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Healthcare

Healthcare Industry — The Rise of Vertical Integration

In recent years, players in the healthcare industry have strived to create more effective systems in order to improve overall patient outcomes. Traditional ‘fee-for-service’ business models have seen America spend more on healthcare than any other nation and are no longer producing the results that patients need. How to break out of the old model?

Leaders in the field have considered a variety of solutions, but the most prominent model is vertical integration, which is where one company takes control of more than one stage in the supply chain. This approach can promote collaboration, reduce costs, and increase focus on providing effective healthcare solutions that meet patient needs.

Vertical Integration

Vertical integration can encourage strengthened partnership among healthcare organisations, and thereby improve the ultimate patient experience. For example, an insurance company might take control of hospitals, primary care providers, home services, or community agencies. The supply chain is often viewed as a channel, with suppliers located upstream and end users located downstream. Thinking of it this way, an insurance company that takes control of a hospital would be regarded as ‘forwards integration’ with the upstream supplier of funding (the insurance company) taking control of the downstream service provider (the hospital).

In late 2017, IMImobile, a global cloud communications software and solutions provider, acquired Healthcare Communications, a patient services provider. According to Jay Patel, CEO at IMImobile, this vertically integrated system “allows the company to extend their cloud communications technology and solutions to support the public services and healthcare sector.”

In early 2018, CVS Health, a provider of retail pharmacies and healthcare stores, acquired Aetna, an insurance company. This deal, a clear example of backwards integration, creates a vertically integrated system that gives CVS the negotiating power to reduce costs for both policyholders and patients, and “improve the quality of care through increased access and convenience.”

In addition, Amazon, Apple, and Walmart are all moving towards a vertically integrated model. Walmart’s accessibility and wide range of consumers, especially among aging populations, would make it a logical partner for the development of chronic care models. Amazon and Apple are both powerhouses in regard to advanced data and analytics, so they are pushing for more personalised health management “from multiple providers into a centralised location: the consumer’s own palm.”

Advantages & Disadvantages of Vertical Integration

Vertical integration can allow tighter control over the supply chain providing four key advantages: specialisation, quality assurance, access to new markets, and stability. Providers who control more of their supply chain have more ability to specialise and distinguish themselves from others within the healthcare industry through a unique “value proposition and brand message that resonates” with patients. Tighter control and oversight of the supply chain also means that providers can closely monitor and enforce quality standards. Partnerships between hospitals, insurance agencies, large corporations, or tech firms also opens doors to new markets that “can create access to a brand or business which may have been unavailable before.” Finally, vertical integration can eliminate unpredictability and create the stability needed to invest for the future.

Vertical integration is not without its potential downsides. Four disadvantages may include high capital requirements to establish a fully integrated business model, unforeseen barriers to entry, confusion for patients, and the inevitable complexity of managing a new system. Transitioning to a vertically integrated system is expensive. In addition to acquisition costs, healthcare organisations must be aware of the costs associated with establishing and managing new facilities and procedures. With new acquisitions come new markets, but at times market entry may not be possible due to low demand or changing demographics resulting in multiple setbacks that can be detrimental even to a vertically integrated healthcare system. Firms in the supply chain may function as distinct businesses (for example, insurance company and hospital), and this can create confusion among patients if the supply chain is not properly integrated. Finally, vertical integration is a complex process. It requires the company making the acquisition to get involved in new stages of the supply chain with which they are usually unfamiliar.

Conclusion

With the number of deals increasing quickly, investors continue to show interest in vertical integration as a way to create value and drive growth within the healthcare industry; a clear indication that this trend will continue to flourish in 2019.

Princess Sutherland is pursuing an MPH in Global Health at the Icahn School of Medicine at Mount Sinai. She aspires to be an influential female figure in the global healthcare consulting field, addressing some of the most pressing issues America faces in the healthcare field and applying this on a global scale

Image: Pexels

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