Kevin C. (Casey) Nolan
Managing Director, Navigant Consulting Inc.
On a recent cross country flight I was catching up on my reading and read two very interesting articles. The first article dealt with the dramatic changes that have swept the banking and financial services industry in the last decade. It chronicled the dramatic wave of consolidation in the banking industry as well as the incredible transformation driven by the “democratization of information.” One of the examples cited was the fact that today consumers can use the internet to solicit loan terms from the banks, versus ten years ago when they had no choice except to go to their local bank and apply for a loan.
The second article reported the results of a recent study by the AMA on the increasing concentration in the insurance industry. The AMA study found that in 56% of the 294 metropolitan regions examined, one health insurer controlled 50% or more of the HMO/PPO market. The AMA study went on to note that in 95% of the metropolitan regions the Herfindahl-Hirschmann Index (the HHI, a benchmark the Department of Justice uses to gauge how competitive a market is) was above 1800 (a score above 1800 is considered to be a highly concentrated, and hence uncompetitive market).
As I reflected on these two seemingly unrelated articles, the thought occurred to me that providers, like banks in the previous decade, will not be able to stop at regionalization. Success—even survival—will require them to be able to go “toe-to-toe” with insurance companies, which in the past decade have grown from fragmented, regionally-based entities to large, consolidated national organizations. After all, a few years ago there were more than 70 Blue Cross plans in this country and today there are just slightly more than 40. Provider organizations must now define their areas of interest and intent in the same terms the insurance companies serving their markets do—if the insurance companies define their market as statewide, the provider organization must do likewise, or risk losing the ability to negotiate effectively, or worse, become irrelevant. Likewise, if the insurance company in the market is one that spans multiple markets or even states, the provider organization will be forced to increase its geographic footprint in order to stay relevant. But this footprint must match up to the insurers. Geographic expansion for the sake of geographic expansion is a recipe for disaster.
So the race from local to regional system has largely been run and won. But the end of that race is not the end of the marathon, but merely the beginning of the next leg. And the insurers appear to be way ahead. So my advice to providers is, “get your running shoes on.”
