Health Reform Is Dead. Let's Go Shopping

As a herd of health-care proposals lumbered through Congress last year, insurers and hospital chains made like big-game hunters, shooting to kill the most sweeping provisions. With great difficulty, health-care companies and their lobbyists negotiated deals they could live with. But now that the overhaul is in deep freeze, how does the future look? Painful, for some. For others, it's a buying opportunity.

If a comprehensive health reform bill had passed, it might have pulled in more than 30 million new paying customers. Without the influx, health care companies are scrambling to cut costs—and the strongest are poised to devour the weak. Giant insurers such as WellPoint (WLP), UnitedHealth (UNH), and Aetna (AET) are on the prowl, along with hospital chains such as Community Health Systems (CYH). Consolidation is the easiest way "to spread rising costs across fewer customers," says Paul H. Keckley, executive director of the Deloitte Center for Health Solutions.

President Barack Obama's original vision called for expanding insurance coverage while toughening regulations to improve care and force down costs. The plan was upended when Republican Scott Brown won the late Edward Kennedy's Massachusetts Senate seat. Obama has since pushed to restart talks on an overhaul, but prospects appear dim.

So change must come from individual companies, and many are already signalling their intentions. WellPoint, the largest health plan by enrollment, owns 14 state Blue Cross plans. It now sees "a unique opportunity" to acquire more as small players come under pressure, CEO Angela F. Braly recently told investors. UnitedHealth, the second largest, has expanded into new businesses and purchased the Northeast unit of rival Health Net. CEO Stephen J. Hemsley told analysts in January that he has no plan to alter this strategy.

Hospitals, meanwhile, continue to see their emergency rooms flooded with uninsured patients. Uncompensated for that care, many face bankruptcy. "Absent reform, fewer and fewer Americans are going to be able to afford their services," said Jacob Hacker, a Yale University political science professor, in an e-mail.

According to the American Hospital Assn., one-third of the nation's community hospitals had operating losses in 2008. In light of health reform's failure, Community Health Systems, Health Management Associates (HMA), and LifePoint Hospitals (LPNT) —all of them leading chains—say they are intensifying their pursuit of recession-weakened competitors. Prices for hospitals have dropped by 50% over three years, says Health Management Senior Vice-President Robert E. Farnham. LifePoint CEO William F. Carpenter III says his chain may buy three more hospitals this year.

In the months ahead, cost pressures are only going to increase. One in five working-age Americans lacked health coverage during the first half of 2009, the highest in six years, according to the U.S. Centers for Disease Control & Prevention. This has the effect of funneling patients with serious, late-stage illnesses into emergency rooms—an expensive alternative to early treatment. Last year health-care spending rose 6% over 2008, to an estimated $2.5 trillion, according to the U.S. Centers for Medicare & Medicaid Services.

If legislation can't bring costs down, consolidation might. It "allows you to operate more efficiently," notes Curtis S. Lane, senior managing director at MTS Health Partners, a New York-based equity fund. "Whether reform is imposed by the government or driven by market forces, these companies are going to have to get better at being more cost effective and providing higher quality."

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