Crisi-tunity: a situation that is either a crisis or an opportunity, depending on your outlook.
Three big factors have set a healthcare bonfire, and one match lit it.
- Healthcare costs are rising faster than GDP.
- Fee-for-service model.
- High Deductible Health Plans
The match? The Cadillac Tax.
Healthcare costs have been rising steadily since the 1990’s, and accelerating through the early 2000’s. Employer-provided health insurance shields patients from virtually all of the costs of healthcare, beyond modest co-payments for prescription drugs, physician visits, and the like. When doctors order tests or procedures, patients comply.
This is the “fee-for-service” model, where insurance companies, including Medicare, pay doctors for each procedure performed. Doctors perform more procedures and get paid more. Insurance companies try to restrict the number of procedures that get done by requiring things like “prior authorization”. This leads to physician practices hiring administrative staff to deal with the insurance companies. (As much as 60% of the overhead in a private physician practice is for dealing with insurance matters). Insurance companies hire more people to deal with the administrative staff. Costs rise, and so do premiums.
Enter “High Deductible Health Plans” (HDHP). With these lower premium plans, a consumer is responsible for the first several thousand dollars of healthcare expenses every year (with certain exceptions, like preventive care). Only after the deductible is met does the insurance company start to pay.
So we have a healthcare model that encourages consumption and drives up costs; and an emerging alternative way to insure people that shifts significant costs to the consumer.
Employers have generally been offering HDHPs as an option alongside traditional gold, silver, and bronze traditional insurance plans. They’ve been very reluctant to offer only HDHPs – even though that is a very attractive option – thinking that traditional plans aid recruiting and retention. (They used to think the same way about pensions, too.)
What could change employer behavior to only offer HDHPs? The Cadillac Tax.
The Affordable Care Act (ACA) includes the so-called “Cadillac Tax” where employers will pay a 40% excise tax on the value of insurance plans in excess of $11,500 per year for individuals and $27,500 per year for family coverage. In 2010, it was thought that this would raise billions in revenue for the government. Naturally, CEO’s vowed that they would figure out how to not pay it. And the way that they’re avoiding it is to offer HDHPs.
By 2018, when the Cadillac Tax is supposed to go into effect, more than half of the employees in the US are expected to be covered by such a plan. Let us assume that 50 million households will have a HDHP, and the average deductible will be $5,000.
That is at least $250 BILLION dollars of healthcare spending by consumers themselves. It includes tests, drugs, crutches, urgent care visits, surgery – all healthcare expenses up to the deductible will be paid for by the consumer. This is a market that re-appears every January 1.
For healthcare firms, this is both a crisis and an opportunity (hence the phrase “crisi-tunity”.)
Many fear that consumers simply won’t spend on needed medical care, and wind up much sicker. Others (including me) think that there will be a short (several year long) pullback in spending, but ultimately, consumers will pay for things that keep them healthy or will restore them to health. They will behave like shoppers do, though. They will compare prices for services. They will inquire whether they truly need an MRI when a diagnostic ultrasound will do, for example. They will look at cost-benefit tradeoffs, also known as “value”.
There will be a “new normal”.
The immediate effect on the industry – particularly pharmaceutical and medical device companies, but also hospitals and providers – is that patients are now customers. Insurance companies simply collect premiums until the deductible is met. (An unintended consequence is that insurance companies will become more profitable as they will pay out far less as consumers become more value-conscious. This will be followed by state regulatory commissions taking a hard look at premiums and profits.)
The crisis part of the scenario is pretty obvious. Not as obvious is the opportunity part.
There will be profound changes in product design, development, and marketing. The nature of competition will change. The forces that companies face will change. The value chains will be completely upended. Innovation will be required. The old business models will have to be discarded and new ones created. All-new products and services will be created as well.
By thinking strategically, there are new ways to create and capture value in the coming years. Models like the Business Model Canvas and Value Propositions Designer can help frame discussion; Outcome Driven Innovation (also known as “jobs-to-be-done”) can capture what customers think is important but poorly satisfied; Blue Ocean Strategy can help guide how to change business models to succeed in this “new normal”.
Which will it be for your firm? Strategic crisis or strategic opportunity?