The passage of health reform hugely impacts almost every sector of the American healthcare industry. We should expect to see a substantially changed environment for innovation.
Directly, the law only modestly impacts incentives for innovation. It sets up a Center for Innovation to sponsor new forms of care delivery, creates an institute to assess the comparative effectiveness of treatments, funds a telemedicine pilot for a small number of the very sick, establishes a range of pilot programs to support quality efforts in healthcare institutions, and promises a national strategy for healthcare quality improvement by the start of 2011. These are all laudable initiatives but will do little to impact the overall innovation climate.
Indirectly, the law substantially impacts healthcare firms’ innovation agendas. The pharma industry is a clear winner, with extended protection for biologic drugs spurring investment in “personalized medicine” that creates high-value tailored therapies for relatively small sets of people (a sea-change from the blockbuster-oriented business model of the past). Other sectors may be most impacted by how the act affects incentives for health insurance firms (payers), hospitals, and physicians.
While payers could have come out far worse in this process, the law still requires a fundamental re-think of strategy and an embrace of disruptive innovations. Subsidies to bring the uninsured into the system will create a temporary uplift, but after 2014 it will be quite difficult for payers to differentiate their offerings, leading to severe pricing pressure in an industry that is already fairly commoditized. Payers will be required to accept all applicants for coverage, they will have less ability to vary prices, and their plans will have to meet certain minimum standards to qualify for inclusion on health insurance exchanges. To make good profits, payers will need to differentiate through working closely with care providers to improve healthcare outcomes, enhance the patient experience, and engineer costs out of the system. There is vast room for improvement along these dimensions, but change has been hindered by the Balkanization of American healthcare among fragmented payers, a profusion of hospitals and physician practices, and myriads of healthcare professionals who dislike having change dictated by insurance firms. No more.
The law will encourage payers to act much more aggressively toward healthcare providers, forcing them to accept changes if they are to stay in a payer’s network of institutions where patients can receive care at the best rates. Previously payers had feared giving their competitors an advantage through taking the lead in pushing change, in case the size of their networks shrank due to care providers resisting these initiatives. Now, payers know that their strategic environment will radically shift in a short time-frame; they must act soon. Even in fiercely competitive environments, firms can act in concert if the writing is on the wall – witness the simultaneous reduction in capacity that airlines have enacted since fuel prices spiked in 2008.
Big payers – Blue Cross plans, Aetna, etc. – will ally with providers that can make change happen, whether these are home monitoring systems for the chronically ill, disease management programs that tightly integrate with physician or pharmacist counseling, improved coordination among specialists, or novel surgical approaches that reduce hospital readmissions. They will also work with employers to improve workplace health offerings, reducing the need for expensive doctor visits. Small payers may have less leverage, given that the extent of their networks will have to meet minimum thresholds to qualify for inclusion on the insurance exchanges, but they have always lacked the scale to create systematic change; we may see substantial consolidation among these smaller firms.
Hospitals will benefit through being reimbursed for care of patients who were previously uninsured, but they will also face new pressures from potential changes in how Medicare pays (e.g. single “global payments” for a visit, rather than for a host of separate charges). Medicare will also stop paying for readmissions of patients, and for the consequences of certain errors. Hospitals will need to exert new pressure on physicians to change engrained habits, improve coordination among doctors caring for a patient, and work with outside entities to ensure effective post-surgical follow-up. Hospitals should welcome payer plans to launch these kinds of innovations.
Physicians will feel the heat from all these efforts. However they will also experience new demand from 32 million previously uninsured patients; if you thought it was hard to get time with your primary care physician, just wait until this law is fully implemented. Physicians should eagerly adopt innovations that enhance their efficiency.
There is certain to be friction along this path, and tense negotiations among payers, hospitals, and physicians are assured. Yet these difficult discussions have been necessary for some time. The technology exists to substantially improve healthcare outcomes and costs; now the industry has overwhelming incentive to embrace change.
For more on New Markets Advisors' thinking on healthcare, click here.
It reminded me of First Tuesday. During the Internet boom, throngs of start-ups would convene on the first Tuesday of each month to swarm around venture capitalists at some local watering hole. The air was electric!
Last week I attended a reception for people interested in “connected health” – broadly, programs that use technology to better connect patients with physicians and other caregivers. Major health insurers were there, as were large physician groups, leading venture capitalists, and a profusion of start-ups. With healthcare a key growth theme for telecom carriers, and the embrace of new technologies a key imperative for insurers, the enthusiasm was over-powering. Yet I walked away thinking that many of these firms were running down blind alleys.
Undoubtedly, connected health could significantly enhance patient care. Home blood pressure cuffs that download data directly to physicians, pill bottles that alert relatives when they remain unopened, text message reminders to eat right, and dozens of other programs are occurring today. With chronically ill patients seeing their doctors relatively infrequently, healthcare could cheaply improve through creating a virtual connection that alerts the care team about potentially hazardous situations.
Despite this promise, very few programs have been scaled beyond pilot stage, and no one could point to a firm making profits in this field. Given that the technology to record and transmit data is relatively straightforward, this is troubling. The problem seems to be a lack of focus.
With so much buzz in the air, firms are rushing to sell their solutions to a wide range of stakeholders – insurers, telecom carriers, physician practices, patients and their caregivers. As during the Internet boom, companies feel pressure to stake out their leadership fast to deter hungry competitors. However, a key weakness of the healthcare system is that stakeholders are inter-dependent but their incentives are not aligned. One stakeholder’s honey is another’s brussels sprouts. Rather than try to create a one-size fits all solution, firms should focus on a particular stakeholder and craft a solution so compelling as to make that target customer force others to embrace it.
For example, health insurers want to avoid costly hospitalization of their sickest members, and also prevent unnecessary physician visits by the “worried well” whose vital signs could be easily checked remotely. Insurers could fund home monitoring technologies such as blood pressure cuffs. Physicians may dislike the extra work of checking online logs of blood pressure readings, but insurers with substantial market power in an area could force doctors’ participation in the program. Patients could be provided with modest incentives for sustained participation, much as companies sometimes reward employees who regularly use the gym. The program would look very different for the sickest patients vs. the worried well – for instance, patients would be required to take readings at different frequencies, and the highest risk patients might need to answer supplemental questions about how they are feeling. It would be essential to laser-focus on the target market, and then branch into other markets as the technology becomes part of the normal workflow of a physician practice.
Pharmaceutical companies, by contrast, want to improve adherence for chronic medications, and also to differentiate their therapies in the eyes of physicians and insurers. Adherence may be most financially important for people on expensive medications, which are probably so costly because competition is weak. Conversely, differentiation may be critical when a drug is at risk of commoditization. Firms need to target the disease state and patient type, and think through all the elements of a program that are essential to make a solution work in that situation, e.g. patient education, outreach to physician office staff, and clinicals that compare the solution to realistic alternatives.
The overall lesson is that land grabs seldom work when creating new markets. Rather, firms need to prioritize and segment stakeholders, focus tightly on a small number of targets, and deliver a complete solution (including through partnerships, if necessary) to make the stakeholder so eager about the offering as to force others in the industry ecosystem to collaborate in its implementation. Then, as the solution gains traction, it becomes easier to extend it into adjacent markets.
Unfortunately, it seems that many of the current players in connected health are orienting themselves around sexy technologies, and approaching the market as, say, a telecom company or a consumer electronics firm. In the intensely cost-pressured world of healthcare today, stakeholders do not want to buy technology; they want solutions.
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Whenever a trend seems inexorable, it’s valuable to look carefully at the whitespace being left behind.
In the case of retail banking in the United States, the ranks of small community-oriented banks have shrunk relentlessly. From over 8,000 banks with under $100 million in assets in 1992, the number of these banks has sunk to under 3,000 today. The biggest banks have benefitted, with the top country’s top 6 banks now having assets equal to over 60% of GDP, compared to 20% two decades ago. Community banks have seemed sub-scale and outmoded, unable to compete with these behemoths.
Yet these banks occupy a potentially powerful market niche. Many customers have little interest in the many varieties of checking account a national bank might be able to offer. They grudgingly trust others with their money, and just want simple services from a bank run by local decision-makers. They want to interact with real people, not faceless call centers, and they are loyal to their communities. As one customer of a local credit union recently told National Public Radio, “You feel like you’re talking to people in your community. You don’t feel like you’re talking to someone who’s sort of filtered through some corporate monstrosity that really does not have your best interest in mind.”
Community banks are enjoying a temporary uplift stemming from their relatively healthy balance sheets and popular anger at big bank bailouts. Yet consumers face many inconveniences in changing their bank accounts; indeed, in many countries you are less likely to change your account than to get divorced. We should not expect a sea-change in community bank prospects from the short-term effects of the financial crisis. Moreover, it should be noted that community banks are largely a U.S. phenomenon – banking markets abroad are dramatically more concentrated.
Whether or not community banks thrive long-term is not the issue; rather, we should look at the customer types they appeal to. These may not be the highest-end customers with the most demanding needs for advanced, 24/7 services, but they may be good credit risks rooted in their communities. Moreover, they may not be keenly motivated by small price differences in banking services, and may care more about having long-term, wide-ranging relationships with a financial institution who truly knows its customers. In short, they may be quite profitable.
These kinds of customers need not be the sole preserve of community banks. For an instructive analogy, we can look to the evolution of the organic food industry. Initially, local farms supplied these foods to specialized grocers. While these farms still play an important role in the industry’s growth, the giants have moved in. One of the leading organic brands, Stonyfield Farm, is 80% owned by France’s Danone, the world’s largest dairy company. Danone bought into an established organic brand, retained its identity, stressed its New England heritage, donated 10% of profits to environmental causes, and did little to publicize its corporate ownership. Colgate has executed a similar strategy in buying Tom’s of Maine, and many other giants have followed this path as well.
Perhaps there is room for large banks to buy into their community-oriented brethren, provide some efficient back office infrastructure, and retain the personal touch and local orientation of the front office. This strategy would allow the large bank to avoid unconvincing campaigns striving to prove a corporate titan’s local connections. Additionally, it would allow the community bank to emphasize its local roots, rather than trying to argue the case that it has a wide menu of services just like the big players. For instance, credit cards could make a donation to a local cause of the month with every transaction processed. It is sad to view countless websites of community banks that look…the same. These banks try to tout how many financial services they offer, but this is simply not ground on which David can win versus Goliath.
The broader point is that strategists should look at what customer needs become under-addressed because of industry rationalization. Independent community banks may lack the scale to thrive over the long-term, but their customers can provide the sort of loyal, profitable relationships that all banks crave.
For more on New Markets' Advisors thinking on financial services, click here.
In the past 30 years, AT&T has undergone several transformational shifts. Government regulators broke up the monolithic “Ma Bell” in 1984, and dozens of successor companies sought to become top dog in the telecom food chain. It turned out that the old, integrated model had many merits, and dealmakers thrived during the tortuous process of putting Humpty-Dumpty back together again. Today, AT&T is again a provider of complete telecom services, albeit lacking the hardware business it once dominated.
Recently the company announced a further step toward integration, opening three “Innovation Centers” around the world. The company says these centers will enable it “to work directly with device makers, application developers and network equipment providers to expedite development of an ecosystem of mobile and wired broadband services and capabilities for consumers and business users.”
Why should AT&T, one of the world’s largest telecom companies, need to create these centers? After all, vendors are eager to work with such a dominant firm. An answer lies in a pathbreaking 2001 article by Harvard Business School Professor Clayton Christensen, titled “Skate to Where the Money Will Be.” Christensen argued that industries almost always get their start through supplying integrated offerings to customers, as that is the only way that companies can get performance to be good enough to meet basic market demands. As industries mature and those performance needs become increasingly sated, customers start to value other things such as customization, speed, and price. This sets the stage for modular solutions to emerge. The PC industry provides an excellent illustration, with its shift from the integrated IBM model to the highly modular ecosystem of today that has different firms provide operating systems, microprocessors, services and so on.
It turns out that government pushed telecom into the modular world too early. Major shifts in the technical architecture of telecom networks were difficult to engineer when key players had diverging interests. It was also tough to change customer behavior when the network “owned” the customer financially, even as device makers created the machines which could dictate most of the customer experience. AT&T and Apple tried a different approach with the launch of the iPhone, tightly integrating the device and the network, but that task has certainly proven challenging.
I have had my own frustrating experiences in this world. As CEO of Brainstorm, a middleware developer for mobile networks, I worked with one of the largest European operators a decade ago to launch their picture messaging services. These services worked differently on the dozens of handsets the operator supported, and network equipment makers were inconsistent in how they handled the messaging protocol. The operator tasked my firm with harmonizing this highly diverse, constantly changing cast of actors. The result was no less than 50 changes in our software platform as the industry rapidly evolved. This is no way to orchestrate the introduction of new customer behaviors.
AT&T’s Innovation Centers seem a promising step toward uniting the right players under one roof. The question is whether these people will have the autonomy needed to create truly integrated solutions. At Samsung, innovators have thrived in its Value Innovation Program Center, bringing together key players in device development, but fundamental to their success has been Samsung’s ownership over a broad collection of assets from chip design to display manufacture. Will AT&T’s innovators be empowered, for instance, to tweak an operating system or communications protocol? Even more critically, will they have the freedom to suggest innovations in the business model? The current business models in this industry are rapidly heading toward commoditization, and one of the brightest hopes for new offerings has to be a game-changing approach to monetizing the ubiquity of telecom throughout customers’ lives. Otherwise, AT&T’s innovations may become marginal differentiators, not the performance breakthroughs that justify this integrated approach.
For more on New Markets Advisors' thinking on telecom, click here.
Counterintuitively, regulatory constraints can lead innovation to blossom.
Washington buzz that the United States Food and Drug Administration may tighten scrutiny of new medical devices has been greeted with sadness, if not surprise, by many device manufacturers. These firms have long thrived under a streamlined “510(k)” regulatory process allowing FDA to grant simple approval for devices that are substantially equivalent to devices currently marketed. FDA insisted on a tougher approval process for more novel devices.
With FDA likely requiring higher standards for clinical trials prior to approval, the current R&D model – in which hundreds of devices may be in firms’ development pipelines – cannot be sustained. It would be far too costly to undertake clinicals for products that fill very small market niches, such as for peculiar surgeon preferences. In the past, manufacturers have thrived through offering a profusion of devices to suit every surgeon’s tastes, even though the devices had to be similar to those already in-market to qualify for the 510(k) pathway. Device makers won market share through having the R&D muscle to offer broad selection while simultaneously having a large salesforce that could get close to surgeons and understand their particular wants. This strategy now needs to change.
In the future, device R&D will need to focus more on a handful of key growth platforms, where the payoff for success can justify the substantial costs for clinicals. Given that many classes of devices are under fierce pricing pressure due to commoditization, the platforms will need to create "disruptive innovations" along new dimensions of performance. They might also cater more to the economic and operational needs of the facilities that purchase these devices – hospitals, outpatient clinics and the like – and less to the tastes of surgeons who have historically recommended which device to buy. Perhaps, for instance, devices will start to integrate with hospital IT systems to better monitor usage, which would both improve patient safety and ensure accurate billing.
Marketing strategies will also shift. Facilities have already become more vocal about buying devices with the lowest cost, regardless of the physician’s personal relationship with a sales representative. Sales reps have started to shift their attention toward hospital purchasing departments. With fewer, but bigger, new products to launch, manufacturers can focus their energies on targeted campaigns to educate the marketplace and possibly to change engrained behaviors. This approach may require different skills and sales interactions than before. One can imagine thinning ranks of run-of-the-mill sales reps, replaced by small numbers of physicians-turned-reps, healthcare economists, and training events highly focused on the ripest markets.
In the past it was easy to bias a development pipeline toward small “quick wins” that could qualify for 510(k). Now manufacturers will need to make hard choices about what platforms really have the legs for growth. Product – and service – prioritization will be about making bets over several years, versus making tactical decisions about one-off improvements. Portfolio planning meetings will look vastly different than in years past.
An analogy comes from an unlikely place: paint. In the 1980s this was an ugly industry. A host of manufacturers made little money through selling commoditized products with high marketing costs. Two decades ago, government introduced environmental regulations on solvents which vastly raised the bar for new products. The winning firms had the resources to meet the challenge, and the new products largely sold themselves. While there were fewer new products in the marketplace, they earned their manufacturers a good return. Innovation also moved in new directions, for instance through commercializing powder coating technology to replace liquid paints. The industry bloomed.
Companies typically greet stiffening regulations with trepidation. Yet under certain conditions, these changes can catalyze much needed shifts in strategy and business model. The medical device industry seems primed for just such a move.
For more on New Markets Advisors' thinking on healthcare, click here.