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Vertical Integration Doesn’t Work in Healthcare:  Time to Move On

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So in this week of THCB’s 20th birthday it’s a little ironic that we are running what is almost a mea culpa article from Jeff Goldsmith. I first heard Jeff speak in 1995 (I think!) at the now defunct UMGA meeting, where he explained how he felt virtual vertical integration was the best future for health care. Nearly 30 years on he has some reflections. If you want to read a longer version of this piece, it’s here—Matthew Holt

By JEFF GOLDSMITH

The concept of vertical integration has recently resurfaced in healthcare both as a solution to maturing demand for healthcare organizations’ traditional products and as a vehicle for ambitious outsiders to “disrupt” care delivery.    Vertical integration is a strategy which emerged in US in the 19th Century industrial economy.  It relied upon achieving economies of scale and co-ordination through managing the industrial value chain.    We are now in a post-industrial age, where economies of scale are in scarce supply.  Health enterprises that are pursuing vertical integration need to change course. If you look and feel like Sears or General Motors, you may well end up like them.  This essay outlines reasons for believing that vertical integration is a strategic dead end and what actions healthcare leaders need to take.

Where Did Vertical Integration Come From?

The River Rogue Ford Plant

The strategy of vertical integration was a creature of the US industrial Revolution. The concept was elucidated by the late Alfred DuPont Chandler, Jr. of the Harvard Business School. Chandler found a common pattern of growth and adaptation of 70 large US industrial firms. He looked in detail at four firms that came to dominate markedly different sectors of the US economy:  DuPont, General Motors, Sears Roebuck and Standard Oil of New Jersey. They all followed a common pattern: after growing horizontally through merging with like firms, they vertically integrated by acquiring firms that supplied them raw materials or intermediate products or who distributed the finished products to final customers. Vertical integration enabled firms to own and co-ordinate the entire value chain, squeezing out middlemens’ profits.

The most famous example of vertical integration was the famed 1200 acre River Rouge complex at Ford in Detroit, where literally iron ore to make steel, copper to make wiring and sand to make windshields went in one end of the plant and finished automobiles rolled out the other end. Only the tires, made in nearby Akron Ohio, were manufactured elsewhere. Ford owned 700 thousand acres of forest, iron and limestone mines in the Mesabi range, and built a fleet of ore boats to bring the ore and other raw materials down to Detroit to be made into cars. 

Subsequent stages of industrial evolution required two cycles of re-organization to achieve greater cost discipline and control, as well as diversification into related products and geographical markets. Industrial firms that did not follow this pattern either failed or were acquired. But Chandler also showed that the benefits of each stage of evolution were fleeting; specifically, the benefits conferred by controlling the entire value chain did not last unless companies took other actions. Those interested in this process should read Chandler’s pathbreaking book: Strategy and Structure: Chapters in the History of the US Industrial Enterprise (1962).   

By the late 1960’s, the sun was setting on the firms Chandler wrote about. Chandler’s writing coincided with an historic transition in the US economy from a manufacturing dominated industrial economy to a post-industrial economy dominated by technology and services. Supply chains re-oriented around relocating and coordinating the value-added process where it could be most efficient and profitable.  Owning the entire value chain no longer made economic sense. River Rouge was designated a SuperFund site and part of it has been repurposed as a factory for Ford’s new electric F-150 Lightning truck. 

Why Vertical Integration Arose in Healthcare

I met Alfred Chandler in 1976 when I was being recruited to the Harvard Business School faculty. As a result of this meeting and reading Chandler’s writing, I wrote about the relevance to healthcare of Chandler’s framework in the Harvard Business Review in 1980 and then in a 1981 book Can Hospitals Survive: The New Competitive Healthcare Market, which was, to my knowledge, the first serious discussion of vertical integration in health services.

Can Hospitals Survive correctly predicted a significant decline in inpatient hospital use (inpatient days fell 20% in the next decade!). It also argued that Chandler’s pattern of market evolution would prevail in hospital care as the market for its core product matured. However, some of the strategic advice in this book did not age well, because it focused on defending the hospital’s inpatient franchise rather than evolving toward a more agile and less costly business model. Ambulatory services, which are today almost half of hospital revenues, were viewed as precursors to hospitalization rather than the emerging care template.

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Happy 20th Birthday THCB

Hard to believe it but 20 years ago (Aug 12 2003) I started writing THCB! Somehow 20 years later it’s still here. Lots of changes over the years. Hundreds of people have written for THCB, thousands have been interviewed on it, and we’ve made a little dent in the world of health care.

Next week we will run some new articles, new interviews and re-run a selection of the greatest hits….

Naive Realism and the Legal Profession

By MIKE MAGEE

In 2002, psychologist Emily Pronin and her co-authors, in an article titled, You Don’t Know Me, But I Know You: The Illusion of Asymmetric Insight, laid out the concept of “Naive Realism.”

As she explained, “We insist that our ‘outsider perspective’ affords us insights about our peers that they are denied by their defensiveness, egocentricity, or other sources of bias. By contrast, we rarely entertain the notion that others are seeing us more clearly and objectively than we see ourselves. (We) talk when we would do well to listen…” Point well taken, but these (most would agree) are trying times.

The problem of our divisions is certainly worse now, two decades later, than when it was first labeled. 2023 headlines speak to “political polarization,” “division,” “factual inaccuracy,” and “loss of civility.”  And yet, we hold tight to the “rightness”of justice under the law, and set out to demonstrate with extreme confidence that our democratic institutions, under assault, have mostly held.

Madison was well aware of extreme labeling of opponents as “unreasonable, biased, or ill-motivated.” He warned on February 8, 1788 in Federalist 51 that “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In forming a government which is to be administered by men over men, the great difficulty lies in this: you must first enable government to control the governed; and in the next place oblige it to control itself.” His solution? Our legal system, and  checks and balances.

Hamilton, in the first paragraph of Federalist 1, tees up the same issue, in the form of an unsettling warning. He writes, “It has been frequently remarked that it seems to have been reserved to the people of this country, by their conduct and example, to decide the important question, whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend for their political constitutions on accident and force.”

The “force” on January 6 was no accident. Hours before the armed insurrection of Congressthat morning, USA Today published  “By the numbers: President Trump’s failed efforts to overturn the election.” The article led with, “Trump and allies filed scores of lawsuits, tried to convince state legislatures to take action, organized protests and held hearings. None of it worked…Out of the 62 lawsuits filed challenging the presidential election (in state and federal courts), 61 have failed…Some cases were dismissed for lack of standing and others based on the merits of the voter fraud allegations. The decisions have came from both Democratic-appointed and Republican-appointed judges – including federal judges appointed by Trump.”

By all accounts, our nation and her citizens, owe our Judicial branch (its judges, lawyers, and legal guideposts) a debt of gratitude.

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I Want a Lazy Girl Job Too

BY KIM BELLARD

I came across a phrase the other day that is so evocative, so delicious, that I had to write about it: “lazy girl job,” or, as you might know it. @#lazygirljob.

Now, before anyone gets too offended, it’s not about labeling girls as lazy; it’s not really even about lazy or even only girls.  It’s about wanting jobs with the proverbial work-life balance: jobs that pay decently, don’t require crazy hours, and give employees flexibility to manage the other parts of their lives.  Author Eliza Van Cort told Bryan Robinson, writing in Forbes: “The phrasing ‘lazy girl job’ is less than ideal—prioritizing your mental health and work-life integration is NOT lazy.”

The concept is attributed to Gabrielle Judge, who coined it on TikTok back in May (which is why I didn’t hear about it until recently).  According to her, it means not living paycheck to paycheck or having to work in unsafe conditions. She believes job flexibility doesn’t mean coming in at 10 am instead of 9 am because you have a dentist appointment; it means you have more control over your hours and when you get your work done. If Sheryl Sandberg was all about “leaning in,” Ms. Judge is about leaning out.  

Ms. Judge explained to NBC News:

Decentering your 9-to-5 from your identity is so important because if you don’t, then you’re kind of putting your eggs all in one basket that you can’t necessarily control. So it’s like, how can we stay neutral to what’s going on in our jobs, still show up and do them, but maybe it’s not 100% of who we are 24/7?

“I’m only accepting the soft life, period,” she says.

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Population Health Management: SDOH Challenges and Solutions

By ARJUN GOSAIN

In the United States alone, one in ten people live in poverty, 10.2% of households are food insecure, and more than half of people living below the poverty line are transportation insecure. These statistics represent social determinants of health (SDOH) measures that describe a patient’s experience outside hospital walls. 

Health.gov defines SDOH as “the conditions in the environments where people are born, live, learn, work, play, worship, and age that affect a wide range of health, functioning, and quality-of-life outcomes and risks.” This definition argues that a patient’s experiences are just as crucial if not more telling than their biology.

And this makes sense as a person who is housing insecure may not have the same access to nutritional food, transportation, or social support. Additionally, some patients, in their efforts to maintain health, may experience discrimination based on their skin color or religious beliefs. 

Some studies have found SDOH can drive up to 80% of health outcomes. This means that the traditional healthcare model—hospitalization, healthcare delivery, and treatment—only affects a mere 20% of a person’s overall health. To tap into this 80%, healthcare professionals need data. However, SDOH data collection poses significant challenges.

SDOH Overview

Before we dive into data collection, let’s review the specific measures of SDOH and why they should take top priority among healthcare professionals. 

SDOH concepts include:

  • Employment insecurity: Measures whether the patient is employed and their current employment or unemployment experience. This includes whether they were harassed on the job or experiencing unequal pay. Employment insecurity can lead to financial stress, mental health problems, and reduced healthcare access. 
  • Psychological circumstances: Measures current events that are affecting the patient’s health. This encompasses a wide range from unwanted pregnancies to exposure to war or violence. Stress, anxiety, and other negative emotions can have a direct effect on a patient’s physical health and contribute to disease development.
  • Housing insecurity: Notes whether a patient has a consistent place to live or is forced to move regularly. Homelessness or housing insecurity can lead to exposure to the elements, mental health challenges, and increased vulnerability to infection.
  • Social adversity: Examines a patient’s social experience including any discrimination or persecution the individual may be facing. Increased social adversity can cause an individual to socially isolate and develop feelings of depression. 
  • Transportation: Observes the patient’s access to transportation including available public transport. Missed appointments can be the direct result of transportation inaccessibility which leads to a decrease in the quality of care. 
  • Food insecurity: Indicates whether a patient has adequate food access and safe drinking water access. Receiving adequate nutrition is essential for maintaining optimal physical health. For example, if a child is food insecure, it can lead to serious developmental issues and chronic disease.
  • Education and literacy: Observes a patient’s ability to read and comprehend hospital paperwork. Note that individuals with higher literacy and education rates typically make more informed health decisions.
  • Occupational risk: Examines how a patient’s current employment affects their overall health. Determines if their job site places them at risk of toxin exposure, physical harm, undue stress, or other hazardous conditions that can contribute to injuries or illnesses.
  • Economic insecurity: Measures a patient’s poverty level to determine if copays, rent, and hospital bills are manageable. A patient living with inadequate finances will face a greater barrier to quality care.
  • Lack of support: Notes whether a patient has reliable support when experiencing difficult circumstances such as the death of a loved one. If a patient has a present support network, they will be able to receive practical, emotional, and physical assistance in times of need. 
  • Upbringing: Takes a patient’s childhood, family, and upbringing into account to assess if a patient is carrying trauma from previous years. Adverse childhood experiences can increase the risk of chronic diseases and mental health issues later in life. 
  • Language: Examines any language or communication concerns, so that a patient can both communicate their issues and understand oral and written treatment. Miscommunications can lead to misdiagnoses and inadequate treatment. 

These contributing factors cannot be ignored since, as previously stated, they can directly impact up to 80% of health outcomes. Thus, organizations that choose to neglect SDOH factors are only focused on the 20%. 

This is why providers must find ways to address SDOH in a meaningful and productive manner, which is where SDOH data comes in. The collection and analysis of SDOH data can help providers identify at-risk populations to provide informed, effective interventions. Measures like patient needs assessments and population-level health disparity analysis can let providers get to the root cause without the guesswork. 

SDOH Data Collection Challenges

SDOH data collection is a sensitive topic. After all, if a patient is experiencing abuse or is unemployed, they most likely would not disclose that information outright. Providers also have limited time to ask additional questions because many feel rushed during routine consultations and may not have the resources needed to collect SDOH data. 

Beyond SDOH data scarcity, there is the issue of standardization. How providers collect housing data, for instance, can vary across definitions and measurements, making quantifying data difficult. So, how can providers offer whole-person care with limited data and a lack of definitive measurements? The solution is three-fold. 

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How to Talk to a Doc

BY KIM BELLARD

For better and for worse, our healthcare system is built around physicians. For the most part, they’re the ones we rely on for diagnoses, for prescribing medications, and for delivering care.  And, often, simply for being a comfort.  

Unfortunately, in 2023, they’re still “only” human, and they’re not perfect. Despite best intentions, they sometimes miss things, make mistakes, or order ineffective or outdated care. The order of magnitude for these mistakes is not clear; one recent study estimated 800,000 Americans suffering permanent disability or death annually.  Whatever the real number, we’d all agree it is too high.   

Many, myself included, have high hopes that appropriate use of artificial intelligence (AI) might be able to help with this problem.  Two new studies offer some considerations for what it might take.

The first study, from a team of researchers led by Damon Centola, a professor at the Annenberg School for Communication at the University of Pennsylvania, looked at the impact of “structured information–sharing networks among clinicians.”  In other words, getting feedback from colleagues (which, of course, was once the premise behind group practices). 

Long story short, they work, reducing diagnostic errors and improving treatment recommendations.  

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Republican Misbehavior Promoted Health Professional Activism

By MIKE MAGEE

If you wanted to create a motto for the summer of 2023 – one that would stand the test of time from the medical exam room of Ohio to the gilded bathroom of Mar-a-lago – it would have to be Jack Smith’s “Facts matter!” If that is true on a national scale, it is equally true in states across the nation where doctors increasingly are coming out from behind a self-imposed clinical curtain and going public.

As reported in ProPublica last week, “Doctors who previously never mixed work with politics are jumping into the abortion debate by lobbying state lawmakers, campaigning, forming political action committees and trying to get reproductive rights protected by state law.”

A few examples:

1. One thousand Ohio doctors signed a full-page ad titled “A Message to our Patients on the loss of Reproductive Rights” in the Columbus Dispatch in response to actions of a state legislature highjacked by radicalized Republicans enacting a 6-week abortion ban post the Dobbs decision. This was after their coalition delivered a protest letter with 700,000 signatures earlier to the State House.

2. Dr. Damla Karsan, a Houston obstetrician, faced off Texas legislators  on July 20th, lending truth to power when she said , ““I feel like I’m being handicapped. I’m looking for clarity, a promise that I will not be persecuted for providing care with informed consent from patients that someone interprets is not worthy of the medical exception.”

3. In Nebraska, the doctor-led “Campaign for a Healthy Nebraska” raised $400,000 to hire political consultants to launch a women’s health rights campaign which helped the Nebraska Medical Society “find its inner voice” and openly oppose abortion restrictions in that state. State Senator Danielle Conrad was impressed. She said, “It’s really just incredible from my vantage point to see how these doctors have been able to not be hobbled by those decades of political baggage, to step forward with this fresh, clear medical perspective and be able to engage more people.”

4. A month earlier, Dr’s Katie McHugh, Gabriel Bosslet, Caroline Rouse and Tracey Wilkinson penned an Op-Ed in STAT in support of their colleague, Dr. Caitland Bernard, who had come to the rescue of a 10 year old Ohio rape victim who had fled to Indiana to gain access to an abortion. Caitlin was shamefully fined $3,000 by the Indiana State Licensing Board. Her colleagues wrote, “While a relatively minor punishment, this finding should send a chill through the medical community and beyond. But that chill shouldn’t be silencing.”

5. In Michigan, a doctor-led group, the Committee to Protect Health Care, teamed up with the ACLU, and successfully passed “Proposal 3”,  a “constitutional amendment to enshrine reproductive rights into the state constitution.” Dr. Rob Davidson declared, “This is a historic victory for reproductive rights in Michigan, and the Committee to Protect Health Care was proud to help get Proposal 3 across the finish line.”

Yesterday’s indictment of  Donald Trump, the citizen, squarely places him and his legislative enablers in Washington and Republican led state houses across our nation, on the wrong side of the truth. As reported, he is accused of “three conspiracies: one to defraud the United States; a second to obstruct an official government proceeding, the certification of the Electoral College vote; and a third to deprive people of a civil right, the right to have their votes counted.”

But what he and his Republican supporters in Washington and state houses across the nation are primarily guilty of, is not simply lying and deceit, but attempting to destroy our democracy and disenfranchise our voters. That is why prosecution under Civil Rights statutes employed in the past to address the savagery of the KKK, are totally appropriate here. Jack Smith’s “stand tall” leadership is a model for us all, and that includes our doctors and nurses.

As I have repeatedly argued, the health of our democracy is inseparably interwoven with the health of our system of caring for each other. At the helm of this system, our health professionals have survived the hurricane force winds of a pandemic, an inequitable and inefficient health delivery system, and a medical-industrial complex that is more focused on seizing patents than serving patients.

And yet, today we take heart. Our physicians, in growing numbers, are rediscovering their strength and their voices. Like Jack Smith, they are speaking up, in opposition to a small group of bitter and evil leaders, who have earned our active condemnation, and now must face the weight of the law.

Mike Magee MD is a Medical Historian, regular THCB contributor, and the author of CODE BLUE: Inside the Medical-Industrial Complex.

THCB Spotlight: Dexcare CEO, Derek Streat

According to their press release, “Dexcare is a care-access platform to manage the logistics of digital-care delivery. The platform enables healthcare systems to forecast and predict demand and manage how and where care is merchandized to consumers – throughout the digital ecosystem”. What does that mean? How does it compare to a bunch of other digital health companies trying to manager consumer operations inside providers? And having been incubated not that long ago at Providence, how has this demand generation and management service grown so fast. And why has Iconiq Growth just pushed another $75m worth of chips onto the poker table in front of them?

Derek Streat has been around digital health for a while, having founded and sold an early Health 2.0 favorite, Medify. I took him through his market and what Dexcare does in a lot of detail, so hopefully you’ll find this look very educational, not only about Dexcare but also about the consumer market environment health systems are operating in. Matthew Holt

THCB Gang Episode 132, Thursday July 27

Joining Matthew Holt (@boltyboy) on #THCBGang on Thursday July 27 at 1pm PST 4pm EST are Olympic rower for 2 countries and DiME CEO Jennifer Goldsack, (@GoldsackJen); patient advocate Robin Farmanfarmaian (@Robinff3); Kim Bellard (@kimbbellard); and medical historian Mike Magee @drmikemagee.

You can see the video below & if you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels.

Sach Jain, CEO of Carrum Health talks to Matthew Holt

The concept of “centers of excellence” has been around for a few decades. Surely sending health plan members and self-insured employers’ employees to the best and most effective providers should improve health outcomes and save payers’ money? Sach Jain is CEO of Carrum which has been working on this problem, partnering with the best providers and aggregating that demand from employers…and putting it all on a state of the art platform. As you might suspect, it’s not as easy as it looks. Carrum raised $45m from Omers Ventures a few weeks back, on top of a decent raise from Tiger Global a couple of years back. So are they getting it right? Sach told Matthew Holt that they are for sure on their way….

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