Vertical Integration in Health Care: The Next Stairway to Heaven?

“CVS to Buy Aetna for $69 Billion in a Deal That May Reshape the Health Industry” – NY Times, December 2017

“Why Does Walgreens Want to Buy AmerisourceBergen?” – Fortune, February 2018

“Anthem to Acquire Aspire Health” – Business Wire, May 2018

“Amazon Snatched PillPack Away From Walmart” – Bloomberg, June 2018

Over the past several years, the health care industry news headlines have read more like celebrity tabloid gossip, rife with both official announcements and speculated rumors of mergers and acquisitions involving some of largest players in the game. Although there are various ways to go about business growth, choosing to integrate is undoubtedly a more aggressive approach to expansion.
In industries that are more technology-driven, a well-played acquisition can automatically create an assured formula for success. The right move can result in the elimination of direct competition while boasting efficiencies and economies of scale. Cost savings are delivered through increased levels of production and often times as the competition within the industry gets a boost, the inherent cost savings is passed down to the consumer.
In the health care industry, however, joining forces with another competitor by traditional means of horizontal integration does not always necessarily pass along guaranteed cost savings to the organization or, more importantly, to the patient. In fact, by avoiding the knee-jerk reaction to devour direct competitors and established rivals, and instead carefully selecting opportunities that create complementary synergies, health care companies can achieve the upper hand.
In the current health care arena, vertical integration may prove to be a more strategic approach to gaining additional market share and increased success. Currently, the key players in the medical marketplace aren’t necessarily looking for growth opportunity outwards as much as they are upwards.
There Are Two Paths You Can Go By
Horizontal Integration
In the horizontal integration business model, a company grows by combining with other companies that provide the same types of products or services. Usually in the forms of mergers and acquisitions, this approach can offer attractive outcomes, such as increased size, robustness, and even the ability to readily enter new markets without the high costs associated with a startup venture.
Businesses can extend their reach to people or places that were once not possible and can leverage an existing company to do so. Mergers that result in increased productivity output can, in turn, drive down industry costs by decreasing cost per unit.
This is most notable among industries in which capital costs are high to begin with and immediately puts smaller competitors who produce less volume at a disadvantage regarding both cost and quality. Although capital costs are also high in health care, this same school of thought doesn’t completely translate.
There is no evidence to say that horizontal integration of health care entities results in absolute price decreases or enhanced quality outcomes. Furthermore, horizontal integration of large organizations that result in the domination of market share or elimination of competition within an industry can be classified as a monopoly.
Vertical Integration
The Oxford dictionary defines vertical integration as “the combination in one firm of two or more stages of production normally operated by separate firms.” Companies that operate in various points of a given supply chain can adopt a vertical integration strategy that eliminates the middle man and diversifies the services and products offered. In health care terms, vertical integration is more specifically the creation of strategic combinations of alliances in an effort to enhance the delivery of health care.
There is no doubt that vertical integrations have been trending upwards in recent years and one could suspect that even more are on the horizon. Hospital systems, drug manufacturers, wholesale distributors, pharmacy benefit managers (PBMs), retail pharmacy outlets, and medical insurers have all jumped on the bandwagon to form unique synergies across the health care industry.
After all, a vertically integrated health care system can offer an expansive array of patient care and health services, resulting in greater efficiencies and lower costs.
All That Glitters is Gold
But what really is driving so many standalone players to pursue partnerships? It is not uncommon to see corporations coming together. In fact, we have been witnessing this for decades across many industries, but this motivation feels different.
Traditionally speaking, some of the most common reasons companies join forces are to generate more profits, to diversify operationally, or to expand geographically. Vulnerable companies are often times prey to more robust companies offering the same or similar services and succumb to acquisitions in times of financial trouble.
However, the partnerships being created across the health care don’t seem to be driven merely out of poor financial health. Are businesses within the health care industry simply looking to grow or are they looking at diversification as the only way to survive?
In today’s marketplace, companies are up against a variety of challenges. Increasing costs of both health care services and medications, particularly specialty medications, are causing patients to choose between food and other necessities in order to pay for prescription drugs. Legislation and federal regulations that threaten the bottom line are also forcing an outside of the box approach to delivering health care in a more economic fashion.

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