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Moody's warns hospitals to beware of payer growth strategies on margins, bargaining power

Hospitals could be staring down bigger competition, declining volume and shrinking margins as organizations such as OptumCare stake bigger claims.

Beth Jones Sanborn, Managing Editor

The payer industry has been making serious waves lately, with several major deals such as the CVS Health/Aetna proposed merger and UnitedHealth Group's announced plans to buy Davita Medical Group triggering mass speculation on how insurers will continue to disrupt the provider space. A new report from Moody's Investor Service says this movement could be a threat to hospitals.

The payer strategies include the acquisition of physician groups and non-acute care services, tougher contract negotiations and greater restrictions on member benefits.

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"To some degree, insurers have engaged in these strategies in the past; but as the pace and magnitude increase, these initiatives will be increasingly disruptive to not-for-profit hospitals' credit quality," the report said.

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First, as insurers pursue growth through the purchasing of physician groups and non-acute care providers, they put themselves in direct competition with hospitals which offer the same services and may also be looking to expand their footprint. However unlike insurers, hospitals also grapple with high inpatient costs, putting insurers in a better position to offer services with smaller price tags due to less overhead. Physician groups can also determine where their patients seek more complicated care. As insurers lay hold of more non-acute care healthcare providers, they'll be in a stronger position to exclude certain hospitals or services from their contracts causing a potential trickle-down decrease in volume for those hospitals.

Optum is a great example, already having secured a legitimate presence in Texas, Florida, California, Connecticut, Indiana and Ohio. They also own physician groups in six other states including Arizona, Colorado, Nevada, New Jersey, New York and Utah. 

"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.' Even if a hospital remains 'in network,' it will face pressure on inpatient service use rates as physician-centric, value-based models are adopted," the report said.

Secondly, hospitals face a potential headwind from insurers that may move toward population-based, full-risk contracts faster than hospitals. Moody's believes Optum is especially well-positioned in this regard because of the company's contracts with managed care clients.

"A physician-centric value-based model would incentivize OptumCare physicians and its contracted health plans to accelerate the trend of shifting patients to cheaper outpatient from higher cost hospital settings, further jeopardizing hospital volume trends," Moody's said.

Finally, the increasing scale insurers gain through their maneuvering will give them more negotiating power with hospitals when it comes to contracts. This will likely breed more standoffs and contract terminations by hospitals and insurers. For their part, hospitals may try to counter the gained leverage through acquisitions of their own that will add scale to their own organizations, especially by maintaining "must have" positioning in networks.

The big insurers will also gain power by adding members covered by government programs, and not only does this mean hospitals' exposure to cuts in government reimbursement rates, they will deal with ever more constraints from insurers.  Meanwhile, hospitals depend on commercial insurance payments to help cover losses from government reimbursement and will therefore find it harder to walk away from commercial contracts, giving those payers more leverage.

Twitter: @BethJSanborn
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