Healthcare Delivery in 2016: A Lot of 'Little Somethings' Are Going to Happen

Insurer mega-mergers get a lot of attention because of their sheer size, but much more significant are the hundreds of under-the-radar, smaller deals by which hospitals and health systems hope to achieve vertical integration.

Two of the biggest healthcare news stories of 2015 broke this summer surrounding the planned mergers between Humana + Aetna and Anthem + Cigna that would cut the big five health insurers to the big three. The ramifications of those mergers, should they be approved by regulators, will be significant. Those two deals, which represent horizontal integration of the market, will get talked about a lot because of their sheer size—Aetna says it will pay $37 billion for Humana, while Anthem will pay $48 billion for Cigna.

Much more interesting than those giant mergers, however, is what's bubbling beneath the surface. By that I mean the hundreds of smaller deals by which hospitals and health systems hope to achieve vertical integration. News about them trickles out nearly every day, but doesn't reach the crescendo of the health plan deals. But the smaller partnerships are a more telling barometer of things to come.

I'd argue that these deals going on under the radar will do more to remake how healthcare is consumed in 2016 and beyond. Why? Well, put simply, the insurance megamergers are mostly about cutting administrative costs and, above all, maximizing shareholder value. Whether that goal conflicts with regulators' current mood on what constitutes a monopoly is the only real unknown, for now, and that verdict won't be in for a while.

Boring.

But infinitely more interesting are the numerous combinations struck as providers seek to gain the greater scale and scope necessary to compete for contracts from those insurers and others, as well as being positioned to deliver better on an increasingly value-focused CMS, which has promised to tie 90% of all traditional Medicare payments to value by 2018. These hundreds of smaller deals are illustrative of an industry that's being remade beneath the surface as 2016 is upon us.

If providers haven't already plunged into the health plan market, you can bet that they are looking seriously at building the right partnerships and infrastructure to move that direction. These deals are where innovation can be found.

"We know that quite a few of the things we do will fail, but we misuse the word 'failure,' " Michael Dowling, president and CEO of North Shore-LIJ Health System (soon to be Northwell Health), told me earlier this year. "When you improve based on [failures], you learn the failure is largely a success."

CEOs Aren't Stupid

Although the pace might seem slow, vertical integration will continue in 2016. Hospitals and health systems know their specialty, acute care, is under siege financially, and vertical integration is where they can be innovative, and critically, where they can grow.

BJC HealthCare in St. Louis is just one organization I interviewed earlier this year on affiliations—agreements between health systems to work together on specific initiatives that fall short of an actual merger. I thought BJC's president and CEO, Steven Lipstein, articulated the promise of the BJC Health Collaborative well when he told me that "by coming together in a collaborative, we can maintain our healthy balance sheets without having to convert our most agile asset, which is cash, into our least agile assets, which are property, plant, and equipment."

From such affiliations many strategic initiatives are possible that wouldn't otherwise be available, like ACO creation, building a continuum of care in the region, incorporating new value-based plans directly with employers, sharing of other resources, leveraging different sites of care to equalize patient volumes among facilities, and, of course, starting a health insurance plan, just to name a few. The possibilities are certainly wide-ranging.

Many organizations are pursuing affiliations not only as a way to expand their regional scope and the continuum of care, but also as a bulwark against increasing consolidation in the payer community.

Forming a provider-owned health plan, either for an established health system like North Shore-LIJ or some confederation of hospitals and health systems, will be a major theme of 2016, says Paul Keckley, PhD, managing director in Navigant's Healthcare practice.

"We will see another wave of consolidation across the provider side for the purpose of starting a provider-owned health plan," he says. "You've got a few that are already scalable on their own."

Still, provider executives will be cautious, he says. Discounted fee-for-service is still the dominant payment mechanism, after all, and CEOs should want to be fast followers rather than the "experimenter in chief," as he describes those leaders who are on the cutting edge of a healthcare business model that's turning upside down. Few can reliably predict the pace of that change.

"CEOs aren't stupid. They read the pronouncements from CMS, but at the end of the day, as they sit with the CFO and COO, they realize that to meet a 4% operating margin, we have to do a lot of work the way we've always done it," Keckley says. "'We need to do it leaner. We'll do a few bundles—the ones that are easy. Let's do the ACO a little bit.' These CEOs know that healthcare never changes as fast as we say and it always costs more. The only thing they know for sure is they have to lower their cost structure, figure out a way to work with the docs, and they have to get a deal with a health plan or sponsor their own. The rest is just noise."

Where Can You Add Value?

Many employers are ready and willing to move with the right partner, too. Wherever hospitals and health systems operate, it's important to make sure to add value.

Take Bob Ihrie, the senior vice president of human resources at home improvement retailer Lowe's Companies, Inc., who I interviewed about patient navigators earlier this year. He and other employers are right to be wary of the big health insurance mergers. Lowe's has already pioneered several direct-to-provider deals in an attempt to limit the power of the insurance middleman.

The Aetna-Humana and Anthem-Cigna mergers "are certainly a concern for us," Ihrie told me. "Not necessarily the size but whether the mergers are really looking to streamline costs and be more efficient and produce better outcomes. So far, as I'm looking at them, there's not a lot of evidence it's directed to taking out the waste as much as it is getting market pricing power."

Even if a 'big three' take over the world of commercial health plans, Lowe's will use them only to construct networks and to pay claims efficiently. Beyond those administrative tasks, there's "very little that we use [commercial insurers] for," says Ihrie. "That's their strength and others have lots of other strengths."

The message is that providers have a different role in the healthcare value chain.

"I think we've finally got some real momentum on people understanding our strategy and helping us control claims," Ihrie says, speaking broadly about Lowe's employees as well as the company's partners in healthcare delivery. He says innovation will come from hospitals and health systems willing to look at new ways to work together with employers, as well as patients themselves.

"A lot of 'little somethings' are going to happen," he predicts. "We're looking for creative people to help us out on programs that are helpful for both sides."