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By Monica E. Oss

July 15, 2011

The past twenty years have been full of experiments in forward integration strategies by provider organizations—creating managed care entities, risk based contracts, and other mechanisms to retain control over health care spending. The track record of those experiments is spotty at best, with lots of failed initiatives and some very notable successes. The forward integration strategy du jour is the accountable care organization, which is a payer-like collaboration of providers that manages health insurance dollars.

But now we have a new integration play—backward integration by insurers. The big news recent news was that Highmark and the West Penn Allegheny Health System have reached a provisional agreement in which Highmark will acquire the struggling hospital operator for $475 million over the next four years. Highmark, which has more than 3.1 million members, has stated that it won’t required its members to use only West Penn facilities and doctors, but admits it may offer a preferred “tier” for the services it owns.

We saw the beginning of this trend last November when Humana purchased Concentra, a Louisville, Kentucky-based provider organization. But what is driving the insurers’ consideration of backward integration? The Highmark/West Penn deal has been attributed to the stiff competition in the Pittsburgh market posed by the University of Pittsburgh Medical Center, which consists of 19 hospitals and also runs its own health plan with 1.3 million members.

I also think that two elements of health care reform are driving this strategic paradigm shift: ACOs and medical loss ratios.

The most obvious is the ACO issue. If the ACO model is successful, those plans would give insurers increased competition for consumer enrollment. But, believing in a draconian financial model in the insurance world, I think the medical loss ratio standards that are part of the health care reform bill are what is driving interest in ownership of service delivery capability. If your “administration and profit” component of the health insurance dollar is now limited, it may be wise to move your holdings to the other side of the equation.

To understand this shift (and most strategy in the health and human service field), I like to remember the adage of Deep Throat in All the President’s Men: “Follow the money.”

 

Sincerely,
Monica E. Oss
Chief Executive Officer, OPEN MINDS

 

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To read more, see: On Your Mark, Get Set, ACO… all members 

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