Side effect of health-insurance mergers: Better health care?

One of the underreported benefits of the recently announced mergers of health insurers Anthem and Cigna, and Aetna and Humana, is that it should speed up innovation in health care.

There is little doubt consolidation will give insurers greater bargaining power with which to negotiate better rates with providers. It will also reduce administrative overhead. Aetna estimates, for example, that the Humana merger could produce approximately $1.25 billion in annual cost savings by 2018. But such savings are minuscule when you consider that total U.S. health-care spending last year was in the neighborhood of $3.8 trillion.

Doctor explaining diagnosis to patient
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To reduce costs even further, several options are available. The wrong approach – and this has been the rap on the health-insurance industry in the past – would be tightening the screws on patients, denying necessary and proper care, or making them run a gauntlet of red tape to get it.

Over the long term, the best way to control costs is by improving patient health. This has not always been within the province of health insurers. But this will be the big story about consolidation and where it is likely to take us.

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Most Americans get medical care today from an array of primary-care doctors, specialists, diagnostic facilities, hospitals, therapists, pharmacies and so forth. Costs and outcomes vary widely among providers in the same general locality and are usually unknown until after the fact. The right hand often doesn't know what the left hand is doing, and the incentives are out of whack, resulting in overutilization and duplication. It's not the ideal system.

Insurers – as bill payers – have been looking for a better way. The model that's emerging can been seen most clearly in the Medicare Advantage program, where some of the most innovative insurers have created networks of preferred providers with strong investments in primary care, aligned financial incentives with providers using clinical best practices and have developed active "care management" programs that keep patients healthy, reducing the need for hospital admissions.

Research has shown that this type of active-care management is less costly than traditional fee-for-service medicine. It also keeps patients healthier.

In 2013, the Boston Consulting Group compared claims data for some 3 million Medicare patients. What we found was that patients in the more managed programs had lower mortality rates and enjoyed better health and fewer complications than traditional fee-for-service patients. Single-year mortality rates, for example, fell from 6.8 percent in the fee-for-service sample to 1.8 percent in the managed-care models. Death rates declined quickly, within the first year of enrollment. The lowest mortality rates and the best performance overall were seen in the capitated HMO plan — that's where the HMO receives a flat fee for each patient and is then responsible for all of the patient's medical needs.

Medicare Advantage patients also averaged shorter hospital stays and fewer re-admissions. Compared to the fee-for-service sample, the capitated HMO sample had hospital stays that averaged 19 percent shorter.

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The big insurers continue to learn from these experiences. One company's chronic-care program, for example, developed in 2012, had reduced hospital admissions among the 235,000 participants by some 45 percent through August of last year.

The big merger story has little to do with who may be heading to the wedding chapel and much to do with what the health-insurance giants have learned in recent years about patient health, managing care and the role incentives play.

The mergers we see ahead should enhance their capabilities, leading to additional reforms, better outcomes and further cost savings.

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Who buys whom is not that important. What is important is what the newly consolidated companies do with their new-found scale, market power and, above all, expertise.

Commentary by Jon Kaplan, a senior partner at The Boston Consulting Group (BCG) and leader of BCG's Health-care Payers and Services team in the Americas. Follow him on Twitter @kaplanjon.