Hospital chains are responding to continued health-care consolidation with some vertical integration of their own. It is the latest sign that traditional industry borders are starting to break down.
Four large systems, comprising about 300 hospitals in total, said this week that they are banding together to create a nonprofit generic-drug company. The goal is to curb shortages of commonly used medicines in hospitals as well as to pre-empt financial damage from sudden price increases on them.
The announcement comes during a difficult moment for the hospital industry. Insurance companies and pharmacy-benefit managers engaged in a series of deals aimed in part at lowering hospital spending. A recent and prominent example came when CVS Health agreed to acquire insurance giant Aetna in a $ 69 billion deal last year.
In other moves, UnitedHealth Group spent nearly $ 7 billion combined to acquire Surgical Care Affiliates, a walk-in surgical-practice chain, and a physician-practice network called DaVita Medical Group. Humana bought a stake in the long-term-care business of Kindred Healthcare. These deals come as publicly traded hospitals have experienced prolonged share-price slumps.
Private insurers targeting lower hospital spending have the potential to sting since reimbursement from government programs like Medicare and Medicaid don’t fully cover expenses. Medicare-based payment issues might worsen in coming years due to a quirk in the program’s reimbursement formula. Cutting spending thus becomes essential, and it has been a force behind a major wave of hospital-system consolidation. Beyond that, joining forces to save money on prescription drugs is a sensible strategic response.
While the generic-drug business has its own slew of problems, a new company run for hospitals won’t add much, if any, pressure over the short term. Building a drug business from scratch will take time and won’t be easy. Hospital executives behind the initiative say they have no ambition to become a pharmaceuticals powerhouse.
The question is whether the initiative will even help. Hospitals didn’t do much to abate cost pressures when they created their own specialty-pharmacy network about a decade ago.
Still, this week’s developments, in tandem with the recent spate of health-care deals, raise serious questions about the sustainability of competitive moats in the industry over the long term as the lines between provider, supplier and payer get ever thinner.
Could hospitals eventually band together to make their own medical supplies such as saline solution and intravenous fluid bags? Over the long term, will drug wholesalers and distributors stay independent, or get folded into larger networks? Given these trends, what constitutes a sustainable long-term competitive advantage in health care?
Investors, take note: Your favorite company might not be as well-positioned as you think.
Write to Charley Grant at email@example.com