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The Healthcare Merger You Never Heard Of
Over the past few months, the largest private insurance company, UnitedHealth Group got the greenlight to pursue a massive merger with Change Healthcare. The multi-billion dollar merger going through dealt a large blow to the federal government's attempts to fight market consolidation in healthcare. So what exactly is Change Healthcare, and why is this merger such a big deal?
NOTE: The Understanding Healthcare newsletter will be moving to Substack in the near future. The current newsletter provider, Revue, is shutting down in January, so the next issue of this newsletter will be coming from Substack. I'm in the process of moving posts over.
The Nashville-based Change Healthcare offered a healthcare software and technology suite for healthcare stakeholders like payers/insurers and care providers through its tools for clinical decision making, patient experience improvement, and most improvement, revenue and billing processing.
Many care providers must submit bills to health insurance companies to get reimbursed for their services. This billing process requires sending appropriate documentation called a "claim" about the insurance coverage of a patient and the medical services they got. This claim must be processed by the health insurer to ensure that the medical service matches the coverage of the health insurance policy, and only after this processing, can the provider be reimbursed by the payer/insurer.
Because care providers -- from small physicians' offices to hospitals -- rely on getting reimbursed by insurers for much of their revenue, the revenue cycle management and billing software that Change operates is a crucial product, and it's something that care providers will continue to rely on to make a living.
Reading through the last annual report to the SEC before the merger, it's clear that these billing-related offerings are just one of numerous products sold by Change, but these billing offerings are responsible for Change Healthcare being positioned at the center of most transactions between payers and providers.
The initial complaint by the Department of Justice summarizes this quite simply:
Change operates the nation’s largest electronic data interchange (EDI) clearinghouse, which transmits data between healthcare providers and insurers, allowing them to exchange insurance claims, remittances, and other healthcare-related transactions.
Change also sells a license to its separate state-of-the-art claims editing technology that enables health insurers to process, in real time, millions of healthcare claims each day to ensure compliance with their health insurance policies.
With this suite of billing products, most large health insurance companies in the US rely on Change Healthcare's technology to pay care providers treating health plan members.
One could say that Change operates the plumbing that keeps the relationship between providers and payers/insurers moving.
Another note to make is how access to this claims data has enabled Change to sell other analytics and patient experience products. The last annual report cited three major stages of the patient journey that Change has offerings for.
Pre-Visit: Selecting a doctor, scheduling appointments, medical record exchange, cost estimation
Visit: Checking medical necessity of treatments, financial clearance for medical services (checking if insurance coverage is valid)
Post-Visit: Claims processing, patient engagement
The report also cites value-based care as a notable market opportunity. Value-based care is a payment model that aims to reward providers for longer-term patient outcomes like quality of life as opposed to traditional fee for individual medical services.
Merger and Antitrust Case
From early 2020, UnitedHealth Group (UHG) leadership began considering the acquisition of Change Healthcare. UHG is the largest private insurer in the US, and access to data via a Change acquisition was poised to give the company an unprecedented edge over its competitors in the health insurance space.
Internal memos and consulting advice from McKinsey & Co. which were brought under the spotlight in the 2022 antitrust case addressed that the claims data on Change's electronic data interchanges (EDI's) would allow UHG to understand the proprietary prices other insurers were paying for medical services and tweak their own plans to perform better.
The deal valued at $13 billion was announced in early 2021. Change Healthcare would be rolled into UHG's subsidiary Optum.
An April 2020 memo to UHG's then-CEO addressed that there may be anti-trust concerns with the acquisition, which turned out to be true when the Justice Department sued to block the merger on grounds of anti-trust.
In a blow to the Biden administration's healthcare anti-trust efforts, a federal judge allowed the deal to go through in September 2022, with the only caveat being that Change Healthcare complete its sale of the Claims Xten product to TPG Capital. Claims Xten is a software business for payers/insurers to assist in processing claims.
With the acquisition of Change completed, there are concerns about how UHG's control of Change may skew the health insurance landscape in its favor.
Change Healthcare has rights to use over half of the vast troves of claims data that it manages through EDI clearinghouse (institution used to facilitate financial transactions between payers and providers). As discussed earlier, these insights can be leveraged by UHG to rework their own health insurance plans and contracts to win market share using data about what is paid for what services by other insurers.
Another concern is that through control of the EDI clearinghouse, UHG can raise the cost to use certain advancements in claims processing technologies for market rivals. For instance, better insights on claims data or faster processing may come at a higher cost for Anthem and Cigna plans while UnitedHealth plans pay next to nothing.
Remember the required sale of Claims Xten? The Claims Xten software, a first-pass claims editing solution, to allow health insurers to verify claims are coded correctly was a Change Healthcare product that was in direct competition with UHG subsidiary Optum's own products. The sale to TPG capital and divestiture would mean that UHG now even owns greater market share for software to verify the validity of claims data.
These, of course, were concerns central to the Justice Department's anti-trust case. Despite a string of successes in blocking hospital mergers, this one blow in healthcare anti-trust may have serious knock-on effects for health insurance pricing. While previously, Change was not owned by a provider or payer to skew its incentives, the change of ownership may cause some challenges for providers and competing insurers down the road.