How other industry players are expanding their healthcare platforms  

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Last week, we introduced our framework for value delivery as a “healthcare platform”, in which an organization’s proximity to both the consumer and to the premium dollar determines how it competes as a “care supplier,” a “care ecosystem,” a “premium owner,” or a “population manager.” Traditionally, different healthcare companies have operated primarily in one of these four domains. However, as shown in the graphic below, we’ve recently seen many shift their business into one or more additional quadrants, as they seek to expand their value propositions. UnitedHealth Group is an obvious example: it has moved well beyond the traditional insurance business, via numerous provider and care delivery acquisitions across the continuum.

Other players have shifted from their own “pure play” positions toward more comprehensive “platform” strategies as well: One Medical adding Iora Health to enhance population health capabilities; Walmart moving beyond retail and pharmacy services, partnering with Oak Street Health to expand its ability to manage Medicare patients; Amazon getting into the employer health business. 

There’s a clear pattern emerging—value propositions are converging on a “strategic high ground” that encompasses all four dimensions of platform value, creating a comprehensive set of solutions to deliver accessible care, promote health, and grow consumer loyalty, with an aligned financial model centered on managing the total cost of care. Health systems looking to build platform strategies will find many of these competitors also vying for pride of place as the “platform of choice” for healthcare consumers and purchasers.

CVS Health to launch a virtual-first primary care platform

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The digital platform is designed to provide consumers with a coordinated healthcare experience across care settings. It’s being sold to Aetna’s fully insured and self-insured plan sponsors, as well as CVS Caremark clients, and is due to go live next year. According to CVS Health, the new offering “enables consumers to choose care when and where they want,” whether that’s virtually, in a retail setting (including at a MinuteClinic or HealthHUB), or through at-home services.

Patients will have access to primary care, on-demand care, medication management, chronic condition management, and mental health services, as well as help in identifying other in-network care providers. 

The Gist: CVS Health has been working to integrate its retail clinics, care delivery assets, and health insurance business. This new virtual-first care platform is aimed at coordinating care and experience across the portfolio, and streamlining how individuals access the range of services available to them.

CVS is not alone in focusing here: UnitedHealth Group, Cigna, and others have announced virtual-first health plans with a similar value proposition. Any payer or provider who aims to own the consumer relationship must field a similar digital care platform that streamlines and coordinates service offerings, lest they find themselves in a market where many patients turn first to CVS and other disruptors for their care needs. 

Investment gains masking health system operating margin difficulties 

The combination of the Omicron surge, lackluster volume recovery, and rising expenses have contributed to a poor financial start of the year for most health systems. The graphic above shows that, after a healthier-than-expected 2021, the average hospital’s operating margin fell back into the red in early 2022, clocking in more than four percent lower than pre-pandemic levels. 

Despite operational challenges, however, many of the largest health systems continue to garner headlines for their sizable profits, thanks to significant returns on their investment portfolios in 2021.

While CommonSpirit and Providence each posted negative operating margins for the second half of 2021, and Ascension managed a small operating profit, all three were able to use investment income to cushion their performance.

A growing number of health systems are doubling down on investment strategies in an effort to diversify revenue streams, and capture the kind of returns from investments generated by venture capital firms. However, it is unlikely that revenue diversification will be a sustainable long-term strategy.

To succeed, health systems must look to reconfigure elements of the legacy business model that are proving financially unsustainable amid rising expenses, shifts of care to lower-cost settings, and an evolving, consumer-centric landscape.    

Is it the beginning of the end of CON? 

We’re picking up on a growing concern among health system leaders that many states with “certificate of need” (CON) laws in effect are on the cusp of repealing them. CON laws, currently in place in 35 states and the District of Columbia, require organizations that want to construct new or expand existing healthcare facilities to demonstrate community need for the additional capacity, and to obtain approval from state regulatory agencies. While the intent of these laws is to prevent duplicative capacity, reduce unnecessary utilization, and control cost growth, critics claim that CON requirements reduce competition—and free market-minded state legislators, particularly in the South and Midwest, have made them a target. 
 
One of our member systems located in a state where repeal is being debated asked us to facilitate a scenario planning session around CON repeal with system and physician leaders. Executives predicted that key specialty physician groups would quickly move to build their own ambulatory surgery centers, accelerating shift of surgical volume away from the hospital.

The opportunity to expand outpatient procedure and long-term care capacity would also fuel investment from private equity, which have already been picking up in the market. An out-of-market health system might look to build microhospitals, or even a full-service inpatient facility, which would be even more disruptive.

CON repeal wasn’t all downside, however; the team identified adjacent markets they would look to enter as well. The takeaway from our exercise: in addition to the traditional response of flexing lobbying influence to shape legislative change, the system must begin to deliver solutions to consumers that are comprehensive, convenient, and competitively priced—the kind of offerings that might flood the market if CON laws were lifted. 

Even the largest health systems dwarfed by industry giants

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Insurers, retailers, and other healthcare companies vastly exceed health system scale, dwarfing even the largest hospital systems. The graphic above illustrates how the largest “mega-systems” lag other healthcare industry giants, in terms of gross annual revenue. 

Amazon and Walmart, retail behemoths that continue to elbow into the healthcare space, posted 2021 revenue that more than quintuples that of the largest health system, Kaiser Permanente. The largest health systems reported increased year-over-year revenue in 2021, largely driven by higher volumes, as elective procedures recovered from the previous year’s dip.

However, according to a recent Kaufman Hall report, while health systems, on average, grew topline revenue by 15 percent year-over-year, they face rising expenses, and have yet to return to pre-pandemic operating margins. 

Meanwhile, the larger companies depicted above, including Walmart, Amazon, CVS Health, and UnitedHealth Group, are emerging from the pandemic in a position of financial strength, and continue to double down on vertical integration strategies, configuring an array of healthcare assets into platform businesses focused on delivering value directly to consumers.

How “Goliaths” that adapt can retain industry dominance

5 Steps for Defeating Digital Goliaths - Adthena

A thought-provoking piece in this week’s Harvard Business Review about the underrated advantages longstanding industry giants have over disruptors got us thinking about health system strategy. The authors highlighted several companies that have enjoyed sustained success over a century or more, including agricultural behemoth Deere and Company, and shipping giant company A.P. Møller-Maersk, which wielded “strategic incumbency” to successfully innovate and pursue new strategies, leveraging scale, trusted customer relationships, and long-term planning capabilities—attributes that new market entrants often lack when looking to disrupt established consumer channels. 

The Gist: In a market where healthcare unicorns constantly garner headlines, the article offers a counterintuitive perspective about the value of incumbency.

Health system leaders might look to the experience of Maersk, which moved from a supply-driven focus (pushing its products to customers), to a demand-driven strategy (navigating customers through logistical pain points), using technology to maximize its vast asset portfolio.

Likewise, health systems have an abundant “supply” of care delivery assets, and now need to build the connective tissue to make the care experience across those point solutions seamless for patients. 

Can we take the long view on physician strategy? 

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Editor's note: Taking the long view | Campaign US

It feels like a precarious moment in health systems’ relationships with their doctors. The pandemic has accelerated market forces already at play: mounting burnout, the retirement of Baby Boomer doctors, pressure to grow virtual care, and competition from well-funded insurers, investors and disruptors looking to build their own clinical workforces.

Many health systems have focused system strategy around deepening consumer relationships and loyalty, and quite often we’re told that physicians are roadblocks to consumer-centric offerings (problematic since doctors hold the deepest relationships with a health system’s patients).

When debriefing with a CEO after a health system board meeting, we pointed out the contrast between the strategic level of discussion of most of the meeting with the more granular dialogue around physicians, which focused on the response to a private equity overture to a local, nine-doctor orthopedics practice. It struck us that if this level of scrutiny was applied to other areas, the board would be weighing in on menu changes in food services or selecting throughput metrics for hospital operating rooms. 
 
The CEO acknowledged that while he and a small group of physician leaders have tried to focus on a long-term physician network strategy, “it has been impossible to move beyond putting out the ‘fire of the week’—when it comes to doctors, things that should be small decisions rise to crisis level, and that makes it impossible to play the long game.”

It’s obvious why this happens: decisions involving a small number of doctors can have big implications for short-term, fee-for-service profits, and for the personal incomes of the physicians involved. But if health systems are to achieve ambitious goals, they must find a way to play the long game with their doctors, enfranchising them as partners in creating strategy, and making (and following through on) tough decisions. If physician and system leaders don’t have the fortitude to do this, they’ll continue to find that doctors are a roadblock to transformation.