Companies often like to be in an economic sector that is staid and predictable. There is less stress and more predictability if you play this year’s game using last year’s game plan.
Customers, on the other hand, prefer competition and disruption because either or both reduce prices or improve quality.
As has been well documented, the US healthcare system is very, very expensive by comparison to the other first world, industrial nations. In most instances the costs for US healthcare are about twice per person in the population as the other countries.
We know that there is pent up demand for better value healthcare in the US. Government, employers and patients are all distraught about prices. Insightful insiders are also concerned about quality and outcomes, but this insight requires special knowledge of the healthcare space.
There are several ways to reduce total healthcare costs including:
1. Decrease the percent absorbed by the health insurers whose revenues are disproportionately large relative to the value.
2. Reduce unit costs. In the fee environment, there are two ways to increase revenues – sell more units and make unit costs higher. Extensive research shows that healthcare procedures costs are higher in the US and vary greatly across regions.
3. Reduce waste. Waste in the US healthcare spending comes from (1) excessive utilization, which is often the result of volume based revenue models, (2) having traditionally had no accountability for costs, providers often don’t recognize waste or, if they do, see don’t see waste as their problem or (3) the inability of the purchaser to determine what care is wasteful.
4. Take better care of the patients who have chronic diseases.
Of these, the fourth is a surprise to many, but shouldn’t be. The Commonwealth Fund and other analysts consistently report that 75% of US healthcare spending goes for the chronic diseases. It is very well understood that lower blood pressures, lower blood glucose, lower lipids, controlled asthma, optimally treated heart failure and COPD, etc. reduce costs.
Uncontrolled chronic disease drives expensive complications – strokes, heart attacks, kidney failure, amputations, heart procedures and inpatient and ER admissions to name only a few. It is impossible to control all of these events, but it is very possible to reduce them considerably. For example, about 70% of kidney failure derives from poorly controlled blood pressure and/or diabetes. Over 660,000 US patients have kidney failure and each costs a minimum of $100,000 per year until death and that is without transplant or other, frequently occurring co-morbid complications.
National data suggests that US healthcare does a terrible job in achieving good outcomes in the chronic diseases. For example, the CDC reports that only about 50% of hypertension patients have their blood pressures lowered to even a minimal standard. Because diabetes has several outcome parameters, diabetes results are far worse. Experts in virtually every chronic disease frequently decry the poor state of care for patients with that disease.
Most healthcare today is delivered in whole or in part by large health systems, typically consisting of one or multiple hospitals, a large medical group and a network of outpatient surgery, cancer and diagnostic services organized under one corporate parent. In a few markets there are independent medical groups who play a significant role in how the market functions. For the most part, these large organizations do not emphasize improved chronic disease outcomes.
The panic that US healthcare costs have engendered in the employers and the public – who often cannot afford their insurance premium plus their annual deductible – opens an opportunity for disruptors. CVS Health, for example, has just announced that it wants to get into the chronic disease space. CVS is not alone. Several venture backed entities are funding alternative primary care models pitched straight to employers while there are a host of technology interventions in design.
If successful, any of these disruptions threatens health systems more than their executives may recognize. In today’s contracting environment the health systems have a powerful advantage in that they and they alone can provide all of the services across the continuum of care. As such, they are in a position today to demand that a purchaser buy everything from urgent care through specialty care and inpatient services and, as “the only game in town,” they can demand their price.
Primary care is where chronic diseases are managed. Thus, primary care is where costs can be controlled for the most expensive portion of the patient population. Should some other party do an excellent job in primary care it could change the entire contracting paradigm. Other parties could break up the “soup to nuts” service model that gives health systems their current contracting advantage and start to institute competition in one area after another.
So, if CVS Health is successful in its wellness and chronic disease efforts it could, as owner of Aetna insurance, shop out knee replacements, stents, CABGs, etc. between different system providers. United Healthcare’s Optum play has a very similar strategy.
The best way to defend against these future disruptions is to be excellent in primary care, especially the chronic disease space. So far, that has not been a focus for most health systems or medical groups. They leave the door open for disruptive competitors at their own peril.