Healthcare Sigma

One consensus point is clear: healthcare volatility is way up. This is beneficial in some industries such as financial, or accepted in other industries such as retail. But this is new for healthcare. Expenses are rising faster than revenues, and our industry has been heavily criticized for waiting too long to react to changes. Waiting to see how regulations or markets shake out is an old strategy, no longer effective. We must learn to work with more uncertainty and evolve business models accordingly, because new competitors with new unexpected capital resources have entered the healthcare market (think Amazon, Google, Berkshire Hathaway). A couple of important questions then surface.

How is the distribution of the healthcare dollar changing? It is shifting away from health systems. For one, more goes to pharmacy supply chain. For another, it is shifting closer to consumers, with alternative services such as the one we discussed a few weeks ago – telemedicine companies, and new products from companies outside the industry as well. Margins are moving, but not to the hospitals. We are in an era of disintermediation, with alternatives that are reducing the hospital’s/health system’s attractiveness of where delivery should occur.

Why are margins so difficult to move? A big part of it is due to the significant capital budget changes in recent years. Health systems are now spending on IT, population health infrastructure, physicians becoming employed, and asset consolidation. EMRs and analytics are costly, with no effect on margins. Population health carries big fixed costs, with reduction in volumes of patients and an upside opportunity that really hasn’t panned out. And buying physician practices? Well any asset purchase where the metric measured is amount of loss per physician is just not going to improve margins. These capital investments just aren’t driving revenues up, so the return on investment is not good, and yet, there is a push to make further investments in value-based delivery of healthcare.

So how should the margin problem and volatility be addressed? There needs to be a greater focus on standardization (reducing clinical variation), expediting throughput and scheduling, and increasing clinician efficiency (but know this: increasing productivity in healthcare delivery is really hard). We need to get smarter in how we apply new models and where further IT investment produces value (meaning drives margins). We need to be proactive, not reactive, in creating new models of care that can compete with new market entrants with respect to access, experience, and cost.

Healthcare volatility doesn’t need to be bad, but it does need to be managed with careful deliberation, mid- to long-term strategic planning, and innovative thinking. Winners will be systems that can capitalize on change.