Lessons Drawn from Humana’s Experience
Vertical integration is a corporate strategy widely used in health care. It is regarded as a tool in terms of improving one’s competitive advantage by regulating prices and facilitating customer experience when interacting with various healthcare segments. In the case of Humana, the primary objective of the company was to secure additional profit by presenting a health maintenance organization [HMO] that would as well address the issue of empty beds across Humana hospitals.
However, the primary issue with such a decision concerns the fact that none of the expected benefits were presented to the stakeholders. According to Walston (2018), the core principle of vertical integration is manifested when “one organization’s products and services are inputs to or outputs from another organization’s products and services” (p. 83). In the case of Humana, the services presented as a consequence of vertical integration were not perceived as a united value chain due to referral and pricing organization. Moreover, the physician relationship in the Humana network undermined the company’s competitive advantage. Hence, the primary lesson drawn from Humana’s experience concerns the idea that the decision to settle for vertical integration should mean the subsequent coordination across the value chain stages acquired. Otherwise, it might be more reasonable and proficient to consider moving to a completely new value chain and employ a product diversification strategy in order to secure a sustainable business.
Humana’s Vertical Integration and Evolvement
From the beginning of the company’s existence, Humana had been experimenting with the value chain services provided by the enterprise, shifting from being one of the biggest nursing home industries in the state to evolving into a hospital provider. Essentially, companies settle for vertical integration in order to gain a competitive advantage in the market by providing lower service prices caused by internal coordination and better control over the value chain (Luco & Marshall, 2020; Walston, 2018).
In the case of Humana, the underlying intention behind the integration was the management’s desire to address the issue of empty beds across the hospitals by presenting an HMO that would refer people to Humana hospitals for a reasonable price for healthcare plans. Additionally, the company would profit from managing its own insurance plans instead of relying on external service providers. However, it had become evident over time that the company was struggling with managing a single value chain with two services, and it decided to divest the hospital business and other operations in order to focus on the evolvement of a full-scale digital managed care industry business.
Provider Assets Divesting
Considering the challenge faced by the company at the time, the decision to divest the provider assets can be regarded as the most efficient and reasonable given the context. In a retrospective, had Humana had more time to initiate and promote organizational change, it might have been able to retain in the provider industry. First, the management team could have addressed the issue of prices by securing lower hospital service prices at the initial stages in order to secure customer retention. Second, Humana could have reconsidered the HMO model within the company, focusing on permanent staff recruitment instead of an API-based model, as physicians interested in the company’s profit would be willing to refer patients to the Humana hospitals.
However, despite the possible option to retain the business’s relevance, the challenge presented to the company left practically no choice, as the core issue concerned the dissonance in terms of profit strategies for insurance and hospital services. Moreover, according to Machta et al. (2019), while vertical integration presents an asset in terms of patient experience and satisfaction with services, the benefits in terms of pricing are not significant enough to risk all the services provided. Hence, the decision to retain in the healthcare plan provision industry was the most efficient in the given setting.
Managerial Knowledge Transfer
Once integrated, the company inevitably faced a series of managerial challenges catalyzed by a lack of expertise and the number of responsibilities and services acquired. The newly acquired health insurance segment was alien to Humana’s management, and they were to invest considerable amounts of money in systematizing this segment, whereas the physician management was not addressed properly, creating a variety of challenges in terms of both physicians’ salaries and professional expertise. Moreover, the management across the existing products and services acquired differed in terms of KPIs and desirable outcomes.
If the hospital segment profited from providing quality care to a certain number of patients regularly in order to keep the hospital beds occupied, the insurance industry benefited from keeping the customer out of the hospital premises. As a result, the management models could not be easily transferred across the nosiness lines, creating the need to outline management strategies for each branch separately in order to find common ground to create a corporation-wide management framework.
Implications of Vertical Integration
Undeniably, the four problems faced by Humana, including costs, physician relationships, conflicting economic objectives, and transfer pricing, contributed significantly to the issues arising from the vertical integration. However, it would be unreasonable to assume that such issues resonate solely with Humana. Such challenges as costs and managerial obstacles are relevant to any large enterprise willing to remain relevant in a highly competitive environment. Indeed, a large size of enterprise is frequently characterized by a wider variety of products and more managerial challenges.
However, when used properly, vertical integration may become an asset rather than a challenge for the enterprise. For example, Wan and Sanders (2017) indicate that vertical integration benefits the process of information sharing across the value chain, enhancing efficiency and customer experience. Hence, it may be concluded that the four issues indicated in the case with Humana, although not exclusive to this enterprise, became major obstacles in the way of implementing the integration model.
Transfer Pricing Implications
Any vertical integration initiative obtains implications in terms of reallocating new costs for the services. Essentially, in order to establish a balance, an organization’s hospitals and physicians should charge cost-based transfer prices and secure the organization’s insurance referring clients to the integrated hospitals (Walston, 2018). However, in the case of Humana, the transfer prices, due to the lack of expertise and the number of assets required, increased rapidly and exceeded the ones in the market.
As a result, Humana hospitals faced the issue of empty beds, as the insurance and physicians referred patients to non-Humana hospitals for the sake of cost-efficiency. In order to avoid such problems, it would be highly recommended to establish a tangible reward system to motivate insurance and physicians to promote the hospital services within the value chain.
Physician Relationships and Initiatives
The primary issue Humana had was the fact that while physicians lacked any kind of authority within the company, their employment was not staff-based, allowing the professionals to work for different HMOs. Hence, physicians who were not interested in attracting new clients tended to refer the patients to non-Humana establishments. Another significant problem concerned the salaries of physicians, as the financial losses catalyzed by integration were expected to be covered at the physicians’ expense. The issue might have been resolved by securing physicians more autonomy on the HMO panel and securing financial incentives for referring patients to the Humana hospitals. The shift from IPA- to staff-based HMO model would also be beneficial in terms of promoting efficient cooperation between physicians, insurance, and hospitals acquired by Humana.
References
Luco, F., & Marshall, G. (2020). The competitive impact of vertical integration by multiproduct firms. American Economic Review, 110(7), 2041-64. Web.
Machta, R. M., Maurer, K. A., Jones, D. J., Furukawa, M. F., & Rich, E. C. (2019). A systematic review of vertical integration and quality of care, efficiency, and patient-centered outcomes. Health Care Management Review, 44(2), 159-173. Web.
Walston. S. L. (2018). Strategic healthcare management: Planning and execution (2nd ed.). Health Administration Press.
Wan, X., & Sanders, N. R. (2017). The negative impact of product variety: Forecast bias, inventory levels, and the role of vertical integration. International Journal of Production Economics, 186, 123-131. Web.