The story behind Kodak’s bankruptcy in 2012, after a century of market dominance, offers a key lesson for healthcare leaders. Kodak was not blindsided by disruptive digital technologies. In fact, a Kodak engineer, Steven Sasson, invented the first digital camera in 1975. Six years later, Kodak’s own market research concluded that digital photography could potentially replace the company’s core film business.
Neither was this a failure to respond. Kodak executives continued taking steps to grow the company but, unfortunately, they chose the wrong growth strategy. While the company made significant investments in digital, they did so with a focus on their core film business: for example, a digital camera that required pictures to be printed.
In hindsight, Kodak’s fall was inevitable. We all know what happened to film.
Hospitals and health systems are, of course, in a very different business than Kodak. Yet, today, healthcare leaders are facing their own Kodak moment—not a color-washed fond memory but a fork-in-the-road decision about how to grow their organizations.
Patient volumes are shifting to outpatient settings, payment pressures are intensifying from commercial and government payers, and consumers are becoming more price sensitive. At the same time, well-funded, nontraditional competitors are disrupting the market. Examples include CVS Health’s popular retail clinics and Apple’s HealthKit, which could alter how patients and clinicians interact.
Realistically, for many healthcare providers, significant future growth is unlikely to be achieved through traditional approaches, such as increasing rates or building a new inpatient wing. Using yesterday’s growth approaches for tomorrow’s marketplace is comparable to a salmon swimming upstream. Healthcare organizations that stick to their historical course need to prepare for a hazardous ride. The other possible route, which might have made all the difference for Kodak, is to seek new markets and broaden the organization’s role.
The “Who,” “Where,” and “What” of Growth
When considering how to expand and diversify an organization’s product and service mix, it helps to leave all business assumptions at the door. For instance, hospital and health system executives have traditionally and successfully focused on their core competencies: providing acute and specialty services. Growth has typically meant staying ahead of competitors in these traditional services, while ensuring cash flow and access to capital.
However, as they look to the future, healthcare leaders need to consider the entire spending pie. While about 52 percent of U.S. health spending goes for hospital and physician/clinical services, another 48 percent is spent elsewhere, for example on home care, personal care, and medical products. Instead of only considering, “How can we get more inpatients and outpatients?” healthcare executives need to ask, “How might we participate in some of these other services?”
Three overlapping questions can help healthcare leaders jumpstart conversations about their organization’s product and service mix:
Who are our customers? This analysis should provide critical insights into the organization’s current and potential patients as well as other customers, ranging from employers to fellow providers. Dividing each customer group into segments based on their needs and preferences, demographics, socioeconomic factors, and attitudes can help identify potential growth opportunities.
For instance, Wisconsin’s Bellin Health responded to the needs of large local employers, including the Green Bay Packers. Bellin’s booming direct-to-employer business, which includes on-site clinics and corporate wellness programs, has seen revenue gains between 12 to 18 percent in recent years.
Where are our markets? Leaders need to look afresh at their current markets for opportunities to grow their offerings and for unmet needs that their organization has the strengths and capabilities to fulfill. In addition, new markets should be scouted for potential growth opportunities at the regional, national, and international levels. Both face-to-face and virtual markets should be considered.
A good example of a health system spreading its expertise to new markets is the Mayo Clinic Care Network. Through arrangements with more than 40 health systems across the globe, Mayo provides specialty consults and second opinions to physicians and their patients, electronically and via video chat.
What products and services? Specifically, executives should assess which of their existing products and services might be expanded, while pinpointing potential spin-offs and entirely new products and services that would be a good strategic fit for the organization. For example, Dignity Health got into the urgent care and occupational health businesses after acquiring U.S. HealthWorks in 2012. The deal put Dignity Health into more access points and expanded the system’s interactions with employers.
The “How” of Growth
A critical fourth question to ask about product and service line growth is “How?” In other words, to expand or diversify products and service lines, should an organization build, buy, or partner? Each option has advantages and disadvantages. If it’s a matter of expanding an existing service, then the build route may make sense. If rapid growth is a priority, then buying or partnering with other organizations may be the preferred avenue.
Already the nation’s largest health insurer, UnitedHealth Group, has been rapidly growing its provider arm, OptumCare, via acquisitions. The subsidiary has more than 500 primary and urgent care locations and 22,000 physicians in 55 U.S. markets. Optum bought a number of businesses in recent years aimed at developing a full array of high-value ambulatory services. For instance, the acquisition of MedExpress in 2015 added 141 urgent care sites in 11 states to Optum’s umbrella. Most recently, Optum and Surgical Care Affiliates announced a merger in January. If completed, Optum would gain 205 surgical facilities, both outpatient and inpatient.
The Need for Urgency
There’s still time to avert a Kodak-like mistake and take steps to grow in new directions, securing future revenues and relevancy. But don’t delay too long. The disrupters are in a hurry to disrupt. For instance, UnitedHealth has seen double-digit revenue growth for its Optum subsidiary. One health analyst, Sheryl Skolnick, with Mizuho Securities, warned providers to watch OptumCare closely: “We expect Optum to be an increasingly disruptive technology, moving more care to outpatient and the home and owning more physician practices and practice patterns.”
Given the push for growth among such competitors, hospitals and health systems will need a strong sense of urgency about identifying and pursuing their own new growth opportunities.
Your comments are welcome. I can be reached at mgrube@kaufmanhall.com.