Why Owning Everything Isn’t Always the Answer: A Lesson for Healthcare from the Car Industry

The medical loss ratio (MLR) compares how much of an insurer's premium revenue goes toward paying medical claims versus how much is spent on administrative costs and profits. Insurers must spend at least 80-85% of premiums on medical care and quality improvement efforts.

This MLR rule has led many healthcare organizations, including insurance companies, pharmacies, and retailers, to attempt to vertically integrate by acquiring various healthcare businesses along the continuum of care. The belief is that owning more of the healthcare supply chain will allow them to capture a more significant share of that 85% MLR requirement, thus boosting their profits.

However, the results of these acquisitions have been mixed at best and outright failures at worst. Major companies like Walgreens, CVS, and Walmart recently announced the closure of their in-house healthcare clinics and services, citing rising costs and a challenging reimbursement environment.

Contrast this with the automotive industry, where car manufacturers typically do not own the companies that make their parts. There are some key reasons why car companies have chosen a different approach (Source: Google Search):

1.???? Specialization: Dedicated parts suppliers can focus on innovating and optimizing specific components, leading to higher quality and efficiency.

2.???? Cost optimization: Sourcing parts from multiple suppliers allows car makers to benefit from competitive pricing and negotiate better deals.

3.???? Scalability: Car manufacturers can easily adjust parts orders to match changes in demand without managing the full production capacity of component factories.

4.???? Innovation: Competition between multiple suppliers drives innovation in design and technology.

The drive to maximize the MLR has led organizations to take the opposite approach, acquiring a wide range of healthcare businesses. However, this vertical integration has not translated into the same benefits in the automotive industry. Instead, it has resulted in a lack of specialization, high administrative costs, and an inability to adapt to changes in the market nimbly.

Perhaps healthcare organizations should learn from the car industry. Rather than trying to own the entire healthcare supply chain, they should focus on their core competencies and partner with specialized providers along the continuum of care. This could allow for greater innovation, cost efficiencies, and the ability to respond rapidly to evolving patient needs.

The ultimate goal should be to deliver high-quality, cost-effective care - not just maximize the share of the MLR dollars. By learning from other industries and embracing a more focused, collaborative approach, healthcare may finally be able to crack the code on sustainable, innovative care delivery.