A Look at Vertical Integration Between Payers and Providers

Kaufman Rossin | Physician’s Money Digest | May 25, 2016

With the radical transformation of healthcare over the past several years, more providers and payers are participating in an integrated delivery system (IDS), also known as an integrated delivery network (IDN).  These vertically integrated networks of healthcare organizations aim to reduce costs and provide better coordinated delivery of patient care.

There has been some debate over the effectiveness of these models, but with the general industry trend moving toward consolidation and vertical integration, healthcare organizations should have a better understanding of the possible benefits and challenges inherent in integrated delivery systems.

While there are many definitions and opinions of what constitutes an integrated delivery system, this article will look at three main IDS structures: hospital-owned, physician-owned, and insurance company-owned.

Hospital-Owned IDS

The first type of integrated delivery system we’ll consider is one in which a hospital owns or employs physicians and ancillary providers. The hospital may also own a health insurance plan, functioning as both the payer and provider.

One of the most significant benefits for the hospital in this structure is that an IDS is more capable of taking on risks than a hospital alone. Hospitals that either own a health plan or partner with a health plan will also be able to share in the cost savings and offset the impact of increasing competition from insurers who are moving into the provider role.

Hospitals who don’t form strategic partnerships with insurance companies may see tighter margins as payers move toward performance-based care models, shifting from volume to value. One alternative for hospitals is to negotiate directly with large employers who are self-insured.

Physician-Owned IDS

In the second type of IDS, a physician group owns or contracts with hospitals for service. The physician group may also contract directly with insurance companies, functioning as both the payer and provider. Leading an integrated delivery system gives physicians access to alternative reimbursement, such as risk models, enabling them to be scalable and have more control and options for growing their business.

Physician-led integrated delivery systems sometimes offer narrow network plans, which come with lower premiums in exchange for a limited number of providers to choose from. On one hand, a narrow network can be an effective cost-containment strategy, and it can enable real-time data exchange between physicians, helping them to better serve their patients. On the other hand, narrow networks are often criticized for too tightly restricting patients’ choices.

Insurance Company-Owned IDS

One of the fastest-growing segments of the market is the third type of IDS structure, in which an insurance company owns or employs hospitals and physician services as well as ancillary services, functioning as both the payer and the provider.

Narrow network plans are also common in payer-owned integrated delivery systems. The smaller the network, the greater the control that the payer has over cost and quality of care. This increases competition and takes away services from hospitals and other providers because insurers tend to steer their members to facilities they own.

This type of IDS may present the most challenges in regards to cultural integration. Physicians may be resistant to the idea of an insurer-run system. After all, changing practice patterns doesn’t happen overnight.

Critical Success Factors

No matter the structure, one major barrier to the success of any integrated delivery system is change management. In particular, cultural integration is a critical challenge that hospitals, physician groups, and insurers will have to overcome if they want to form an effective partnership. Getting all stakeholders on board with new changes, and encouraging providers to not only participate, but to help lead the organizational change and transformation to an IDS, is key.

Some of the other elements of a successful integrated delivery system include:

  • Shared vision and commitment to a transparent and accountable partnership
  • Thorough understanding of costs and a plan for managing costs
  • Robust information system (electronic medical records, etc.) to enable collaboration and communication between various providers
  • Care coordination and care management by clinical staff
  • Patient education to help them stay healthy and out of the hospital

As the consolidation and integration trend continues in the healthcare industry, payers and providers will have to adjust to the evolving post-healthcare reform changes if they want to remain profitable and continue to grow their businesses. They may want to consider engaging an experienced healthcare advisory professional who can help them identify and overcome challenges in the transformation to an integrated delivery system, including assisting with managing the integration process to minimize disruption and maximize impact.