2015 Healthcare Trends

Riding a wave of policy turmoil, consumer empowerment, and tightening margins, payors and providers have no choice but to go bold.

It can be hard to distinguish the signal from the noise surrounding the healthcare industry these days. And the decibels will only rise in 2015, especially as the U.S. Supreme Court is set to weigh in on a critical facet of the Affordable Care Act and 2016 presidential contenders are beginning to offer their healthcare prescriptions.

Among the din and uncertainty, however, some clarity can be found. Indeed, the immediate future for the healthcare sector can be summed up by these trends, which Strategy& and PwC have dubbed the New Health Economy:

• Consumers will increasingly play a decision-making role in their healthcare coverage and treatments.
• The federal government will further solidify its position as healthcare market maker.
• Insurance reimbursements will become stingier.
• Employers will look for ways to remain paternalistic by exploring new care and funding models such as bundles.

More than five years ago, Strategy& postulated that the creation of state healthcare exchanges would lead to competition for consumers among insurance companies offering a range of affordable insurance plans. Yet we cautioned against the notion that these exchanges would make employer-driven insurance obsolete. So far, these predictions appear to be on track. Despite a shaky start, the new insurance marketplace is having an impact; a total of 6.7 million people had enrolled through the federal and state exchanges as of November 2014, and insurers are planning to offer more products in more states. Of course, if the U.S. Supreme Court rules in favor of the plaintiffs in King v. Burwell and outlaws federal subsidies for people living in states without their own insurance exchanges, the ACA’s insurance market will have been dealt a heavy blow. But it would not be fatal — many states are already developing workarounds to continue subsidizing coverage.

In 2011, Strategy& also forecast that hospital margins would come under tremendous pressure for the rest of the decade, taking a hit of 20 percent. Since then, a Modern Healthcare study has shown hospital margins have lost about 14 percent, going from 3.6 percent in 2012 to 3.1 percent in 2013. Moody’s has similarly reported a decline in hospital margins over the past two years, nonprofit institutions feeling it the most.

Going forward, we anticipate that as reimbursement pressure grows and underlying costs continue to rise, margin pressure will persist, despite economic expansion and increases in overall healthcare spending. Elimination of the subsidies by the U.S. Supreme Court would exacerbate the situation, particularly in the states opposed to the ACA. Hospitals must respond by significantly lowering costs, surgically removing waste, and reinjecting savings into areas of growth. Many health systems, including some of the most advanced systems in the country, are preparing for this through comprehensive transformation efforts, targeting double-digit improvement in financial performance. We believe that every health system still has room to improve on this front by standardizing, innovating, automating, and driving toward greater system cohesion.

Strategy& strongly believes that there is a need for stronger-form healthcare products — procedural, acute, chronic, or long-term care offerings that change the way healthcare is delivered, financed, and consumed. The accountable care organization (ACO) construct, which reimburses participating providers for achieving quality and cost objectives for a defined Medicare population, has not generated sufficient improvements in care transformation or patient engagement. Indeed, the Pioneer ACO program has lost 40 percent of participating hospitals. Health systems that are continuing with the ACO construct are realizing that changes have to be more than skin-deep. Meanwhile, productized or bundled healthcare — in which a patient pays a single fee for all tests and treatments related to a condition or procedure — is gaining in popularity. A recent Strategy& survey found that about 30 percent of the large health systems and innovative employers are pursuing bundled care and another 50 percent are interested in the concept.

We are witnessing the evolution of a new healthcare marketplace, offering a range of solutions that combine care and financing. It will be more competitive and more transparent, and ultimately shaped by the shifting of risk to providers and consumers, and the addition of retail channels for care and financing. This marketplace will deal in population health solutions combined with a range of acute, chronic, and long-term products. Below are three recommendations for how to lead, manage, and differentiate your organization in this new environment.

Ladies and gentlemen, place your bets

In the past, many of Strategy&’s recommendations for healthcare payors and providers took the form of no-regret moves — foundational management actions sure to pay off under any industry scenario. However, no-regret moves are insufficient for competitive differentiation, and this year we urge payors to place big bets.

Huge decisions loom about the role payors will play, particularly in care delivery transformation. As risk shifts to providers, rewards will follow, and payors will have to decide whether to defend against this transition or accelerate and enable it. For example, payors might seek gains by investing in care delivery assets, renting analytical capabilities to ACOs, or helping balance demand and risk for bundled services offered by a provider. Deciding on the right course will require payors to pick winners — a role they have been uncomfortable with up to this point. And becoming more involved in care delivery means going outside the traditional payor core, a move that could make sense for a subset of payors in 2015 as a way of transforming their business while leveraging their capabilities.

Moreover, capturing the new healthcare consumer will require all health plans to develop a clear retail strategy relying on solid customer analytics. To attract a broad swath of consumers, health plans should develop a winning product mix, pricing structure, and customer experience in 2015, with pilots and experimental programs focused on developing new distribution and digital channels by 2016. And just as payors face fresh competition from providers going directly to employers, private exchanges bring the risk that benefits consultants will play a larger role in influencing an employer’s choice of healthcare plans.

Hospitals and health systems are similarly standing at a crossroads. The decision of how much risk to assume is a major one, driven by a range of factors including market dynamics, mission, network adequacy, and technological strengths. We anticipate that several hundred health networks will become payors. Even more fundamentally, many health systems have yet to decide how they will stand out to consumers and employers: Will it be on the basis of convenience, cutting-edge innovation, value, or experience? Downstream from this fundamental choice is a set of decisions about how health systems will use the new retail channels in the financing and delivery of care.

Having decided on how they will differentiate themselves, health systems can and should double down on growth. The nuance this year is to find opportunities that are less capital intensive by crafting affiliations with like-minded organizations, forging more effective physician partnerships, leveraging advances in virtual health, and freeing up internal funds and bandwidth to redeploy in areas where strategic gains are possible.

Don't take no for an answer

As a health plan or hospital executive, you may have had a conversation with your team recently in which you were told that they have nothing left to cut. Respectfully disagree. In our experience, aligning resources with strategic priorities and applying modern industrial engineering techniques, such as standardizing processes as well as the flow of patients through the facility, can reduce health plan administrative costs by as much as 25 percent.

The “find savings” conversation is most contentious in hospitals, where quality and safety are often given as the reasons to just leave things alone. Another frequently heard excuse is, “We don’t want to stop doing x while the payors are still reimbursing it.” In our experience, it is possible to improve quality, safety, access, patient experience, and engagement of physicians and staff while cutting costs. Most of the leading health systems in the country are setting ambitious targets and rightfully embarking on a ruthless search for unnecessary complexity, fragmentation, and waste. By closely matching supply to demand and getting faculty, doctors, staff, and facilities to perform at the top of their potential, these systems are realizing benefits no matter what payment model they choose. In short, a campaign for operational effectiveness and efficiency is no longer optional — it is table stakes.

Don't believe the hype

In 2014, hospitals, payors, and companies from other industries invested record amounts in healthcare technologies through venture funds, incubators, accelerators, and a variety of other vehicles. Chances are, many of your team members are talking about disruptive innovation, and bankers, vendors, and potential partners are lined up outside your door.

But not everyone will be equally successful in these diversification and innovation efforts. Some will play to their strengths and gain capabilities required to succeed in their specific markets. They will use innovation and diversification as an engine to transform their fundamental core and create advantages in the face of multiple possible industry scenarios. Many others will overpay and take their eyes off the ball. Be guided by your particular business strategy.

Conclusion

The coming year will serve as another waypoint in the evolution of the healthcare industry toward a more competitive and efficient marketplace. We’re optimistic about cost-saving innovations, the entry of new consumer-savvy competitors to the marketplace, and the flourishing of genuinely new models like productized and virtual health. The process will remain evolutionary and thus slow, nonlinear, and massively parallel, with an occasional dead end. Those hoping for a great leap forward will likely be disappointed. Those prepared to compete over the long term will succeed.