Healthcare Megatrends, Part 1: Shifting Risk
While debates continue on the pros and cons of health reform, one fact remains: the marketplace is changing.
There has been approximately $1 trillion in health care M+A activity since 2008. Payers are becoming providers, providers are becoming payers and placing insurance products on the exchanges, benefit consultants are creating exchanges, payers are looking increasingly like IT companies…and dialysis provider Davita is now in the business of providing integrated care after their $3.6 billion acquisition of HealthCare Partners.
Over the past three years the Affordable Care Act was approved, then nearly pulled back, and is now being implemented with iterations along the way.
Here at Aberdare Ventures, where I am a partner, we view these policy inflections as merely accelerators to change in the healthcare sector. The fundamental drivers, however, are the work of macroeconomic forces—rising health care costs to payers, employers and individuals.
This evolution gives rise to new opportunities. Incentives are re-aligning and the industry is reconfiguring, morphing service lines and adopting new technologies.
Reform should result in a more cost-effective and consumer-centric health system. However, the situation is complex and it is difficult to predict which business models will prove sustainable given this period of flux.
This is the first in a series of articles that extrapolate beyond policy inflections, market reactions, and technology innovation to highlight underlying investment themes. Given the complexity of the industry, a deep understanding of these topics is required to create viable disruptive companies.
Megatrend #1: Transfer of Risk to Provider Systems
The clock is ticking. As we hurtle toward the implementation of the Affordable Care Act, the Department of Health and Human Services and Secretary Sebelius are driving to get the bulk of the Act’s complex provisions online. All eyes will be on whether Washington will be able to execute the biggest expansion of government since the introduction of Medicare and Medicaid in 1965.
While this project is massive and there will be plenty of media coverage, almost all of this sound and fury will miss the point. The big story should be that a quiet revolution is happening in healthcare, and it is being driven by changes in the way we pay for it.
In the current dominant system, called “fee-for-service,” we (or, more likely, our insurers) pay a price for every piece of healthcare we consume. Need an operation? Here’s a bill. Did it require anesthesia? Here’s a bill. And while we are at it, here are bills for the hospital stay, your medications and even the bedpan.
This system incentivizes healthcare providers like hospitals and physicians to give you as much healthcare as you can handle at the highest price possible. For the most part, patients go along with this, especially if they are charging it to their insurer’s credit card.
The system is clearly broken, and we need to find a way to change the way healthcare providers are incentivized. Whether it’s through an accountable care organization (ACO), bundled payment, or a patient-centered medical home, hospitals are increasingly evaluated by (and paid for) what occurs outside of their four walls. Risk is shifting and we are moving away from a transaction-based payment model. This shift in business models is similar in magnitude to the way online shopping is disrupting bricks-and-mortar stores or the way Netflix and HBO are changing entertainment—but most people outside of the healthcare industry are not aware of it.
We can’t predict which of the models for managing risk will be successful, but it’s clear that providers must adapt to an environment where patient health and well-being outside of the institution has a significant impact on hospital revenue. Moving forward, hospitals will have to become care delivery networks, as opposed to standalone entities, that are capable of managing the full continuum of care in various settings all the way to the home.
Optimizing for Change: The Role of Technology and Innovation
Although this move toward delivery networks is underway, it won’t happen overnight. It’s hard for systems focused on driving transactions to suddenly pivot to managing risk. Many have optimized their systems, processes, culture and technology for a fee-for-service environment and it won’t be easy to untangle the web and reconfigure.
Before new technology may be applied to this equation, hospitals need to experiment and implement appropriate payment models. They then need to transform their clinical and operating processes to facilitate truly coordinated care. (Health systems are currently at various stages in this evolution, which creates fragmentation in today’s market.)
To enable this transformation, a new set of companies will emerge to provide the services, tools, and technologies that enable legacy providers to get paid in the evolving landscape. Healthcare systems will be happy to pay for offerings that help keep the costliest patients healthier and out of the hospital. Well, that’s our bet, anyway.
So while the focus is on the scramble at the state and federal levels to implement the upcoming wave of Obamacare provisions, this hides the real tsunami of change that is coming to the business of healthcare. That is the big story.