Harvard Pilgrim-Tufts Health Plan Merger ~ Managing Healthcare Costs

Today’s Managing Health Care Costs Indicator is 2

Yesterday the big news in Boston was that Tufts Health Plan and Harvard Pilgrim Health Care were exploring a merger. These are among the two best health plans in the country; each has a long and proud pedigree – and each has very deep roots in the community here. Together, they are still just 2/3 the size of Blue Cross Blue Shield of Massachusetts (see below).

The Boston Globe reports that the two CEOs and Board Chairs have already agreed to positions, so it’s likely that this merger will indeed go through.

What does this mean for health care costs?

Some immediately imagine that a decrease in health plan competition is bad – and will raise costs for consumers. We need to evaluate how health plans price their services, and how the merger will affect the acquisition costs for health care services. I believe that decreased health plan competition in a market is likely to lower overall health care costs – and here’s why.

Jim Roosevelt (CEO of Tufts HP) and Eric Schultz (CEO of Harvard Pilgrim) and said today that there would be administrative savings – and that’s absolutely true. The two health plans will only need one set of senior executives, and will be able to have a single set of IT systems – so there are a bunch of fixed costs of having two health plans that will diminish when they merge. They’ll diminish, of course, after a brief period of increased costs associated with harmonizing different systems. These lower administrative costs, though, aren’t how this merger can add social value by lowering health care costs.

There’s a lot of talk about high executive pay and administrative waste – but if you could dramatically lower administrative cost –that would not be the way to make health care (much) more affordable. Health plans spend 85% in general on payments to physicians, hospitals, ancillary providers and others. The “medical loss ratio” is closer to 90% for these regional nonprofits.

The only way the merger will lower costs will be if it lowers the price paid by these health plans for medical care. It can do this through larger discounts or different payment methodology – but the larger the health plan is, the more leverage it has to pressure the provider community.

One of our local NPR affiliates WBUR had a series of health care experts talking about the impact of this merger on competition –and a number of them raised fears that health plan consolidation would lead to provider consolidation, and thus could raise prices. Regina Herzlinger quoted this National Bureau of Economic Research working paper , which does indeed express this fear. However, provider consolidation is subject to antitrust rules, and the Attorney General and the FTC can prevent provider consolidation that would lead to increased prices. No surprise that the Mass Hospital Association expressed concern about the proposed merger.

It's a paradox that sometimes more competition can lead to higher prices if the fragmented intermediaries have to pay for higher 'ingredient' costs due to their lack of leverage.

My take - Tufts Health Plan and Harvard Pilgrim will fit well together culturally, will overcome the inevitable IT and ops integration challenges, and will after some period of time be more effective at procuring health care for a lower overall cost. They will lower their total administrative costs, too (which means many of my friends and colleagues will be looking for new positions). The AG hearings on this proposed merger will give us an interesting window into both health plans, and their strategy to increase value through the merger.