Industry sources informed MCM late today that, in a stunning move, Coventry Healthcare agreed to acquire health plan giant UnitedHealth Group. For several days there had been rumors that UHG would snap up Coventry, the troubled mid-tier health plan, but events of the last few days led to grave concern at UHG that the Ingenix database problems might bring down the parent company. Reportedly the board felt it had ‘little choice but to get what we can while we can’.
The deal was done over the last two days, evidently triggered by the appearance of UHG CEO Steve Hemsley before Sen Jay Rockefeller’s Senate Committee. Hemsley and Ingenix CEO Mike Slavitt were ‘hammered’ by Rockefeller and his fellow Senators, who were particularly incensed at the health plan execs inability or unwillingness to “acknowledge consumers’ concerns about whether they were being shortchanged.”
The hearing was quite contentious, but there was at least one light moment. At one point, responding to a Senator’s pointed questioning about UHG’s conflict of interest, Slavitt said “”There is an important difference between an inherent conflict and the actual practice of bias–the latter is something neither I nor my employees nor our parent company would ever tolerate…” Senator Rockefeller reportedly whispered to a colleague “huh? that guy talks like a politician…”
Sources indicate Hemsley called old friend and colleague, current Coventry CEO Allen Wise, to commiserate shortly after he and Slavitt left the Senate hearing room while they were en route to National Airport. “I don’t want to be AIG’ed”, Hemsley reportedly told Wise; “I can’t believe there’s all this fuss over a lousy few hundred million bucks…I just want to run my company and be left alone, and now this McCaskill woman says she’s going to be on me like white on rice…”
Wise had thought he was close to a deal with his old employer to sell Coventry for a slight premium over the current stock price (around $13). Instead, Hemsley told him he and the UHG board had decided to get out of the health plan business, and were going to sell the company as quickly as possible. A deal came together very quickly, with overall terms agreed to before Hemsley and Slavitt boarded their flight for a return to MInneapolis. (terms were not disclosed)
One of the key motivators for UHG was the concern on the part of UHG’s board and Hemsley that they would be back in front of Rockefeller et al repeatedly, and would be ‘the poster child for bad health plans’. The Senator had concluded the hearing by telling Hemsley and Slavitt that he was going to order the GAO to determine if and how Ingenix’ database had been used to shortchange federal employees who had accessed out of network providers.
Slavitt was reportedly quite shaken by the dressing-down during the hearing, and was ‘close to tears’ as he exited the chamber. Hemsley was seen to be comforting Slavitt, patting him on the shoulder and murmuring “now, now, it will all be all right” as they walked towards their waiting limo.
When reached for comment, Hemsley refused to confirm or deny the deal, although he did say “I actually had to fly commersh to DC; do you have any idea what a hassle that is?” Hemsley was referring to the Board’s command that he not use one of UHG’s fleet of corporate jets, and instead fly Northwest to attend the hearing. (On a side note, Hemsley reportedly said “Northwest… isn’t DC southeast of here?”)

Perhaps the biggest battle brewing in Congress in the health reform war is that of the public option. As I said back in January, “Opponents claim that the Feds would have an unfair advantage due in part to their sheer size; they’re just so big that private plans could not compete.” Some Republicans and their affiliated think tanks continue to complain private health plans will not be able to compete with a public option as the public plan will just dictate pricing to providers, and they don’t have the capital and financial stability requirements forced on private plans.
They’re half right. Re the capital requirements, they’ve got a valid argument. As we know all too well with Medicare and Medicaid, the Feds (and we taxpayers) know we have an ultimate unfunded liability in excess of $22 trillion, but that figure doesn’t show up on any formal financial statements.
But when they complain about pricing, that’s a red herring – for two reasons.
First, physicians don’t have to accept Medicare or Medicaid, and wouldn’t have to agree to any ‘public option’ pricing. In fact many docs don’t accept Medicare today. As participants in the free market, they are able to opt out if they feel the compensation is too low – and many do.
The other factor is just as simple – pricing is but one component of the health cost equation. The others are utilization and frequency. ‘Utilization’ is the number of a specific type of services used by a patient, while ‘Frequency’ is the percentage/number of patients that use that type of service.
Here’s an example. For MRIs, the total cost calculation might be 10 million patients (frequency) X 1.2 MRIs per patient (utilization) X $800 per MRI (price).
Sure, price is a factor – but it is not the most significant factor – not by a long shot. By keeping patients out of the hospital, a private plan would eliminate utilization and prevent price from ever becoming a factor. So, even if a service area was dominated by a public plan, a private plan that did a really good job of keeping members healthy and out of the hospital would deliver lower costs – even if their hospital stays, when they did occur, were more expensive.
Those lower medical costs would enable the private plans to offer lower premiums, which in turn would attract more members, and those members’ dollars. The private payers that could deliver better health would also deliver better returns to their investors, while taking share from both the public plan option and other, less successful private plans.
The other reason – markets are already monopsonies
As noted previously, there’s another reason the arguments against a public plan don’t stand up. Opponents complain that the government’s market power would allow it to dominate a market, thereby making it impossible for a private plan to compete.
The reality today is that almost every market is already dominated by a very few health plans, so much so that in most markets, there really is very little market competition amongst health plans.
Here are a few factoids using 2005 data; if anything there has been more market consolidation, so these percentages are even higher today…
– 96% of HMO/PPO markets are deemed highly concentrated
– 99% of HMO markets are highly concentrated
– in 96% of markets, at least one insurer has share higher than 30%
– in almost two-thirds of the markets, at one insurer has share greater than 50%
– in a quarter of the markets, one insurer has share at or above 70%.
What does this mean for you?
If anything, a robust public plan would add competition to many markets, competition that would, if anything, increase consumer and provider choice.
How exactly is that bad?