2013 Payor/Provider Industry Perspective
by Gary Ahlquist, Igor Belokrinitsky, Minoo Javanmardian, Gil Irwin, and Jack Topdjian
Originally published by Booz & Company: December 13, 2012
Healthcare reform is now inevitable, and that will lead payors, providers, and hospital systems to think differently this year—about consumers, costs, technology, and acquisitions.
What a difference a day makes. Before the U.S. presidential election, executives throughout the healthcare industry were talking about “no regrets” moves—robust bets that would pay off no matter how our highly uncertain future unfolded. The day after the election, there was a sudden, palpable change in the mood and conversation. At a meeting of senior industry leaders, we heard a CEO say something that we’ve heard many times since: “The future is real, and it’s here. Our markets are about to change dramatically. Are we ready?”
This year-end perspective is addressed to healthcare payors, hospitals, and health systems. The year 2012 has marked a strategic inflection point for everyone in the industry. Despite a few lingering uncertainties, the Supreme Court decision and the presidential election have made the implementation of the Affordable Care Act inevitable. For those organizations still sitting on the sidelines, this represents the final signal to get in the game. For those that have already laid a foundation for the future, it provides the impetus to build on that foundation.
So far, most healthcare organizations have responded to this change much as they had responded in previous periods of uncertainty: with diversification, innovation, and consolidation. Thus, in 2012, several health plans expanded internationally and diversified into new businesses, particularly care enablement and delivery.
We observed a significant bump in the adoption of innovative care models—such as “healthcare products” that encompass all the care needed to treat a specific illness or condition for a bundled price. (According to surveys conducted by Strategy& in 2012, most physicians believe these bundles are a more effective means of improving affordability than accountable care organizations or patient-centered medical homes.) Finally, we saw a wave of acquisitions, with payor M&A levels reaching decade highs, continuous rollups of physician practices, and several of the largest hospital deals in recent history.
The changes occurring in the industry are irreversible, but many will take time to scale and mature as governments and markets seek solutio.
Here is what we know about the future. First, the growth in the cost of care is unsustainable. In 2012 alone, healthcare costs rose two times faster than inflation, while the number of individual members in high-deductible plans has tripled since 2006. Second, the industry must become more consumer-centric; it lags well behind hospitality, financial services, and retail in customer satisfaction. Third, the sustainability of many healthcare organizations is going to be threatened. Our analysis shows that hospital margins may shrink by as much as 20 percent in this decade, and payors will face higher medical and administrative costs at the same time as their pricing power declines.
Our clients often tell us how much they admire Apple as a company. Perhaps 2013 is the year to take a page from Apple’s playbook and “think different.” Hospitals, health systems, and payors will need to think differently about their customer base, their costs, and how they use technology and M&A to achieve their strategic goals and support their distinctive capabilities.
Health plans are well aware that their customer base is shifting from groups to individuals. Even within groups, buying behaviors will change, with innovations such as private exchanges enabling employers to offer employees more choice. Similarly, care providers will see more of their patients engaging in comparison shopping, and selecting affordable, limited-network plans on the exchange.
Hospitals, health systems, and payors have already been ramping up their investments in branding, marketing, and development of retail channels. Although that is necessary, it is not sufficient. The most successful healthcare organizations will need a level of marketing prowess that rivals that of the best companies in other industries. This capability will be rooted in deep clinical and behavioral insights; it will allow organizations to recognize consumers, attract them, serve them with a seamless experience across all channels, and retain their loyalty.
Most important, this capability must enable healthcare organizations to influence consumer behavior. This will be an increasingly critical need as health systems begin to assume risk and payors lose the ability to risk-adjust their prices.
The essential question: What will it take to develop the consumer engagement capability you need?
In response to margin pressure, health plans and hospitals intensified their cost transformation efforts in 2012. On the administrative cost side, most health plans focused on driving economies of scale and operational efficiencies. Such efforts are now approaching the structural limitations of a health plan; a more transformational change of the operating model is needed to achieve greater savings. We believe such a change is possible—and have challenged the industry with a recent paper on a truly disruptive approach: The $5 PMPM health Plan: Coming soon to your neighborhood by Gil Irwin, Thom Bales, Anil Kaul, and Sundar Subramanian.
Similarly, many hospitals have focused their cost transformations on the nonclinical areas. Such efforts tend to skirt the largest spend areas and often produce across-the-board cuts that are either insufficient, detrimental to growth, or short-lived.
The new era demands a shift in perspective: from viewing administrative and medical costs as discrete cost components to focusing on the total cost of delivered care.
We think the keystone of such an approach must be the alignment of cost reduction with strategy. Too much cost cutting occurs in isolation from strategic growth initiatives. These two efforts are typically carried out by different teams pursuing different objectives; because there is no clear and compelling strategic vision as a driver, cost reduction often encounters strong organizational resistance. The solution to this dilemma is a clear prioritization of spending in terms of the strategic goals and capabilities of the organization. This is the best way to earn the resources to invest in a revenue-constrained environment, as well as to achieve more affordable care for consumers.
The essential question: Can your cost reduction approach produce the savings needed to drive affordability and fund your future strategy?
The full potential of technology in healthcare has yet to be realized, and the path of adoption has been long and winding. A recent study found that half of the surveyed physician practices were already replacing their electronic medical record solutions, and many health systems are several years into costly and disruptive implementations, with no clear end in sight. Health plans that have spent the past several years integrating and optimizing their platforms for fee-for-service payments now face the need to support risk-based reimbursements and perhaps launch multiple segment-specific platforms.