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WellPoint's buying 1-800-Contacts may portend a troubling trend

Insurance giant's buyout of contact-lens seller reflects a nascent movement among healthcare heavyweights to consolidate, and raises conflict-of-interest concerns.

June 12, 2012|David Lazarus

At first glance, there doesn't seem anything untoward about WellPoint, the insurance giant that owns Anthem Blue Cross, buying contact-lens retailer 1-800-Contacts.

The deal "further diversifies the company's revenue stream" and enhances "our efforts to build trusted relationships with consumers across the entire country," said Angela Braly, WellPoint's chief exec.

But a major health insurer's acquisition of a major healthcare provider — 1-800-Contacts is the country's largest direct-to-consumer seller of contact lenses — highlights an emerging trend in the medical world and raises troubling questions about conflict of interest.

Will WellPoint be able to use its market muscle to drive other contact-lens companies out of business?

What happens when a health insurer acquires a manufacturer of prescription drugs? Or a hospital? Will patients be penalized if they don't use the insurer's medical services?

Isn't there any state or federal law that regulates such acquisitions?

As to that last question, the answer is apparently no.

"The department is not aware of any legal prohibition that would prevent a health insurer from investing in a healthcare provider, nor are we aware of any provisions in the federal healthcare reform law that would block such an investment," said Dave Althausen, a spokesman for the California Department of Insurance.

The idea of insurance and medical services being bundled together certainly isn't new. This is precisely how Kaiser operates, for example.

But the closed loop of Kaiser has always been balanced by the more open networks of so-called preferred provider organizations, or PPOs, which give patients choices as to what physicians they see and which hospitals they visit.

As insurance companies seek additional revenue and greater control over costs, they could increasingly deny patients such healthcare choices and offer treatment on a take-it-or-leave-it basis.

"It will be interesting to see whether WellPoint says you can't get contact lenses that they pay for unless you buy them from 1-800-Contacts," said Shana Alex Lavarreda, director of health insurance studies at UCLA's Center for Health Policy Research.

Details of the 1-800-Contacts buyout weren't disclosed. No one at WellPoint responded to my requests for comment.

Lavarreda said health insurers are scrambling to get ahead of changes scheduled to take effect in 2014 as part of President Obama's healthcare reform law.

For example, they'll no longer be able to deny coverage to people with medical problems — assuming the law remains largely intact after the U.S. Supreme Court rules this month on a requirement that most people buy insurance or face a modest tax penalty.

"The insurance companies won't be able to cherry-pick customers any more," Lavarreda said. "Some of the biggest options they use now to compete are being taken away."

That explains, she added, why insurers like WellPoint would want to acquire their own healthcare providers. If they can't stack the deck by covering only healthy people, they'll focus instead on dictating the terms of patients' treatment.

"We're going to see more and more closed loops where providers work with only one insurance company," Lavarreda predicted.

This could work to consumers' benefit if it results in lower costs without a commensurate loss in quality of care. Kaiser would argue that such an approach suits its customers just fine.

But it's not hard to see how such consolidation among healthcare heavyweights would ultimately lead to less competition and, as a result, a less consumer-friendly marketplace (if such a thing is even possible in the healthcare field).

For proof, look no further than the phone and cable industries. After years of multibillion-dollar mergers, we've now reached a point at which a single company may control most telecom services in a particular area.

Last year, the average household paid $86 a month for cable service, according to market researcher NPD Group. By 2015, the firm says, the average monthly bill will top $123. And by 2020, it will hit $200.

A 2010 report by the California Senate Office of Oversight and Outcomes found that AT&T's charge for directory assistance jumped 226% in the three years since the phone market was deregulated in 2006, while Verizon's climbed 106%.

AT&T raised its fee for an unlisted number 614%, while Verizon increased its fee 25%, the report found. AT&T's prices for call forwarding and call waiting rose by about 86%. Verizon's call forwarding charge went up 20%; its call waiting fee grew nearly 36%.

Why would we think the healthcare industry would operate differently?

UnitedHealth Group last year purchased the management arm of Monarch HealthCare, an Irvine doctor network. Blue Shield of California subsequently sued UnitedHealth for $10.5 million over allegations that Monarch doctors were trying to switch patients away from Blue Shield coverage.

Market consolidation never works in consumers' favor. A company with growing control over a market simply has no incentive to hold prices in check or improve service — and, arguably, has every incentive to boost its bottom line.

As I say, WellPoint acquiring 1-800-Contacts appears benign. At first.

But that slope is slippery indeed.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to

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