July 9, 2019
There is broad agreement that the U.S. healthcare market has structural challenges that need correcting: Cost of healthcare is the highest in the world and has been growing faster than GDP for decades. The number of consumers without coverage is unacceptably high and those that have coverage struggle with costs. Pharmaceutical drug companies and medical device manufacturers face backlashes on price increases and business practices. Providers continue to struggle with reimbursement. Payers grapple with administrative costs, dissatisfied patients, and providers.
Past attempts at healthcare reform have had mixed success. Presidents Nixon, Ford, and Carter tried unsuccessfully to introduce price controls and expand coverage. President Reagan signed a law guaranteeing emergency care regardless of coverage. President H.W. Bush imposed price controls on Medicare. President Bill Clinton’s attempt at universal coverage was unsuccessful. President George W. Bush’s push for “consumer directed healthcare” led to the creation of high deductible plans and Health Savings Accounts (HSAs). President Obama, with the Affordable Care Act, maintained the overall market structure but expanded coverage. And President Trump was elected partly based on a promise to repeal Obamacare and reduce drug prices, but specific legislative actions and the implications on the healthcare market are yet to be fully realized.
While healthcare reform has had mixed results, three factors are changing how healthcare is accessed and delivered: 1) increased availability of data, 2) advances in technology, and 3) evolving consumer behaviors. Companies like Cerner and Epic have created big data solutions that improve clinical outcomes. Teladoc, a telemedicine company provides on-demand remote medical care, and Welldoc provides remote guidance to manage chronic conditions. Amazon is entering the field, and based on its track record, is expected to significantly alter the landscape. These changes are causing shifts in the value chain between healthcare services and technology companies, payers, and providers. In response, we have seen vertical integration plays, such as the mega CVS-Aetna and Cigna-Express Scripts mergers that are expanding the service offering and mitigating the impact of shifting profit pools. There has also been horizontal consolidation among regional healthcare systems to reduce costs and improve negotiating power with payers and service providers. Private equity investment crossed $60B in 2018, driven by physician practice management and health IT targets.
So, what should a healthcare provider, payer, or services and technology company do to win in this evolving landscape? How should a healthcare player develop its call-to-action?
A standard strategic approach is to develop a long list of the various market forces relevant for the client (e.g. AI, Medicare reform, consumerism, personalized medicine, VBC adoption, risk capitation) and analyze each’s impact on the business. While this may sound like a reasonable approach, we at HighPoint believe that it can lead to placing too many small bets without strengthening competitive advantage.
We advocate that healthcare companies anchor on 3 principles as they plan the next chapter of growth:
1) Take a pragmatic view of market changes:
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten” – Bill Gates
The scale of opportunities presented by big data/AI in Healthcare was not contemplated 10-15 years ago. And it is impossible to predict with a reasonably high degree of confidence how the regulatory environment will change and how various trends (e.g. Amazon, drug pricing, data regulation, SDOH) will shape the Healthcare market 10-15 years from today.
Accordingly, we discourage clients from commissioning large outside-in efforts to predict 10-year impacts on current business from market forces. Rather, attention should be focused on deepening the understanding of existing economic moats. Starting from your core moats, develop an inside-out view on opportunities available to increase competitive advantage while taking a pragmatic view on market trends.
2) Leverage core strengths:
To effectively compete in this changing market, it is important to both deepen existing economic moats and create new opportunities. For example, Optum’s acquisition of DaVita Medical Group leverages its existing economic moats (payer relationships and access to data) to create a new economic moat in healthcare delivery. Through the acquisition, Optum is set to be one of the largest employers of physicians in America and is capable of exerting higher pressure on clinical labs and other service providers to improve its economics.
As the value chain and profit pools shift, strengthening existing economic moats and creating new ones will require investment in vertical or horizontal M&A opportunities. Carefully choosing the right bets is critical for long-term value creation. HighPoint is an advocate of making proactive investment decisions to build on existing strengths rather than responding to market activity or anticipated trends.
3) Create the right organization and teams to respond in a nimble way to market forces
A dynamic healthcare market presents several opportunities and risks. How is your company positioned to adapt to evolving conditions?
All organizations need structure to manage scale. Targets are deployed to individual business units. Administrative and support functions operate as a shared service. Depending on how the organization has evolved, the result is some type of matrix with centralized governance that manages performance and steers the business units. When designed well and set up with the correct decision rights, this structure facilitates steady-state performance at a high level.
But is this traditional structure effective in evolving healthcare markets? A large majority of public company employees have been through an enterprise-wide restructuring initiative to improve efficiency and decision-making. These initiatives cause disruption and often fail to yield desired results. So how should a healthcare company organize for agility, with or without restructuring?
A stand-out example of an innovative, highly responsive, networked organization is Spotify. Spotify is not organized in a standard matrix structure. Instead, it uses squads, tribes, alliances, and guilds to run its business. Spotify credits its unique networked structure for its innovativeness and customer centricity. There are other, less radical approaches along these lines that have also yielded positive results. Microsoft, Barclays, and Ericsson have all been credited with organizational effectiveness improvement by creating small, empowered “agile” teams based on the same principle.
HighPoint has seen that organizations need to consciously create formal and informal networks that mobilize rapidly in response to market forces. Agility needs to be prioritized over prescience. We are not advocating radical replacement of traditional hierarchy and governance. We believe that networks play a complementary role that adds value to traditional structure. With the right support, networks provide incisive and cross-functional insight on business performance not often achievable through traditional dashboard governance. More importantly, they provide the ability to retool and respond in a nimble fashion, without disruptive, enterprise-wide restructuring initiatives.
If your business is looking for a partner to effectively execute key strategic imperatives and would like to test an alternative method of rolling out change within your organization, please reach out. We would like to hear from you.
Vikram Rao is a Partner at HighPoint Associates, a strategy consulting firm headquartered in El Segundo, CA. Previously, Vikram was COO of ViaeX Technologies, a Bay Area nanomaterials startup. Earlier in his career, he served as a Principal at Bain & Company.