Late last month, Anthem announced it reached terms to acquire rival Cigna in a $54 billion acquisition. In tandem, Aetna is pursuing Humana in a $37 billion transaction. Combined with United, the Big Three will have 2015 revenues of $386 billion and cover 122.5 million American enrollees. That’s 40 percent of total premiums and 45 percent of the insured population including those with private, Medicare, Medicaid and military health coverage.

The rationale for these deals is clear: The commercial insurance market is shrinking as more employers drop coverage and push employees into high deductible individual plans and to private exchanges. Operating margins from their traditional risk-based business is thinning and they’re under intense pressure from regulators to keep premium increases down. Their new growth market — privately managed Medicaid and Medicare plans — is half as profitable as their commercial business so increased enrollment is necessary to simply stay afloat. It's that simple.

The fact, is the consolidation among insurers will not result in a "too big to fail" scenario for the insurance industry … at least not right away. The Big Three combined trail strong regional Blue Cross plans in many markets, especially in the southeast, and they may face antitrust scrutiny in places like the Northeast where they are dominant. Although the 36 Blues and Big Three control 80 percent of the nation’s insurance market, there’s still room for insurance sector consolidation in an market that boasts more than 800 different carriers.

So what does this mean for hospitals and health systems?

The insurance sector's consolidation poses a major challenge. The tension between hospitals and plans is palpable in many markets already. On the one hand, plans are purchasing medical practices and ratcheting down payments to hospitals and physicians. At the same time, they’re soliciting hospitals to “partner” in risk sharing relationships like bundled payments and accountable care organizations.

Looming in the background is the issue of health costs. Data released last Tuesday by Centers for Medicare & Medicaid Services Office of the Actuary suggest that health spending increases will average 5.8 percent annually through 2024 — well above the 4 percent average increase from 2007 to 2013.  Gross domestic product will average no better than 3.5 percent annual growth in the same period, and wage growth will lag similarly. So at the same time as insurers are consolidating, employers and consumers will be bearing the brunt of escalating health costs.

For hospitals and health systems, the stakes are high. The tsunami of escalating health costs, insurer consolidation, implementation of the Affordable Care Act and increased price sensitivity by employers and consumers requires rethinking of the hospitals' mission and strategy, especially as it relates to third party payer relationships. Tough questions need to be answered by boards and leadership.

  • Is our "best" strategy to contract with multiple plans or secure a strategic partnership with one? Should we sponsor our own plan and go head to head, or take our chances with others? And if we go the route of collaborating with one or more plans, how do we make sure we share risks and rewards equitably?
  • How do we become attractive to insurers who might bring volume (patients) to our organization? Is our reputation enough? Is our value proposition strong? Is our cost structure competitive and our pricing conducive to volume growth? Can we differentiate on the basis of our outcomes, safety and patient experiences while also being the low cost provider?
  • What is our strategy to breakeven on Medicare and Medicaid? Can we operate at those reimbursement levels, given decreased likelihood shortfalls can be made up in transfer pricing to commercial payers and consumers?
  • Are physicians actively aligned and fully integrated, or reluctantly affiliated and ready to jump ship for the next deal offered by other suitors? How prepared is our frontline clinical team of physicians, nurses, pharmacists, dentists, optometrists, nutritionists, mental health professionals, health coaches, and others organized and equipped to manage results and coordinate care beyond the operational confines of our clinics and facilities? Are physician leaders prepared to step up?
  • How big do we need to be to control our own destiny? What businesses do we need to integrate into our enterprise to increase our scale and reduce the leverage of third party payers? Do we understand how to operate these businesses effectively, or do we need partners? If independent, is that sustainable and smart? If affiliated, is the affiliation focused on the right long-term challenges?

At this juncture, everything has to be on the table for hospitals and health systems. There can be no sacred cows. Maybe instead of owning, sharing is key. Maybe instead of patients, it's about consumers as individuals. Maybe instead of capital for bricks and sticks, it's clicks and tools for care coordination. Maybe instead of physicians as customers, it's physicians as partners. And maybe instead of a value proposition premised on convenience and access, it’s about proven care at known prices.

No doubt, consolidation among insurers will accelerate and the stakes for hospitals and health systems intensify as a result. The implications are clear: The status quo is not enough. It’s time to ask the tough questions.

Paul H. Keckley, Ph.D., a health economist and expert on U.S. health reform, is managing director at the Navigant Center for Healthcare Research and Policy Analysis. His H&HN Daily column appears the first Monday of every month. He is a member of Health Forum's Speakers Express. For speaking opportunities, contact Laura Woodburn.