The Era Of Megamergers And Vertical Consolidation

The Era Of Megamergers And Vertical Consolidation

Recent healthcare industry headlines have clearly shown that vertical consolidation is a major trend. It’s worth examining what’s happening— and what the implications are for the future of the industry.

Vertical Consolidation In The Healthcare Industry

In December 2018, Cigna and Express Scripts closed their $67 billion merger, which had been approved by the Department of Justice (DOJ) only a few months prior. This deal comes on the heels of similar acquisitions by United Healthcare (UHC), such as the Davita Medical Group, which saw UHC further expand as an integrated healthcare provider and payer.

Last year, pharmacy chain CVS Health closed their $69 billion acquisition of Aetna, signaling a landmark for consolidation in the healthcare industry. The joining of these two companies – one of the country’s largest pharmacy chains and one of the largest health plans – represents a major shift for American Healthcare. Both companies believe that the consolidation will enable greater efficiency in healthcare and improved quality of care.

For healthcare leaders, this raises questions. First, how will vertical consolidation impact the cost curve?

In yet another example of vertical consolidation, Humana and two private equity firms acquired Kindred Healthcare, the largest home healthcare company in the United States. The deal indicates that Humana and other major insurers believe that controlling care provision will enable better cost control on the payer side.

The Federal Trade Commission (FTC) has control over vertical consolidation. Recent comments from FTC representatives indicate that the commission sees vertical consolidation as distinct from horizontal consolidation. So it is likely that the trend toward vertical consolidation will continue across all industries, including healthcare.

What This Means For The Future Of Healthcare

For healthcare leaders, this raises questions. First, how will vertical consolidation impact the cost curve? It is possible that consolidation will enable health plans to differentiate themselves in the market, through either cost or care quality and continuity. Another question is why we’re seeing so much vertical consolidation now. One possibility is that UHC—a giant in the industry—is now too big to consolidate horizontally by acquiring more health plans.

From this perspective, vertical consolidation seems like a natural next step for growth.

In the case of Humana, the company might be entering the vertical acquisitions game because there aren’t any attractive Medicare Advantage plans left to acquire. The long-term implications of these consolidations for cost, quality and continuity of care remain to be seen. For now, healthcare leaders should assume that we’ll soon be living in a world where payers, providers and pharmacies are increasingly intertwined.


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