A good friend just told me about Montana’s state-run clinics that are only for state employees. Going to the clinic is free for state employees, which means the state is paying for everything. And yet, despite paying for everything, the clinics are doing such a good job of managing diseases that the state is actually saving more money than it’s spending on the clinics.
I’ve talked about the importance of cost-saving prevention before, but my point in describing this example is to illustrate a growing trend in healthcare–a trend that is largely unrecognized, but is starting to fix healthcare. So let’s break it down.
Think of the Montana state government as a company. This company, just like most companies, has suppliers that sell it critical inputs it needs to perform its services. And one of the most important suppliers to this company isn’t obvious: healthcare providers. Think about it–they are supplying the healthcare that keeps employees productive, which is surely a critical input.
And here’s the interesting thing about the relationships companies have with their suppliers: if the supplier’s product is too expensive, or isn’t good enough in some way, companies will sometimes just take over the production of that critical input themselves. This is called “backward integration.” Think of all the ways employers are backward integrating into healthcare, whether it’s having their own salaried physicians or working closely with providers to redesign care processes; they’re all variations on the same theme.
But employers aren’t the only ones with a supplier-buyer relationship with healthcare providers. Insurers depend on providers to supply the healthcare they are guaranteeing to their customers. So are insurers backward integrating as well? YES. Any time an insurer joins up with a provider, it could be seen as an attempt by insurers to backward integrate (ahem, ACOs). And insurers are also going crazy trying all sorts of hands-off approaches to backward integration (if it’s hands-off, can it still be called backward integration?) with things like pay for performance, bonuses for starting medical homes, and probably hundreds of other experiments I’ve never heard of. They are all attempts to exert some degree of control over the unsatisfactory supplier. Or, in other words, to fix healthcare delivery.
So, I guess we could say that employers and insurers are fixing healthcare delivery. Strange, isn’t it?
[Update: This is good and all, but there are only so many innovative things a single provider can develop, which is why an even better (system-wide) solution would be to do the following: get patients to choose the highest-value providers, which then rewards those highest-value providers with market share, which creates an incentive for all providers to be innovating to win more patients. This idea is expounded more in other posts on this blog. Anyway, in the meantime, this backward integration thing is a great alternative.]
4 thoughts on “How Backward Integration Is Starting to Fix Healthcare Delivery”
Or you could say that the government is fixing healthcare.
Yes, the government is playing a big part in changing incentives for providers. I wouldn’t give it all the credit, but it’s true that Medicare has been leading the way with new payment mechanisms. And Obamacare’s insurance exchanges will give private insurers a big jolt to start experimenting more as well.
Hi, Taylor. I just stumbled across your blog. Very interesting and a vast, fascinating topic. I haven’t had a chance to read all of your articles but I think you may be interested in this one from the New Yorker magazine. It explores the relationship between volume and quality of care. Spoiler alert – it’s an inverse relationship! http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande
Ah yes, a classic–thanks for recommending! My favorite part of this article is that it acted as an impetus for so many people to start questioning what we’re doing in healthcare.