Beware the disruptors and their wellness-industrial complex!

The New Health Economy in the age of disruption: Novel combinations attempt to remake the health system

PwC Health Research Institute, April 2018

The last six months have seen an explosion in unusual deals with the potential to reshape the US health ecosystem. CVS Health announced its intention to purchase Aetna for $69 billion. Cigna Corp. has announced an agreement to buy Express Scripts Holding Co. for $67 billion. UnitedHealth Group’s Optum purchased DaVita Medical Group for $4.9 billion. Albertsons Cos. has agreed to merge with Rite Aid Corp. Other high-profile and novel healthcare deals have been floated in the press. Several unusual partnerships also have been announced, including one among Amazon, JPMorgan Chase & Co. and Berkshire Hathaway Inc.

And these are just the largest and most recent deals and partnerships. In 2017, 967 deals occurred in the US health services market, including healthcare payers and providers. Deal value increased 146 percent over 2016. The US health industry is undergoing seismic change generated by a collision of forces, including the shift from volume to value, rising consumerism and the decentralization of care. This shifting terrain is creating uneven opportunities in the New Health Economy and will likely drive players new and established to reconsider their business models and strike the sorts of deals announced in the past six months. Some will be driven to seek returns in new markets as their core revenues shrink. Others will find success creating value for other players, including consumers. Still others will thrive by building infrastructure for the emerging virtual health system.

The US health system is starting to reorganize to obtain more favorable pricing and reimbursements. Companies are building capabilities to cut costs and meet customer needs in more convenient and transparent ways. Companies with capabilities across vast swaths of the health ecosystem are emerging, offering consumers one-stop shops for care, treatments, financing and risk management, wellness products and services—and in the case of retailers, toys, milk and wireless speakers.

The New Archetypes:

* Vertical Integrators

Companies such as CVS Health and Aetna, UnitedHealth Group’s Optum and DaVita Medical Group, and Cigna Corp. and Express Scripts Holding Co. have announced mergers or acquisitions to offer millions of consumers access to a broad array of cost-efficient, integrated, transparent services and products. They are doing this, in part, by absorbing some of the industry’s middlemen and vertically integrating parts of the US health ecosystem. “In a value-based environment, the more pieces of the supply chain that you can influence, the more you can impact utilization and cost, driving a win-win across providers, payers and patients,” said Jane Sarasohn-Kahn, a healthcare economist and founder of the group THINK-Health.

Companies also need a wider, data-driven view to develop new ways to cut waste and improve outcomes at lower costs. Vertical Integrators can, in theory, pull together many sources of key consumer data, allowing that broader vision to come into focus. “Data is really key to integration efforts,” said Eric Topol, founder and director of the Scripps Translational Science Institute.

* Employer Activists

Employer Activists are banding together to find ways to cut their employees’ healthcare costs. In February 2016, 20 US companies formed the Health Transformation Alliance (HTA), which has since worked on developing tools for its members to cut employee healthcare costs. In January 2018, Amazon, JPMorgan Chase & Co. and Berkshire Hathaway Inc. announced they would partner to form an independent company to lower healthcare costs and improve satisfaction for their employees by addressing healthcare quality and transparency.

Employers have, of course, long worked to reduce the amount they spend on health benefits. They have shifted premium costs to employees, raised deductibles and other cost-sharing, narrowed choices of in-network providers, experimented with reference pricing, launched pricing transparency tools to help employees and their families make price-conscious choices, and used formulary decisions and pre-authorizations to curb use of higher-priced therapeutics.

These strategies have had an impact. Utilization has been mostly flat for the last decade. Medical price, however, has risen 3-6 percent each year and remains an important medical cost trend driver.

* Technology Invaders

Technology Invaders have been trying to disrupt the US health industry for almost a decade. In 2013, HRI found, 76 percent of the Fortune 50 were engaged in the healthcare industry; several were technology companies aiming to use their digital prowess, pragmatism and consumer savvy to develop better ways to deliver, pay for and access care. In 2018, a slightly higher percentage of the Fortune 50 is involved with health, with about the same number of tech companies.

These Technology Invaders are gaining traction. Besides being an Employer Activist, Amazon has quietly started selling private-label over-the-counter medical products, from hair growth formula to allergy medicine. It also started offering Medicaid recipients discounted access to its Prime subscription service.

Apple’s newest operating system allows users to access parts of their EHRs on their phones; the company has partnered with more than three dozen hospitals for its Apple Health Records platform.

While Technology Invaders have the capability to disrupt, they likely will need partnerships with existing healthcare companies to actually do so.

* Health retailers

Health Retailers such as CVS Health, Walgreens Boots Alliance, Walmart, Albertsons Cos. and others use their vast network of store locations, troves of consumer insights, national and global supply chains and national (and sometimes global) branding to attract consumers looking for affordable, convenient care and goods in a system known for its lack of affordability and convenience. Over the past five years, consumers have consistently told HRI that they are open to receiving a wide range of services in retail settings, from wound care to MRIs.

Health Retailers are expanding in size and adding to their health offerings. The Albertsons-Rite Aid deal would give the chain 4,350 pharmacy counters in 4,900 stores and an additional 320 medical clinics, according to the companies. They said they expected the combination of its retail locations and healthcare offerings to drive financial growth. “This powerful combination enables us to become a truly differentiated leader in delivering value, choice, and flexibility to meet customers’ evolving food, health, and wellness needs,” said John Standley, Rite Aid chairman and CEO.

Health Retailers have an opportunity to use their consumer financial savvy to bring patients into the fold and keep them coming back, using reward programs and other strategies. For example, companies can offer consumers incentives to obtain care at a clinic, or offer subscription-type services to keep consumers coming back on a regular basis.

What comes next?

Dramatic change has been predicted for the US health system for many years. Finally, the industry is seeing the emergence of fundamentally new models: Vertical Integrators, Employer Activists, Technology Invaders and Health Retailers. Whether they will succeed in disrupting the health system, which has stubbornly resisted significant change, remains unknown. But they may find the environment more amenable to change than ever before, as healthcare costs are increasingly borne by consumers and pressure to pay for value instead of volume increases.

Companies may find success in these models, but they are unlikely to be bound by them. In fact, companies that are able to blend various archetypes may be positioned best to win in an evolving environment. At a minimum, companies should consider how they fit in this new environment and how they can succeed in their particular space. Consolidation and integration may put new pressures on existing healthcare organizations like pharmaceutical manufacturers, but they also might open up new opportunities, such as partnerships between providers and Health Retailers.

Players new and traditional come at the shifting landscape from very different directions, but there are resilient moves all healthcare companies should consider making:

* Invest in customer experience.

Consumers’ views on health can change rapidly. Many consumers are ready for healthcare to mirror other parts of their lives in terms of convenience, choice and the presence of affordable options with predictable pricing. Vertical Integrators, Technology Invaders and Health Retailers all have a leg up on many established health players in understanding consumers and tailoring experiences for them.

* Plan for a broader workforce.

These new business models possess capabilities that are minimally present in established health players. The new models may have armies of workers coding, working on AI, analyzing data, prototyping new services and products, and focusing on customer experiences. These new companies also may have staff from traditional players with deep knowledge of the health industry. Health companies competing in this new world should plan for a much broader workforce. And they should be prepared to pay for them—the rest of the global economy is seeking these capabilities too.

* Focus on price.

Employers, the government and other players largely have focused on utilization over the past decade. Price is the next frontier. Vertical Integrators, Employer Activists, Technology Invaders and Health Retailers are positioned to address price through greater scale, ownership of middlemen and a wider grip on the US health system value chain. Consumers, employers and the federal government are seeking relief on price and likely will reward companies able to significantly cut them without downgrading quality.



By Don McCanne, M.D.

Arnold Relman warned us about the medical-industrial complex, but it is likely that even he did not realize how intense would be the disruptive innovation in health care that is beginning to take place.

What we are about to see is a takeover by the disruptors who "have a leg up on many established health players in understanding consumers and tailoring experiences for them."

"This new world should plan for a much broader workforce (of disruptors), and they should be prepared to pay for them."

The disruptors "are positioned to address price through greater scale, ownership of middlemen and a wider grip on the US health system value chain."

It is almost as if the physicians, nurses and other health care professionals and the hospitals and clinics in which they provide their services have become a peripheral, albeit necessary, appendage to their wellness-industrial complex that is displacing our traditional health care delivery system and its more recent iteration of the medical-industrial complex - all for power and profit.

I remember when California enacted legislation that allowed the insurers to contract directly with the health care providers. I warned my friends about what this meant. "That can't happen," they said, and they hardly turned around when the managed care revolution was upon us.

Well, you say, this is different. It can't happen. But it has already begun, and before you can turn around... well, you know.

Once the transformation is well along, imagine trying to implement a single payer, improved Medicare for all. It is likely that traditional Medicare will have been displaced by future iterations of Medicare Advantage plans, and so it would no longer serve as a model for reform. Once the silos of the health care delivery system are flattened, how will health care services be financed? Will there still be networks? Cost sharing barriers such as high deductibles? Will it be possible to fund this expansive model of the wellness-industrial complex through anything remotely resembling an insurance product, especially when the insurers are being amalgamated into what was formerly the health care delivery system? And now that the plutocracy is in control, how could we ever remove the passive investors that extract humongous rents through the wellness-industrial complex? And what about the patients? Did we forget about them?

The acutely ill, the injured, and those with chronic diseases will always be with us. The demand for decent health care will always be there. But the longer we wait to enact a truly universal, accessible, equitable and affordable health care system, the more difficult it will be. As an example, just think of how difficult it is to inform the public that they are getting a very bad deal when they support private Medicare Advantage plans. Compound that difficulty with the massive disruptions that are about to be foisted upon us by the New Health Economy that PwC describes in this report. The disruptors really understand marketing.

And, by the way, a Medicare buy-in public option won't do it. It will only give the disruptors more time to fortify their New Health Economy. We must change our course today (yesterday, except that we can't recover time already lost).

A single-payer national health program, aka an improved Medicare for all. Nothing less. Pull all stops today!

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