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What Can Ford’s River Rouge Plant Teach Us About Vertical Integration in Healthcare?

Posted by Brian Chapman on August 28, 2018



shutterstock_696639082-536127-editedThis blog post was originally published on the Medtech Conference (AdvaMed) blog

For anyone who grew up in Michigan, the Ford River Rouge Plant is legendary, in both the scale of its ambition and its dramatic fall as the auto industry matured. Built outside of Detroit in 1928, it was the largest manufacturing facility in the world at its peak, with 16 million square feet and 100,000 employees. Unloaded on the docks of the River Rouge were iron ore, coal and other raw materials. Rolling out the other side of the factory were fully finished cars. In between was a steel mill that boasted its own coal power plant. By 2018 the factory was idled and now has a museum, a light truck assembly facility and a very large parking lot.

The River Rouge facility is the classic, textbook example of vertical integration, and it came to mind as I was pondering what the future will hold for the vertical integration that we’re witnessing in healthcare today—and whether healthcare’s integration might fare better than the auto industry’s.

Here are a few of my thoughts on how things are shaking out:

  1. Medtech companies are forward-integrating to better control distribution and the provider environment, but at the same time, there are questions about conflicts of interest and ensuring patients’ best interests. A device and durable medical equipment supplier might be acceptable, but a capital equipment and nutrition supplier plus full-service hospital is not above scrutiny.
  2. Hospital IDNs are reaching forward into rehab and home health, and backward to employ office-based physicians and capture referrals. It started with CMS pushing toward episodes of care, but at least some of these make good sense for the patient and the provider. If anything on this list, the integration across site of care is a very positive trend for the patient and for total cost.
  3. Traditional hospital distributors are buying branded manufacturers. Will this take over and become standard, giving distributors all of the power in the relationship? As much as I believe in a vision of hospitals becoming efficient “factories” of patient care, I can’t imagine a situation where the brands no longer have value. Amazon (and others) provide a constant boogeyman that can’t be ignored, but brand value won’t diminish that precipitously.
  4. Some well-known integrated payer/providers are entering the generics manufacturing game. Is this a one-time opportunity or a big trend that will overwhelm generics manufacturing? (I’m guessing the former.)
  5. Payers are back in the game of owning pharmacy benefit managers—a flashback to 10 years ago when a pharma company owned a PBM. But the conflict of interest is less obvious, so maybe this will stick.
  6. One payer is buying surgery centers with a clear intent of shifting surgeries into its cost-controlled environment. Is this a one-time deal or an indicator of the broader ambitions of payers to enter the provider space?
  7. Amazon/Berkshire Hathaway/JPMorgan Chase is creating a big, imposing healthcare entity, which is an exciting concept but possibly a little confusing in practice. We can rest assured that the conglomerate will do something with its data, but will it revolutionize healthcare?
  8. And, speaking of the auto industry, General Motors is contracting directly with the Henry Ford Hospital System in Michigan. (Can you imagine what Ford would have said about the optics of GM plus Henry Ford?) While this is extremely interesting, I have my doubts that this trend of cutting out the payer middleman can really scale in a meaningful way across the market. The concept of employers contracting directly with providers isn’t broad enough to remove the need for insurance companies. Only the biggest employers enjoy a scale that allows them to ignore the function of insurers in spreading risk. Direct contracting could provide some important local shockwaves, but I’m not ready to count out insurers.

A cynic could watch all of this and say that it’s all about power, and competing for patients, lives, access and control. Others might conclude that it’s about data interoperability and longitudinal outcomes-tracking. Either way, vertical integration is a trend that we need to watch. Just like how the River Rouge facility transformed Detroit, the auto industry and even wartime production in the United States, the impact of vertical integration in healthcare can’t be ignored. Even if the market eventually settles down, the effects of vertical integration will reshape the healthcare landscape for years to come.

Want to learn more about the implications of vertical integration in healthcare? I’ll be moderating a panel on the topic at The Medtech Conference (AdvaMed), held Sept. 24-26 in Philadelphia.   


RELATED CONTENT 

BLOG POST: It's Time for Medtech to Turn Digital

BLOG POST: Don't Call It a Transformation: Four Takeaways From The Medtech Conference


 

Topics: medtech, healthcare, vertical integration, m&a, payers, providers, IDNs, The Medtech Conference, AdvaMed, Henry Ford, River Rouge factory

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AUTHORS
Brian_Chapman_thumbnail
Brian Chapman
Principal,
ZS Associates
Tobi_Laczkowski_thumbnail
Tobi Laczkowski
Principal,
ZS Associates
Will_Randall_thumbnail
Will Randall
Manager,
ZS Associates
Matt-Scheitlin-London_thumbnail
Matt Scheitlin
Associate Principal,
ZS Associates
Andy-kach_thumbnail
Andy Kach
Associate Principal,
ZS Associates
Bhargav_Mantha_thumbnail
Bhargav Mantha
Associate Principal,
ZS Associates
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