The Three Fundamental Forces in Healthcare

There are three fundamental, complex forces changing the healthcare industry:

Every business plan for healthcare companies should hinge on taking advantage of at least one of these forces.

The cost pressure in healthcare is reaching untenable levels, particularly in the US. I suppose I don't need to be too specific here, because just about everybody knows or has experienced this; it's the driving reason behind radical proposals like Medicare For All. This cost pressure is leading two major changes in payment: price cuts and novel formats.

The simplest way to decrease cost is to reduce the price you pay. That's exactly what's increasingly happening in the healthcare industry. The Center for Medicare and Medicaid Services (CMS) has taken the lead in slashing payment levels and reducing the amount paid for a wide range of services. In the field I work in, ophthalmology, procedures across the board are seeing 3-4% decreases in the amount paid. For a healthcare industry that has gotten fat on annual payment increases that outpace inflation, this is a monumental shift.

In addition to cutting the amount paid for healthcare services, the way that expenses are literally paid for is changing. The most prominent and promising way is through value-based care. Rather than paying on a per procedure or per treatment basis, payment is instead structured around entire "care episodes". For example, if you have a back surgery, the insurer used to pay on a line item basis for your medications, the time spent operating on you, the anesthesia, and everything else that went into caring for you as you got the back surgery. Nowadays, the insurer will pay a flat fee to a single entity to manage the entire surgery for start to finish. If the net cost is lower than the flat fee paid, the healthcare organization that provided the care can keep the difference. This modification is meant to encourage efficiency and reduce unnecessary care. You could say that it's pay for performance, instead of pay for procedure.

Some examples of new payment structures that have had interesting results are:

Think of all the healthcare innovation that has happened in the last 10 years. A quick and dirty list:

These massive technology shifts are disrupting the healthcare industry. Importantly, there are two specific realms in which technological advances are reshaping care delivery in the healthcare industry: precision medicine and population health.

Precision medicine is custom medicine. It involves taking information that is specific to a patient, like their genome or their lifestyle, and using it to specifically craft a treatment plan that only works for them or patients who are very similar. This is different than our current model of treating patients, which is one-size-fits all and focuses on treating the average patient, not unique patients.

Technological advances are making precision medicine a reality. Last year, this article in the New England Journal of Medicine described a case where a 6 year old girl was treated with a biologic drug that was specifically crafted only for her rare disease. Within months, doctors went from examining her symptoms, to understanding what was unique about her disease, to creating a biotechnology-based treatment that literally saved her life. Innovations like CRISPR, gene therapy, and molecular diagnostics are powering the implementation of precision medicine.

How do you practice medicine in an era of truly custom medications? How do you help doctors efficiently understand what's unique about the patient in front of them and offer relevant treatment? New technologies that enable precision medicine will also need business models to effectively deliver it at scale.

Population health is the flip side of the coin for precision medicine. Rather than the treatment of specific patients, population health deals with the management of health outcomes for a large group of people. For example, insurers constantly want to understand the aggregate health of their members, so that they can make financial forecasts and have enough cash on hand to payment for treatments.

Technological advances are dramatically changing the modern notion of population health. Look to machine learning for an example. Using gobs of healthcare data (i.e. electronic medical records, claims data, etc.), ML is reinventing the way that to think about risk in your population. When risk is better understood, specific patients groups can be stratified and received better, more targeted care. This results in improved aggregate outcomes.

Traditionally, the relationship between patient and healthcare system was episodic. If you were sick, you saw the doctor; if you weren't, you avoided the unpleasant interaction at all costs. There were no Amazons or JetBlues in healthcare that made the experience pleasant.

That has changed in the last 10-15 pears. Healthcare is newly customer-centric. Companies like One Medical, Ro, and Oscar have made strong inroads into healthcare based entirely on reinventing the "front door" experience. Crucially, these companies have built brands and relationships with their customers that are substantial in depth and yield serious brand loyalty. If you ever talk to someone that's used One Medical, it's hard to imagine that they'd be satisfied with going back to a traditional primary care office or setting. As a result, existing incumbents, like UnitedHealth Group, are attempting to catch up, indicating how profoundly this has affected the industry.

Of course, healthcare consumerism has a long way to go. Most people still don't have an app that lets them access their health records easily or get in touch with a customer support equivalent. Healthcare still has to catch up with finance and travel, let alone e-commerce and entertainment. Nevertheless, as this consumerism trend continues to change all traditional aspects of care delivery, there are lots of opportunities for new business models. In a future post, I will explore how these consumer-oriented changes are playing out across the "care continuum", from preventive care to chronic condition care.

These three fundamental forces clarify the most important ways that the $3T in US health spending is changing. Strong business ideas can emerge from understanding the tactical implications of these three strategic shifts. Using these ideas as a foundation, you can effectively understand and create healthcare innovation.