Rachel Woods: The reason why this research topic is so big 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: 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, etc. But you see in around 2011 when Optum launched ever since then, a real uptick in this type of acquisition.

Woods: 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?

Trigonoplos: 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.

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, etc. etc. I'd say frantic.

Eliza Dailey: 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.

Woods: Like who?

Dailey: 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.

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.

Woods: 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?

Trigonoplos: 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, 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.

Woods: But it sounds like the goal of scale and control are really happening in the context of value-based care. Is that right?

Trigonoplos: 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.

Woods: 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.

Dailey: 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.

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.

Woods: Like what?

Dailey: As you take on more risk, there are many opportunities to help rein 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.

Woods: 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.

Dailey: 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.

No stakeholder in healthcare is staying in their lane. Cost and margin pressures, in-market growth limitations, competitive threats to core business, and a growing MA population are driving payers, providers, and retailers to purchase assets or partner with organizations that exist outside of where they traditionally do business.  What are the impacts of all of this, and what comes next?Read on to find out the four biggest questions that we'll be devoting resources to answering.