Revolution in Roanoke? Perspectives on the Aetna-Carilion deal


  • The line between health plan and provider continues to evolve: the Aetna-Carilion deal exemplifies providers backward integrating into insurance (and contrasts with other providers exiting commercial insurance business e.g. art part of last year’s Coventry deals)
  • The Aetna-Carilion alliance appears to have compelling, multi-layered business logic and there will surely be more of these sorts of couplings in markets where there is a strong provider brand and a health plan with low share but deep capabilities and ambition.
  • Using the provider brand to sell insurance creates challenges for health plans looking to sell products centered on Accountable Care Organizations (ACOs): why should the consumer buy a narrow network product from a health plan if they can buy one direct from a major provider? How can the health plan brand compete vs. provider brands as more and more consumers are making the purchase (e.g. on health care reform’s Exchanges)?
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The Aetna and Carilion Clinic alliance announced last week offers a very interesting view of how competition – health plan vs. health plan, provider vs. provider and provider vs. health plans — may evolve under health care reform. See announcement here.

Carilion is a major delivery system with 8 hospitals and 500+ physicians headquartered in Roanoke, Virginia and with 50%+ share in its service area. Aetna has about 8-9% commercial share in Virginia (about 2% in nearby West Virginia), far behind the local Blues (which have 65% share in the commercial business factoring in Wellpoint and Carefirst which serves parts of Virginia).

The key deal features which can be gleaned from the disclosures are:

  • Carilion and Aetna will pursue an ACO reimbursement structure
  • Aetna will provide Carilion with administrative services – contracting, payment for the ACO and back office services for Carilion’s Medicare Advantage product
  • Aetna and Carilion will sell co-branded commercial health insurance for businesses / individuals as well as expand into Medicaid by the end of the year
  • Aetna to become the benefits administrator for Carilion employees

With these limited details, we can speculate on the underlying business logic:

For Aetna 

  • Differentiation: the local Blue has strong share and capabilities of its nationally scaled parent Wellpoint. None of the other nationals (United, Cigna, and Aetna) have a clear share or capability advantage over each other and largely split the rest of the market. Real growth is going to require differentiation from the pack. A provider alliance is certainly that.
  • Little at risk: Aetna share is small enough that the risk of cannibalizing the existing business by creating a new entrant (co-branded Carilion-Aetna products) is small: If the new co-branded products take 10% share from the incumbents, that’s an incremental 6-7% share from the local Blue but less than 1% from Aetna. If profits are split 50/50, Aetna would be net way ahead.
  • Mitigate leverage disadvantage vs. providers: The Carilion alliance provides Aetna early access to ACO savings which can make up for its lower share (and therefore weaker leverage in rate negotiations) vs. the Blue.
  • Unique consumer brand on the Exchanges: Under reform, the individual market will become much larger. Further, given the little room for broker commissions in the insurance cost structure under reform, much of the selling is going to be either direct or mediated by Exchanges. Consumer brand is going to be critical. And provider brands are generally far better regarded than health plan brands.
  • Medicaid: Strong local position can often be critical for winning Medicaid business. Right now, Aetna has capability (Schaller Anderson) but no real business in Virginia. What could be a better platform could there be than a tie-in with a major non-profit delivery system?
  • Rebranding the narrow network: ACO’s need to be centered on narrow networks to maximize their impact. Payers can try to sell products with narrow networks but lack credibility with consumers (who worry how much pricing vs. quality went into the selection of providers). Building a narrow network around a branded provider can change the terms of the discussion: Consumers choosing a Carilion product will have a good idea what they are buying from the beginning (while other health plans will have to explain the ACO concept to wary consumers before, during and long after the sale).
  • Expanded services business: Aetna’s services revenues lie outside the MLR constraints, industry taxes imposed by health care reform, and other drags on health insurance profitability. Given the energy around ACOs, being in the ACO enablement business with a strong set of client references is a good place to be.
  • Contract win: 17K additional lives for Aetna (Carillion employees and dependents) is a nice win.

For Carilion

  • Defense against reimbursement pressures in medium term: If ACO savings significantly exceed the difference gap between providers and payers on fee-for-service rates, then early ACO adoption by Carilion can help protect its economics in rate negotiations: offer the ACO model as an alternative and keep a large enough share of the savings instead of bickering over rates.
  • Defense against ACO commoditization in long-term: If ACOs become widespread, it will be harder for early adopters like Carilion to keep a large share of savings. By having its own product, Carilion can be assured that at least one of its carriers won’t play one ACO off vs. another.
  • Turbo-charging its Medicare Advantage offering: Carilion’s Medicare Advantage product has less than 1K lives as of early 2011. Tying in with Aetna’s large scale operations can improve the administrative cost position. Carilion can also presumably enhance its products with Aetna’s national network for itinerant retirees.
  • Medicaid: Medicaid will grow under reform and Virginia is a believer in managed Medicaid (managed care plans have about 70% share of the Medicaid lives of the state). If Carilion is able to crack the ACO code and deliver lower medical costs, it would be better to get more of this value by running the managed care plan than just continuing to get the very low Medicaid reimbursement rates. Access to Aetna’s Schaller Anderson capabilities in managing Medicaid lives can certainly help as well.


  • The deal is a strong proposition for both sides. Look for more of its kind in markets with similar conditions (strong provider, deeply capable low share health plan).
  • Gauntlet is thrown down on plan vs. provider branding: ACOs and implicit requirement for narrow networks creates an opening for providers to sell health insurance. Provider brands are probably better suited to convey the requirements and value of a narrow network than a health insurer, especially in the low-touch selling environment of the future.
  • Providers should be thinking through several steps ahead. If successful, transparency and ACOs can limit the power of reputation and scale in negotiating leverage. How will big name providers defend their economics then?
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