UnitedHealth is smart to add doctors to its fold

Anybody curious about why a company like UnitedHealth Group continues to gobble up physician practices and pharmacy companies just needs to ask themselves one question: What business is UnitedHealth Group in?

If the response is "health insurance," they need to update the file.

Minnetonka-based UnitedHealth just completed the $4 billion acquisition of a medical practice group from DaVita, but it has been buying medical practices or otherwise collecting physicians for a long time. A Bloomberg article last year ran under the headline of "30,000 Strong and Counting, UnitedHealth Gathers a Doctor Army."

Traditional health insurers reimburse doctors who treat the insurer's members, not assemble them into an army.

Another of the biggest in UnitedHealth's business, Aetna, announced its $69 billion sale to drugstore company CVS Health the same week UnitedHealth said it would buy DaVita's medical practices. These deals were emblematic of the recent past in American health care.

In looking at the industry, it's not at all surprising what UnitedHealth is up to. In fact, it might just be getting started.

The trade press has been writing a lot about this so-called vertical integration, as a retailer like CVS comes to sell itself as a health care provider while traditional health care providers take on the financial risks for patients that they once let the insurers handle.

Vertical integration is not a new idea, of course. In a nutshell, it means taking over different stages in an overall value chain when it makes sense to do that.

One popular justification for taking over another part of the process is to cut costs, but this is often cited by strategists as sloppy thinking. Greater control is a perennial goal, too, the reason Henry Ford not only invested in northern Minnesota iron but tried growing rubber trees for car tires.

A traditional vertical integration approach that might seem to make sense is a health insurance company, or payer as the industry calls them, merging with a big system of hospitals, clinics and doctors.

That's been tried but isn't a particularly popular strategy, as explained by Kyle Weber, health care expert and associate partner with consulting firm McKinsey & Co.

What's worked better is a payer acquiring physician practice groups, ambulatory surgery centers, urgent care clinics, specialty pharmacies and other assets for patient care that aren't hospital systems, Weber said.

"They are investing in capabilities that help them get the member to the right place of care at the right time," he explained. "It's not necessarily that any specific asset is the key to generating returns. But we find that those payers that have said that 'I need to figure out a better way to have members receive care at the right place at the right time,' and are investing in those kinds of assets and capabilities, those are the ones doing better."

That means another good business to acquire can be technology services, the infrastructure for the flow of information that will guide the payer and the individual member to the cheapest, most convenient and best care.

Maybe the way to think of what's best done inside vs. outside isn't as linking parts of a chain, but as deciding what pieces really help a company win in the market. This has been one of the main ideas taught by the consultant and author Geoffrey Moore.

An entertaining and vivid writer, Moore explained to his readers how they could thrive while inside the tornado, survive the trip across the chasm when introducing new technology and shrewdly invest only in technology gorillas.

Along the way Moore grew to believe that what drove a company's stock value really mattered. Not short-term, massage-the-quarterly-results kind of thinking, but using valuation as a collective judgment of how big a competitive advantage had gotten for a given company and how long it seemed likely to last.

The only thing worth investing in for managers is what increases competitive advantage, he wrote, meaning the attributes that get the profitable customers to pick you over the competition. That's the core of the business. Everything else a company did was just "context."

Moore thought of it this way: Picking your spouse's birthday gift is core. Wrapping it is context, so outsource that.

Becoming really good at what Moore called context — running an ambulance service, for example — doesn't matter if no customers really care. Let someone else do it.

In thinking about what a company like UnitedHealth considers core to the business, it's useful to know two ideas its executives talk about. One is "value" in health care, which seems to mean slightly different things depending on the context, but can including making sure folks pay for an outcome like remaining healthy and not just for another procedure or bottle of pills.

The other is making the consumer happy. In a transcript of a meeting UnitedHealth hosted for institutional shareholders and analysts late last year, the executive team must have mentioned consumers dozens of times.

At first glance this seems puzzling, because a lot of times UnitedHealth seeks the business of government agencies or large employers where individual consumers are never seen or heard at the table.

Yet consumers are increasingly important in health care, Weber of McKinsey explained, in part because they are increasingly on the hook for more of the annual spending. They have ever rising expectations, too, having had far better experiences with the other things in life they buy.

One persistent "pain point" is frustration that the various pieces of health care can't seem to work better together, like how staff in a doctor's office they may have been referred to doesn't seem to know much about them when they walk in.

As it happens, one of the priorities UnitedHealth execs discussed during that investors meeting last year is an individual health record, a complete, real-time health record for each consumer that's fully portable.

That would sure help, but so does owning the clinic the consumer just walked into.

Buying that clinic doesn't feel like classic vertical integration. It's far smarter than that.

lee.schafer@startribune.com • 612-673-4302