Connect with us

International Circuit

Why Some See Healthcare’s Vertical Mergers As Good And Necessary

The meaningful factors driving vertical integration are largely market-based, not rooted in regulation, one professor told a Senate subcommittee.

There are good reasons for the spree of vertical mergers and acquisitions in healthcare these days, witnesses told a Senate subcommittee Wednesday during a hearing on the competitive implications of this type of industry consolidation.

U.S. Sen. Mike Lee, R-Utah, asked why the healthcare industry has been seeing so much vertical integration in recent years and what the main economic and regulatory drivers of that consolidation have been.

Craig Garthwaite, PhD, an associate professor of strategy and director of the healthcare program at Northwestern University’s Kellogg School of Management, said there’s a broad range of factors driving vertical integration. The meaningful factors, though, are rooted in a rational response to the market, not to regulation, he said.

Garthwaite gave three examples of the market-based factors to which vertical mergers are responding:

  1. One prominent success story, in particular. Some firms that see how well UnitedHealth Group, based in Minnetonka, Minnesota, has been performing after its extensive vertical integration may wish to replicate that success for themselves, Garthwaite said. Analysts have described the recent actions by competing insurers Cigna, Anthem, Humana, and Aetna as trying to catch up with UHG’s integrated approach.
  2. Investments needed without clear payoffs. “In time periods of uncertainty about the value-creation process, where lots of firms have to make different investments in the value chain, you might be worried,” Garthwaite said, “that you’re going to make an investment today that doesn’t prove to be profitable to you in the future but might prove to be profitable to someone else in the chain.” A provider’s investment in retail clinics today, for example, might make an insurer more profitable in the future, he said. “In that type of uncertain world—and I think we’re pretty sure that the world of healthcare right now is uncertain and evolving—in that type of world, you might end up seeing more vertical integration.”
  3. Rising use of specialty medications. Garthwaite said the healthcare industry is grappling with increasingly complex pharmaceutical products that may sometimes be administered by a physician (and, therefore, covered by a medical benefit) and sometimes be taken by the patient at home (and, therefore, covered by a pharmacy benefit manager). “It’s very hard to offer a coordinated benefit in those types of products, which are growing in their importance, if you have one firm that administers the medical benefit and one firm that administers the pharmaceutical benefit,” he said.

Participants in the hearing discussed one closely watched vertical healthcare merger, CVS Health’s nearly $70 billion Aetna acquisition, which closed last fall but continues to be the subject of a prolonged Tunney Act review process by U.S. District Judge Richard Leon.

“I think this is a compelling merger,” Garthwaite said, arguing that the combination might be beneficial in the shifting world of physician-administered drugs. And the “HealthHUBs” being rolled out by CVS offer something resembling direct primary care that might help to control chronic conditions and spending, he said, though it remains to be seen whether CVS-Aetna will attain the success it’s targeting.

“That’s a hard thing to do, to make people healthier,” Garthwaite said. “But now they at least have the incentive to do it; the incentives are aligned correctly. And that’s why I think we need to give them a shot, and if they fail, their shareholders will lose money. But that’s OK. This is America.”

Fellow witness Thomas L. Greaney, JD, a visiting professor at the UC Hastings College of Law, said it’s not entirely clear what Judge Leon can or should do in his CVS-Aetna review. But some of the witnesses who testified in opposition to the megamerger earlier this month—such as Diana L. Moss, PhD, from the American Antitrust Institute, and Neeraj Sood, PhD, from the University of Southern California Sol Price School of Public Policy—made a compelling case that the transaction is problematic in the sense that its combined vertical strength will likely disadvantage rivals, Greaney said.

Fiona M. Scott Morton, PhD, a professor of economics at the Yale School of Management in New Haven, Connecticut, said it’s time for industry players and policymakers to do away with the presumption that vertical mergers are categorically safe.

Morton said she assisted Cigna in its Express Scripts acquisition and sees value in what the CVS-Aetna deal aims to accomplish but also believes each proposed transaction should be evaluated on a case-by-case basis.

The regulatory agencies, including the Department of Justice and Federal Trade Commission, therefore need more resources to thoroughly evaluate these sorts of deals, she said. Morton submitted a paper she coauthored outlining her views in greater detail.- Health Leaders 

Copyright © 2024 Medical Buyer

error: Content is protected !!