In recent months, several healthcare providers and payers have announced their plans to create integrated provider-payer entities. These mergers are generally introduced as ways to control costs of care, but some are concerned that these integrations may reduce access to care while having little impact on lowering costs. Voices calling for government interventions on these mergers could emerge in time. Through the lenses of disruptive innovation, however, we see these changes to be potentially positive for health care, provided that different integration models are allowed to compete. The disruptive innovation theory forecasts that the care provider system will continue to decentralize, and new forms of integration models will either internalize or avoid the current third-party payer system.

We think integration of providers and payers is largely driven by both parties seeking a more sustainable care model. The “jobs to be done” concept from the disruptive innovation theory implies that a third-party payer’s objectives of reducing costs cannot be effectively aligned with the provider’s growth objectives. With the Affordable Care Act (ACA) providing insurance to more than 40 million uninsured Americans going forward, an independent payer’s ability to keep the cost of care under control will be significantly challenged. The only way that providers and payers can align their incentives is by fully integrating both entities to align their “jobs to do.” In fact, Kaiser Permanente and Intermountain Health are two of the long-standing examples of how provider-payer integration can work effectively without harming the quality of care.

The emerging concern around this new trend is whether the integrated entities could become too powerful to be checked. Although it may be tempting to intervene sooner than later, in this new world of 40 million newly insured patients, we think the market-driven forces may be the best regulators of these new mergers.

First, the provider-payer merger is not the only integration model emerging. For example, Push Health, a Southern California company, is pursuing a direct pay model, where patients can pay for many of the diagnostics and preventative care services out of pocket. Eduro Healthcare, a Utah and Wisconsin based home health agency, is bypassing payers by entering into direct contracting relationships with self-insured employers. Because these models bypass the payer system, they will directly compete against provider-payer model, keeping the providers with in-house payers in check from passing the costs to patients.

Second, the proliferation of retail clinics will also put pressure on provider-payer model. The traditional retail clinic model based on drug store or super market premises continues to grow. But, the new variations include large, self-insured employers expanding their in-house clinics. Independent employer-site clinics are also emerging, targeting small and medium size companies who prefer outsourcing these services. To compete with these services, providers will need to be both value-adding and reasonably priced.

The notion that provider-payer integration will have a “green light” to raise prices overlooks that our healthcare system is already regulated. As long as Medicare (CMS) enforces its pricing schedule on providers, it will serve as a ceiling for general pricing schedules at integrated providers. The disruptive innovation theory suggests that these integrations are part of an evolutionary process, where stakeholders are looking for ways to be sustainable. New business models, both integrating and dis-integrating our current system, will continue to emerge. Innovative approaches are allowing patients, doctors, providers, and payers to think more deeply about the best ways to minimize cost and maximize clinical outcome. Let the invisible hand of the market guide us through these important transformations.


  • Spencer Nam
    Spencer Nam