We’ve seen both healthcare providers and health insurers turn to mergers as a way to shore up their destiny in the uncertain and changing healthcare industry. The majority of these mergers are categorized as horizontal integrations—mergers between multiple companies on the same level of an industry’s value chain. Horizontal mergers among health systems and providers give these organizations more leverage when negotiating with private health insurers for higher payment rates. On the other side of the fence, recent merger attempts among private health insurers give these companies greater leverage to negotiate lower prices when paying for services on behalf of their members.

Merger deals and speculation in these two healthcare industry segments have heated up as of recently, but on neither side of the fence will horizontal integration and market consolidation be a solution for sustainable success in healthcare. In fact, recent merger attempts have come up against strong public and regulatory resistance, as those opposed cite their anticompetitive nature. Two alternative strategies have emerged in response to the race to consolidate. Both vertically integrated and single payer models centralize the power to dictate prices and orchestrate change, but one is particularly suited, at the moment, to address the problems plaguing our nation’s healthcare system.

California single payer proposal

One strategy being proposed in the state of California is a single payer solution. This entails a single consolidated entity, run by the state government, that pays for all healthcare services rendered by providers—effectively creating a monopsony. In this case, the California state government has the power to name its price and determine the rules in paying for healthcare on behalf of all of its citizens (as is the case with Medicare, in fact the current bill proposes paying providers Medicare rates).

A single payer system holds potential to reduce administrative complexity by eliminating the variation that exists in administrative processes among the state government, federal government, and numerous private health insurers. On top of this, a single payer can guarantee some sort of coverage for everyone.

A lone payer is a useful design for paying all providers in a consistent and standard manner, especially for conditions that we are able to reliably diagnose, measure, and predict the patient outcome (think knee and hip replacements, antibiotic regimens, etc.) If we cannot do the preceding three things, a single payer struggles to find a payment formula that works for all providers in maximizing outcomes while containing costs. This is because there is variation in how individual caregivers approach unstructured and complex cases. Hence, we see the state of California bringing back language of fee-for-service reimbursement in its proposed bill, as this payment formula gives providers more financial freedom to vary their methods in addressing complex patient cases. But, fee-for-service has become a dirty word in healthcare, as it is a payment formula too often misused for well understood and routine patient cases, and this has come at the expense of containing care costs.

Vertical Integration

As opposed to the traditional dichotomy of insurers and providers battling for leverage against each other, vertical integration employs the strategy of “if you can’t beat them, join them.” A vertical integration entails two or more firms, that traditionally operate at different levels within an industry’s supply chain, merging operations. In healthcare, in order to control spending, this typically entails a private health insurer and healthcare provider merging operations.

In this arrangement, as opposed to fighting against each other, payers and providers can attempt to work together to manage expenditures and improve patient experience. Coordination between payer and provider allows these parties to better work together in finding ways to best treat and pay for complex conditions in which there may not be industry consensus in regard to standard procedures. This would encompass treatment regimens for patients with multiple chronic conditions the likes of diabetes, heart disease, or Parkinson’s disease. This integrated structure allows payers and providers to fit their arms around the whole of the issue, and more easily adjust the way they do business to accommodate for any number of unknowns, as both sides invest in figuring out the best way to treat and budget for non-routine care. Over time, these vertically integrated systems discover best practices and create new capabilities for treatment of complex conditions, and can more easily adopt proper ways to pay for that treatment.

Which is the right path?

In both instances, centralizing the power to orchestrate change is critical—and that power can be vested in either a government ministry or private entities. Both of the above do this and are potential solutions for overcoming the dispute of how best to pay for patient care. Alas, both alternatives function best under different circumstances. To figure out which is the best fit for the U.S. we must understand what causes high costs and poor experiences in our healthcare system in the first place.

In the U.S., over half the adult population suffers from a chronic condition and those with at least one account for 86 percent of total healthcare spending. The business and delivery models of our healthcare institutions are not yet centered around the predominant issue of preventing and managing chronic conditions. This is evident when considering that incidence and cost burden of chronic conditions are continually getting worse over time.

The problem of managing spending while effectively treating chronic conditions still eludes most of the U.S. healthcare system. Existing solutions are not yet structured in a manner in which simple and standardized transactions can be an effective way to pay for episodes of care. The nature of the problem begs for integration of efforts and expertise between both payers and providers. A vertically integrated arrangement will give us the best shot to discover how best to diagnose, measure, and predict the patient outcome of interventions for major chronic condition categories and multiple morbidity cases. Only then can we determine how best to pay for them.

For more, see:
How Disruption Can Finally Revolutionize Healthcare


  • Ryan Marling
    Ryan Marling