The Urge to Merge Drives Vertical Integration and Market Disruption

Vertical integration is shaking up the U.S. healthcare market. It began in earnest in December 2017 with the game-changing announcement that CVS would purchase Aetna to create the largest vertically integrated healthcare company in the world. The stakes were raised soon after in February when Amazon, Berkshire and JPMorgan announced their plans to further disrupt the healthcare market. Most recently, insurer Cigna proposed a $67 billion purchase of pharmacy benefits manager Express Scripts, Inc.    

This recent disruption in the healthcare market will have the five following impacts:

1. Improved patient experience. By extending the supply chain, these major healthcare-related integrations will create substantially more-competitive “products” that generate higher margins. The patient experience will be less frustrating and more personalized – as will the providers’ experiences – potentially increasing perceived value, loyalty and use. An efficient, vertically integrated entity is better equipped to use all relevant patient data, streamline and improve care and communication, and reduce costs – activities that do the much-needed work of improving what the industry calls “patient intimacy.”
2. Optimized data. Business synergies, improved market presence and extended business models and revenue streams are critical to the success of any merger or acquisition. But in today’s race to go digital, data is the bigger factor. The adoption and adaptation of digital technologies and strategies facilitate healthcare organizations in managing data in more ways than ever before. Vertical integrations are particularly effective at taking advantage of data; the more vertically integrated a business, the greater it can leverage data.
3. Advancements on the digital trajectory. The healthcare industry is woefully behind on its digital journey. While healthcare payers are exploring cloud migration strategies, they lag considerably behind regulated industries like banking and finance. Recent market integrations allow the combined entities to take a transformational step forward in gaining new digital ground. Lessons learned on how to securely operate a regulated environment in the cloud (from those like JP Morgan) will undoubtedly penetrate the healthcare market sooner rather than later.
4. Current and future disruption. Vertical integration introduces a widening range of potential players and business models, which creates an intensely disruptive business environment. Companies are responding to regulatory change, evolving their business models and adopting cloud-based technologies to address the unique combination of operational inefficiencies that exist in the healthcare industry. Vertical integrations that reshape the payer-provider-pharmaceutical continuum will be the dominant trend in U.S. healthcare for the foreseeable future.
5. Fewer raised regulatory eyebrows. We all remember the recently attempted mergers of Anthem/Cigna and Aetna/Humana that failed because a federal judge ruled they would reduce competition for consumers. Although it is open for debate as to whether similar mergers would have a different outcome today, what cannot be disputed is that billions of dollars were spent in pursuit of these mergers and decision-makers are thinking twice about pursuing horizontal mergers again.

Recent disruption in the healthcare industry creates considerable opportunity for astute IT and business process service providers. Verticalization is reshaping the roles and value of enterprise IT. New business models will require more agile IT in more types of business, accelerating and expanding the role of internal IT departments as services brokers. And the need for data in such environments will accelerate much-needed investment in improving IT security.

Bringing vastly complex businesses together requires more services to enable and support integration and transformation. We do not expect a widespread return to the massive outsourcing projects of yore. Instead, the current trend will likely continue with enterprises using a growing array of business IT services, including enhancing the data center, integrating systems and processes, improving security, and optimizing IT and business operations. Automation will play a significant role in IT and business optimization; machine learning and associated artificial intelligence technologies will be key to enabling and appropriately applying data analysis.

Disruptive digital transformation is the new normal – not only in healthcare but in most vertical markets worldwide. ISG offers a unique combination of IT, business process and services/sourcing expertise with unique insights and guidance for enterprise and IT provider clients in healthcare and other industries. We help enterprises understand IT and business disruption – and inform, assist and guide them through the required transformation toward their effective and profitable future state. Contact me to learn more.

About the author

Bob Krohn is a Partner and Healthcare Practice Lead at ISG. He has an extensive background in business process optimization, organizational design and execution including the direct oversight of numerous outsourcing contract negotiations. His background also includes the design, implementation and subsequent management
of operations of ERP solutions and the management of large Information Technology infrastructure organizations.