For almost a century, the model for buying and selling new cars in America has remained basically unchanged. Customers visit automobile dealer franchises, usually on large lots on the outskirts of town. Customers browse the cars available on that lot, test drive their favorites, negotiate the price with a salesperson, and purchase or lease the car.
According to the National Automobile Dealers Association, the franchise model benefits consumers by creating competition among dealers, benefits local communities by creating jobs, and benefits car manufacturers by providing a free distribution channel. Every state in the country has laws that support the franchise model and discourage automakers from selling directly to consumers.
Car dealers act as gatekeepers, much as physicians do in the healthcare system. Car shopping is largely limited to in-person interaction, much like healthcare. And innovators are in the process of fundamentally rethinking the entrenched auto sales model, much like the fundamental changes emerging in healthcare.
New Models for Auto Sales
Tesla, the manufacturer of electric cars led by Elon Musk, has dispensed with the dealer model entirely and substituted a radically simplified approach. Tesla uses small stores and “galleries” in well-trafficked shopping areas, where consumers can learn about the technology and car models available. In most states, Tesla is prohibited from actually selling cars at these facilities, in which case customers are directed to the Tesla website to make their purchase. Lynk & Co, a new Chinese automaker, plans to enter the U.S. market in 2019 with a similar sales model combining boutique stores with online sales. For Tesla and Lynk, this direct-to-consumer approach reduces costs by eliminating dealer mark-up, dealer inventory, and traditional advertising. For consumers, it eliminates the need to travel to and negotiate with dealers, and removes the limitations of an on-site inventory.
The automobile purchasing model is changing as well. Lynk will focus on selling what it calls subscriptions—an arrangement similar to a lease under which customers can exchange their cars after a one- to three-year period. In addition, Lynk cars will have technology that allows the car owner/subscriber to rent the car to others. Further diversifying the options for car ownership are app-based car-sharing services like Zipcar and Maven, and ride-sharing services like Uber and Lyft.
The most dramatic evidence of the appetite for a new approach to automobiles and auto sales is the news in April 2017 that Tesla’s market valuation surpassed both Ford and General Motors, despite the healthy balance sheets of those two 100-plus-year-old companies. Tesla barely registers in a comparison of sales volume: In March 2017, Tesla sold 4,000 cars compared with 256,000 for G.M. and 234,000 for Ford. However, what captures the imagination of investors is Tesla’s potential for rapid growth. In the first quarter of 2017, Tesla’s sales grew 69 percent over the first quarter of 2016, compared with relatively flat performance for Ford and G.M.
Resistance to a New Model
Not everyone believes that car purchasing can be simplified or that the existing model is flawed.
One industry analyst said that for most Americans, dealing with trade-ins and financing makes car buying more complicated than “this strange notion that who comes to [Lynk] is going to be able to click online, pick the color, pick the interior, pick whatever style—and please send it.”
Regulatory issues present another very real barrier to this new model. Similar to Uber’s battle with regulations designed for the taxicab model, Tesla continues to face legal challenges in various states for the right to sell cars outside of the franchise dealer model. Lynk says that the reason it is waiting until 2019 to begin sales in the U.S. is to have time to work through legal barriers to its sales model.
The chairman of the National Automobile Dealers Association, Jeff Carlson, believes that the direct-to-consumer model could lead to higher prices. He recently said, “The public policy makers are going to go to the consumers and say which [model] do you want? The discounted product? Or the product at retail?”
However, as with other disruptive forces, regulatory and legacy resistance is unlikely to slow the pace of change that is well underway.
Lessons for Healthcare
Like the auto industry, healthcare is seeing the rapid rise of new models of care, including retail care, team-based care, population health management, concierge practices, telehealth, and genomics/artificial-intelligence-driven precision medicine. The impetus for these new models also reflects that of the new models in the auto industry: to develop a new business model that more directly meets changing consumer needs and that reduces costs embedded in the existing model.
As in the auto industry, healthcare is seeing strong momentum from new competitors. Walgreens is the nation’s No. 2 provider of flu shots (behind the federal government). CVS has surpassed 30 million patient visits at its in-store clinics. IBM is pinning the company’s future on artificial intelligence, with a primary focus on healthcare, where the company invested $4 billion in just 10 months. The largest portion of Google’s venture capital investments is in healthcare. There have been 190 equity investment deals in healthcare artificial intelligence startup companies in recent years for a total of $1.5 billion. And recently, Amazon invested in GRAIL, a startup company focused on genomic sequencing for cancer diagnosis.
As healthcare makes this profound transition, the examples of Tesla and Lynk offer important lessons for legacy hospitals and health systems.
Offer options. Not every consumer has the same needs, and those needs vary depending on the situation. Some people drive to work, while others drive only on weekends. Some people prefer to see a physician face to face and rely solely on his or her expertise, while others are comfortable with digital interaction and want to do their own research. The goal, then, is not so much to eliminate the existing model, but to offer choices tailored to individual wants and needs. “This is not against dealers,” said Lynk Senior Vice President Alain Visser. “This is showing that we have alternatives to the existing model.”
Focus on millennials. There are more than 75 million millennials, and they recently surpassed baby boomers to be the nation’s largest age group. This group came of age at the same time as the iPhone, Amazon, Netflix, Twitter, and Facebook, and their preferences reflect that experience. Eighty-four percent of millennials say their mobile device is essential to the work they do, and 51 percent of millennials say that they run their lives from their mobile devices, according to 2016 Salesforce.com research. In healthcare, 70 percent of millennials would chose a primary care physician who offers an app for online appointments and bill paying over one who does not, 64 percent are open to virtual care treatment for non-urgent matters, 42 percent have used video telemedicine, half have emailed their doctor, and one-third have downloaded a health app in the last 30 days, according to 2016 Rock Health and Salesforce.com research. Tesla and Lynk are especially focused on millennials, and it is critical that healthcare do the same.
Integrate digital and in-person experiences. Tesla and Lynk are following the successful path of Apple to seamlessly combine a convenient, engaging, and educational in-store experience with online research and shopping. Like many other legacy entities, hospitals and health systems have a long way to go in this regard. They will need to improve their front-line digital interaction: accessing provider information, getting health information, scheduling appointments, paying bills, communicating with providers, accessing test results, reviewing medical records, and renewing prescriptions. They will need to provide synchronous and asynchronous connectivity for low-intensity and chronic health needs. They will need to use engaging digital methods for patient education. They will need to use remote monitoring. And they will need to integrate these digital interactions with electronic medical records and networks of retail clinics, urgent care centers, and inpatient facilities that are aligned with the demand for different types of healthcare services in the community.
Think big. The most important lesson from companies like Tesla and Lynk is the importance of questioning the status quo in a fundamental way. The existing model may have a long history, be supported by regulations, be intrinsic to existing structures and processes, and be accepted by many consumers. However, a new model may be far more agreeable to consumers, take advantage of new technologies, and be more economically and operationally viable. Tesla and Lynk are banking on attracting a segment of consumers interested in a new type of vehicle, purchased in a new way, and even owned in a new way. For Tesla, this model has meant rapid growth, a huge valuation, and a profit margin on its car sales, while traditional automakers rely more on service and add-ons for their margins.
While companies like Ford and G.M. have worked hard to streamline their existing operations and strengthen their financial position, they also recognize that major changes are occurring in cars and car ownership based on new technology and new consumer expectations. These companies are investing heavily for that radically new future, for example, in self-driving cars. In the same way, while legacy healthcare organizations work to improve existing operations, they need to recognize the radical changes coming and devote time, energy, intellect, and capital to envisioning and establishing bold new technology-enabled, consumer-centric models of care.
Modified and reprinted by permission from H&HN Daily, May 10, 2017. Copyright 2017, by Health Forum, Inc.