Healthcare consolidation is rampant – and it’s placing huge demands on organizations to prepare for a future of fierce competition for informed consumers.
Consider a few statistics: Five for-profit insurers now control 43% of the market. More than 60% of community hospitals belong to a health system, and less than half of physicians own part of a private practice. Digital health venture funding exceeded $5.8 billion in 2017 while vertical integration mergers and acquisition deals topped $175 billion.
What do all these seemingly crosscutting statistics mean? The healthcare business is rapidly transforming itself even as large parts of it remain isolated, riven by dysfunctional management and stakeholder silos and burdened with legacy information systems.
The headlines show the furious activity as healthcare grows toward a $5.5 billion marketplace by 2025, representing 20% of the U.S. Economy. Health systems are buying community hospitals at the same time as mega-health systems alike Dignity and Catholic Health or Ascension and Presence are merging. The Rite Aid pharmacy chain has been gobbled up by Walgreens and Albertson’s, while CVS, Walmart, and Costco also battle for a share of the local pharmacy business.
On the payor side we’ve seen Centene acquire Health Net and Fidelis Care, and Anthem scoop up two Florida Medicare Advantage plans. But the real attention-getting action is around vertical integration, as CVS Health merges with Aetna, Cigna buys Express Scripts and Walmart tries to merge with Humana. All trying to streamline their supply chain by removing a middleman and owning different products or market-specific services.
And as if this wasn’t enough to track, everyone is still asking WWJD…What Will Jeff Do? With 100 million Amazon Prime members, the ‘Amazonification’ of healthcare has everyone looking over their shoulder!
Think future ready.
It’s important to understand what has unleashed this flood of vertical and horizontal integration in healthcare. While some point to the politicization and ad hoc dismantling of the Affordable Care Act while others say corporate America is simply fed up with rising healthcare costs and declining health status indicators on a global level.
Here are five business drivers behind the healthcare transformation movement:
1. Fragmentation As much as the term ‘healthcare system’ is thrown around…it’s not a system! Across every vertical, the healthcare value chain is broken. Care is uncoordinated, stakeholders are siloed, and communication across the care continuum is disjointed at best. As consolidation brings key health delivery components together – providers of care, payers of care, suppliers of care –fiefdoms will break down and begin to unify around the consumer.
2. Scalability As many healthcare upstarts are finding out, it’s a long road to success without customers. Operating costs are impossible to cover with the low brand recognition and immature market presence that goes with a small base of existing customers. Meanwhile think about combining CVS’ 9,800 retail outlets, 1,100 clinics, 94 million PBM members and 5.5 million Medicare drug plan members with Aetna’s 38 million customers (including over 2 million drug plan members). Scale can be a beautiful thing!
3. Efficiency Unsustainable administrative costs, red-tape bureaucracy, and legacy information systems plague the healthcare system now, with waste representing more than 20% of total healthcare expenditures. While the jury is still out on efficiency gains from consolidated health systems, mass-negotiated pharmaceutical rates, and even value- or outcomes-based reimbursement schemes, all must be studied and implemented.
4. Dominance New market dominators or ‘titans of healthcare’ will emerge, driven by dreams of efficiency and entrepreneurial spirit. That could threaten competition, when 90% of Americans live within 10 miles of a Walmart, 75% within 10 miles of a Walgreens and Humana has almost 9 million members.
5. Consumerism And don’t forget the consumer. There’s a reason why so many health care entities are hiring a Chief Experience Officer (CXO). They recognize healthcare consumer service stinks! At every step along the health care customer journey there’s friction, complexity and frustration. Hospital patients are filling out endless forms and still don’t have access to a personal health record. Health plan members are juggling high-deductible out-of-pocket plans only to find out there’s a claims appeal in their future anyway. Prescription drug costs for both acute and chronic conditions are seeing extraordinary (500+%) price hikes. It’s imperative for insurers to knit all this together into a consumer digital experience that is satisfying, not frustrating. Vendors like Zipari, where I am an advisor, help eliminate barriers among legacy systems to extract and present the data consumers need to manage their healthcare.
Consumers will drive the healthcare industry to be “future ready.” Whether it’s GenY or Millennials or Boomers, they won’t engage with the healthcare system the way it is structured now. They are demanding virtual health, telemedicine, retail clinics, wearables, and active aging. These all require a vast investment in information technology to weave together often-incompatible systems and deliver the data and applications the modern healthcare enterprise needs to recruit and retain consumers.
They want relationships with companies they can trust to make their healthcare simple: Be there when I need you, communicate with me honestly, deliver an experience that respects me, and do the right thing for my health.
Get future ready.
For some, jumping into the consolidation fray is the right move. As a buyer, while the landscape is competitive, climate for deals, access to capital, and availability of synergistic opportunities remains strong. If you’re a seller, timing couldn’t be better, assuming value and strategic alignment are strong…start a bidding war!
For those not interested or positioned for deal-making, the level of sustained market turmoil should be all the motivation needed to step back and take critical look at core business plans, operating assumptions, and growth strategies. It’s the ‘who, what, when, where and why’ assessment you need to compete and win going forward.