Updated: Jun 22
And the persistence of the independent clinician
Vertical consolidation is increasing in many different parts of the healthcare ecosystem—and with so many healthcare companies feeling ongoing margin pressure, we’re likely to see even more of it in the near future, prompting numerous jeremiads on the end of independence and its impact on cost, quality, and probably the future of democracy.
Plenty of (virtual) ink is being spilled on this trend, most of it negative; meanwhile, if you read press releases from the consolidators, there you will find nothing but the positive take (or at least spin) on vertical integration. But the truth is, arguments at both ends of the spectrum tend to be oversimplified and overwrought, to the point that while boosters and detractors have valid points, rarely does reality remotely resemble the rhetoric. And we’ll be exploring why—and why that could change—in a series of research posts, starting with this one. So let’s start by taking a step back.
What vertical consolidation looks like today
Vertical consolidation in healthcare today can take many forms. Tech companies buying virtual care or medical groups. Health systems buying nearly any kind of provider (especially medical groups), plus small insurance plans. Insurers buying nearly everything except health systems, and mostly medical groups. And medical groups buying…other medical groups in different specialties. Notice a pattern? It’s the physicians that are the linchpin to most versions of vertical consolidation—and they are also the reason why this kind of M&A sparks such animosity.
One reason vertical consolidation is difficult to talk about is that it’s complicated, and one needs to be fluent in all the sub-businesses to talk competently about it. And for that reason, there’s tremendous variety; UnitedHealth Group and CVS Health may fancy themselves rivals (and of course they are in some key markets), but their respective business models are quite different, for example. And their national reach means that a weirdly large number of people in healthcare work for them, or used to, or will in the future—which complicates the perceived motives of anyone who wants to comment on them (we’re no exception; more on that in a moment).
Let’s take a look at the biggest companies that have the greatest levels of vertical consolidation. All of them tend to have four components:
A health plan that is often perceived (and often incorrectly) to have the leading role in the organization. That perception stems from the idea that insurance is the ultimate payer (which it isn’t—government, employers, and patients are the ultimate payers).
A pharmacy benefit manager and often pharmacy services themselves. These have complex histories we don’t have space to go into now, but are increasingly viewed as vital to managing complex medical conditions, and typically come with low but stable operating margins. Many of the ostensible care management ambitions stem from control over the drug pipeline—and we’ll be tackling this topic in another post in this series.
And finally, a provider component. These are usually primary care or multispecialty medical groups, and increasingly incorporate virtual care as well. They have the power to steer referrals, control prescribing, and, in some cases (particularly with Medicare Advantage), increase plan enrollment. Medical groups are the keys to integration, and therefore control of the entire patient journey.
The other common form of vertical consolidation, of course, revolves around the health system. These organizations will typically own a significant share of the primary care market, along with scattered assets in specialty, ambulatory, home-based, and sometimes post-acute care. And increasingly, they have built out health plans as part of a “payvider” strategy. That alone deserves its own post—which I’ll save for another date in this series. But like the health-plan-first form of vertical consolidation, physician groups are the linchpin to making any given organization’s strategy work.
Recapping the aspiration
The general argument for vertical integration, in any industry, is always the same: joining forces between disparate parts of the value chain will generate efficiency, increase scale, improve outcomes and convenience, and lower costs for purchasers.
Looking through the above synopsis, it’s fairly intuitive to see how that applies to healthcare. Greater control over the care continuum allows for greater care coordination, better longitudinal care management, and a streamlining of supply and revenue cycle costs. And successful organizations have done just that (I refer you to the countless articles written about Intermountain and Kaiser, both of which unusually have significant hospital, physician, and insurance assets).
The people most in favor of vertical integration tend to be those leading organizations that are involved in the transaction—however, one can also find corners of healthcare with a “neutral to positive” third-party attitude to these ecosystems. We commonly hear that, if well operated, a vertical healthcare ecosystem can be a great place to innovate within, because it’s somewhat of a captive sample of the continuum as a whole. That’s attractive if you are, say, a digital health startup, and you’re trying to get to scale fast within a controlled environment where your solution can be given a big systematic push and someone will help connect the dots across different parts of healthcare service flow.
Recapping the fear
Here is the compelling argument against vertical consolidation in healthcare (or anywhere): Consolidation will entrench market power. It rarely has any impact on quality, can produce negligible improvements in convenience, generates practically no scale (other than financial leverage and maybe some revenue cycle consolidation), and almost certainly raises prices for ultimate healthcare purchasers (government, employers, and patients). Controlling patient data will stifle any innovation from would-be disruptors to the status quo. You don’t have to turn over many rocks to find some evidence for all of these assertions.
Now for the step back
Having outlined both ends of the positive-negative viewpoint spectrum, here’s our view. I’ll again stipulate that there are elements of truth in both the aspirations (improved access and convenience can happen for certain treatment areas), and the fears (competition for medical groups does raise costs). That said:
Although true vertical integration (whether driven by health systems, health plans, or other corporate entities) can, in theory and practice, generate better patient outcomes with greater efficiency, and also entrench terrifying market power—in reality, vertical consolidation very rarely produces either result. And that’s because there is a difference between vertically consolidated and vertically integrated.
Most of the positive outcomes that proponents are hoping for—and most of the negative outcomes that detractors fear—require integration (not just consolidation) to pull off; and that rarely occurs. Think about it: if you’re the CEO of an enormous consolidated business, managing diverse assets as a portfolio is a lot easier and more lucrative than creating an integrated business with all the parts dependent on one another.
Real-world example: vertical consolidation vs. vertical integration
Let’s take UnitedHealth Group as an example. In theory, could United/Optum operate as a cooperative hive mind, coordinating business decisions across units to build a formidable enterprise that is both the streamlined patient care machine of vertical boosters and the conquering Borg of its detractors? I mean, maybe. But in my experience—both as someone who studied the organization as an outside observer and as someone who eventually worked there for a time (after Optum acquired Advisory Board)—that’s not really how it works. Like the Borg of Star Trek, UHG is and seemingly wants to be everywhere. But unlike them, I don’t see much of a hive mind. UnitedHealth Group thrives because its diverse portfolio of businesses comprise a series of flywheels and hedges that allow it to prosper in nearly any economic environment. In that way, it is a delightfully simple and powerful thesis that has, so far, been borne out by its long-term share price growth (its exposure to changes to MA and drug prices notwithstanding).
And I would argue that any large conglomerate almost always has to work that way. Business silos, walled data gardens, and a lack of coordination aren’t an artifact of acquisition: they’re rather the point. Manage diverse businesses separately with strong financial discipline, find intuitive flywheels (such as MA) where you can, and otherwise let them act as natural hedges against one another.
But I can hear the rebuttal: OK, but just because the assets of large conglomerates don’t (by and large) work in tandem to stifle competitors, that doesn’t mean they can’t in the future. And here is where the physicians come in. There is so much more to say on the role of physicians in building an integrated healthcare enterprise—their role in driving changes to cost, quality, access, and innovation—and we will give those topics full treatment in future posts, but for now, a note on the fundamental challenge of getting doctors to row in the same direction.
Remember: physicians don’t have a boss
Much is made of the fact that the vast majority of physicians are now owned by some kind of corporate entity: health systems, other corporate owners (usually health-plan affiliated) or the emerging “large independents” whose long-term impact on the industry will also need its own post.
So much of the medical group market—especially primary care—is locked up by system, other-corporate, or large-independent ownership (current data suggests north of 75% of all physicians and practices operate this way). And yet care coordination at scale, designed to keep patients within a specific ecosystem, remains remarkably elusive for most. And the reason is simple: most physicians don’t really have a boss. We are talking about a class of professionals who are highly sought after, have numerous options for both employment and entrepreneurship, and are valued for a set of skills and judgments that are not easily or rapidly cultivated. Their training has historically valued their clinical independence, and that independence is typically protected by law in some form.
Can you encourage greater productivity? Sure. Can you provide clinical-standard guidelines that they are likely to follow? Mostly. Can you incentivize groups to push growth in MA lives? Generally. Can you nudge them to make referrals to your preferred sites of care? Sometimes. Can you prevent them from making decisions you don’t like but they feel are in the best interest of their patients? Rarely. In an environment where physicians are the cats you need to herd, making modest changes at the margins and operating their groups as a portfolio asset just makes more sense. But that doesn’t mean that some orgs won’t try to exert more control. It bears watching to see if and when that happens.
We have so much more to say on this
It almost pains me to say that even after nearly 2,000 words, I’ve barely scratched the surface on this topic. Are there ways to do vertical consolidation well? Absolutely. Is that what we study regularly? Also yes. And while we’ll be scratching more of the surface in future posts in this series, all of it is part of our State of Healthcare research which lives behind the paywall for our members. So if you’d like to learn more, or want to provide feedback, either subscribe below or send a message to firstname.lastname@example.org. We’d love to hear from you!