous provisions of both contracts will be the new contract" for providers in this type of situation, predicts Michael Barrett, a Winter Park, FL-based managed care consultant with Advanced Managed Care Solutions.
There is a danger of pay cuts for practices that currently contract with Prudential, although this may depend on local market conditions, agrees Don Hamilton, a partner with Ernst & Young in Chicago. "Prudential typically has been more generous [in terms of reimbursement]. On the other hand, Aetna U.S. Healthcare may grandfather [contract provisions] as they are going through the transition," he says.
That transition period, probably on the order of two years, could be a challenge for physician practices contracting with Aetna U.S. Healthcare, Hamilton says. Practices may have to put up with problems such as slow payment or duplicate documentation requests before the kinks are worked out.
The combined entity could be formidable, making Aetna U.S. Healthcare the country’s largest provider of health benefits. The company estimates that the Prudential acquisition will give it approximately 6.6 million additional members, bringing its total membership to 22.4 million. Of those 22.4 million members, 18.4 million would represent managed care contracts. Aetna U.S. HealthCare officials say the transaction is expected to be completed in the second quarter of 1999.
The Prudential purchase would be Aetna’s third acquisition in less than a year, and one of several prominent mergers announced among managed care entities over the past two years. Aetna in the past year acquired U.S. HealthCare and NYLCare, a regional managed care entity with a strong presence in the Southeast. Other prominent managed care mergers in the past two years include the PacifiCare-Foundation Health Plan union on the West Coast, and Minneapolis-based United Health Care’s acquisition of Reston, VA-based Metra Health (which a year earlier had merged with Travelers Insurance’s health care division). And despite the failure to consummate the proposed United Health Care-Humana merger announced in 1998, analysts expect Humana to be picked up by another payer.
These large national payers represent an increasing percentage of total HMO membership across the country. (See list of the country’s 15 largest HMOs, p. 18.)
All this activity leaves five national payer giants: Aetna U.S. Healthcare, Humana, United, Foundation, and CIGNA Health Plans. "If you think the consolidation is over, you’re dead wrong," Barrett says. There will be further consolidation among these national leaders and among regional payers, not to mention a continuation of acquisition and merger activities that have occurred among Blue Cross Blue Shield plans in many states.
So what’s a practice to do? Barrett and Hamilton predict that the merger mania will serve as a wake-up call to physician practice leaders about the need to organize and speak with a cohesive voice. The idea is that a group of physician practices has more bargaining power than individual practices.
Barrett admits getting physicians to organize is a formidable task.
"The physician business is a cottage industry in its core element," Barrett says. "Consolidating any industry where you have independent entrepreneurs who are highly trained experts in their field can be frustrating. Anytown USA has had at least half a dozen attempts at organizing physicians. The vast preponderance of them haven’t worked, but they have to continue. If organized, physicians represent the power base in health care."
MGMA’s Wright says providers need to take this concept one step further by extending coalitions to include all parties in the health care continuum — physician practices, hospitals, payers, and affiliated providers such as nursing homes and pharmacists. "We still haven’t figured out how to do that," he admits. "We’ve got to get to the phase where all these parties can sit down together."
Wright says as practitioners begin to form alliances, they need to decide what their priorities are. Are they looking for financial security? For clinical independence? For the ability not to have to worry about the paperwork hassles associated with practice administration? "Whatever model you choose to go with, the players that are participants need to add value to patient care. Ask yourself what value each brings to the table to make a more effective delivery system," he says. "Practices have to figure out how to develop alliances in a collegial manner that doesn’t come across as money-grubbing."
Others aren’t so sure providers will benefit from the Aetna U.S. Healthcare merger. The AMA’s highly publicized letter to the Department of Justice in late December challenged the proposed merger, calling it anticompetitive and "a threat to the freedom of patients and employers to choose their health care plans."
"Basically, Aetna is involved with some very heavy-handed techniques in dealing with physicians," AMA Executive Vice President E. Ratcliffe Anderson Jr., MD, tells Physician’s Managed Care Report. "In the past, they have used implicit gag clauses . . . [and] there have been provisions which have given plans final authority of medical necessity . . . provisions that compromise the patient-physician confidentiality agreement. This AMA action is unprecedented. We think these giant health plans are Goliaths trying to dominate the landscape. The AMA is the only David in the valley."
For its part, Aetna US Healthcare issued a statement saying it was disappointed with the AMA response. "Aetna’s proposed acquisition of Prudential HealthCare will increase both consumer choice and the quality of health care in America," the statement says. "There is vigorous competition in each of the markets in which we do business from national, state and local health plans. Our inclusive network strategy offers broad choice of physicians. Further, employers typically offer their employees the opportunity to choose from among different healthcare plans and companies."
Hamilton says he believes the Aetna U.S. HealthCare merger will go through despite the AMA’s objection. "If you’re going to have to live with it [the merger], you’ll have to figure out the best way," he says. "They don’t own the world. Probably most [provider] groups will be on most of their panels. They have indicated that they will sort by quality more than cost."
For example, Hamilton says, Aetna U.S. Healthcare has huge database capabilities that it has been developing for almost a decade. The company distributes reports to each of its participating physicians telling them how their treatment of patients with specific medical problems compares with that of their peers. This kind of information can be valuable to a physician practice and can reward practices that provide high-quality care.
"In the long term, [the merger] probably will do some good," Hamilton says. "But the transition could be pretty bad. Digesting three acquisitions is a big act."
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