Consolidation in health care part of a necessary transition

The Senate Judiciary Antitrust Subcommittee today will hold a hearing to examine the impact of mergers in the health care space. As advisors in the health care sector, we believe that policymakers need to view consolidation in health care within the proper context. We hope senators will keep this context in mind as they ask questions at the hearing.

We are in the beginning phases of an important transition in the American health system. We are moving away from the majority of the system being financed by a third-party, fee-for-service payment model. The exact form of its replacement is not yet clear, but there are patterns emerging. Here is what is happening and why we believe consolidation is a necessary part of this transition.

To answer the challenge of how to contain health care costs without sacrificing patient satisfaction, health care payers, including the government, have begun experimenting with paying providers based on patient outcomes, rather than for services rendered.

These payment arrangements have fueled the trend toward consolidation. When providers are paid based on patient outcomes, having disconnected parts of the health system providing separate episodes of care is a liability. Providers merge to better coordinate patient care and absorb the costs of the technological investments required to execute these new payment arrangements.

What has quickly become clear, however, is that in competitive health care marketplaces, such as urban areas, this sort of integration can give providers greater leverage over insurers. Providers can demand higher payments, which drives up insurance premiums.

At the same time, it is proving more difficult than anticipated to develop these new payment arrangements. There are many factors that determine patient health outcomes and many of them occur outside the doctor’s office. Some doctors also feel that they are being micromanaged by distant insurance bureaucrats.

This is why many forward-thinking leaders in health care have begun to set the stage for a new paradigm. They recognize that as long as the third-party, fee-for-service payment model is the dominant form of health care payment, economic incentives never will be correctly aligned to eliminate waste and make the investments necessary to keep patients healthy and out of the hospital.

On the provider side, these leaders are moving toward assuming greater responsibility for patient health outcomes. One health system we work with created its own health plan, becoming both the payer and the provider for its plan customers. This creates an incentive for the hospital system to invest in virtual health options with a company that offers live, physician-guided exams. Under a normal fee-for-service model, this would not be economically feasible. The health system also invested in a strong, front-line team of primary care doctors and developed a weight loss and nutrition program to help people manage chronic illnesses and avoid costly medical interventions.

Meanwhile, payers are moving toward becoming providers by investing in primary care clinics. Several insurance plans have partnered with primary care providers to open medical clinics in their geographic footprint. This helps these plans make sure their customers receive the sort of preventative medicine that makes patients healthier while lowering costs.

The overall pattern is clear. The traditional divide between payer and provider is being broken down in favor of an integrated model in which payers, providers and patients have aligned incentives. This new model is a much more stable, predictable and market-oriented foundation upon which to build a new American health system. It will reduce administrative overhead, produce better patient outcomes and lower costs.

This does not mean that all merger and acquisition activity in health care is good for the patient. We believe that each proposal should be evaluated on its merits.

As lawmakers and regulators evaluate transactions, we encourage them to keep in mind the potential of the integrated payer-provider financing model and the role that consolidation plays in getting us there.

Newt Gingrich is host of the Newt’s World podcast. A Republican, he was speaker of the U.S. House of Representatives from 1995 to 1999. Follow him on Twitter @NewtGingrich. His latest book is “Collusion.”

Joe DeSantis is chief strategy officer at Gingrich 360 and leads the organization’s health care strategic initiatives and consulting. Gingrich 360 advises various companies and organizations in the health care industry.