Hospitals pressured as insurers pursue more vertical integration


Hospitals that don't adapt could get squeezed out of the care continuum as insurers grow and direct more care to lower-cost settings, according to an analysis from Moody's Investors Service.

Both not-for-profit and for-profit hospitals are feeling the pressure of falling inpatient volumes and reimbursement levels from government payers along with rising drug costs and labor expenses, as well as regulatory changes to policies like the 340B drug discount program.

Those downward pressures on margins will continue if insurers' plans to vertically integrate with providers come to fruition, the ratings agency said. The Medicare Payment Advisory Commission estimated that hospital margins could sink to negative 10% in 2017, a drop from negative 7.1% in 2015.

Insurers have had to get creative since regulators blocked recent attempts to grow horizontally, including the thwarted mergers between Aetna and Humana, and Anthem and Cigna Corp. They now look to align with providers through proposed combinations between CVS Health and AetnaUnitedHealth Group's Optum and DaVita Medical Group, and Humana and Kindred Healthcare—partnerships designed to prevent hospital visits through regular primary-care checkups and home healthcare. 

Since they don't have to carry the hefty overhead of full-service hospitals, insurers that combine with physician groups and non-acute-care service providers can offer similar preventive, outpatient and post-acute care to their members at lower costs. Scale will also give them an upper hand in rate negotiations, denting providers' bottom lines. 

The proposed deals could give insurers the power to direct care rather than doctors, said Juan Morado Jr., of counsel at law firm Benesch. But limiting patient choice is a risky proposition, he added.

As insurers grow their physician networks, they will be better able to carve out "high-cost" hospitals or certain services from contracts, which will mean lower volume and revenue for hospitals, Moody's said. Optum, which has been on a physician-acquisition binge, could funnel more care to cheaper, risk-bearing hospitals. Also, Anthem's policy to limit coverage of emergency visits in certain states will mean fewer patient visits, lower revenue and higher bad-debt rates for hospitals, the report said.