by Tom Robertson
Executive Director, Vizient Research Institute

Just before the financial meltdown of 2008, a neurologist named Michael Burry – who managed an investment hedge fund – foresaw the implosion of the mortgage-backed securities market and began investing heavily in what are known as credit default swaps. For years, banks had been making mortgage loans to people who were borrowing far beyond their means. Lenders were then bundling risky loans into mortgage-backed securities and selling those securities to investors ranging from large pension funds to little old ladies in white tennis shoes. Burry anticipated a time when borrowers would be unable to pay for the mortgages and he, in effect, bought insurance (credit default swaps) that would pay off in the event that the borrowers defaulted on their loans. He was betting that the mortgage market would collapse and he was right … and when it did, he made a lot of money – and became the subject of a Hollywood movie called “The Big Short.”

The name of the movie, and the book on which it was based, come from Wall Street vernacular – and a process called “shorting” a stock. If an investor is convinced that a company’s stock value is going to decline in the future, they can buy an option to trade the stock at a lower price on a future date. The option contract is like a bet; the investor is betting that the stock price will fall. If they are right, they make a profit. If they are wrong, they lose money. By contrast, betting that a stock will increase in value is called taking a “long” position. When Dr. Burry became convinced that the mortgage market would collapse, he “shorted” mortgage-backed securities. When the prices plummeted, he became the subject of a movie.

Insurance companies have been purchasing physician practices and ancillary services, creating a lot of noise and a certain amount of anxiety in the market. Reactions have ranged from raised eyebrows to elevated blood pressure. Some health systems have felt threatened and a subset of those feel pressured to follow suit.

A number of motivations have been hypothesized for the insurers’ decisions to acquire providers; some assert that it is an attempt to coordinate care and reduce health care costs, while others suggest that insurers are anxious to guarantee provider access for their Medicare Advantage beneficiaries. Whatever the rationale, the acquisition of physician practices and other service providers by insurance companies has been something of a rubber hammer to the patellar tendon of the industry.

While it may be reassuring to believe that insurance companies are purchasing medical providers with a noble goal in mind, an alternative explanation is suggested by another movie blockbuster: “Jurassic Park.”

According to the consulting actuaries at Milliman, annual health care spending for a working family of four just surpassed $28,000. The most recent year-over-year increase was 4.5 percent, nearly two times the increase in wages. As health care spending hurtles forward, and with 60 percent of the millennial generation expressing a preference for a single payer health system, insurance companies have little choice but to question their future roles. Unless insurers are content to serve as administrative subcontractors, they may be hedging their futures by wading into the provider space. If the bright light in the western sky is not the sun but a meteor in the form of a single payer financing system, the acquisition of health care providers may be an attempt by insurers to avoid extinction.

Our recent research finds us on a path toward $50,000 in annual health spending per working household by 2030. Utilization reductions cannot slow that spending growth by enough to make it sustainable. Prices have to fall, and if they do, provider revenue streams will be reduced, in turn lowering the market value of those assets.

Insurers who purchase health care providers at their current market value are in effect taking a “long” position on assets that macroeconomic indicators might suggest that they short. Well-positioned health systems that are already in the provider space might do well to avoid the temptation to chase insurers who may be scrambling for a foothold before the ground moves beneath them.

As I contemplate the wisdom of staying the course and avoiding overreactions to noise in the market, my mind goes to another classic movie. After clicking her heels together and reminding herself that there’s no place like home, Dorothy awakens in her own bed on the farm in Kansas. The lesson that she learned in Oz may be portable to health systems: “… if I ever go looking for my heart’s desire again, I won’t look any further than my own backyard; because if it isn’t there, I never really lost it to begin with.”

About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.

Published: October 1, 2018