The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week's article.
This morning, like most, I started the day with Starbucks, The New York Times, Washington Post and The Wall Street Journal. On the way home, I stopped at Exxon for gas, and at Walgreens for cough medicine.
At some level, I know these purchases ended up in the coffers of a big company headquartered elsewhere, but it really didn’t matter. It’s part of life. Big is everywhere.
Most of us accept the advantages of big when we buy things like our coffee, newspapers, over-the-counter medications and fuel. At some level, we rationalize that were it not for big, there would be less variety, fewer locations, shorter operating hours, and something different than a mom and pop economy could provide. And lenders and investors see the advantages of big: they invest in start-ups that have the potential to go big, and in established big’s that are growing through innovation and acquisition. In most industries, the big’s enjoy advantages others don’t—the ability to attract top talent, the capacity to access and deploy game-changing technologies and adequate capital to fund entry into new markets and businesses. But being big is no guarantee of success: recent disappointments by big names like McDonalds and WalMart illustrate the reality that every organization, big or small, must innovate and adapt to survive and thrive.
Big is part of healthcare too. Last week’s news of Walgreens’ intent to acquire Rite Aid and Pfizer’s pursuit of Allergan are the two most recent deals getting news coverage. The pursuits of Cigna by Anthem, Humana by Aetna are still being vetted by the Department of Justice as four big’s become two, and with United, the new Big Three in health insurance. The fact is that major players in each sector of healthcare are big and getting bigger. They’re doing well for the most part, based on their most current earnings reports (below), and they are getting bigger.
(1) Income loss from operations
Highlighted indicates 2Q data since 3Q not reported as of 10/30/15 1 Income loss from operations; Express Scripts only provides mail pharmacy services; it has no retail chains.There is no precise market share for each of the top players; an estimate can be seen here: http://www.mdm.com/2014_pharmaceuticals_mdm-market-leaders
But at the center in healthcare are local providers, and relatively speaking, they’re small. The reality is that those that deliver health care services in our communities—hospitals, physicians, post-acute providers, and allied health professionals are David in the land of Goliaths. Some local boards and medical groups say. “As long as we are able to fulfill our mission and serve our community, the big’s can’t hurt us.” But ask yourself: Did Walgreens or CVS ask permission of the hospital board or local physicians to set-up retail clinics in your community? Did the big insurer ask permission to enroll the patients in its care management programs and direct its members to providers they chose? Did the big employer ask permission to send its open heart and joint replacement cases elsewhere to get a better deal? And are digital health services doing a better job educating the local citizenry about the quality, costs and safety of the services provided than we do ourselves?
To compete in this industry, providers must get bigger, deeper and wider. Granted the regulatory climate is uniquely perplexing–regulations that constrain programs via certificate of need procedures, practice parameters set by licensing boards within state boundaries, antitrust issues and safe harbors that define markets locally while competing with organizations whose scope and scale is national and others. But regulation in healthcare is a framework, not a straight jacket. While the Affordable Care Act was seen by some as threatening, for many it’s unleashed innovation and growth.
For providers, going big means building a fully integrated system of health that spans a region, provides preventive, chronic, acute and post-acute services seamlessly in a variety of retail, virtual, alternative and traditional settings. It’s an organization whose brand connotes value and the breadth of its services and programs extends well beyond those compensated through third party payments. It takes full financial and clinical risk for its traditional programs and services under capitated agreements with multiple payers including its own plan. And its focus is total population health—from cradle to grave for the sick and the well. It connects health and human services and its investments in healthy communities and digital technologies to empower self-care are as critical to core operations structure as clinics, hospitals, ancillaries and post-acute programs.
For healthcare providers, the transition to big is not without risk, but the greater risk is to be run over by the big’s. There are certainly limits to going big: monopolies are carefully policed in our economy, but relative to the consolidation in other parts of healthcare, providers remain small and at a disadvantage.
The breadth and depth of services necessary to be a big system of health requires transformational leadership and well-equipped boards. The C suite must be led by a visionary leader with wide, diverse industry expertise and a board that’ shares a vision about the breadth of the enterprise of the future. It’s exciting, but scary at the same time, and not everyone will be happy with the changes.
In an ideal world, I would love to get my 5 am coffee and papers from a local barista but Starbucks is my only option at that time. They’re big but I like their coffee and I value their product. I feel no guilt about spending money at Starbucks though I recall an earlier day when they weren’t around at all. In some communities, the same reminiscing might be true of local health providers. In one sense, it boils down to go big or get out.
Category Statistics for Market Share Caluclations: Hospitals and Drug Manufacturers: IBIS World Report Data:https://www.ibisworld.com/industry/home.aspx; Health Insurers: Based on NAIC’s total premium data:http://www.naic.org/documents/prod_serv_statistical_msr_hb.pdf; Retail Pharmacy: Drug Channels Institute 2014 Report:http://www.drugchannels.net/2015/01/2014s-top-pharmacies-specialty-shifts.html; Drug Distributors: Modern Distribution Management 2014 Report:http://www.mdm.com/2014_pharmaceuticals_mdm-market-leaders
Organizational information: HCA Revenue %:http://mms.businesswire.com/media/20151027005999/en/493052/1/final_HCA_Reports_2015_3Q_Results.pdf?download=1; Ascension Health:http://ascension.org/~/media/files/community_investor-relations-pdfs/consolidated_ascension_financial_statements_for_year_end_june_30_2015.pdf?la=en; UnitedHealth Market Share:http://www.thestreet.com/story/13326781/1/unitedhealth-group-is-a-great-long-term-investment-despite-last-week-s-earnings-report.html; Health Insurance Market Share 2014:http://www.naic.org/documents/prod_serv_statistical_msr_hb.pdf; Anthem Earnings & Revenue: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTk5MjYxfENoaWxkSUQ9MzA5OTg0fFR5cGU9MQ==&t=1; Humana Earnings & Revenue: http://finance.yahoo.com/q/ks?s=HUM+Key+Statistics; Aetna Earnings & Revenue:http://finance.yahoo.com/q/ks?s=AET+Key+Statistics ; Drug Store Market Share:http://www.drugchannels.net/2015/01/2014s-top-pharmacies-specialty-shifts.html; CVS Results: http://www.cvshealth.com/content/cvs-health-reports-record-third-quarter-results; Walgreens:http://www.businesswire.com/news/home/20151028005411/en/Walgreens-Boots-Alliance-Reports-Fiscal-2015-Year-End
Other data are all from Yahoo Finance: http://finance.yahoo.com/
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.