The clock speed of the healthcare industry has been accelerating for years. And now the pace is growing frenetic. Consider the news from just one week. U.S. insurer UnitedHealth Group, which has been building its Optum subsidiary into a health services juggernaut, acquired DaVita Medical Group, adding significantly to its roster of 30,000 physicians. The blockbuster combination of CVS and Aetna will blur the lines between care delivery, care management, and retail. Should the deal close, the combined entity’s reach will be impressive. Some 70 percent of the nation’s population resides within five miles of a CVS–Aetna location.
The latest dramatic corporate moves are playing out against the backdrop of broader regulatory uncertainty surrounding proposed changes to the Affordable Care Act (ACA) and the Medicaid program and of the systematic shift toward a more consumer-oriented, value-driven and cost-effective health system.
Over the next five to 10 years, up to $1.5 trillion in healthcare profits could be up for grabs.
The level and scope of consolidation highlights the ways in which companies continue to place large bets even amid the continual disruption and uncertainty. But it’s evident to us that it is both necessary and advisable to take action — even when we can’t be entirely sure what the market will look like in five or 10 years. Market participants that can manage dynamically with a sharp eye focused on value creation can gain an advantage. The path to doing so starts with three major steps: understanding future money flows and sources of value; identifying viable business models and choosing a suitable “way to play”; and developing a resilient strategy that combines no-regret moves likely to pay off in a variety of scenarios, offensive plays, and investments that create option value.
Future Money Flows and Sources of Value
As we’ve noted, the vast and powerful forces at work are fundamentally reshaping the way money will flow through the healthcare system. Over the next five to 10 years, up to US$1.5 trillion in profits could be up for grabs. A demand-driven restructuring of the industry in which consumers become decision makers, creating almost $400 billion in value in the form of lower prices through better competition between providers. Providers could capture a significant amount of value as supply-driven restructurings lead them to take on risk and focus on prevention over treatment. Material changes to the ACA and other regulatory actions could place $200 billion of profits at risk.
Looking ahead, we see three key sources of value that healthcare industry participants can mine.
Creating medical value. In the supply-driven scenario, insurers capture value by making more effective use of the existing pool of healthcare dollars. Profits will be created by improving care coordination, reducing hospital readmissions, redirecting patients from high-cost settings, managing wellness levels and utilization rates across populations, and adopting value-based care.
Winning consumer trust and loyalty. In the demand-driven scenario, the market “retailizes.” Consumer choice becomes more powerful. Consumers will shift their focus to quality, convenience, and transparency, spurring models such as tele-health and mobile surgery and placing a greater emphasis on using patient health records to manage care and spending.
Enabling. In either of the above scenarios, products, technologies, and services that support and enable the new business models will find strong demand. Already, startups that specialize in digital patient engagement or provider enablement are receiving a substantial share venture capital funding.
Ways to Play
The drivers of disruptions are forcing the industry to reconsider old boundaries and embrace a reconfiguration of the value chain through different vertical integration possibilities. Several ways to play that are integrated regionally or nationally will co-exist, and some will be better positioned than others to control, create, and reap the benefits.
Scale insurers. By controlling insurance dollars, these large companies can build up scale in data and analytics, and join forces with provider networks to enable consumer-friendly population health models. Although they reduce risk by building national scale, they won’t own the delivery of care so they won’t benefit from the efficiency advantages that vertical integration confers.
Larger integrated insurers. By combining medical and pharmacy benefit management, these companies can gain broader access to data over the continuum of care, and can partner with provider networks. As with insurers, they will miss out on some of the advantages of vertical integration.
Retail healthcare insurers. By uniting medical insurance, pharmacy benefit management, and a retail presence under one roof, these companies can gain synergies through the collection of data, the ability to increase traffic in the retail component, and the possibility to pivot into retail care. A retail presence can enable the construction of a national operator with lots of local touchpoints, offer significant synergies, and lead to the creation of an entirely new care model. They will still have to rely heavily on networks of providers.
Home healthcare insurers. Uniting medical insurance, pharmacy benefit management, and home care in one organization gives players greater control over a large volume of spending and enables much greater coordination of care. This approach is likely to be attractive to companies serving Medicare and Medicaid populations, though they will have to assemble provider partnerships at the local level.
Consumer engagement insurers. By combining medical insurance with digital interface platforms, these companies can directly control member engagement across a variety of channels — beyond the narrow confines of a doctor’s office or hospital. These players will be particularly well positioned to partner with provider network to enable population health and other consumer-friendly models.
The Resiliency Factor
Regardless of a company’s chosen way to play, it’s important to keep a powerful factor in mind: resilience. Thriving in this environment isn’t just about reacting to changes or responding to uncertainty. Rather, it requires the ability to construct a collection of tactics and approaches that enable the company to weather changes more robustly. Instead of placing all the chips on a single bet, it makes sense to invest in a portfolio of actions that build resiliency.
Companies should channel between 30 and 50 percent of investments into what we call no-regret actions — investments that are likely to pay off regardless of the policy outcome. These investments could include better contracting and supply chain management. At the same time, companies should deploy between 30 and 50 percent of their investments into initiatives that allow them to rethink the existing business model, test new modes of doing business, and place bets while playing offense. Many offensive bets will focus on how technology such as virtual health can create a better consumer experience at a lower cost. Finally, companies should deploy a small portion of their investment budget — 5 to 20 percent — into option-value bets. These are the bets that may change the paradigm of how health is delivered and paid for with new combinations of companies that seamlessly connect virtual health delivery with a retail model.
This may sound like a conservative approach, especially in an era in which massive deals threaten to reorder the vast healthcare sector. But this is a long game, and we are only in the opening innings. The forces currently influencing a sector that accounts for about one-sixth of the U.S. economy will be reshaping businesses for years to come. It’s never too soon — or too late — to look ahead to consider how profits will shift, what business models will make sense, and how to construct a ship can resist the forces buffeting it.
- Sundar Subramanian is an advisor to executives in the healthcare industry for Strategy&, PwC’s strategy consulting business. Based in New York, he is a principal with PwC US.
- Igor Belokrinitsky is an advisor to executives in the healthcare industry for Strategy&. Based in San Francisco, he is a principal with PwC US.
- Jay Godla is an advisor to executives in the health and corporate and business strategy practices of Strategy&. Based in Chicago, he is a principal with PwC US.
- Also contributing to this article were PwC US director Christoph Dankert, partner Kelly Barnes, and principal Jeffrey Gitlin.