<img height="1" width="1" style="display:none;" alt="" src="https://dc.ads.linkedin.com/collect/?pid=343345&amp;fmt=gif">

Healthcare Sector Shakeup

04.01.2018 | Ben Phillips, CFA

healthinsurance policy

 

Last week’s news about the potential Walmart acquisition of Humana is the next chapter in the changing dynamics of the healthcare sector.

 

If completed, the acquisition would pair one of the largest and most well-known retailing brands with a large insurance provider. But it’s not the first. CVS entered an agreement to purchase Aetna in December 2017. How did we get here? It all started in 2010 with the signing of the Affordable Care Act.

 

Download the Policy Tracker (PDF)

 

Obamacare Changed Insurance

 

Its signature provision prevented insurance companies from denying coverage or charging higher prices to individuals with pre-existing conditions. In exchange for taking on the risk of more unhealthy patients, insurers were promised a lower uninsured population and risk reduction payments. The law: 1) built in protections for insurers who enrolled very sick people; 2) provided backup payments for high-cost cases; and 3) defined limits for losses and profits in the first three years.

 

There was also a mandate for employers to offer health insurance to their employees and for individuals to maintain health insurance coverage. The federal government in turn would subsidize lower income customers’ premiums.

 

Insurers jumped at the opportunity to increase their insured populations with risk reduction payments from the federal government.

ACAInsurance

 

Business Models Changed

 

Insurance companies focused on pricing the policies. They built in modest profit margins for their larger base, but they also took on more risk.

 

It was an experiment and they were entering a new landscape. But the bill also impacted other companies in the healthcare supply chain, such as hospitals, healthcare technology, drug distributors, and outpatient health centers. Together, they all needed to identify high-risk people, provide more resources and better outcomes to them, and keep them out of the hospital. Profitability was at risk. Payments and reimbursements to doctors and hospitals were determined based on the ability of the provider to lower cost while creating better patient outcomes.

 

Cost containment throughout the patient’s experience was a big focus. The focus was on improving preventative care, lowering costs for items used in the operating room (gloves, gowns, syringes, surgical tools, etc.), and promoting outpatient services and nursing homes that shorten the length of stay.

HealthInsurance

 

Policy Uncertainty Spooked Insurers

 

The risk reduction payments never fully materialized. It was controversial from the beginning. The Trump administration ended them in October 2017, arguing Congress never appropriated them. Insurers are now suing the government after being promised the payments.

 

In our view, uncertainty around healthcare is at an all-time high as the midterms approach and political messaging begins. Last month’s gigantic spending package, which was most likely the chance this year to address the payments, didn’t even mention them. 

 

It’s all evolving. On top of bearing the risk of unknown costs and utilization in the early years, which turned out to be higher than expected, insurers continue to be subject to legislative uncertainty. And it has been reflected in their approach to the exchanges. Some insurers increased premiums. Others simply left the health insurance exchanges.

 

Download the Policy Tracker (PDF)

 

Why Consider Merging?

 

Scale and resources. Insurers now realize they need to bulk up. There’s renewed focus on the healthcare supply chain. Why not vertically integrate the entire delivery system, realize cost efficiencies, and share a proportion with the customer? Everyone could be a winner. We think this is a big reason for the proposed Walmart acquisition of Humana.

 

Think about it in terms of the public markets. It seems decentralized and inefficient. There’s hospitals (HCA, Encompass Health, Tenet), health insurers (United Health, Aetna, Centene), pharmaceutical manufacturers (Pfizer, Merck, Eli Lilly), drug distributors (Amerisource Bergen, Cardinal Health, McKesson), and pharmacy benefit managers (Express Scripts).

 

Some companies see this an opportunity. Amazon is working to establish itself in the medical supplies segment and recently announced a partnership with Berkshire Hathaway and JP Morgan to form an independent health care company for their employees. We’ll continue to follow how the healthcare industry evolves, and how these changes affect the markets.

 

 


 

For more policy insights and market impacts...

 

New Call-to-action

 

Subscribe to our Newsletter

New Call-to-action

Related posts:

Important Information

Active Weighting Advisors LLC ("AWA") is an SEC-registered investment adviser that manages ETFs under the brand name EventShares Funds. Mr. Phillips is the Chief Investment Officer of AWA. The views expressed are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. AWA is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. Mr. Phillips and AWA disclaim responsibility for updating information. In addition, Mr. Phillips and AWA disclaim responsibility for third-party content, including information accessed through hyperlinks. For more information about EventShares, contact us by calling 877.539.1510 or visit our website at www.EventShares.com.