Innovation and Disruption

CVS-Aetna Deal Targets Hospital Utilization for Savings

February 28, 2018 9:32 am

The deal is part of a recent trend of affiliations between payers and non-hospital providers, which may increase competitive pressures on hospitals, analysts note.

Feb. 27—Executives at CVS Health and Aetna told Congress this week that the merged entity they propose to create will look to garner savings from reduced hospital use.

The new entity specifically would aim to garner savings by reducing consumers’ use of emergency departments (EDs) and the number of hospital readmissions, testified Thomas Moriarty, executive vice president for CVS, and Thomas Sabatino Jr., executive vice president for Aetna.

The Trump administration is reviewing CVS Health’s proposed $69 billion acquisition of Aetna for any antitrust concerns.

The new company aims to help reduce ED visits—one-third of which are unnecessary, Moriarty told the House Judiciary Committee’s Regulatory Reform, Commercial and Antitrust Law Subcommittee on Feb. 27. Expanding the availability of Minute Clinic alternatives to EDs would sharply cut consumers’ average out-of-pocket costs from $600-$800 at EDs to an average of $75-$80.

“The emergency room visit for the individual who has to pay out-of-pocket for it is huge,” Moriarty said at the hearing, which marked Congress’s first review of the proposed deal.

CVS has about 1,100 Minute Clinics within its retail pharmacies, but executives said it would expand healthcare services if the deal closes.

However, Moriarty cautioned that Minute Clinics are “not a replacement, [they’re] a complement” to EDs and would focus on addressing lower-acuity issues.

The potential for the deal to expand lower-cost alternatives to EDs drew praise from some healthcare economists. For instance, Lawrence Wu, PhD, president of NERA Economic Consulting, told the panel that half of hospital admissions come through the ED, “which is an expensive place for a doctor to figure out if a patient needs to be hospitalized or not.” 

The expansion of such clinics—especially in places with a shortage of urgent care clinics—would be “a big step forward,” he said.

Craig Garthwaite, PhD, associate professor of strategy at Northwestern University, noted that many of the higher costs in EDs stem from their designed preparation to address any medical need and from the much more extensive regulatory requirements they must meet. Additionally, he noted that the profitability of EDs is frequently determined by the area in which the hospital is located.

“It should not be surprising that when the University of Chicago built their new hospital recently, they neglected to put an adult trauma center in because of the negative payer mix that comes with that,” Garthwaite said.

Rep. Tom Marino (R-Pa.), chairman of the panel, noted that many hospital administrators have underscored to him the high costs of operating EDs. He wondered out loud about the financial impact on hospitals of a proliferation of CVS clinics.

So far, the American Hospital Association has not taken a position on the proposed deal, a spokeswoman said. 

The potential impact of the merged entity on hospital volumes was echoed in a Feb. 21 report from Moody’s Investors Service, which noted the risk to hospitals of a scenario in which Aetna members get their primary care services from CVS’s retail health clinics instead of hospital outpatient settings.

Other Impacts

Additionally, the provider-payer company “would provide additional leverage to the insurer in its negotiations with hospitals,” Moody’s noted.

The combined company also could expand its targeting of care transitions. Seventy percent of transitions that result in a hospital readmission are the result of poor pharmacy management, Moriarty said.

An example of the new company’s potential to expand pharmacy management is CVS’s home infusion business, which moves infusions to the lower-cost home setting from the hospital, where infusions can cost about $340,000 per patient annually.

“We’ve been able to work with those transitions, make sure the medications are correct, and we’ve reduced hospitalizations by some 24 percent in that instance,” Moriarty said. “That gives us a value proposition that we think we can scale even more with Aetna.”

Part of a Larger Trend

The CVS-Aetna proposed merger is part of a recent trend of mergers between insurers and non-hospital providers, Garthwaite noted. Another example is the proposal by Optum, a division of UnitedHealth Group, to buy DaVita’s medical group division.

“But they are not interested in purchasing the inpatient hospital, and that’s because in many ways that business is not going to be a very good business to be in going forward—at least that appears to be the bet a lot of people are making,” Garthwaite said.

Optum’s purchase of physician practices followed a years-long trend of hospitals buying physician groups to ensure that they retain admissions and can better align financial incentives with physicians, Moody’s noted.

“Hospitals face uncertainty regarding the potential for market share shifts if OptumCare and its health plan clients decide to contract with area hospitals that are ‘lower cost,’” Moody’s stated. “Even if a hospital remains ‘in network,’ it will face pressure on inpatient service use rates as physician-centric, value-based models are adopted.”

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare


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