Kaiser Permanente, a standout among managed health care systems, has become a model of how to deliver good health care cost-effectively. Illustration Capsule 6.4 describes how Kaiser Permanente has made vertical integration a central part of its strategy.

What value chain segments has Kaiser Permanente chosen to enter and perform internally?

How has vertical integration aided the organization in building competitive advantage?

Has vertical integration strengthened its market position? Explain why or why not.

Kaiser Permanente's unique business model features a vertical Integration strategy that enables it to deliver higher-quality care to patients at a lower cost. Kaiser Permanents is the largest vertically integrated health care delivery system in the United States, with $53.1 billion in revenues and $2.7 billion in net income in 2013. It functions as a health Insurance company with over 9 million members and a provider of health care services with 37 hospitals, 618 medical offices, and more than 17,000 physicians. As a result of its vertical integration, Kaiser Permanents is better able to efficiently match demand for services by health plan members to capacity of its delivery infrastructure, including physician and hospitals. Moreover, its prepaid financial model helps to incentivize the appropriate delivery of health care services.

Unlike Kaiser Permanent, the majority of physicians and hospitals in the United States provide care on a fee-for-service revenue model or per-procedure basis. Consequently, most physicians and hospitals earn higher revenues by providing more services, which limits investments in preventive care. In contrast, Kaiser Permanent, providers are incentivized to focus on health promotion, disease prevention, and chronic disease management. Kaiser Permanents pays primary care physicians more than local averages to attract top talent and surgeons are salaried rather than paid by procedure to encourage the optimal level of care. Physicians from multiple specialties work collaboratively to coordinate are and treat the overall health of patients rather than individual health Issues.

One result of this strategy is enhanced efficiency, enabling Kaiser Permanent to provide health insurance that is, on average, 10 percent cheaper than that of its competitors. Further, the care provided is of higher quality based on national standards of care. For the sixth year in a row, Kaiser Permanents health plans received the highest overall quality-of-care rating of any health plan in California which accounts for 7 million of its 9 million members. Kaiser Permanents is also consistently praised for member satisfaction. Four of Kaiser's heath plan regions, accounting for 90 percent of its membership, were ranked highest in member satisfaction by J.D. Power and Associates. The success of Kaiser Permanente's vertical integration strategy is the primary reason why many health care organizations are seeking to replicate its model as they transition from a fee-for-service revenue model to an accountable care model.

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Vertical integration strategy One where firm expands its business into areas those are at different ... View the full answer