Warning: "continue" targeting switch is equivalent to "break". Did you mean to use "continue 2"? in /nfs/c01/h03/mnt/37506/domains/strongerberger.org/html/wp-content/plugins/revslider/includes/operations.class.php on line 2539

Warning: "continue" targeting switch is equivalent to "break". Did you mean to use "continue 2"? in /nfs/c01/h03/mnt/37506/domains/strongerberger.org/html/wp-content/plugins/revslider/includes/operations.class.php on line 2543

Warning: "continue" targeting switch is equivalent to "break". Did you mean to use "continue 2"? in /nfs/c01/h03/mnt/37506/domains/strongerberger.org/html/wp-content/plugins/revslider/includes/output.class.php on line 3525
The New Reality of Healthcare Scale - Building a Stronger Berger

The New Reality of Healthcare Scale

The New Reality of Healthcare Scale

Via KaufmanHall »

This week, four game-changing healthcare deals were announced within five days. Despite different characteristics, these deals demonstrate a common message: that a whole different level of scale is needed to survive and thrive in the new market realities of healthcare.

On Dec. 3, CVS Health announced that it would acquire Aetna Inc. for $69 billion, forming the nation’s second largest company by revenue. CVS is the largest retail pharmacy chain in the U.S., with 2016 revenue of $177 billion and 9,700 stores; Aetna is the third largest health insurer in the U.S., with 2016 revenue of $63 billion and 22 million members. Together, the companies will be positioned to integrate insurance, primary and chronic care, and pharmacy benefits management, turning CVS’s stores and clinics into healthcare centers.

On Dec. 4, Advocate Health Care and Aurora Health Care announced plans for a merger that would create the 10th largest not-for-profit health system in the U.S., with $11 billion in annual revenue and 27 hospitals, serving nearly three million patients per year in Northern Illinois and Southern Wisconsin. The merger “is about transforming care delivery and reimagining the possibilities of health as bigger meets better and size meets value to benefit consumers,” according to Advocate President and CEO James Skogsbergh.

On Dec. 6, UnitedHealth Group/Optum announced it would acquire DaVita Medical Group for $4.9 billion. UnitedHealth is the nation’s largest health insurer, and DaVita Medical Group is one of the largest physician groups, including 280 primary and specialty care clinics. UnitedHealth/Optum already had more than 500 care locations from previous acquisitions. This deal shows UnitedHealth’s continued interest in rapidly increasing its provider assets—other than inpatient assets—to complement its insurance, data analytics, and pharmacy benefits services.

On Dec. 7, Catholic Health Initiatives and Dignity Health announced a definitive agreement to create the country’s largest not-for-profit provider health system by revenue. The organization would have annual revenue of $28 billion, and almost 140 hospitals and 700 care sites across 28 states. The system would have a broad footprint, primarily across the Western United States. Priorities of the new organization include expanding outpatient and virtual care, managing people with chronic conditions, and advancing digital technologies.

What Is Happening?

Although each deal is different in composition, scope, and model, these and other mega-deals are making a unified statement about the new realities of healthcare.

More Resources—A Lot More Resources—Are Needed to Be a Leader
Pressure is coming from all directions to transform healthcare into a more efficient, contemporary, effective, and consumer-focused enterprise. Transforming a highly complex, long-standing, change-averse $3 trillion industry that touches the nation’s entire population, including all businesses and governments, is not for the faint of heart or those light on resources.

A huge investment of capital and immense intellectual resources will be necessary to develop and incorporate technologies such as telehealth, remote monitoring, artificial intelligence, and precision medicine. Table stakes for leading this effort are considerably more than almost any single organization has.

Amazon and Apple Are Poised to Enter Healthcare in a Big Way
Jeff Bezos never met a $3 trillion industry he didn’t like. Amazon is now licensedas a wholesale pharmacy in at least 12 states. It has discussed possible acquisition of generic drug companies. It has a skunkworks project called 1492 focused on opportunities in healthcare, including telemedicine.

At the same time, Apple recently negotiated to acquire two medical clinic chains. Apple CEO Tim Cook told Fortune that healthcare “is a business opportunity… medical health activity is the largest or second-largest component of the economy…There’s a lot of stuff that I can’t tell you about that we’re working on… it’s a big area for Apple’s future.”

Companies like Amazon and Apple would introduce a level of competition that even the largest healthcare companies have never experienced. Amazon and Apple have a level of intellectual resources, aggressiveness, and access to low-cost capital unheard of in the history of American capitalism. When they enter an industry, whole sectors fall. Even huge companies like UnitedHealth and CVS are seeking additional scale to withstand the potential entrance of this new level of competition.

Becoming a Commodity Is a Real—and a Really Bad—Possibility
Whether insurer, retail pharmacy chain, or provider, any company in healthcare that focuses on a single business line is in danger of being commoditized. As large entities position themselves to manage broader healthcare ecosystems, component parts will lose influence over price and differentiation.

Recent moves by UnitedHealth and Aetna to diversify into patient care show their concern that health insurance is on its way to being commoditized, even for major players. Similarly, CVS’s moves into patient care and insurance suggest its concern that retail pharmacy will be commoditized.

Legacy health systems face a somewhat different path to potential commoditization. Companies like UnitedHealth/Optum and CVS are carving off pieces of the legacy health system portfolio that they can deliver at a high level of efficiency and convenience, a low level of cost, and a comparatively low price point.

For example, CVS/Aetna will likely make a business out of using data, analytics, pharmacy management, care management, remote monitoring, and the CVS footprint to manage chronically ill people outside of the hospital. UnitedHealth/Optum appears eager to invest in any major provider service that does not involve a large building. These organizations will be more than happy to take the low-cost, high-margin parts of healthcare, and leave the high fixed costs and complexity of inpatient care to legacy providers.

What’s Next?

The four deals announced this week are not isolated events, but four points on a trend line. That line is moving healthcare ever more steeply toward larger scale, new entrants, and new business models. The need for resources and competitive positioning will only intensify, and with them the pace, size, and scope of deals.

These new realities pose several critical questions for the executives and boards of legacy healthcare organizations:

  • How will we compete for the limited number of physician practices, surgery centers, urgent care centers, and other assets?
  • How will we enhance our cash flow and access to capital?
  • How will we gain access to a different level of intellectual capital?
  • How will we achieve a broad and strong market footprint large enough to advance our organization?

When we look back, this week will stand as iconic in the history of healthcare. The events of this week should influence the perspective of all healthcare organizations about their future role and business model. It will be up to every healthcare “provider” to gain a sense as to how to adjust and react to what is looking to be a new healthcare order.