Look at the massive healthcare mergers in the hopper this year. With the industry evolving at light speed, we’re seeing an unprecedented scramble to compete, add capabilities and resources and lower costs, all at the same time.
These huge healthcare players are combining with equally large competitors to get a broader product base, reduce research and development costs and manage diminishing returns as profit-generating, patented products go generic. The consistent factor mentioned in each of these deals seems to be cost reduction.
There’s that tricky little splinter – lowering healthcare costs. But it remains to be seen whether these mergers and acquisitions will generate meaningful costs reductions deep enough to benefit patients.
Joining forces will reportedly help the new entities improve bargaining power, rate negotiations and reduce administrative overhead. As an example, CNBC reported last month that Aetna estimates the Humana merger could result in $1.25 billion in cost reductions by 2018.
But given the significant mandates of healthcare cost reduction, the question remains: Who benefits if these mergers produce such cost reductions… will it be patients or stockholders?
Traditionally, industry in general doesn’t directly, actively reduce consumer pricing with immediacy. When corporations experience significant cost reductions, consumers usually see benefit through stabilized pricing over time. It’s more financially feasible for companies to do that than to take a massive revenue hit by dropping prices across the board in one fell swoop.
The current healthcare industry environment poses a lot of pressure to actively reduce corporate costs with a mandate to directly show a reduction of consumer costs. That can’t happen overnight. But will these mergers be the beginning?
Healthcare doesn’t have the luxury that other industries have in the ability to tier their product in high-end, mid-range and economy versions where people get what they pay for. Healthcare is an industry with an altruistic underpinning, where the need for care can’t play out in “good-better-best” scenarios. While an inexpensive car will still get you from place-to-place to meet the core need for transportation, there is no inexpensive choice where health is concerned. If you need care, you need care.
Will the short-term benefits for the merging companies be enough to show the kind of all-encompassing reduction the mandate climate is demanding? Will some company wind up having the sheer guts to say savings can and should be passed along to patients, but less profitably? Or will it take some innovative, as-yet unknown new business model to achieve it?
The mandate climate from regulators and patients makes it clear that it isn’t a question of if the cost reduction will ever reach patients, it’s when. It will be very interesting to see who benefits from the M&A phase of the industry’s evolution.
We shall see.
Do you think industry consolidation will reap cost savings that will reach consumers? What more might it take? Tell me about it in the comments section below.