The Biggest Challenge in U.S. Healthcare - Becoming a Retail Industry

The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week’s article.

In my opinion, the biggest challenge facing the health care system is not the transition from volume to value in its incentives for physicians and hospitals, reducing unnecessary cost and waste, the risks of clinical innovation in the regulatory environment facing device and drug development, the consolidation of physicians, hospitals and plans into integrated systems of care nor the implementation of the Affordable Care Act. These five are important, but they’re transitional as the industry’ moves from its manufacturing model to a retail market model.

Our industry has performed well in a manufacturing model: the parts are built and shipped to middlemen who assemble and deliver. The costs of each part are added to the price, and discounts applied to customers who use more. The parts are the facilities we build, technologies, drugs and devices we use, and the financing arrangement for purchases negotiated through health insurers and the government who charge a 7-9% admin cost to administer the purchasing program for individuals and companies.

Ours is a B2B industry. It’s great business for manufacturers and middlemen who successfully access capital markets to create their newest and best parts and facilities, especially if they’re able to align with frontline workers to use them as much as possible. The B2B manufacturing model has made healthcare 1/7th of the U.S. economy and a $9,000 per capita industry: it’s big business and profitable for most.

But is it working for individuals themselves? And what happens when consumers engage directly as purchasers managing their own financing? Will healthcare become our economy’s biggest B2C retail market in the future? And are we ready?

In today’s Fact File, there are some notable lag and lead indicators that seem to affirm the market in U.S. healthcare is shifting from manufacturing to retail. There’s no questioning the trend: the issues are how the system makes the transition from manufacturing to retail. The five near-term challenges facing us need consideration in the context of the eventuality of a B2C future for healthcare. Consider:

  1. The shift from volume to value. In a retail market, the appropriateness of procedures and tests, the actual costs of every item in the supply chain, and the most convenient source for the solution is readily accessible to individuals. Price to costs relationships are readily used for competitive advantage, and guarantees/warranties (aka outcomes and experiences) a key part of the value proposition. In B2C healthcare, how providers and payers align to deliver their services is moot; what consumers get for what they pay is more important. And the ways providers and payers share risk is of less concern than what the consumer gets as a result.
  2. Reducing waste and costs. In manufacturing, cost reduction is about efficiency gains and process improvements that translate to lower costs and better products. Not so in healthcare: cost reductions are offset by higher spending, cost shifting to fewer able to pay and higher premiums. In retail healthcare, competition will be price driven, with quality the table stakes that enable competitors to play. In B2C healthcare, lower cost is a competitive advantage.
  3. Clinical innovation in device and drug development. In a retail market, the effectiveness of all methods for diagnosis and treatment are accessible and compared via online scorecards. And these options include non-traditional methodologies of interest to consumers alongside traditional approaches preferred by the sponsor. In B2C healthcare, signs, symptoms, risk factors, co-morbidities and important, but also important are the individuals preferences and values, and their cost.
  4. Consolidation of physicians, hospitals and plans into integrated systems. In a retail market, the “big box retailers” are likely those that offer the full range of services desired in a single entity. There’s one front door requiring membership and seamless checkout where purchases for all products and services are managed in a single transaction. We have 4,900 hospitals, 800,000 physicians, 400 health insurance operators, 9,300 urgent care centers, 1,900 retail clinics, 4,000 drug and 6,000 device manufacturers. Even Medicare has 4 parts! In B2C, consumers value simplicity, convenience and transparency, and they’ll pay for it. And the successful retailers in B2C healthcare don’t view IT investment as a mandate; for them, “meaningful use” means access to bigger groups of consumers interested in buying products and services from their preferred system of health big box.
  5. Implementation of the ACA. In a retail market, the ACA’s emphases on transparency, online tools, preventive health, comparative effectiveness, administrative simplification, and demonstration models (medical homes, bundled payments, accountable care) would be moot. Consumers would demand them, and providers would demonstrate their differentiated performance using these for competitive advantage. In B2C healthcare, those seeking to outperform their competitors would use these ACA requirements for competitive advantage.

This week, I was able to participate in meetings in 3 cities thanks to retail clinics and over the counter medications. I was a consumer operating in a retail B2C model. When I had my knee replaced last summer, I was a patient. The manufacturers added up and passed thru the 11 items in my $47,000 transaction, and after the fact, I learned how much I’d end up owing. I picked my surgeon; from there, the manufacturing system took over.

The U.S. health system is currently about patients who use, members who join, subjects who test, and voters who react. Will healthcare become a retail B2C market in the U.S.? It’s happening already, though some manufacturers haven’t noticed.

Paul

Sources: Alex Cukan, “U.S. spends $2.8 trillion, or 17.2 percent of its gross national product, on healthcare,” United Press International, May 30, 2014.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Navigant Consulting, Inc. The information contained in this article is a summary and reflects current impressions based on industry data and news available at the time of publication. Any predictions and expectations noted herein are inherently uncertain and actual results may differ materially from those contained in this article. Navigant undertakes no obligation to update any of the information contained in the article.

©2015 Navigant Consulting, Inc.