As IDC Health Insights predicted in August 2017 (Digital Transformation and New Economics Highlight Payer Disintermediation), we anticipated more deals and vertical integration. CVS announced its intention to buy Aetna.in December, and this week Amazon, Berkshire Hathaway, and JPMorgan Chase announced a partnership to cut health-care costs and improve services for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.
Whether this joint venture is an attempt at employer-direct health care, a glorified co-operative or association health plan, or eventuates to a technology-inspired provider-blended health plan for use by all, the move speaks directly to the desire to rip apart the traditional health-care system from distinctive silos.
Health insurers are the ultimate middle men. They sit between the providers of care and the purchasers (the members, caregivers, or patients), and are usually working with and influencing employers, who effectively are purchasers as well. They have traditionally have offered three functions: 1. Underwriting risk, 2. Setting up networks of providers who offer discounts in return for volume, and 3. Processing of claims and payments.
Vertical integration occurs when an entity acquires or develops capabilities to reduce reliance on upstream suppliers or downstream sales channels. It is a move up or down the supply chain —— up to control costs and supplies or down to gain more direct access to customers. For example, a hospital system may acquire a physician group, skilled nursing facility or retail clinic to extend its patient care services. Or, it may acquire payer capabilities, enabling more control over the financing of health care and better management of risk-based contracts.
Intermediaries may be located at different positions on the value-added chain in the healthcare system. One can differentiate broadly between three levels of value creation.
- An initial value-added stage includes producers and service providers in the areas of pharmacological products, medical supplies, apparatus, equipment and other goods and services. This stage provides preliminary value-added for the second stage.
- In a second value-added stage, the healthcare providers are located within the healthcare system. These include physicians, hospitals, clinics, pharmacies, laboratories, etc. They are the actual producers of medical services.
- A third value-added stage includes the health insurers in the healthcare system. These include accident insurance companies as well as medical insurers These insurance organizations represent collective safeguarding systems which, essentially, directly or indirectly handle the financial settlement of services used by patients.
As payers and providers converge into “payviders” the differences unrecognizable between care and payment, the value-chain contracts. Similarly, as consumers focus on convenience (telehealth, web pharmacies, direct-buy medical supplies, and minute clinics), and transparent pricing (instead of obfuscated rates in provider contracts) the number of players lessens and the value of the intermediary, the payer, dissolves.
Cynics point to the Quadruple Aim and ask:
- Do health plans improve the care team experience?
- Do health plans improve the patient experience?
- Do health plans improve outcomes?
- Do health plans lower costs?
Considering this simple assessment, it's not hard to see the trend (and push) for disintermediation. Co-ops would have worked if ACA had allowed outside funding and co-ops weren’t devastated by Risk Adjustment remunerations, Association Health Plans are reviving under the administration’s new emphasis. Now outsiders with no baggage and plenty of capital are looking at a fragmented, disjointed, overlapping, profit-centric market and simply asking “Why so many parts, and why so expensive?”
There is absolutely no reason to believe that the health industry will be immune to pressures to eliminate or reduce the costs of intermediaries that do not make the process any easier or cheaper. Most health insurance still relies heavily on a complex channel of intermediaries to connect them to their end-customers.
This industry is at risk.
If they don’t want to go the way of the dinosaurs, insurance companies will find a new business to be in, one that is useful in the new world of coordinated care. They have the inside track as today they are trusted intermediaries to employers and providers, are uniquely positioned to develop networks and understand consumers, and have woken up to consumerism just in time to perhaps save their role.
If not, somebody else will.
“Employer direct healthcare, governmental intervention, consumer sharing networks, technology-inspired startups and spinoffs, and provider consolidation and repurposing are all chipping away at this industry, in which the traditional payer struggles not to be the next Blockbuster Video…… When deep technology and financial pockets pay attention to your middleman market, it’s time to be nervous. — Jeff Rivkin, research director, IDC Health Insights.