New competitors and new technologies are moving to upend the healthcare industry. To prepare, traditional healthcare organizations can use strategies of the Internet economy.
In some industries, disruption occurs in a major swoop. Blockbuster went from generating more than $5 billion in revenue in 2008 to being bankrupt in 2010, thanks in large part to management’s inability to get ahead of streaming and on-demand video.1 Borders went from a $100 million profit to a $150 million loss within one year, and was bankrupt three years later, thanks to Amazon’s aggressive moves with e-commerce and e-books.2
In the Internet economy, disruption is not the exception but the rule. Large, fast-moving companies with innovation in their DNA and access to cheap capital are working every day to own whole sectors of the economy, usually with technology as their weapon of choice. This is a hyperdrive version of the classic path of disruption: Innovators take a complex, high-priced service and offer it with more convenience and at a lower price, attracting consumers, and drawing volume and revenue away from traditional providers.
In the Internet economy, disruption is not the exception but the rule.
With its high costs, often-inconvenient consumer interactions, and $3 trillion size, healthcare is all but begging for disruption. However, the path of disruption has been slower and more fragmented than in other industries due to healthcare’s size, complexity, regulation, physician- gatekeeper model, and lack of a homogeneous customer group.
Over the past decade, numerous forces have been chipping away at healthcare’s barriers to disruption. Moving into 2018, we see evidence of large and well-capitalized for-profit competitors using consumer- oriented technology to reinvent service models and draw volume and revenue from traditional players.
New Competitors Have Arrived, and They Are Big—Really Big
Kroger was doing fine. It was the nation’s largest grocery chain, with $115 billion in annual revenue and 2,700 stores in 35 states. It was the No. 1 or No. 2 chain in 98 of its 120 markets.3 More than 600 of its stores offered online shopping.4 Advanced data analytics made for efficient operations.5
Then the big kids got out of school.
Kroger now finds itself squeezed between giants. On one side is Walmart, leveraging its huge scale and sophisticated logistics to provide lower prices in far more locations than Kroger has. On the other side is Amazon, whose purchase of Whole Foods for $13 billion was a drop in the proverbial bucket of Amazon’s available capital. The move promises digital innovation in customer experience that anyone not named Jeff Bezos could barely imagine. After the announcement of the Amazon merger, Kroger’s market capitalization fell $7 billion in two days.6
Companies like Amazon, Apple, and Google can use their size, scale, and seemingly limitless access to financial and intellectual capital to enter new arenas with low risk. This phenomenon is coming to healthcare. Three examples follow.
UnitedHealthcare. UnitedHealth Group, No. 6 on the Fortune 500, is rapidly growing its urgent care, surgery center, and analytics presence through the Optum subsidiary. The company’s most significant recent moves were the $2.3 billion acquisition of Surgical Care Affiliates and the announced $4.9 billion acquisition of DaVita Medical Group, which has nearly 300 medical clinics—moves out of reach for virtually any single traditional healthcare system.7
CVS Health. No. 7 on the Fortune 500, CVS Health is using its size, scale, and large footprint to move into both the healthcare payer and provider spaces. CVS already offers routine primary care through its MinuteClinics (which are located within 10 miles of home for half of all Americans).8 It is working with insurers to expand its role in chronic care management. Even more significantly, as of this writing CVS has agreed to acquire Aetna, which would form the second largest company by revenue in America.9 The combined entity would have great power to manage healthcare costs and, according to The Wall Street Journal, “accelerate CVS’s existing efforts to remake its stores into health centers more akin to clinics, pushing it deeper into the healthcare provider space.”10
Apple. Recent reports reveal that Apple, No. 3 on the Fortune 500 and with a market cap of $800 billion, was in negotiations to buy medical-clinic network Crossover Health.11 Some analysts speculate that, along with its work on healthcare devices, Apple might use its 300 stores to launch a primary care service. Apple CEO Tim Cook said in September 2017 that healthcare is “a big area for Apple’s future.”12
Companies like Amazon, Apple, and Google can use their size, scale, and seemingly limitless access to financial and intellectual capital to enter new arenas with low risk.
The increasing presence of these competitors has big implications for hospitals and health systems:
- They draw volume and loyalty from legacy organizations. Optum, CVS Health, and others are providing highly accessible, low- price outpatient care alternatives to legacy health systems. Ceding these encounters to non-hospital entities would undercut one of the most valuable assets a community health system has: loyalty of its patients
- They take assets out of the system. Optum’s acquisition of Surgical Care Affiliates highlights the vulnerability of not-for- profit health systems to well-funded for-profit organizations that have the resources to acquire healthcare’s limited number of provider assets
- They threaten to overwhelm the not-for-profit influence on healthcare’s future. The scale of these corporate participants threatens to exclude not-for-profit healthcare from conversations about the future of healthcare taking place among technology, payer, retail pharmacy, and life- sciences companies
New Technology Is Taking Hold— but Not So Much in Hospitals
It is hard to overstate the omnipresence of digital technology in the U.S. Eighty percent of U.S. adults own a smartphone.13 Almost three quarters of adults have used an on-demand online service.14 Total digital media use has nearly tripled since 2010.
In this digital world, hospitals remain largely analog—in-person and campus focused. Only 14 percent of hospitals offer digital tools and information to enable consumer engagement, and only 23 percent offer a range of virtual and telehealth access points.15
For busy Americans able to use mobile phones for everything from video calls with distant friends to finding an inexpensive parking spot downtown, the lack of digital capabilities in healthcare is simply not acceptable. This is particularly true for America’s largest population segment, Millennials. Among this group:16
- 71 percent want to book appointments with mobile apps
- 74 percent would prefer to see a doctor virtually
- 75 percent look at online reviews before selecting a physician
- 42 percent have used synchronous video telemedicine
If legacy providers cannot offer this level of digital experience, others will. As noted, Apple has shown significant interest in healthcare, not only devices but patient care services as well. Entrepreneurial providers of direct primary care, such as Crossover Health and One Medical, promote their integration of a digital and in-person healthcare experience. And telehealth companies such as American Well and Teladoc are building national telehealth platforms that contract with traditional health systems, but also with insurers and large employers.
At the same time, breakthroughs in artificial intelligence and genomics promise to refine diagnostics to a new level. The expense and scale required to develop and use these technologies could put them out of reach of the typical community hospital, potentially centralizing many diagnostic functions and commoditizing the role of community hospitals. Healthcare is the No. 1 area of investment for artificial intelligence, focusing initially on radiology, pathology, and dermatology, as visual recognition improves. Geoffrey Hinton, a professor at the University of Toronto who is considered the father of artificial intelligence, characterized the effect of artificial intelligence on radiology this way:17
“I think that if you work as a radiologist you are like Wile E. Coyote in the cartoon… You’re already over the edge of the cliff, but you haven’t yet looked down. There’s no ground underneath. It’s just completely obvious that in five years deep learning is going to do better than radiologists.”
Payers Are Saying “Enough” to Hospital Prices
The longstanding concern about hospital prices has turned a corner. Payers are beginning to institute policies that mandate use of lower-priced, non-hospital providers, or hold the hospitals financially responsible for the difference.
In July 2017, Anthem began rolling out a new policy under which it will no longer pay for ambulatory MRIs and CT scans performed within hospitals without preauthorization of medical necessity.18 Anthem will provide physicians with names of alternative free-standing imaging locations for patients to use. The hospital, not the insured individual, would bear the cost of a procedure performed in a hospital that Anthem deems not medically necessary for that setting. By 2018, the policy will be effective in 13 of the 14 states that Anthem serves.19
The policy comes on the heels of Anthem’s decision to deny claims for non-emergent services provided in emergency departments in three states, pushing for patients to be seen through retail clinics, urgent care centers, and virtual visits.20
Anthem is not alone in this message to hospitals. The Centers for Medicare & Medicaid Services is reducing payments for outpatient services provided in hospitals and off-campus hospital outpatient centers,21 and is considering paying for total knee and hip replacements in ambulatory surgery centers.22
For hospitals, this means a very real possibility of volume and revenue loss. It is the classic disruptive scenario coming to fruition, with retail and urgent care clinics, and freestanding outpatient imaging and surgery centers providing services at a lower price and with greater convenience. Consumers and payers are shifting to these innovative entities, leaving legacy organizations with dwindling volume and revenue.
Five Strategies for Success
Healthcare organizations now exist in the Internet economy, and success requires that strategies be designed for that environment. A good place to begin is with the strategies of the Internet economy’s most successful companies. The five strategies below are adapted from those of Amazon, Apple, Facebook, and Google, as captured by NYU Professor Scott Galloway in his book The Four.23
- Perfect your product. In the Internet economy, the major point of competitive differentiation is a traditional one: the quality of the product or service. Google is the best search engine, and it has the 85-plus percent market share to prove it. Apple has built its entire business model on a simple and satisfying user experience of premium products.24 Healthcare organizations need to ask themselves a very tough question: How can you make the services you offer better than those of your competitors? Today those competitors include not only the hospital across town, but also retail clinics, telehealth companies, providers with a national reach and reputation, and many others. Can you perfect an aspect of service so that you “own” it in your market or your region? Can it become the basis of a new business model?
- Get serious about costs. For hospitals, costs and revenue tend to travel together and in the same direction. As revenues increase, costs increase, and as revenues decrease, costs decrease. Successful companies in the Internet economy take a very different approach to cost. Their point of view is that they will deliver excellence at the lowest-possible cost—no matter the level of revenue. Thus, a company like Apple maintains high margins by pricing the iPhone as a luxury item and producing it at the lowest cost possible, using a rigorous approach to materials, supply chain, and assembly. For hospitals and health systems, getting serious about costs requires a holistic approach to the efficiency of the enterprise: divesting or repurposing services or facilities that are duplicative or low performing, reducing unwarranted clinical variation, and dramatically redesigning processes for better quality and efficiency.
- Remove friction. Amazon is one of the most successful companies on the planet in large part because of its obsession with providing a friction-free shopping experience. In just two years, ride-sharing companies’ share among ground transportation for business travelers increased almost six times, in large part because Uber and Lyft removed the friction of hailing, directing, and paying for a cab. Friction is rampant in healthcare— appointment scheduling, communication with and among providers, wait times, difficult wayfinding, repetitive paperwork, confusing billing, and perhaps most of all, lack of digital options for care and communication. Consumers put their heads down and tolerated the friction of the taxi experience until an alternative emerged, and then they shifted loyalty fast. It may well be that the most influential healthcare company of the Internet economy will be the one that truly simplifies the experience of care.
- Control the last mile. The great battle in retail today is to control the last mile. Whether through in-store pick-up or drone delivery, getting the product from the nearest possible warehouse into the customer’s hands as quickly and smoothly as possible is key to customer satisfaction and competitive differentiation. Access is a critical concern among healthcare consumers, but the industry is just beginning to apply Internet- era capabilities to putting care as effortlessly as possible within the reach of consumers. Mobile healthcare and telehealth, conveniently located clinics, online scheduling and information, remote monitoring—all of these are in their infancy, but are being pursued rigorously. However, much of the effort to master the last mile of healthcare is taking place outside legacy organizations—by tech companies, app developers, telehealth companies, and entrepreneurs. Internet-era companies know that controlling the last mile is key to customer engagement, trust, and loyalty. Legacy healthcare organizations cannot cede this connection to others and expect to thrive.
- Accelerate careers. Among Silicon Valley companies the war for talent is legendary. Facebook founder Mark Zuckerberg personally calls promising graduate students in artificial intelligence, and sometimes a starting salary is in seven figures.***25*** Along with money, a key attraction of innovative firms is the opportunity for employees to accelerate their careers—to get new opportunities, and to put a respected company name on their resumes. In the Internet economy, healthcare is part of this war for talent—a need for innovative thinkers with expertise in new technology, digital engagement, artificial intelligence, genomics, and advanced analytics. Thus, healthcare organizations will need to figure out how to be viewed as a career accelerant—and that likely means providing an environment highly conducive to experimentation, innovation, and career mobility, and one that is unencumbered by healthcare’s tradition of risk-aversion and incrementalism.
Healthcare organizations now exist in the Internet economy, and success requires that strategies be designed for that environment. A good place to begin is with the strategies of the Internet economy’s most successful companies.
The disruptive forces in healthcare are gathering strength. They are as large as the largest companies in the country and as advanced as the most cutting-edge technology. These forces threaten to erode the financial strength, consumer loyalty, and relevance of legacy healthcare organizations. However, another threat is even more serious: the threat that legacy healthcare will continue to bring an old-economy mindset and old-economy strategies to the challenges of the ever more powerful Internet economy.
References
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22 Centers for Medicare & Medicaid Services: “CMS Proposes Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Changes for 2018, and Releases a Request for Information (CMS-1678-P).” CMS, July 13, 2017.
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