Unintended Consequences

By: Brett Peterson, CFA and Owen Gerard, CFA

During the time of British rule of colonial India, the government became concerned about the number of venomous cobras in Delhi. Leaders came up with a clever solution – pay a bounty to any citizen who brought forward a dead cobra. Initially, the program was a success, and fewer cobras were seen slithering through the streets. But then payouts began to increase at a staggering clip. Officials investigated and discovered that enterprising citizens were breeding cobras so they could be destroyed and turned in for income. British officials, now slightly embarrassed, scrapped the program, at which point the budding entrepreneurs, seeing no use for their commercially raised serpents, released the cobras into the wild. Thus, the government wasted tons of cash, only to end up with a much bigger problem.

Which brings us to the American health care system.

The US health care system has become something of a Frankenstein monster, with pieces stitched together ad hoc by regulators and special interests. Price transparency, affordability, accessibility, and consumer knowledge have all gotten worse, not better, over the recent several decades. The Affordable Care Act of 2010 seems to have eased some pain points but exacerbated others. The beast has grown to 17.6% of GDP1 and nearly double the average of other wealthy countries2, and yet seemingly nobody is happy with the health care system broadly. Not to mention our abysmal outcomes when compared to other developed countries in categories such as life expectancy, avoidable deaths, and obesity. Medicare and Medicaid have become bloated and inefficient, patients yearn for price transparency and greater affordability, providers continue to see significant reimbursement cuts, employers dread receiving their annual premium increase letters, and insurance payors complain about overbillings.

The constant tension points between various industry players combined with incremental reactive policy changes forces all participants to carefully assess their long-term strategy to remain relevant. And individuals and companies are acting. Several mega-cap acquisitions over the past decade have helped companies leverage economies of scale and move closer to a patient-centered business model.

CVS Health’s merger with leading health insurance provider, Aetna, in 2018 allowed the company to better coordinate patient prescription drug services. By leveraging Aetna’s extensive employer-paid insurance and benefit programs, CVS Health has greater visibility into patient care needs and can provide a higher level of service to its now over 100 million lives covered.

Over the past decade plus, UnitedHealth Group has successfully closed a half dozen acquisitions, resulting in the creation of the largest non-government health care organization in the country. Their 2011 acquisition of Optum, a pharmacy services, primary care provider and data technology behemoth, kickstarted a daisy chain of M&A deals that has since established UnitedHealth Group as the nationwide leader in health care services and insurance generating revenue of over $400 billion last year.

But headline grabbing acquisitions and strategy changes do not always work out. In 2018, the venerable troika of no less than Jamie Dimon (JP Morgan Chase & Co.), Jeff Bezos (Amazon.com, Inc.), and Warren Buffett (Berkshire Hathaway Inc.) announced the creation of Haven, a joint venture between their respective companies with an aim to disrupt health care by improving care and lowering costs. The venture was lauded as an innovative, outside-the-box approach to unwinding the tangled mess of the health care system that these company’s employees – and all of us – have to navigate. But you probably don’t remember what their ultimate solution was or how successful it was for their employees. That’s because there was no solution and there was no successful outcome. The venture was quietly disbanded just three years after its founding. Backers of the project blamed its failure on unclear strategy, regulatory hurdles (wasn’t the project supposed to cut red tape?), and complexity of the health care system (duh!).

Other established players have attempted to navigate an evolving industry landscape with meaningful activity, but limited success. Look no further than Walgreen Boots Alliance (WBA) sale announced last week that brings to a close one of capitalism’s most spectacular value incinerating machines3. The take-private transaction valued at $10 billion is a precipitous fall for the 123-year-old company from its peak enterprise value of $105 billion in 2015. After losing a high stakes game of blind man’s bluff to Express Scripts in 2011, Walgreens went on a deal making spree. Buying overseas health care giant, Alliance Boots in 2012, followed by ill-fated investments in Theranos blood-testing clinics and primary care provider VillageMD. But Walgreens fall from grace was as much self-inflicted as it was being slow to copy competitor’s successful moves. In the winter of 2018, insurer Cigna bought Express Scripts for $67 billion, and CVS acquired insurer Aetna for $70 billion. The deals helped protect pharmacies from lower reimbursement rates that health insurers and pharmacy-benefit managers were seeking during contract negotiations. But Walgreens was left on an island. And so began a decade of slow decline and the destruction of nearly $100 billion of value. 

One specific approach to enhancing patient experience that continues to grow and show success is the managed service organization (“MSO”) business model. Under this business model, physician-owned practices sign a long-term contract (“partial economic buyout”) with a third party that provides administrative, operational, and business support to physician-owned medical practices. In exchange for this upfront payment and long-term commitment for back-office support, the MSO company retains a certain percentage of the practice’s profit. This model allows physicians to retain meaningful ownership of their practices while outsourcing non-clinical functions, helping them remain financially viable and patient-focused in a world with increasing emphasis on finding economies of scale to compete. The MSO model has been around for decades, but in the past seven years the health care industry has seen a significant uptick in the number of investors targeting the sector. Leading to a proliferation of MSO enterprises catering to radiology, oncology, orthopedics, primary care, dental, and vision among many other specialties. It is innovative in its approach to improving patient care by streamlining workflows and freeing up doctors to focus solely on patient care.

While inpatient care will continue to drive significant revenue and margin, the most innovative health care organizations are focusing on driving growth outside of the four walls of their legacy businesses. A consumer preference shift towards lower acuity setting has led some systems to invest or partner in diversified businesses. This trend is likely to become essential for systems to have a more cohesive and valuable offering. Data shows that over the next decade, inpatient volume growth will be more muted (+3%) compared to urgent care (+50%), ambulatory surgery (+21%) and home health (+22%)4. Opportunities exist in home care, post-acute and more expansive ambulatory offerings, with the need for investment in seamless connectivity across assets.

Value-based care has evolved as a transformative approach in healthcare, shifting the focus from a fee-for-service model to one that prioritizes patient outcomes and cost efficiency. Initially, healthcare systems operated on a volume-based model, where providers were reimbursed for the number of services rendered rather than the effectiveness of treatments. Over time, rising healthcare costs and disparities in patient care outcomes highlighted the need for a more sustainable and patient-centered approach. Value-based care emerged as a solution, emphasizing preventive care, coordinated treatment plans, and performance-based incentives for providers. This model encourages collaboration among healthcare professionals, reduces redundant procedures, and enhances overall patient well-being. By linking payment to health outcomes, value-based care improves quality, reduces unnecessary spending, and fosters a more efficient and equitable healthcare system.

Addressing the Gordian knot that is today’s health care landscape requires a multifaceted approach. Solutions should be focused on: (i) expanding access to necessary medical care; (ii) controlling costs not just to the patient, but throughout the value chain; (iii) improving quality through care coordination and efficiency; and (iv) increasing emphasis on preventative care and promoting healthy lifestyles.

The journey toward health care reform is complex and requires collaboration among policymakers, providers, payors, and the consumer (i.e., patients). However, by prioritizing the principle of affordable and accessible care, we can collectively rebuild a health care system that is patient-centered AND still serves the needs of all its participants. The U.S. is the only high-income country that does not guarantee health coverage.  The concept of “universal healthcare,” while politically charged, needs to be replaced with a more practical alternative as we continue to fundamentally adhere to the standard of not turning away patients in need of care – as it is written in the Hippocratic oath and something we as humans seem to stand behind. Like any other endeavor (personal or professional) that ultimately desires to cut costs and maintain existing quality of care, it starts with us, and acknowledging that we as consumers are part of the problem… which means we’re also part of the solution. 

Good luck and stay healthy!

A quick postscript on the current market volatility (namely tariffs and trade policy):

Last week was a wild ride of volatility that is continuing to spill into this week and obviously the reaction wasn’t priced into most economists, strategists, and boardroom expectations of what was going to occur. Whichever side of the aisle you’re on politically (which has seemed to frame the basis for the perspective / argument thus far), we as a country seem to be endeavoring to try and accomplish three tasks that, when taken alone would be significant for any government to shoulder, specifically:

  • tax reform (i.e. extension of the 2017 Tax Cuts and Jobs Act and the potential for further cuts);
  • deregulation (inclusive of immigration reform); and
  • trade reallocation

It’s a reminder of the cautionary fable of the Zen Master (“We’ll See…” text below)…  while today’s flavor and the markets’ reaction would certainly point to the conclusion that this is ‘bad’, the reality is that things can change and ultimately end up being good or bad… or neither. The constant is change and while it’s too early to pick winners and losers, there’s certain to be groups impacted differently, and probably not inaccurate to assume mostly negatively in the short term. Having a long term and generally optimistic perspective also is beneficial. And while a place like Iowa (where NCP offices and resides) likely is ‘more’ negatively impacted based on our exports and certain industry concentration (i.e., agriculture), the United States, with all its faults, is still, on a relative basis, a better place to be than most other countries in the world. 

            “We’ll See” – a Cautionary Fable –

On his sixteenth birthday the boy gets a horse as a present. All of the people in the village say, “Oh, how wonderful!”

The Zen master says, “We’ll see.”

One day, the boy is riding and gets thrown off the horse and hurts his leg. He’s no longer able to walk, so all of the villagers say, “How terrible!”

The Zen master says, “We’ll see.”

Some time passes and the village goes to war. All of the other young men get sent off to fight, but this boy can’t fight because his leg is messed up. All of the villagers say, “How wonderful!”

The Zen master says, “We’ll see.”

A brief closing statement from our Company’s founder:

Change and disruption, like the passing of time, are a few of the only certainties in life;

Opportunity and adversity are two sides of the same coin;

“A house divided against itself cannot stand”. (OK this one is from Abraham Lincoln and apropos)

  1. Dalla Torre, K., & India, M. (2025, January 7). Health Care Transformation and growth: 2025 and Beyond. EY Parthenon. https://www.ey.com/en_us/insights/strategy/health-care-transformation-and-growth-2025-and-beyond. ↩︎
  2. Center for Medicare & Medicaid Services. (2023). National health expenditure data [Fact Sheet]. https://cms.gov. ↩︎
  3. Peter G. Peterson Foundation. March 10, 2025. Chart Pack: Healthcare. ↩︎
  4. Walgreens Boots Alliance. March 6, 2025. Walgreens Boots Alliance Enters into Definitive Agreement to Be Acquired by Sycamore Partners. ↩︎