Disruption, Consumerism and Demand-Side Incentives

From Volume to Value

Profit

Time

Volume Driven

Value Driven

Chaos Zone

Supply Side Incentives(or risk sharing)

FFS

P4P

VBP

BPACO

Full Capitation

Type of Plan

Level of Provider Risk

Model of Disruption:Steel Industry

• Two ways of making steel– Massive integrated steel companies $10 billion to start– Mini Mills

• Melt scrap in electric furnaces• Don’t have to scale up the down stream process• Make steel at any given quality 20% lower costs

• Steel is a commodity– If you were a integrated company would you adopt the

mini mill?

Flee or Fight

• Prior to the late 1960s, integrated mills were doing all

types and were making buckets of money

• Late 1960s mini mills came on to the market– Melting scrap, quality was low and could only

participate in rebar market – about a 7% margin

Flee or Fight

• Integrated mills were happy to get out of rebar– Why fight for a 7% gross margin?

• Profitability of integrated mills increased as they left rebar

• Profitability of mini-mills increased as they entered rebar

• Everyone was happy

• But then in 1979 last integrated mill exited rebar– Price of rebar collapsed– Competition drove prices down to where mini mills were barely

making money.– Becoming more efficient only a recipe for survival– Looked up!

Flight or fight?

• Same thing happened

• Mini-mills entered “bars and rods”

• Integrated mills were happy to leave (higher profit

margins in higher quality steel)

• Mini-mills were 20% cheaper so made profit

• Until 1984

Guess what happened?

1975 1980 1985 1990 1995

Quality

Rebar

Bars and Rods

Structural Steel

Sheet Steel

Quality of integrated mill’s steel

Quality of m

ini-mills

steel

7%GM

12% GM

18% GM

24% GM

• Eventually integrated mills only producing specialty

steel

• All but one integrated mill has gone bankrupt

• “stupid manager”?

• No stupidity involved

• Innovators Dilemma

Innovator’s Dilemma

• Firms have a choice:– Make better products that we can sell for more

profits to our current customers?– Or make worse products that none of our

customers would buy and would ruin our margins? – Companies can put too much emphasis on

customers' current needs, and fail to adopt new technology or business models that will meet customers' unstated or future needs

Innovator’s Dilemma

• How to defeat a giant?– Go after best customers?– Enter the bottom

• Giant is motivated to flee rather than fight

• Toyota– Entered in the 1960s

• Corona

– Ford GM, were happy to let them have it

• Today Kia and Hyundia

Types of Firms

• Solution Shop– Built to diagnose and solve unstructured problems– Deliver value primarily through people

• Focused Factory– Transform inputs of recourses into outputs of greater value– Capabilities are built more into its processes than its resources

• Facilitated Network– Meant to enable people to exchange things via a platform.– ebay, Craig’sList, telecoms

Innovation in Health Care

• The successful innovators are those who will be able

to un-jumble the mix– Simplify the process– Where is “the bottom”?– Minute Clinic: focused factories– Facilitated user networks?

• User networks shift care of chronic diseases out of intuitive based practices (solution shops)

• PatientsLikeMe

Challenges to new business models

• Lack of a retail market– How to create Demand-Side Incentives?– Consumers need the proper incentives to shop

• Health Savings Accounts?• Population Health Management?

• Regulatory barriers– CON and other laws make innovation difficult

• Incumbents will often use regulation as a cover– “What’s good for GM is good for America”

Demand-Side Incentives

• Value-based purchasing are all supply-side

innovations– Some explicitly prohibit financially incentivizing

consumers

• As an alternative there are various movements which

are giving consumers greater incentives to produce

health more efficiently

The Unique Health Care Consumerism Challenge

• Information asymmetry between the medical professional and the patient

– The shopping problem• Uncertainty

– Demand is irregular and unpredictable – Often during highly stressful and emotional times

• The dichotomy between the consumer and the payer– Price isn’t always the signal it is in other markets

• Difficulties teasing out both demand and need– Quality is hard to define/measure/agree on

The Rise of Consumerism

• Increased cost sharing and transparency– Patients are being forced to be better consumers

• Increased options for the consumer– Demanding higher quality services

• New types of entrants and diseconomies of scope– Opportunities abound for entrepreneurs

2009 2010 2011 2012 2013

40%

46%50% 49%

58%

13%17%

22%26%

28%

Small Firms (3-199 Workers)

Large Firms (200+ Workers)

Particularly Severe for Out-of-Network Care

Employer Shifting Risk by Increasing Cost-Sharing

2009 2010 2011 2012 2013

$680$760

$1,010$940

$1,230

$1,000

$1,380

$1,750

$1,570

$2,110

In-Network Out-of-Network

Average In- and Out-of-Network Deductibles for Group Plans

n = 1,100 employers

Percent of Covered Workers Enrolled in a Plan with a $1,000+ Deductible by Firm Size

Single Coverage

HDHP/HSAs on the Rise

Low-Wage Employers Most Active Today, but Skilled Industries in the Wings

Source: Accenture, “Are You Ready? Private Health Insurance Exchanges are Looming;” privatehealthexchange.com; Health Care Advisory Board interviews and analysis.

Huge Growth Forecast for Private Exchanges

2014 2015 2016 2017 2018

3M

9M

19M

30M

40M

Potential Growth Path for Private Exchange Enrollment

Prominent Employers Using Private Exchanges

For Active Employees:

For Retirees: (Medicare Advantage, Medigap plans)

Private exchange operators as of October

2014

172

Catalyzing a Shift in Network Demands

Market Forces Turning Patients into Consumers

Traditional Market Retail Market

Growing number of buyers1

Proliferation of product options2

Increased transparency3

Reduced switching costs4

Greater consumer cost exposure5

Passive employer, price-insulated employee

Activist employer, price-sensitive individual

Broad, open networks Narrow, custom networks

No platform for apples-to-apples plan comparison

Clear plan comparison on exchange platforms

Disruptive for employers to change benefit options

Easy for individuals to switch plans annually

Constant employee premium contribution, low

deductibles

Variable individual premium contribution, high deductibles

Characteristics of a Traditional vs. Retail Market

Rising Consumerism

• What people want is changing– Consumer expectations of better services and

experiences are rising– New choices and options

• Choices of services, products, devices, and providers• Clinics in retail stores, convenient care, telehealth,

mHealth, etc

Primary Care: A Growing Network of Immediate Access Choices

Markets Responding to Unmet Needs

Traditional Access Points

Consumer-Oriented Access

Points RetailClinic

Urgent Care Center

Virtual Visit

Primary Care Office

Low Acuity High Acuity Emergency Department

Consumer-Oriented Service Delivery Sites Filling the Gap

Driving Provider Questions (Fight or Flight?):• Should we partner to establish retail clinics?

• Should we build or expand our urgent care footprint?

• Is virtual care something that we should provide?

• When should we enter into partnerships to meet patient demands?

Facilitated Networks

• strong networks of personal support and industry influence– Open Research Exchange– Data for Good

Direct Primary Care

• About 4,400 physicians today, as compared to 146 in 2005

• Monthly fee, allows physician to be the shopper for the patient

• Are these “risk bearing entities” and should therefore be licensed and

regulated as such?

Rising Consumerism

• New entrants view health care through a different

lens– Targeting specific markets/problems

• Clinical delivery• Health and wellness• Population health• Data analytics

– Helping the consumer (or employer) to overcome the shopping problem

Price Transparency

• Driving access to cost and quality information to help

consumers make better choices and manage

expenditures

• https://www.youtube.com/watch?v=sPWVoNbn82s

Price Transparency

– Creating open marketplaces where consumers and providers negotiate and agree upon the price for procedures

Patient Engagement

• Carrots and sticks of motivational and behavioral

change levers

Patient Engagement

Behavioral Change TherapyMobile softwaregamification

Smoothing the interface between Patients and the health care system

•physician locator and scheduler

•streamlines appointments and scheduling

•text messaging service that links patients and providers with personalized reminders, education, and support

Economies of Scope

• Health care typically packaged as one-stop shop –

large economies of scope in traditional health care

system

• All these innovations are pointing to a change– Maybe much more specialization

Demand Side vs Supply Side

• Note these may not be compatible– HSA vs Capitation– Supply side movement suggest we will have fewer

large health care systems delivering care– Demand side movement suggest the opposite –

• lower barriers to entry• Increased Information• Transparency • Consumers are better shoppers• More narrow product lines

Conclusion

• Health (r)eform – the market experimenting with

alternative financing models– Provider driven?

• Give providers incentives to keep people healthy– ACOs, Population Health Management, etc.

• Give providers incentives for price competition– Narrow Networks, private exchanges

– Consumer driven?• Give consumers incentives to stay healthy

– Health savings accounts, technology, entrepreneurism.