Mergers and Acquisitions
Market consolidation continued to be a major theme this year within the health care sector, with merger and acquisition attempts among all types of businesses—some of which were successful and some not. Others have yet to be resolved one way or the other.
Fate of mega-mergers among the insurance giants remains unknown
In July, the DOJ sued to block Anthem’s $48 billion acquisition of Cigna and Aetna’s $37 billion acquisition of Humana, with Principal Deputy Associate Attorney General Bill Baer stating that the deals pose “unacceptable risk to competition.” Baer had told a Senate subcommittee in March that the proposed payer mega-mergers have the potential to reshape the insurance industry, given the fact that the number of large payers would shrink from five to three. Multiple states joined the DOJ’s challenge of the mergers, as did the District of Columbia. The Aetna-Humana trial concluded last week; a decision is expected in January. The Anthem-Cigna trial is ongoing.
Baer, a rising star in the DOJ, has been a key figure in the fate of these deals—but, truth be told, it’s not really a difficult political position to hold. Everyone is against the mergers except for the insurance giants themselves, and even Cigna appears less than enthusiastic about the prospect of uniting with Anthem. Anthem, on the other hand, is facing a $1.85 billion termination fee if the merger with Cigna doesn’t close by Jan. 31, 2017.
FTC clamps down on health system mergers
The Federal Trade Commission (FTC) intervened in several mergers this year as well, between health systems—most notably the one between Chicago’s Advocate Health Care and NorthShore University HealthSystem—primarily on the grounds that the deals would limit competition and drive up costs.
In June, a U.S. District judge denied the FTC’s motion for a preliminary injunction to block the Advocate-NorthShore merger. Two months later, 11 states filed an amicus brief with a federal appeals court asking that the merger be suspended until the FTC could hold administrative hearings on the proposed deal. The appellate court sided with the FTC in October and sent the case back to the district court to reconsider its decision on issuing the injunction.
Harrisburg, Pa.-based PinnacleHealth System and Penn State’s Milton S. Hershey Medical Center ended their attempt to merge in October, after a U.S. Court of Appeals overturned a lower court’s decision to deny the FTC’s motion for a preliminary injunction.
The proposed merger between Kingsport, Tenn.-based Wellmont Health System and Johnson City, Tenn.-based Mountain States Health Alliance took a step forward in early November when the Southwest Virginia Health Authority blessed the alliance, despite the FTC’s recommendation to reject the deal. The FTC subsequently filed a formal report with the Tennessee Department of Health outlining its objections.
Other notable transactions—initiated, completed or terminated:
The largest deal that didn’t happen in 2016 was the one in which Pfizer tried to buy Dublin-based Allergan for $160 billion. Recognizing the proposed merger as an attempted tax inversion arrangement, the U.S. Treasury issued new regulations in April that effectively eliminated any tax benefits Pfizer would have derived from the acquisition. Soon thereafter, the companies went their separate ways, with Pfizer paying Allergan a $400 million termination fee.
Shareholders of St. Jude Medical Inc., a medical device manufacturer based in St. Paul, approved a merger agreement in October that will allow Abbott to buy St. Jude for $25 billion. The two companies plan to divest a portion of their business to Terumo Corp., a Japanese firm, for approximately $1.1 billion after the deal closes. Meanwhile, Abbott filed a lawsuit in December requesting termination of the $5.8 billion agreement it entered into in January to buy diagnostics firm Alere, citing multiple issues with Alere that have arisen throughout the year.
Abbott spin-off AbbVie entered into a definitive agreement in May to acquire San Francisco-based Stemcentrx Inc. for $5.8 billion plus milestone payments. Stemcentrx has five oncology drugs in development, including rovalpituzumab tesirine (Rova-T) for small-cell lung cancer.
- Sanofi offered $9.3 billion in May to buy San Francisco-based Medivation and later attempted a hostile takeover, but Pfizer ended up clinching the deal in August with an offer of $14 million. Medivation developed Xtandi, a drug approved to treat advanced prostate cancer, and has two other cancer drugs in the pipeline.
Winston-Salem, N.C.-based Novant and the University of Virginia Health System completed a merger in January, forming a new entity known as Novant Health UVA Health System.
New Jersey’s Barnabas Health and Robert Wood Johnson Health System finalized a deal in March to form RWJBarnabas Health, which reaches more than half of the state’s population.
South Jersey’s Kennedy Health and Philadelphia-based Thomas Jefferson University Hospitals entered into a definitive agreement in August to combine their organizations. That agreement led to the termination of a proposed alliance between Jefferson and Inspira, another South Jersey health system.
Louisville, Ky.-based Almost Family signed a deal in October to acquire an 80 percent equity interest in Community Health System’s home health business for $128 million, extending Almost Family’s presence into 10 additional states.
In November, Ventas Inc. and Kindred Healthcare Inc. entered into agreements for 36 skilled nursing facilities (SNFs) that Ventas owns and Kindred operates. Under the agreement, Kindred can buy some or all of the SNFs for up to $700 million. Kindred plans to resell the SNFs, with the intent to exit the business segment by the end of 2017.
McKesson Corp. expanded its Specialty Health business with the April acquisitions of Manhattan Beach, Calif.-based Vantage Oncology LLC, a radiation and medical oncology provider, and Cary, N.C.-based Biologics, a specialty pharmacy focused on oncology products, for approximately $1.2 billion. The company is also extending its geographic reach through the acquisition of Rexall Health, which has retail pharmacies primarily in Ontario and Western Canada, from Katz Group for $2.23 billion. McKesson just received regulatory approval from Canadian authorities to proceed with the purchase, which was announced in March.
- IBM added another health data firm to its holdings in April with the acquisition of Ann Arbor, Mich.-based Truven Health Analytics for $2.6 billion. The deal was IBM’s fourth health data-related purchase since the technology titan launched its Watson Health Unit in April 2015.
Final CMS Actions Under Obama's Watch
As the year draws to a close, CMS has been busy tending to last-minute business before the Trump administration takes over.
Most notably, CMS quashed a five-year mandatory Medicare Part B pilot program unveiled in March. The CMS Innovation Center developed the model to test new methods of paying for outpatient drugs, such as oncology and rheumatology treatments administered by infusion or injection, in an attempt to contain costs. Among other changes, the program would have lowered the current 6 percent add-on Medicare pays for prescription drugs to 2.5 percent and instituted a flat payment of $16.80 per drug per day, in addition to the drug’s average sales price. The flat fee would have been updated annually. A CMS spokesman said the agency decided not to proceed with the program because the public comments it received were mostly negative, and there was not enough time remaining in the Obama administration to address stakeholders’ concerns.
A group of House Republicans led by Dr. Tom Price, Trump’s nominee to head HHS, requested in September that CMS not make participation in payment reform models such as this mandatory. Time will tell if the group’s views will influence implementation of the proposed mandatory bundled program for cardiac services or the Comprehensive Care for Joint Replacement model launched in April, which also is mandatory (see below for more information about those models).
Just over a week ago, CMS finalized rules to take effect in 2018 for the Health Insurance Marketplace; the rules are intended to improve the stability of Marketplace exchanges. The changes include updates to the risk adjustment model that will, among other things, account for partial year enrollment; better account for risks associated with high-cost patients; improve compensation for healthy enrollees; and use prescription drug data as an alternative method of accounting for members with higher utilization.
ACOs Show No Signs of Slowed Growth
In August, CMS released 2015 results for the Pioneer ACO Model and the Medicare Shared Savings Program (MSSP), which together include more than 400 ACOs. Total savings exceeded $466 million in 2015, and 31 percent of the ACOs met their savings threshold and quality performance standards, thereby qualifying for shared savings. Only one of the Pioneer ACOs owed shared losses, and none of the MSSP ACOs did.
A deeper dive into the results revealed a 21 percent reduction in per-beneficiary spending over a four-year period for the Pioneer ACOs (from approximately $11,222 per person in the first performance year to approximately $9,298 per person in the fourth year), and nearly a 15 percent reduction in per-beneficiary spending for the MSSP ACOs over a three-year period (from approximately $11,500 per person in the first performance year to approximately $10,022 per person in the third performance year). The savings were achieved with no sacrifice in quality. In fact, scores increased for many of the quality metrics, and markedly so for the Diabetes Composite Score.
In January, CMS announced the participants of the first year of the Next Generation ACO model and the second year of the ACO Investment Model (AIM). Next Generation ACOs are taking on significantly greater risk than is possible in the earlier models. In return, they have the opportunity to realize greater shared savings. Of note, by July, three providers had dropped out of the program: River Health ACO (Harrisburg, Pa.), Heritage California ACO (Northridge, Calif.) and WakeMed Key Community Care (Raleigh, N.C.).
A total of 39 new participants were accepted into AIM for 2016. The model is intended to encourage development of ACOs in rural and underserved areas where startup costs can be prohibitive; these ACOs receive either upfront payments or ongoing monthly payments.
New ACO models
In a bold step, Vermont became the first state to receive approval from the federal government to establish an all-payer health care system that covers all providers. The state’s regulatory health care board approved the Vermont All-Payer Accountable Care Organization Model in October, paving the way for implementation in January. Vermont hopes to have approximately 30 percent of primary care providers participating in the model by the end of the first year and 80 percent within five years. Gov. Peter Shumlin (D-Vt.) estimated that the all-payer system could save the state approximately $10 billion in the course of a decade.
UnitedHealth Group announced plans to launch a nationwide ACO called NexusACO in 2017. It will be offered to companies with 100 or more employees during the fall open enrollment period. At the time of the announcement in November, UnitedHealthcare said it already had a dozen employers committed to the new ACO.
The Innovation Center just announced a new Medicare-Medicaid ACO (MMACO) model that builds on the Medicare Shared Savings Program (MSSP). Under this new model, MSSP ACOs that are currently accountable for assigned beneficiaries’ Medicare expenditures can also take on accountability for the Medicaid costs of dually eligible enrollees. CMS said it “seeks to encourage participation from safety-net providers in Alternative Payment Models [APMs]” through the MMACO. The agency will partner with as many as six states in rolling out the new model, with preference given to those having “low Medicare ACO saturation.” Participating states can choose to begin their first 12-month performance period on Jan. 1 of 2018, 2019 or 2020.
CMS also announced the “Track 1+” model ACO in October, which appears to be a bridge to attract more providers into taking on downside risk. The amount of exposure is more limited than Track 2 or Track 3, but the upside isn’t as great either.
CMS Rolls Out New Bundled Payment Models
CMS released its second annual evaluation of the Bundled Payments for Care Improvement (BPCI) initiative in September. That report included results for nearly 60,000 episodes of care for 15 clinical episode groups initiated by 130 hospitals, 63 skilled nursing facilities, 28 home health agencies and four physician group practices. Overall, 11 of the 15 clinical episode groups showed potential savings to Medicare.
A study published in JAMA that same month indicated that the average Medicare payment for lower extremity joint replacement episodes for the BCPI-participating hospitals decreased by $3,286 during the first 21 months of the program, whereas the average Medicare payment for nonparticipating hospitals decreased by $2,119 during that time, with no significant change in quality outcomes.
Encouraged by the results of BPCI model, CMS launched its first mandatory bundled payment model, the Comprehensive Care for Joint Replacement (CCJR) program, in April in 67 geographic areas. Under the program, hospitals are accountable for the quality and cost of care provided to Medicare beneficiaries who undergo hip and knee replacements—not only during the patient’s hospital stay, but also for the 90 days following discharge. Hospitals are eligible to receive an additional payment if they perform well on cost and quality measures. Hospitals face downside risk in 2017. Last week CMS expanded this model to include surgeries for hip and femur fractures.
CMS also proposed a mandatory five-year bundled-payment program for cardiac services that is slated to take effect in July 2017. The agency just finalized the payment model for the cardiac program, although if Rep. Tom Price takes charge of the HHS, he is likely to abandon the program. If it is implemented, approximately 1,120 hospitals in 98 randomly selected metropolitan statistical areas will be accountable for the cost of bypass surgery and myocardial infarction treatment, as well as the quality of care for both.
The program is similar to the CCJR model; providers will receive a fixed amount per Medicare beneficiary for an episode of care that covers the inpatient stay and the 90 days following discharge. Hospitals that hold costs below a predetermined target price while meeting quality benchmarks will receive quality-adjusted payments, while those that exceed the target will eventually be expected to pay Medicare a percentage of the difference.
The initiative also includes a cardiac rehabilitation payment model to test whether incentive payments can increase the use of those services.
What's to Come in 2017
Whether you supported President-elect Trump’s bid for the White House or not, we can all agree on a few things: Trump is unpredictable, often changes his mind on policy matters, and can sometimes play fast and loose with the truth.
This is not to condone or condemn the man and our company does not take political positions. It’s bad for business.
But his leadership style is important to note here in the context of predicting what’s ahead, precisely because of Trump’s unpredictability. Will he push for the repeal of Obamacare on Day 1, as promised? Will he take on the insurance mega-mergers, as promised? Will he tackle drug pricing policies, as promised?
He’s called out Boeing and Lockheed. No reason why he wouldn’t do the same to Pfizer. He rose to the presidency with a populist message and calling out the drug companies would resonate with a lot of Americans.
Given the unpredictability of Trump or any new president taking office, it is with trepidation that we offer the following predictions for 2017:
We expect that ACOs (Medicare and commercial) will continue to flourish in 2017 and that CMS will announce more bundled payment initiatives for a 2018 start.
We see CMS building on lessons learned from a number of Innovation Center grants related to behavioral health. Expect the agency to launch a new national initiative focused on behavioral health.
We expect the pace of consolidation to remain robust, as the market forces that are driving consolidation are still here.
We predict that the Aetna-Humana will be approved. Anthem-Cigna won’t.
- We don’t expect any form of drug price regulation. But we do expect Trump to fight for a Medicare Part D drug formulary, and for him to win that fight.