A shrinking healthcare landscape
The Bermuda Health Council is aware of the potential equity stake transaction involving Argus and BF&M. This results from international firm Camellia seeking to divest 3.4 million shares in one of its noncore investment assets. The health council, as the provider of licensure for all local health insurers, will ensure any implication of such a transaction meets BMA’s requirements and if necessary adjust any health insurance licence conditions for the applicable period.
While the transaction centres on company shares, we are monitoring the potential implications for the health insurance market and service provider consolidation. This is especially critical as Bermuda seeks to better manage our healthcare costs and right-size our supply side. All this in the face of projected increases in over-65, age-based demand — but also projections of stagnant growth of other ages within the population.
Having two similar service entities such as Argus and BF&M come together is referred to as horizontal integration. Vertical integration occurred when the Argus Group made a transaction to acquire medical practices. Integrations such as these can lead to consolidation of functions, either through soft consolidation or traditional consolidation.
In the past, integration in our local health market has been more about “soft” consolidation. Soft forms of consolidation involve activities such as agreements over integrating clinical services or designating preferred provider networks. For example, our hospital, KEMH, has a clinical affiliation with an overseas medical institution; local GPs and specialists have partnered over time to provide informal-care teams for patients; insurers have agreed to cover speciality care at specific overseas health centres; and some Universal Health Coverage projects are gearing towards creating collaborative paths for producing better health outcomes.
In general, consolidation, if done right, can lead to increased efficiencies, co-ordination of care and patient outcomes. These positive outcomes lean heavily towards cases where consolidation is less about financial activity and more about clinical collaboration.
Despite the history of soft consolidation in Bermuda, over the past few years, we have seen our health market aggressively approach traditional consolidation at the service and funding levels. Traditional consolidation refers to mergers, purchases, acquisitions or ownership of entities — hostile or non-hostile.
On the surface, this has meant that fewer companies in some speciality areas are in charge of making significant population health decisions. As a country, we are quite new to this practice in the health market and will need to track changes to understand the local impact. For many of the past decades, we have engaged in a very decentralised health system often with silos, where agreements of process and standards were co-located within each entity.
So what may traditional consolidation mean for each of our communities? At a base, we know that fewer companies also mean uncertain shifts in power, which, if unchecked and not operating under evidence-based regulatory rules that consider the health and sustainability of the entire health system, could derail any real efforts to improve our population’s health.
While traditional consolidation is newer to our market, it is more familiar globally. A 2022 reprised report from Project Rand looked at a number of these consolidation activities and found mixed impacts in the areas of healthcare prices, health spending, quality of care, patient access and health professional wages. Multiple reviews have specifically pointed out that horizontal integration of commercial health insurers in the United States led to lower prices being paid to providers.
These lower payments were triggered by stronger leverage for insurers for price negotiation. While there are few formal mechanisms for price regulation in Bermuda, there are tools for price influence. In cases where prices may not seem “fair”, the BHeC is working towards more price transparency and broader regulation in what many consider an expensive consumer market. Finding ways to manage healthcare spending better is important as it allows families to spend more of their earnings on areas that will help them maintain their mental and physical wellness.
In addition, the Rand study noted that consolidating health insurers may reduce the insurers’ incentives to pass savings to customers. So while, on paper, lower prices may sound great for consumers, there is the part where such lower prices may not directly benefit the consumer. This is where it does make a difference whether a majority shareholder of a local company is a Bermudian-based entity.
The principle should be that Bermudian-based companies are more intimately interested in the local economy and, therefore, will make decisions on consumer benefits that align with the local ethos. However, fewer players in the game may also mean less motivation to one-up the competition with price breaks. Therefore, historically, horizontal consolidation within the commercial health insurance market has resulted in higher premiums. We will be actively monitoring this area owing to the precedent of such transactions.
However, the precedent of increased premiums from horizontal consolidation should come with a caveat that the higher premiums may be offset by lower total healthcare spending. For reference, total healthcare spending by an insured consumer is the cumulative effect of paying monthly premiums and other out-of-pocket costs. If the evidence stays true, insurer consolidation could pressure providers to lower prices, but to keep their new consumers happy, insurers may cover more of those costs.
For example, instead of a provider charging $400 for their service and the insurer covering 50 per cent of that charge ($200), the pressure from the market may lead the provider to charge $300 for that service, and the insurer may opt to pay 80 per cent ($240) of that charge. So while the premiums may need to increase to cover that additional $40 for the service, the out-of-pocket charge to the consumer in this example went from $200 to $60.
All consumers should take stock of their total healthcare spending when deciding on health insurance options and not just their monthly premium or out-of-pocket costs as separate items. An individual who spends $2,200 a month on premiums but only spends $500 for the year in out-of-pocket or “copay” costs for a total of $26,900 for the year is not necessarily better off than an individual who spent $530 a month in premiums, but had to shell out $5,000 in copay costs for a total of $11,360 for the year.
With that said, the issue with some of these market comparisons and any reported outcomes is the size of the market. An insurer such as UnitedHealth Group, which carries about 15 per cent of the private market in the US, has more than 27 million members. Whereas our largest private market shares are less than 30,000 lives. Within such a small market, it becomes very difficult to have a sufficiently large customer base to spread the risk; generate enough revenue to cover operating costs, claims payments, and administrative expenses; and remain financially stable with “affordable” premiums.
The larger the risk pool, the better an insurer can manage costs. With smaller pools, risk selection becomes critically important. The commercial insurer market has different levers available to experience favourable selection as part of normal practice, whereas government insurers have far less control over such. Size-of-market dynamics and measurement of risk become even more sensitive when we are also concerned with an oversupply of some health services and products compared to international benchmarks.
As an aside, while we know that there will be a higher demand for age-related care as the population profile shifts, an oversupply of the wrong types of services and labour can add to cost pressures by unnecessarily increasing demand for healthcare. As a result, there is a strong case for public policy to target oversupply. In that same vein, where there is undersupply and poor labour planning, there can be unintended consequences such as poor labour productivity — leading to a similarly strong case for updates in public policy and execution.
As we see the winds of change coming, and have seen some change already pass us by, we have to be in the best possible position to respond. A proactive and well-planned response will allow the people of Bermuda to have the best shot possible to be successful under any of these changes. To accomplish this proactivity, the BHeC continues to require good data in the health system to assess this newly consolidating market — including data related to enrolment, premiums, and costs of commercial health insurance by the insurer, the plan, the customer segment, and the local market; and more reliable data related to the services we have, the services we are using, and the services we need. Bad data equals bad decisions. All these types of data would help us understand whether, when and for whom consolidation and changes in our market trends are harmful or beneficial.
The health council has also put interventions in place to strengthen the regulatory environment so that we are more agile in addressing such market changes. We have set up mechanisms to publish fair pricing and more forcibly regulate reimbursement standards. We are discussing methods to curb oversupply, properly set targets, and identify gaps in the health system that need innovative thinking. We are working with the industry to shift spend from complex care provisions to greater prevention of disease and complications. We have set up a drug formulary and will begin to procure more affordable prescription medications and regulate the price to consumers more effectively.
The specific news of market transactions on a Tuesday morning in June may be surprising. The potential of such transactions may be uncertain. However, the BHeC has been aware of the direction of travel for the market for quite some time, and while this consolidation trend may present a new challenge, inherent in change are opportunities.
There are opportunities to ensure that when companies seek to transact equity shares within a critical market that we are proactively in front of the issue and extrapolating benefits instead of retrospectively responding to any downward-spiralling market fires that it may unintentionally cause. The health council will continue its due diligence in working with Argus and BF&M as shares change hands and decisions are ultimately made on day-to-day operations.
• Ricky Brathwaite, PhD is chief executive of the Bermuda Health Council