Humana’s reported interest in a merger with Walmart, much like its planned acquisition of a portion of Kindred Healthcare, reflects the insurance industry’s growing interest in providing health care — not just paying for it, a University of Louisville professor told Insider.
The Wall Street Journal had cited unnamed sources last week in a report that indicated Walmart and Humana were in preliminary discussions about a possible merger — though the sources said the talks may just result in closer cooperation.
Either scenario likely would prompt Humana to steer more of its 21 million customers to Walmart to buy prescription drugs and routine health care services. That would mean lower expenditures for Humana, as the insurer would be able to keep its customers out of more expensive drugstores, medical clinics and hospitals.
And Walmart would gain customers — especially Humana’s important Medicare population — for both its growing health and wellness business, with the expectation that once customers go to the superstore for prescription drugs and routine procedures, they may linger to shop for electronics, clothes and groceries.
“There’s a lot for them to gain,” said Elizabeth Munnich, assistant professor of economics at the University of Louisville.
Reports of the possible merger between Walmart and Humana came on the heels of a string of announcements in which health insurance giants were trying to merge with partners in related industries.
Shareholders of insurer Aetna and drugstore company CVS recently approved a $69 billion merger, while insurer Cigna and pharmacy benefits manager Express Scripts said last month that they planned to merge in a $67 billion deal. The WSJ report surfaced just hours before voting began on a merger involving Humana and Kindred Healthcare, which the parties had announced in December.
Humana could not be reached to comment on the latest reports, which emphasized that the talks were preliminary and involved a possible partnership other than a merger. Humana and Walmart already are working together on a Medicare prescription plan that provides customers with drug discounts.
Health care experts had told Insider shortly after the Humana/Kindred announcement, that such deals represented an escalation in the “arms race” between insurers and health care providers.
Before the latest wave of merger announcements, both insurers had been merging with other insurers, and health care providers had been joining forces with other providers as both sought to leverage their greater heft in reimbursement negotiations. However, federal regulators last year stopped the planned unions between Humana and Aetna as well as Cigna and Anthem on antitrust grounds.
With Aetna and Cigna finding new partners, it shouldn’t come as a surprise that Humana, too, has been open to acquisitions or to being acquired, Munnich said.
Both Aetna, with its planned merger with CVS, and Humana, with its reported interest in merging with Walmart, want to take a more active role in the kind of care their customers are getting and where they’re getting it, she said.
Drugs and clinics
Part of Humana’s motivation arises from prescription drug price pressures. U.S. health care spending has been growing faster than inflation, in part because of prescription drug costs. A recent Government Accountability Office report noted that retail prescription drug expenditures account for 12 percent of total personal health care service spending in the U.S. in 2015, up from about 7 percent in the 1990s.
One way for insurers to gain greater control over drug costs: merge with prescription drug sellers, such as CVS or Walmart, or pharmacy benefit managers, such as Express Scripts. Another way: Keep customers out of hospitals.
Aetna CEO Mark Bertolini recently told CNBC that half the U.S. population has a chronic disease, and “They Drive 86 percent of our cost.”
Humana CEO Bruce Broussard in January provided the same dynamics as a rationale for the insurer’s interest buying a stake in Kindred.
“Most of our members have severe chronic conditions and the more we can engage with them, keep them out of the hospital systems, the institutions, staying at home and preventing the disease from progressing, the more impact that we have on both them … from a health point of view, cost point of view and societal point of view,” Broussard said.
It’s clear that insurers are taking a more hands-on approach to making sure that they can keep patients out of hospitals to keep their costs down, Munnich said.
If Humana and Walmart join forces, hospitals likely would see even less access to millions of customers: Walmart has 1.5 million full-time U.S. employees and about 100 million customers per week, while Humana at the end of last year had about 21 million customers.
If both companies push their employees and customers to get more drugs and health care services at Walmart, traditional health care providers will lose business for lab and diagnostic services and specialized clinics that provide procedures such as partial knee replacements and cataract surgeries.
Those types of services have been important revenue streams for hospitals because they are typically covered by private insurance companies, which pay hospitals more than Medicare, the government insurance program for older Americans, and Medicaid, the program for the poor. Technological and medical advances also have helped patients recover more quickly, which means they spend less time in hospitals, which also means less money for the providers.
“In a lot of ways, hospitals should be worried,” Munnich said.
Many hospitals are struggling already: Nearly 160 hospitals closed from 2013 to 2015, eliminating nearly 23,000 hospital beds, according to the American Hospital Association’s most recent data. In Kentucky, five hospitals have closed in the last two years or ceased providing inpatient care, according to the Kentucky Hospital Association. In Louisville, Jewish Hospital, for example, has been losing money, which has prompted its owner, KentuckyOne Health, to put it up for sale.
The KHA and the American Hospital Association declined to comment for this story.
Ironically, the possible Walmart-Humana deal, which would put even more pressure on hospitals, also is partially a result of low government reimbursement rates.
Walmart said in last year’s annual report that “pharmacy reimbursement pressure at the Walmart U.S. segment negatively impacted our fiscal 2016 gross profit rate.” The retail giant also has been pushing customers to sign up for health insurance.
Munnich said that a Walmart-Humana merger likely would reduce options for consumers, as both companies would steer customers to obtain their health care and prescription drugs from Walmart — instead of a CVS or Walgreens or their primary care physicians with whom they’ve developed a relationship.
Consumers may benefit financially through lower copays or insurance premiums if Humana and Walmart pass at least some of their savings on to consumers, but whether that would happen is the “million dollar question,” Munnich said.
It’s a question that likely would occupy federal lawmakers and antitrust regulators, she said.
In testimony in February before the U.S. House of Representatives regarding the proposed Aetna-CVS merger, two speakers said the merger presented low risk for competitive harm. However, a Northwestern University professor and a consumer advocate both said a merger between an insurance company, pharmacy benefit manager, retail pharmacy and minute clinic operator could benefit consumers — it probably won’t without healthy competition.
“Overall, a merged CVS Health-Aetna could align many incentives in the health care market for the merged entity to offer a set of benefits including a decrease in: pharmaceutical list prices, consumer out-of-pocket payments, and overall health spending,” said Craig Garthwaite, associate professor of strategy and the director of the Health Enterprise Management Program at Northwestern’s Kellogg School of Management.
However, he said, “Absent meaningful competition for health insurance, even a value-creating merger of this nature will result in an increase in firm profits rather than consumer welfare.”