Nearly three decades ago insurance companies realized that if they could control how doctors dispense treatment, they would have a tighter grip on health-care spending. With that in mind, they created health maintenance organizations, which were ultimately rejected by doctors, who didn’t like losing control over medical decisions, and patients, who felt shortchanged by a system that emphasized cost before care. Today, insurers are giving the idea another try, but this time they’re aiming to provide higher-quality care upfront to keep patients out of the hospital.
Insurers have spent more than $5 billion in recent years buying up doctor practices and clinics to create networks that might help them woo new customers. The companies are betting they can cut spending by keeping patients healthier with better-coordinated treatment and by ensuring that physicians across the country use the most effective approach for any given condition. “Buying up the doctors is buying up the decision-makers, the gatekeepers of health care,” says Sheryl Skolnick, an analyst at CRT Capital Group, a brokerage in Stamford, Conn.
The double-digit premium increases insurers have long used to shore up profits are getting tougher to implement. State insurance commissioners are challenging rate hike requests more frequently, and federal regulators have said they will review any increase exceeding 10 percent. Efficient physician networks can help keep costs in check, says Jason Gurda, an analyst at health-care investment bank Leerink Swann. “If members agree to use only the insurer’s physicians and perhaps a limited network of lower-cost hospitals, insurers can develop more price-competitive products and contain spending,” Gurda says.
Last December, Humana (HUM) paid $790 million for Concentra, a Texas company that employs 800 doctors at urgent care centers and clinics in 42 states. In June, WellPoint (WLP) spent some $800 million on CareMore Health Group, the operator of 26 clinics specializing in elderly patients in California, Arizona, and Nevada. UnitedHealth Group (UNH) in 2008 led the current wave of acquisitions with its $2.6 billion purchase of Sierra Health Services; on Aug. 31 the company said it would pay an undisclosed amount for the management arm of Monarch HealthCare, which represents 2,300 doctors in California.
Insurers have focused most of their attention on companies that cater to elderly patients. Since seniors tend to take more medications and deal with more doctors than the general population, they get greater benefit from coordinated care, says Wayne DeVeydt, WellPoint’s chief financial officer. “We see how much the chronically ill consume, with 20 percent of our members accounting for 80 percent of our medical spending,” DeVeydt says.
The purchases are raising concerns that insurers may sacrifice quality care as they seek to tamp down spending. After insurance companies created HMOs in the 1980s and 1990s, patients complained that care was limited in the name of lowering costs, and doctors believed their decisions were being second-guessed. “I see a big problem with this model,” says Arthur Caplan, a bioethicist at the University of Pennsylvania. “There’s the potential to put cost savings ahead of what might be in your best interest. … The marketplace rewards the payers for making profit, not on patient outcomes.”
The collaboration should be more successful this time around because technology has improved, says Mike McCallister, Humana’s chief executive officer. His company has spent the past decade building data analytics and Web-based systems that let doctors see all of the care a patient is receiving and make it easier to file insurance claims. And physicians these days are more willing to join integrated health systems, which let them keep more predictable hours and avoid the costs of maintaining an office. “It wasn’t working as well in those days as I think it potentially can work now,” McCallister says. “There’s a lot more opportunity for success.”