Rae Woods (00:02): From Advisory Board, we are bringing you a radio advisory, your weekly download on how to untangle healthcare's most pressing challenges. My name is Rachel Woods. You can call me Rae. Vertical integration is one of the biggest change drivers in healthcare right now, and it seems like everyone is trying to figure out what to buy and where to partner. Look, everyone is trying to understand this massive movement in the industry, and frankly, that includes us at Advisory Board. That's why this week I'm bringing two advisory board experts, Paul Trigonoplos and Eliza Dailey. They're going to talk to us about the research that they're doing right now and their attempts to understand what diversification and integration looks like across all stakeholders in the healthcare industry. Hey, Eliza. Hey, Paul. Welcome to Radio Advisory. Eliza Dailey (00:53): Hey Rae. Paul Trigonoplos (00:53): Hey Rae. Rae Woods (00:54): What do we call this thing that we're going to talk about? What are we calling your latest research? Eliza Dailey (01:00): We affectionately refer to it as the research topic that is not all the other things that we're researching. Rae Woods (01:07): Very clear. Paul Trigonoplos (01:09): I think of it as what is everyone buying and why, which is small and scoped as a research topic. Rae Woods (01:30): The reason why this research topic is so big and why we've struggled to name it is because there is a lot happening in the market when it comes to organizations getting bigger, diversifying into new revenue streams, integrating as a larger healthcare organization. My question for the two of you is what do we actually mean by all of that and what's different today than when we've talked about trends like consolidation in the past? Paul Trigonoplos (01:57): There is a proper definition of diversification, at least that we've been going off of, which is any services or revenue that is generated beyond an organization's traditional responsibilities or scope of business. To your question about how it's different, the vertical acquisition landscape has gotten more intense over the last decade or so. Organizations in healthcare of all types have been buying different things or different assets since the 1980s. Health systems have had health plans, doctor practices, et cetera. But you see in around 2011 when Optum launched ever since then, a real uptick in this type of acquisition. Rae Woods (02:38): You're still partway through this research and you're out there talking to health leaders every day about this topic. What's their reaction as they are watching all of this vertical integration happening in healthcare? Paul Trigonoplos (02:52): I think it largely depends on where they operate in terms of the market that they're in. Most folks I've talked to are a little bit on the frantic side, not in terms of being pulled a million directions, but just in terms of trying to keep up with all the news and all the activity that's happening. And it does have a trade war type feel. And if you are in a market that is growing that a lot of other organizations are investing in, then you're probably going to start feeling a little bit boxed in because no one's staying in their lane anymore. And that's of course, in addition to all the other headwinds that the industry's facing, inflation, site-of-care shifts, et cetera, et cetera. I'd say frantic. Eliza Dailey (03:29): I'd say there's also a lot of skepticism, particularly those who are in markets that are pretty protected and shielded from some of these forces. Rae Woods (03:38): Like who? Eliza Dailey (03:39): I'd say particularly those who are in a market where the health system is quite dominant, especially those who are perhaps in less urban or suburban markets. The other reaction that I've gotten, especially from some of the medical groups that I've spoken with is some confidence, which has surprised me. Rae Woods (04:01): Same. Eliza Dailey (04:02): Particularly those who have really scoped out a niche market position. Those who have a very specialized care model, they see all of this competition and power grab for more assets as actually quite good for them because they have this specific strategic market advantage that they've become really good at. Rae Woods (04:23): I agree that there's this dichotomy of either, "We are screwed," or, "This isn't going to impact me. Bring it on. This isn't really going to be something that touches my book of business," and I'm not sure that either of those reactions are right, but to know which one is most accurate, we have to understand the end game for all of this vertical integration. What is the thing that everyone seems to want to achieve right now? Paul Trigonoplos (04:49): On face value it's revenue, but I think beyond that, it's the advantages of scale and control that can come with it. You have payers and IDNs, especially and some retailers trying to create ecosystems that are multi-regional, lot of lives, lot of volumes, key patients within their ecosystems control the purse strings ideally and lengthen any consumer interaction that a patient has with them instead of someone else. And it's popular for a few reasons. One, history shows that it's achievable. You have Optum, you have different versions of Optum from other payers, IDNs showing that an ecosystem approach does lead to profitability. You have, two, any organization that is bound by geography, they need to grow and growing into a new market is an obvious way to do that. Three, is scale is really useful to succeed in Medicare Advantage, especially as the profitability starts getting a little bit scrutinized over time. And then four, there's advantages to scale that we saw during COVID, back office efficiencies, more negotiating power, staffing agencies, better credit ratings, the list goes on. Rae Woods (05:58): But it sounds like the goal of scale and control are really happening in the context of value-based care. Is that right? Paul Trigonoplos (06:07): Most of it is happening that way, and it's not just value-based care, it's a lot of it is Medicare Advantage. We're seeing that race play out most visibly, specifically in terms of ownership over physicians and home health and a few technology capabilities as well that you need to succeed in. Rae Woods (06:23): Paul, you just mentioned two things that these organizations are buying in order to get the scale necessary to succeed in value-based care. They want geographic reach, they want covered lives, and they are looking to buy physicians, employee physicians or purchase home health. I want to talk more about what that means, Eliza, I know you are our physician expert. Tell me what's going on in the physician landscape right now. Eliza Dailey (06:51): Sure. We've been on this podcast several times talking about the medical group landscape and all the activity we're seeing, and there's actually recent data that shows deals have increased 33% from 2021 to 2022. Activity is hot and just keeps getting hotter. Rae Woods (07:09): I think we said it was hot in 2021. I agree with that. Eliza Dailey (07:13): One of the big things that's different though is there are these new types of buyers that Paul was alluding to. There are these entities that are really trying to grow and scale these vertical ecosystems, and they really view the doctor as the thing that is going to help win patient relationships and control utilization. And most of that investment today has been in primary care. We've seen a lot of big acquisitions of primary care practices, particularly those that are experienced in value-based care and know how to take on risk because primary care is really the key to controlling utilization, but it also is logistically how you get those patients attributed to you for risk-based contracts. One other thing that we've been eyeing though is this shift to specialty care. We've started to pick up on some signals in the market that show increased acquisition and interest in owning specialty care assets. Rae Woods (08:09): Like what? Eliza Dailey (08:10): As you take on more risk, there are many opportunities to help reign in costs on the specialty care side. Right now there's more activity in the medical specialty space. Those specialties that are tangential to primary care where there may be increased referral patterns or you may be referring out and there's greater opportunity to bring those within your ecosystem. There've been some notable deals in the news. I know we've talked about the VillageMD and Summit acquisition at length, but that one really stands out to me as a key indicator of the value of specialty care. Summit is heavily specialty based, and prior to that acquisition, Village was all in on primary care. To me that's a signal that there's greater value in owning specialists. Anecdotally, we've also heard on calls, increased interest in endocrinology, rheumatology, some of those specialties that are increasingly important for value. Rae Woods (09:08): And what about home health, because this is another area where I feel like deal activity is picking up quite quickly, but also might be a bit more variable than what we're seeing in the physician's space. Eliza Dailey (09:21): Home health really is that total cost of care play for a Medicare Advantage, and this is one where on the physician's side, the strategy really has been to employ and directly own doctors. The strategy varies by stakeholder on the home health side. We've seen payers really lead the way with buying up and directly owning home health, whereas health systems have really opted for the partnership route and developing these strategic relationships with home health companies. Today, the home health landscape is still quite fragmented, but the pace of acquisition has really picked up, and we predict that things are really going to consolidate across the next three to five years with the end state being that there are very few home health companies that remain independent. Rae Woods (10:10): You just mentioned that the strategy differs by stakeholder. I want to focus a little bit more on that, both thinking about incumbent stakeholders like health systems and to Paul's point, health plans, but also some of the new-ish players in the market. I'm of course thinking about retailers here. Let's start with the payers. What are we seeing in the payer space? Paul Trigonoplos (10:32): Payers and health plans are like everyone else feeling competition and feeling inflationary pressures and they're responding accordingly. There's some horizontal mergers happening, but the big conversation is in the vertical space. Payers spent the last five plus years, especially during COVID, when the amount of dollars they had to spend on reimbursements were down, they had a lot of cash built up. They spent that time building this vertical acquisition momentum and buying assets that not only increased revenue, but also help control, total cost of care, improve quality, and help them succeed in whatever contracts that they're focused on, usually MA, but could be Medicaid, could be employer. The key here is that they were able to focus on this while other parts of the ecosystem were focused on the operational side, they had so much premium dollar to spend, and that has built up some advantages for them. (11:28): On the care delivery side, in terms of investments, we're seeing a few standard purchases shake out. One, which Eliza mentioned is risk-bearing primary care, and then some specialists increasingly. Some of the payers do have ambulatory networks or surgical centers. Home care is very popular, virtual options, retail, pharma, and it's also important to note that most of these guys have a PBM that they can use as a margin padding as well. That's on the care delivery side and the drug side. But I also want to note on what I know was a previous podcast here was the health solutions label. These payers also have what they call health solutions businesses, Optum, Cigna has Evernorth, Humana has CenterWell, these are service arms that sell to basically every organization type in the industry, payers, hospitals, doctors, employers, they're playing all sides. And for the time being, it's working out very well. Rae Woods (12:23): What's different about the retailer approach here? Eliza Dailey (12:26): With the retailer, these are companies that really already have an extensive brick and mortar presence. They are solidified in their communities, and they're using that community access to deliver care more directly to patients. We see increasing investments in building up primary care and retail pharmacy. Really their strategy has been, "How can we take these physical assets that we have, this community reach, and deliver care through them to get as close to the patient as possible?" Lean on those existing community relationships. Rae Woods (13:01): It sounds like maybe the difference, back to the word that Paul used was scale, is that this is less about covered lives and more about geographic reach. Eliza Dailey (13:10): Exactly. And it is something where they already have that strategic advantage. They've been building up these brick and mortar sites for retail purposes, selling more things to more people, and now they also serve this purpose of being these centers where they can deliver care. Rae Woods (13:27): I think another difference from their approach is that not a lot of the retailers have a health plan arm unless you count CVS, which I don't know, do we count them as a retailer? Do we count them as a payer? Which bucket do we put them in? But if we say, "Okay, CVS is different," I think very few of these have a payer. Am I right? Paul Trigonoplos (13:48): Yeah. I don't think any of them besides CVS do have a payer. It shows that you can do this through partnerships. Walgreens is partnering with Humana, Walmart's partnered with UHC. You can still amass power and market size without owning one. Rae Woods (15:16): We started off this conversation talking about the reactions that you are hearing directly from leaders in healthcare, but there's another reaction in the market that we haven't talked about yet. I'm thinking specifically about the FTC here. What have or have we not seen from the FTC? Paul Trigonoplos (15:35): We have seen warnings and stern talking to's, and I say that tongue in cheek, but there's a reason behind it. There have been some warnings put out Amazon and One Medical got one about cross-sharing data. CVS got some scrutiny about Signify. UHG got it for Change Healthcare. The FTC is trying to expand the levers that it can use to deem something anti-competitive and illegal, but the problem is there's just not much precedence to finding vertical acquisitions anti-competitive right now. They're trying everything they can. Melancon has said many times that they have an aggressive approach, very anti-monopoly, and they're going to try to move the law forward however they can. But right now, they're going to focus on things like consumer protection and data privacy because those have a little bit more of established precedence than being able to just immediately shoot down some vertical merger. Rae Woods (16:32): Which to me says, "We're just going to see more vertical integration." And it feels like everyone is really running at this goal, and I can understand why some leaders are feeling that that frantic mindset, especially if you are watching UHG CVS, Cigna, Walmart, Amazon. My question for the two of you is if we keep seeing this pace of change, is there room for everyone to keep growing or are we ultimately talking about a zero-sum game? Paul Trigonoplos (17:06): I don't know if we know. My personal take is, for the time being, probably there's room. MA population's growing, Medicare population's growing, the overall US population's growing. I think there's going to be room here. I do also want to call out that some sectors actually want competitors to do what they're doing. I saw a quote the other day from the CMO of Walgreens saying that in healthcare you don't want to move a blade of grass, you want to go in packs. And he said, "I'm fine with CVS doing what we are doing because it puts more wind in our sails." There's a little bit of a powers and numbers thing going on that I find really interesting. Rae Woods (17:46): Eliza, what do you think? Eliza Dailey (17:47): I agree with Paul. But I do think that it's already a game of catch for those who haven't made moves. I think there is opportunity to get in, but I don't think we're going to see another company of the likes of UHG or CVS, that story has pretty much been written. They've been at this strategy for well over a decade, and I think at that level, there's not much room to enter. I do think there are some fast followers, some of whom we've talked about. There may be more opportunity there. And I do think there are some markets that haven't been touched yet, and you can either rest on your laurels or you could actually be that first mover or disruptor in your own market. Rae Woods (18:33): You know who we haven't talked about yet, we haven't talked about health systems. Where do they fit in? Paul Trigonoplos (18:40): They're not being bought by any of the people that we talked about. I think that's well understood now. Rae Woods (18:47): Yeah. It is. Paul Trigonoplos (18:48): The phrase hospitalless ecosystem is a thing you hear in healthcare for a reason, but that's not to say that they're not, the folks, we've been talking about are not partnering with hospitals. Optum works with like 90% of hospitals. Every payer has to negotiate, but also some of the different retail partners are they sell to hospitals, some of their technology services and things like that. Operating, no, but all the players we have talked about are getting into the pre and post-acute space, which is, again, making some health systems feel pretty boxed in depending on what market they're in. Rae Woods (19:19): I imagine that hospital systems, health systems probably also need to diversify their own revenue streams just based on their relative place of fragility in the market. Paul Trigonoplos (19:31): And this reflects some of the more core headwinds that health systems have, inflation, site-of-care shift, payer mix, these are headline headwinds that most folks I think know about. And health systems have been diversifying a lot over the past decade at least. And depending on who you are, it looks a little bit different. Rae Woods (19:54): What does diversifying look like for a health system beyond expanding into having a health plan as well? I'm thinking about hospital sponsored health plans. I'm thinking about integrated delivery networks. Is that the end of the road or are there other options? Paul Trigonoplos (20:10): No, there's a lot of other options, and it depends on who you are in the organizational model that you operate. For those integrated delivery networks, like you mentioned, Intermountain, Banner, Geisinger, they've bought horizontally and vertically and now own most of the value chain. One of our coworkers was looking into what these companies own, and she said that out of 15 or 16 assets, the only thing they didn't have money in was medical devices. Rae Woods (20:38): Wow. Paul Trigonoplos (20:40): If you look visually, they own pretty much everything or partner for it. Rae Woods (20:44): I think that would surprise a lot of our listeners. Paul Trigonoplos (20:47): Yeah, it surprised us as well. I'd say the one org type we haven't talked about is the more traditional health system, particularly not-for-profits. That is where you're going to see a lot of variation. Of course, they're trying to expand into new service lines, winning more contracts, doing more JVs with docs and buying practices, but they also have a lot of IP commercialization, monetizing and selling core services, investing in tech products. And then of course, the not-for-profits have the benefit of 340B and specialty pharmacy to get some more revenue there. Rae Woods (21:18): What about all the other players we haven't talked about? I'm thinking of the smaller organization, maybe one that doesn't have all the capital in the world to do all of the other things that we've been talking about and diversify their revenue streams and buy up doctors and so on and so forth. What does the future look like for them? Eliza Dailey (21:38): I alluded to this earlier, but we have seen a good segment of the market really focus on doubling down on their unique value propositions, their specialized care models. Some health systems that are really just focused on being a high performing hospital center, some medical groups who have really scoped a care model that is heavily focused on just the Medicare Advantage population or other certain patient populations. And here we're actually seeing divestment and some divestiture in certain markets, which to us is actually a signal, not of anything bad, but actually these organizations really strategically investing in the areas where they are strong and have a unique value proposition. I would say the other big strategy we've seen here is more regional partnerships crop up of entities. Coalition type models, both of health plans of health systems and of medical groups really partnering with like-minded organizations to pool resources and pool assets. Again, going back to that idea of scale and control, doing that via partnership instead of building it up through ownership or acquisition. Rae Woods (22:55): Talked about how the end game for a lot of these players is to succeed in value-based care, as researchers and especially as researchers that are halfway through your current area of focus, what are you watching for that will determine if these vertically integrated players are actually successful? Eliza Dailey (23:13): For our team, we're really focused on integration because we think it's the thing that's going to differentiate holding companies from these care delivery platforms that actually do have the potential to transform the markets that they're in. It's an active area of research for us, and early hypothesis is that integration matters in key strategic areas. A big one, for example, is your medical group assets that just owning doctors isn't going to guarantee loyalty or the behavior change to align with your strategy and buying them in the first place. I'd like to say it's an active area of research for us. If anyone wants to talk with our team, we'd be open to an interview, got to put in that plug. Rae Woods (23:56): Love it. Eliza Dailey (23:57): But Paul, I know that you're a little bit more skeptical on integration. Would love to hear your take on this. Paul Trigonoplos (24:03): I think that integration gets floated around as like a must have imperative in the industry, but history does show that you can grow and grow and grow and be profitable without it. OptumCare competes against itself, that's a known thing. Amazon has assets that compete against itself. That's not to say I don't think it's important. I just think that it might matter a little bit more to your point, for care delivery organizations rather than organizations that are already holding companies that continue to grow that way. Eliza Dailey (24:35): We'll see who's right in six months. Rae Woods (24:38): We'll have to have you back on when you have more answers. Paul Trigonoplos (24:43): We will all be right. Rae Woods (24:45): Thank you both so much for coming on Radio Advisory. Paul Trigonoplos (24:47): Thanks, Rae. Eliza Dailey (24:48): Thanks, Rae. Rae Woods (24:51): We recorded this episode in the middle of April, just about a week before news broke that Kaiser Permanente is acquiring Geisinger Health, which will operate independently under a new subsidiary of Kaiser called Risant Health. And this move is just the beginning. The health systems both say they're looking to several more hospitals to fold into their new organization. The goal is exactly the goal that we talked about in this episode, to develop an enterprise that can actually succeed in value-based care. What's different is they're trying to build a model that works for health systems. (25:26): We are watching what's next. Just like we're watching all of the organizations that we talked about in this episode, I want to underscore that in all of these models, the devil is in the details. Ownership and partnership don't necessarily mean integration, and it's not a given that these models make the hard work of doing value-based care easier. Remember, as always, we're here to help. (25:56): If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Rae Woods, as well as Katy Anderson and Kristin Myers. The episode was edited by Dan Tayag with technical support by Chris Phelps and Joe Shrum. Additional support was provided by Carson Sisk and Leanne Elston. Thanks for listening. (26:36): The