New health economy: Focusing on the consumer
This article, published by Healthcare Innovation News, explains the transformation on the industry’s economy, where people are no longer just “patients,” but healthcare customers. The traditional money flows in healthcare have changed, we have new entrants in the market - players hailing from the retail, telecom and tech sectors, and innovation is the key to create a tool good enough for what the healthcare's future holds.
Volume 1, Issue 1
Sample Issue, 2014
Healthcare Innovation News
Sample Issue, 2014
New Health Economy: Focusing on the Consumer
by Kelly Barnes and Ashish Kaura
ne thing that everyone agrees upon is that the U.S. healthcare system is broken—and desperately needs repair. But an open question is whether existing healthcare companies and organizations are up to the challenge. Looking at the current state of the industry, quantitative evidence shows that despite major scientific achievements, the United States has a mixed record of health outcomes. The annual survey from the Organization for Economic Cooperation and 1 Development has shown for years that the United States spends far more on healthcare than any other comparable country; yet, it gets far less for its money. Insurance coverage is expanding, but millions still lack basic care. Unnecessary procedures and administrative waste account for more than a third of spending2, and financial incentives are misaligned. And the purchasers of care have no easy way to compare prices or measure the value of services they buy. The good news is that the ground is beginning to shift. The old landscape is giving way to new economic structures and care models in which “wellness”—the art and science of helping people recover from illness and maintain their health, and also helping them to avoid getting sick in the first place—is providing both a new model for delivering care and a goal for patients and communities overall. Technological advances, empowered customers and rising demand by an aging population are ushering in this new era in healthcare. While many of those trends have been emerging for some time, never before have they been accompanied by a rapid shift in dollars, triggering major changes in behavior, fundamentally altering the healthcare business and revealing cracks in the industry’s current operating models. Simply put, healthcare organizations need a new way of thinking. Follow the Money Driven initially by changes in reimbursement policies under Medicare, and legislated by the Affordable Care Act, the traditional money flows in healthcare have changed. Up until now, most healthcare revenue flowed from government and employers through third-party payers, insulating customers from true costs. In the future, purchasers—government, employers and individuals—will direct payment to the entities providing the best value, whether it is a clinical team or a sporting goods company, a nutrition counselor or a website. In this new economy, “patients” will be “customers” first, with both the freedom and responsibility that come with making more decisions and spending their own money. These customers will demand a continuum of well being, rewarding the trusted advisers that can help achieve that. With a greater focus on “wellness,” there is a new healthcare motto: “No outcome, no Income.” Outcomes are becoming key to payment and increasingly, those outcomes are measured on the basis of the experience and satisfaction of people who are no longer just “patients,” but healthcare customers. And it is happening at the same time that all participants in the health system are focused on reducing costs—especially the costs they are charged by other parties. Care providers are demanding more efficiency and better deals from device manufacturers and pharmaceutical suppliers; providers face increased cost pressure from payers; and all institutions are increasingly aware that the newly empowered health customers are ready, willing and able to vote with their feet to take their health and wellness business wherever they can secure a better deal. New Entrants Threaten the Established Order A new study by PwC’s Health Research Institute (HRI—“Healthcare’s New Entrants: Who Will Be the Next Amazon.com” — detailed how today’s $2.8 trillion healthcare industry is threatened by disruptive new entrants such as those that reshaped retail, banking and travel. A consumer survey HRI conducted for the report identified $64 billion in revenues for common health diagnostics, treatments and services that is at risk of being drawn away from health companies by new entrants—based on consumers’ willingness to seek competitively priced health solutions from non-traditional sources. For example, more than 50% of respondents told HRI they would use an at-home strep test purchased at a store, check vital signs at home with a phone device or send a digital photo of a rash or skin problem to a dermatologist for an opinion. These new players hailing from the retail, telecommunications and technology sectors are moving fast to disrupt healthcare. They are part of an economic transition that represents the most significant re-engineering of the health system since employers began covering workers in the 1930s. It goes beyond the recent period of convergence in which business roles blurred. Now, siloes are coming down as providers, insurers and life sciences companies begin to coalesce around the pressure to demonstrate value. As the money flows from customers to new players, a wide-open health marketplace will replace today’s siloed industry. Influencing Customer Behavior To compete effectively against these new entrants, the health industry will have to promote and support more control, awareness and responsibility on the part of the healthcare customer. The digital enablers of consumerization—big data, cloud computing, telemedicine and social media—are already at hand, and can be leveraged by forward-thinking executives. Eventually, as customer-focused initiatives multiply and their effects reverberate throughout the industry, they could bring about a dramatic improvement in health and a transformational reduction in costs. A fundamental reframing of the role of the healthcare companies’ customer is a prerequisite for sustainable healthcare systems because customer behavior has an outsized influence on the demand for care and care outcomes. In the United States, fully 40% of deaths are attributable to behavioral factors—more than factors such as genetics, environment and 4 socioeconomics. According to the American Medical Association, 25% of the United States’ total annual healthcare expenditures are the result of behaviors that could be changed, such as smoking, lack of exercise and poor diet.
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Sample Issue, 2014
Healthcare Innovation News
New Health Economy: Focusing on the Consumer … continued from page 4
As customer-driven healthcare spreads, the fundamental nature of the industry will change—just as in other industries that have moved from B2B to B2C, such as banking, computers and electronics. The ultimate goal for insurers, care providers and pharmaceutical companies alike is to drive initiatives forward until the industry reaches a tipping point. The new healthcare industry that results will be adept at influencing customer behaviors. It will use sophisticated analytics about customers’ attitudes and preferences to design and deliver personalized products and services, and its financial performance will be linked directly to care outcomes. Such an industry will motivate customers to pursue wellness and will provide them with access to healthcare when they need it via the channels that they prefer. Redefining Innovation Looking toward that future, the very term “innovation” needs redefining for a new economy that rewards value—as measured in affordable patient outcomes and customer satisfaction—over volume. “Innovation” must mean more than simply adding incremental features to a drug, device or health insurance policy to bolster sales. It will mean mastering an entirely new set of capabilities around insight-powered products and services, more engaging care delivery programs that influence customer behavior and compelling end-to-end customer experiences, as well as adopting a whole new innovation process. Organizations that don’t will risk being displaced by competitors whose innovations achieve the same high clinical standards but are faster, better, cheaper and more integrated into a care delivery continuum that increasingly transcends geography. That is the true threat from new entrants into the healthcare space. Creating an Innovation Engine The innovation process is fundamentally different from most other business activities and requires a different logic, infrastructure and style of management. Three key elements of an innovation strategy for this new age are: 1. Be ambidextrous. Companies need to create an innovation operating model that separates breakthrough and radical innovation from the incremental innovation necessary to support the core business. For established enterprises to achieve this, they must learn to operate in the mode of a “lean startup,” while concurrently maintaining lean Six Sigma disciplines to sustain the core businesses. Measure innovation in new ways. Companies must manage the innovation cycle differently than the operating cycle, using forward-looking metrics and connecting the dots for stakeholders, who need help understanding the changing role of innovation. Collaborate to get closer to the patient. Healthcare companies must look increasingly to external customers, partners and even competitors to help them generate valuable insights and widen the funnel of ideas flowing into the organization. One way to succeed is by integrating into the broader patient experience, the larger health ecosystem and new payment models. “Many of today’s health companies have begun the journey, refashioning care delivery to be more patient-centric, tapping into big data to develop more sophisticated customer insights, taking on more risk and forging unconventional alliances.”
What the future holds Next-generation health companies will need different products, tools, skill sets and investments. Core capabilities must evolve to take advantage of technological advances, delivering better clinical outcomes and improving the overall customer satisfaction. Organizations must have the courage and agility to fail frequently on their way to success, perhaps via pilots, incubators, crowd sourcing, simulation or computer modeling. Expertise in unconventional areas such as behavior change and social media take on greater importance in the New Health Economy. Many of today’s health companies have begun the journey, refashioning care delivery to be more patient-centric, tapping into big data to develop more sophisticated customer insights, taking on more risk and forging unconventional alliances. Consider the number of insurance companies that have invested in major analytics divisions, physician group practices, affordable housing and healthy food programs. Drug companies are pursuing relationships with universities, patient groups, the makers of remote sensors and computers—all with an eye toward faster, cheaper discoveries and proven value for cost-conscious purchasers. The lines are already blurring, and players old and new are embracing the kinds of innovative change that will be required to succeed through this transition. Health systems are securing insurance licenses. A telephone giant advertises its role in treating sick children in India and the Philippines. And drugstores are pushing deeper into care delivery. These innovators—some incumbents, some newcomers and some hybrids—are sketching out the contours of the New Health Economy.
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“Health at a Glance 2013: OECD Indicators.” Organization for Economic Cooperation and Development. Nov. 21, 2013. Berwick DM, Hackbarth AD. “Eliminating Waste in U.S. Health Care.” JAMA. April 2012; 307(14):1513-1516. “Healthcare’s New Entrants: Who Will Be the Industry’s Amazon.com?” Chartpack. Health Research Institute. April 2014. 4 McGinnis JM, Foege WH. “Actual Causes of Death in the United States.” JAMA. 1993:270:2207-12. Mokdad AH. Marks JS. Stroup DF. Gerberding JL. “Actual Causes of Death in the United States.” 2000. JAMA. 2004:291:1230-1245. Kelly Barnes is a partner and U.S. health industries leader with PwC and can be reached at email@example.com. Ashish Kaura is a partner of Strategy&. His email is firstname.lastname@example.org.
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