Here's why the health care whirlwind could be just getting started
If your head is spinning from all the health care announcements in recent months, then buy yourself another bottle of Advil, because more upheaval likely is on the way.
The reason for the flurry of activity (the most recent being Walmart’s pursuit of Humana) is that the traditional “fee for service” reimbursement system is moving to block grants and “per capita” contracts with major medical delivery insurers such as Aetna, Anthem, Cigna, Humana and United Healthcare best equipped to function in the new environment.
The reason for the shift toward an annual per-capita arrangement is that individual physicians and HMO/PPO provider networks based on fee-for service reimbursement are getting too expensive for government and insurance payers.
In 2016, Medicare cost $11,588 year per enrollee and Medicaid cost $7,540 per enrollee. In contrast, major insurers last year delivered health care to their insured populations at a cost of between $1,810 and $2,680 per member.
How are they are able to do it? Well, their populations are fundamentally healthier than the Medicare/Medicaid cohort, but insurers are also backward integrating through the purchase of doctor groups, surgical centers and hospitals.
The logic is pretty straight-forward. It is cheaper to pay a physician as an employee than it is to reimburse the same physician on a fee-for-service basis. The same logic applies to surgery centers and hospitals. Better to own them where you can manage your costs more effectively than reimburse them based on the fee-for-service system that has no cost control.
In support of this view, David Wichmann, CEO of United Healthcare, recently said that he could remove $1 trillion in health care cost simply by attacking the current fee-for-service reimbursement system. Note that the total U.S. health care spending in 2017 was $3.5 trillion, so Wichmann’s statement represents a substantial cost reduction.
Hence, the move by Walmart on Humana. At a single stroke, it removed one of the health care options for the Bezos-Dimon-Buffett initiative announced a few months ago, and they will be able to combine the Humana hospitals and networks with their local stores for seamless health care delivery based on Walmart’s ubiquitous retail presence across America.
It is really rather brilliant and affords Walmart the opportunity to competitively bid for per capita health care contracts from government, insurers and employers with all medical costs under their direct control.
Mike Meehan, C.F.A., is a member of the Health Care Alliance of Manatee County.
This story was originally published April 12, 2018 at 12:21 PM with the headline "Here's why the health care whirlwind could be just getting started."