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Payers and providers must consider the key differences between two consolidation models: "horizontal consolidations" and "vertical consolidations." Here's why.
As the healthcare industry continues to respond to rising healthcare costs, quality improvement efforts, and the Affordable Care Act (ACA), health plans and providers are collectively thinking about how to move forward separately and in partnership.
Terry StoneAn increasing number of healthcare players are working together in new ways. But what market partnerships can both payers and providers develop that are likely to help them be the most successful?
That's a question Terry Stone, a partner and global head of the Health and Life Sciences practice at Oliver Wyman, and Todd Van Tol, also a partner in the Oliver Wyman Health and Life Sciences practice and lead of their payer team, sought to answer during their presentation, "Vertical Integration: The Evolution of Non-traditional Partners," at the America's Health Insurance Plans Institute 2015 Conference in Nashville, Tennessee.
"ACA and the broader industry affordability and transformation challenges are putting tremendous pressure on traditional payer and provider business models," Stone told Managed Healthcare Executive before the conference. "As profit models are squeezed, organizations are increasingly turning to consolidation as a means to strengthen market position and preserve existing profit pools."
Stone and Van Tol said it's critical for organizations to consider the key differences between two consolidation models: "horizontal consolidations" and "vertical consolidations."
Horizontal consolidations, or "like-like" consolidations, improve cost efficiency and negotiating power-2013 saw a wave of this activity with big players like Aetna purchasing Coventry, and Tenet purchasing Vanguard.
Still “these consolidations tend to consume significant capital, management bandwidth and operational attention, and they don't always deliver a better overall value proposition to the plan sponsors and ultimately consumers,” said Van Tol. In fact, he said, horizontal consolidations tend to produce only short-term financial gains ranging from 3% to 6% depending on the business, scale, and competitive landscape.
Vertical consolidations, in which various aspects of the supply chain are owned by one company, are often a much better option for payers and providers, said Stone. Payer-provider alliances of this sort have been popping up with more frequency in recent years-the IBC-DaVita joint venture named Tandigm Health and the Aetna-Inova partnership named Innovation Health are good examples.
Vertical consolidations, she said, allow market participants to better manage populations, curb total healthcare costs, and innovate the customer experience in healthcare. "Effectively managing these dimensions could improve margins by 10% to 20%, and offers the best longer-term platform for success," said Stone.
While Stone acknowledged that vertical partnerships or acquisitions can be more challenging to pull off and scale effectively due to their complexity, she also said they "may lay a more effective long-term path toward the improvement of the consumer value proposition."
When payers and providers join forces and integrate their capability sets, there is a greater opportunity for both players to more effectively manage their patients and to create a more seamless experience across multiple touchpoints in healthcare, she said. The ability for payers and providers to jointly improve the consumer’s experience, in addition to the improved quality and cost achieved through effective population health management, is what makes the vertical integration plays more attractive long-term.
During their presentation, Stone and Van Tol said health plans and providers need to consider the following questions as they grapple with their partnership/consolidation options:
• What best practices or criteria for success can be gleaned from innovative market examples to date?
• Which strategies have greatest potential for creation of real value?
• Which strategies are fraught with risk?
• What are the keys to successful integration, particularly those between plan and provider?
What's key to remember, Stone told Managed Healthcare Executive, is that not all integrations are created equal. "Managed care executives must consider multiple consolidation strategies (and integration alternatives) while carefully counterbalancing short-term considerations (which favor 'like with like' horizontal integration) and long-term considerations (which favor using vertical integration as a strategic tool to build out and embed population health management capabilities," she said.