In 2019 and 2020 alone, 3200 physician practices were acquired by hospitals. Most of these acquisitions were a result of the outbreak of COVID-19. As the overall number of physician practices owned by hospitals increased by 5%, over one-quarter of physician practices are now owned by large hospitals. What does this vertical integration in healthcare mean for patient outcomes, cost control, and health efficiency?
This article explores the ramifications of vertical integrations like that of CVS and Aetna, Walgreens and AmerisourceBergen, and Anthem and Aspire Health. Are mergers like these truly as promising as they seem?
What is vertical integration?
It is the merger of two entities at different levels of the supply chain, catering to different markets. For example, vertical integration in healthcare includes the acquisition of physician practice by a hospital or that of a pharmaceutical provider by a health insurance plan.
This allows the healthcare organization to offer a diverse range of services to its patients, such as pharmacies now having walk-in clinics, while insurers, drug manufacturers, wholesale distributors, retail pharmacy outlets, and all other service providers join hands in one form or another.
If the service providers merge at the same level, such as the synergy of two nursing homes or two private physician practices, that would be horizontal integration. Horizontal integration also has its own set of benefits such as lowered costs and reduction in competition.
Why vertical integration in healthcare?
Vertical integration serves as a great means to expand and enhance profits. Here are some of the benefits of vertical integration in healthcare.
The most important reason why vertical integration in healthcare exists is to increase profits, both by reducing the cost and raising the revenue.
A lot of money is saved by taking advantage of economies of scale when your organization is larger. This means that when you place orders in bulk (for a large institute), you get discounts, thereby lowering the cost per unit item. For example, if you were ordering beds for a hospital and a nursing home, the higher volume of beds is bound to reduce your overall price.
Moreover, if you merge with a supplier, you gain independence from the uncertainty of their costs and improve supplier-chain coordination, making you immune to supplier disruptions, and saving money.
Besides that, transactional costs and administrative financial burden are considerably reduced when vertically integrating into healthcare, for example when a hospital has an insurance arm. Since it is all under the same roof, the need for extensive contractual paperwork is eliminated, saving both time and money.
Higher business revenue
Vertical integration comes with significant marketing benefits, in terms of accessibility, as well as diversified operationality. Why would a patient choose a hospital with no pharmacy over one that has acquired a third-party pharmaceutical retail outlet? Usually, when bigger hospitals take over a smaller practice, the clientele of the latter increases due to the reputation of the former, thereby increasing revenue.
More importantly, when you have different services under the same wing, it increases the likelihood of referrals, so that you can receive maximum business from the same patients. According to the National Bureau of Economic Research, the number of referrals has gone up significantly.
Higher numbers of diagnostic imaging and laboratory tests are being ordered, from relevant places in the same facility to maximize profits. This alignment of financial incentives in hospital-owned physician practices has caused the average reimbursement of diagnostic imaging and laboratory tests by Medicare to rise by 6.38$ and 0.57$ respectively.
Similarly, if a nursing home has merged with a hospital, it is more likely to refer patients to that hospital for minor issues, to bill those services as much as possible. This also helps limit the competition and establish you as a dominant member of the market.
Better quality of care
Linking multiple services via vertical integration in healthcare eliminates the hassle of administrative burden and transit time between availing two of these services. For example, if the hospital has an insurance arm, patients don’t have to wait for the insurance paperwork to be completed and their claims processed before the next step. This improved coordination saves a lot of time and allows patients to receive the greatest efficiency at lower costs.
This improves the word of mouth for your merged business and allows for a higher patient turnout which translates into higher profits.
Accessibility exponentially increases, when patients are provided with multiple services under one umbrella, improving preventive care and patient outcomes. For example, the
acquisition of Aetna by the pharmacy benefit manager CVS has enabled them to align their financial incentives.
Moreover, the reduction in administrative costs by vertical integration in healthcare results in lowered costs of services provided. This allows you to cater to a wider demographic, especially undocumented and uninsured people who could not afford the expensive services initially.
Improved market standing
Vertical integration in healthcare is a strategic way to form alliances, to gain a larger share of the market. This places you in a better bargaining position, allowing you to efficiently navigate your way through the entire spectrum of service delivery – a luxury your competitors don’t have.
You can leverage your way through to specific benefits. For example, if a health plan and a pharmacy were to merge, that means they own the majority of the drug supply chain, having an impact on the referrals and the cost of health services provided.
With lowered costs, better patient care, and now a better market standing, you effectively outsmart your competition. This includes both established businesses and budding ones who do not have the resources your vertically integrated healthcare does, establishing you as the go-to healthcare service for everyone.
Vertical integration in healthcare also makes you more stable than your competitors, because larger organizations are more resistant to economic change than smaller or new ones are. As you gain control of the supply chain, that element of unpredictability is no longer a concern, allowing you to focus on the things that matter and not just the impending future.
Vertical integration in healthcare has proven to be revolutionary in terms of improved patient outcomes, increased revenue and profits, and a stronger market position. Managing a bigger healthcare organization can be overwhelming but with a data-powered solution suite like Precision Hub, you can streamline your workflow by automating tasks such as revenue cycle management.
With services such as medical credentialing, consultations, insurance verifications, and forwarding claims among many others, Precision Hub removes all administrative friction so you can focus on patient care and raising your revenue. Now that enhanced responsibilities are no longer a burden, vertical integration in healthcare is an avenue worth exploring when you think about expanding and maximizing profits.