Vertical Integration Comes to Health Care

NEW YORK (TheStreet) -- Aetna's (AET) acquisition of Coventry Health Care (CVH) for $5.7 billion, as described by our Antoine Gara, is simple to understand with minimal resort to politics.

When I was covering health IT for ZDNet, the two groups seen as having the best practices were Intermountain Health of Utah and Kaiser Permanente. They used electronic health records throughout their systems to drive decisions based on data.

GE even agreed to put Intermountain's decision engine into its own software, as eWeek reported back in 2005.

Why did Intermountain and Kaiser -- which put $1.8 billion into a 10-year transformation of its IT infrastructure a decade ago, as Health Data Management reported -- do what they did?

It was because they had vertical integration, as Intermountain's own insurance arm, Select Health, explains on its Web site. The same hands collecting insurance dollars were delivering the care. This gave them a financial incentive to do health maintenance, just as owning your own car gives you an incentive to take it to the shop for regular oil changes.

One of the great ironies of American health care is that the highest-risk groups actually cost the least to serve, thanks to vertical integration. The Veterans Administration -- a single-payer system -- is the leader in this. Medicaid and Medicare also have limits on their budgets that create incentives to do the easy things first, with a minimum of fuss.

Insurers have approached this opportunity first by buying health care organizations with Medicare Advantage expertise, a process described last year in HealthLeaders Media. As UnitedHealth (UNH) explained when buying XL Health last year, "managed care plans have integrated disease and case management programs that can materially lower cost of care," Bloomberg reported.

In other words, medical groups that can deal with Medicare and Medicaid today know things that insurers need to know, and by buying that expertise they can lower their costs and prepare for the incentives for cost control that are coming to the larger market through the Affordable Care Act.

Where does this lead? It leads to more consolidation. To control their costs, insurers are slowly buying our health care system. I predict it even leads to purchases of hospital chains by big insurers, once those hospitals adapt to the fee-per-patient model and bring their costs in line.

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