A new Oliver Wyman report suggests an innovative business model is soon going to disrupt healthcare’s status quo for good, especially as more incumbents and challengers begin – and continue – shaking up the market in areas of cost, regulation, and more. This shift –likely to be driven by customization – will occur even though the healthcare industry is still quite weak in certain foundational areas including affordability, value, and accelerated technological advance. And those resistant to change will need to step aside for those who embrace the coming healthcare revolution, as the time is now for healthcare’s long-awaited interruption. Here, in this report we outline just a few potential paths disruption will take in coming years.
Healthcare in the United States has long looked like an industry immune to disruption, with institutions too deep and interdependencies too intricate to allow radical change. Take, for instance, the division of the healthcare dollar: In 1960, 37 percent went to hospitals, 24 percent to doctors, and 11 percent to drugs; today, those shares remain effectively the same.
The rules of the game are well defined. To win, players need scale: scale in assets and facilities; scale in the ability to bundle services that align with benefit structures; scale in the ability to meet the broad needs of national employers; and, when negotiating, scale in the share of local market spending commanded. Scale has made those that achieve it essential to their markets, and in recent decades both payers and providers made sure to increase theirs.
Yet, even the most powerful business model can eventually run out of steam. Today, regulators are beginning to block mergers that limit competition as more and more geographies fall under the control of entrenched players; consolidations that do occur increasingly involve distressed assets. Both insurers and health systems are living with declining margins, which in turn has limited their ability to invest in the business. Companies are accelerating layoffs and looking for additional ways to reduce costs. The scale-based model may not be dead yet, but it is no longer a way to increase value.
Out With The Old
Worse, the traditional benefits of scale – cost synergies and efficiencies that deliver value to customers – have never been realized in healthcare. Players got bigger, but rarely better. It turns out achieving scale worked against innovation, ossifying the industry.
As the old business model withers, a new one is beginning to emerge. Based on our work with the healthcare industry and Oliver Wyman research of numerous other industries in disruption, we believe that in the next five years several foundational aspects of the healthcare market will be overhauled as organizations – both challengers and nimble incumbents – embrace new rules that are just now being written.
For healthcare, it is time to prepare for a post- scale world.
Unleashing The Value
One of the most important ways industries transform themselves is by exploiting trapped value. Trapped value is like potential energy for business: the difference between the value a company is creating and the value it could be generating, based on the needs of its customers.
Today the potential energy of healthcare is high, as both consumers and employers suffer with less-than-optimal products, high costs, and inefficiencies across the value chain:
- Costs have increased drastically, but outcomes are not demonstrably better
- Pricing is opaque, and it is difficult or impossible to assess the value of the product
- The experience of interacting with the system – across health plans, providers, and pharmacy – has remained complex, confusing, and frustrating
- Product evolution is painfully slow, with little innovation or differentiation
- The industry is dominated by generic offerings that try to serve everyone, and therefore serve no one well
As healthcare’s trapped value accumulates, the demands and expectations of consumers, employers and policymakers are mounting as well, with the gap between what is wanted and what is offered widening. Bottom line: Consumers, employers, and policymakers find healthcare’s seeming inability to provide affordable care efficiently, consistently, and conveniently to verge on the intolerable.
Clearly, the company or companies that unlock healthcare’s trapped value will reap rich rewards. And the catalytic regulatory, technological, and social forces that have fueled the rise of Amazon, Google, and many other innovators are increasingly being felt in the healthcare arena. Regulatory changes are enabling new reimbursement models; new data sources and insights promise to revolutionize diagnostic capacity and personalized care; and consumers are beginning to expect their doctors and insurance companies to provide the same convenience and personalization as online shopping or ordering a Lyft. (See Exhibit 1)
As these forces take hold in healthcare, they will make it possible to compete and deliver value in new ways: Organizations will deploy their resources differently, investing in a new and different mix of assets. The basis of commerce, profit, and strategic control will shift to respond to a new set of rules.
Three Paths To Interruption
Other industries provide clues to what a post-scale healthcare world will look like. In each industry that has faced interruption, we recognize in retrospect how releasing trapped customer value through business- design innovation has dramatically reshaped the industry. Whether we’re talking about brick-and-mortar stores versus Amazon or networks versus streaming, the shifts in value and relevance have been enormous.
The real question is, "Who or what will be the disruption that forces healthcare out of its increasingly less profitable comfort zone?"
We see three vectors along which healthcare’s interruption is likely to occur. Each addresses core elements of the value trapped by the industry today. Each is already beginning to move from ideas and hypotheses to evidence and momentum. Taken together, the three provide the basis of a new, post- scale healthcare industry that operates in a fundamentally different way.