Posted by The Bowdoin Group on December 26th, 2018
Originally published on HIT Consultant on December 28, 2018. Authored by Sean Walker, Partner at The Bowdoin Group, Josh Gottlieb, Managing Director, Digital Health at The Bowdoin Group, and Michelle Mattson-Hamilton, Associate Principal at ST Advisors.
As always, this year was full of interesting developments in healthcare. As the year comes to a close, we’ve rounded up three trends that we feel are going to significantly impact the landscape of HealthTech and Digital Health in 2019 and beyond. Trends are only interesting if we examine the impact, so let’s hone in on how each of these trends will affect company strategies and hence their leadership roles in Digital Health.
Trend 1: Large scale mergers and vertical integrations – Since 2015, following the expansion of the Affordable Care Act insurance coverage, providers have struggled with weaker margins—in fact, 65% of health systems experienced an average 38.7% operating margin decline over that time period. To combat this trend and respond to market and regulatory demand for value-based care, providers have been using mergers and acquisitions as a tool to strengthen their balance sheets: CommonSpirit Health, a combination of Dignity Health and Catholic Health, resulted in a $28.4 billion healthcare system—the largest nonprofit hospital system (by revenue) in the United States. Aurora Health Care and Advocate Health Care completed their merger in April, resulting in an a combined system with $11.6 billion in revenue, 500 sites of care, 27 hospitals, and 3,000 employed physicians. In October, Texas-based Baylor Scott & White Health and Memorial Hermann announced plans to merge, which would result in a $14 billion revenue, 68 hospital healthcare system.
Health insurers seek a broader role in an increasingly value-based healthcare environment. As payers look to areas such as pharmacy, technology, and care provision, large-scale mergers and acquisitions have followed: Humana, combined with PE firms Welsh, Carson, Anderson & Stowe and TPG, finalized their acquisition of long-term care and home healthcare provider, Kindred Healthcare. United’s acquisition of DaVita for $4.9B is still pending, but when finalized, it will make United the largest employer of physicians in the U.S. With the CVS-Aetna and Cigna-Express Scripts mergers, these organizations will follow a similar strategy to United where each payer has their own captive pharmacy benefits manager and specialty pharmacy (UNH/Optum, ANTM/Ingenio Rx, and CI/ ESRX)—giving each additional leverage to bend the cost curve. While still in early stages, Walgreens and Humana are also in early discussions to take reciprocal equity stakes.
Why should Digital Health companies care?
- Strategic impact: Continued mergers and acquisitions mean that there will be fewer potential customers to target for Digital Health companies. Fewer, larger customer organizations will amass more buying power, and it will also be increasingly difficult for small solution providers to compete. That said, the goal of these mergers is to enable more effective, integrated care, so once integrations are compete, these organizations will likely become viable targets for applicable value-based solutions. Unfortunately, while these transactions tout their goal of reducing costs, research shows that, at least on the provider side, healthcare costs post-consolidation tend to increase from between 11% to 54%. As consumers, let’s hope that, in these cases, history does not repeat itself.
- Impact on leadership skill sets: Rather than have expertise in one area of healthcare, the leaders of Digital Health companies must understand how the broader healthcare ecosystem works and how to operate successfully within it. The C-Suite must be able to navigate the evolving ecosystem to commercialize more effectively and to ascertain fit and positioning. As a result, it’s become more important to understand how the healthcare industry is connected than to have specific expertise in all of healthcare’s sub-verticals. Companies are then filling in any expertise gaps with strategic hires.
Trend 2: Innovation in 2019 is likely to come from forward-thinking employers – As health insurance costs continue to rise, many large employers are on the lookout for new ways to cut costs. A recent survey revealed that the total cost of offering medical and pharmacy services is $13,482 per employee with employers shouldering 70% of that burden ($9,100). Faced with rising costs for five consecutive years, employers are getting creative, and while this concept isn’t new, they have made good traction over the course of this year:
- January 2018 – The year kicked off with the announcement of Amazon, Berkshire Hathaway, and JPMorgan Chase & Co. forming a non-profit venture aiming to use technology solutions to improve healthcare quality and costs for U.S. employees and their families. The entity named its CEO in June: Atul Gawande, MD, MPH, surgeon, writer, and public health advocate. While the idea is still in its infancy (and not the first attempt by a consortium of large employers and other purchasers to lower costs), tech’s aggressive push into healthcare has renewed focus on non-healthcare players and their potential impact on the space.
- August 2018 – In an attempt to lower healthcare costs, 2018 saw 11% of large employers contracting directly with hospitals and health providers (up from 3% last year), rather than continuing to contract through insurance companies. In August, GM announced its “ConnectedCare” plan option where it partnered with Henry Ford Health System to provide access to more than 3,000 doctors, hospital, emergency room, and pharmacy services. Approximately 24,000 employees in Southeast Michigan will be able to choose this policy option in 2019.
- September 2018 – While other large employers have seen an average 3% annual increase in healthcare costs over the last five years, Comcast’s healthcare expenses have increased by just 1% a year (and Comcast employees have a $250 annual deductible compared to the national average of $1,500). Although it still works with insurers, Comcast’s success has come from contracting directly with a portfolio of healthcare companies that its employees can utilize, including Accolade, which helps employees use their healthcare benefits effectively, Grand Rounds, a company that helps people find doctors and second opinions, and Doctor on Demand, which offers access to doctors via phone or video conferencing.
- November 2018 – In an effort to cut costs and reduce unnecessary procedures, Walmart expanded its Centers of Excellence program to create a mandatory program for employees seeking spine surgeries (previously it had been voluntary). The program requires employees seeking orthopedic surgeries to travel to specific high-quality (directly-contracted) hospitals, such as Mayo Clinic and Geisinger, with Walmart paying for the full cost of the procedures and travel.
Why should Digital Health companies care?
- Strategic impact: The large employer market is made even more attractive by the continued financial struggles of the consolidating provider market. That said, vendors approaching large employers need to understand the intricacies of the sales channel, including the presence of consultants such as Mercer and Towers Perrin as gatekeepers and how the company’s value proposition fits into the broader scheme of value provided by other benefits offerings.
- Impact on leadership skill sets: Many Digital Health companies are adding employers to their growing list of target audiences, which may already include insurers, providers, and consumers. With the expanded purview comes questions about whether a company has the right leadership in place. Executives who have some kind of background with large employers, or at least experience commercializing and selling complex solutions, and who are known for being innovative are quickly rising to the top.
Trend 3: The battle has begun for the entry point to the health system – When you’re sick, you visit the doctor, right? Not anymore. With consumers influencing more of their healthcare decision-making, the entry point to the health system is up for grabs as telehealth vendors, retailers, employers, and primary care physicians battle it out to win favor with patients.
On the telehealth front, 2018 saw the Bipartisan Budget Act of 2018 and the SUPPORT for Patients and Communities Act passed—both representing significant legislative advances for telehealth. The Bipartisan Budget Act improved access to telehealth for Medicare patients, especially those with chronic conditions or those who benefit from early interventions, like stroke patients. The SUPPORT Act removed many (but not all) barriers to telehealth for patients with substance abuse and mental health issues as well as for underserved populations. According to the 2018 Medical Trends and Observations Report, 55% of the 900 health plans surveyed by Gartner and DirectPath are now offering telemedicine to their members (up from 33% in 2017), and progress is only expected to continue for telehealth, as employers and patients alike recognize the convenience and opportunity for cost savings.
With extensive footprints of physical locations, retailers and pharmacies are working to provide more healthcare services. Walgreens, for example, will expand a pilot with LabCorp to open 600 patient service centers in its retail stores over the next four years. CVS Health has plans to pilot a new concept wherein 15 to 20% of the store will be repurposed for services like an expanded MinuteClinic. This news as well as the recent CVS-Aetna merger signals continued momentum for care management at retail locations. Some even predict that Walmart will get in the game, as its retail stores are convenient for residents of rural areas where there are few other healthcare options.
Routine care is being redirected and so is the newer recognized category of “urgent care.” While sometimes emergency care is indicated/required, many times the need is less severe or “urgent” (strep or a strain) as opposed to “emergent” (chest pain, suspected stroke, or a serious accident). Given the high costs inherent in emergency room visits (and that’s before considering any potential “out-of-network” cost differential), this new category has been burgeoning and now represents an $18 billion industry, with the number of urgent care clinics reaching 7,639 in mid-2017 according to the Urgent Care Association (UCA).
Employers and payers are also in the frey, offering solutions like Buoy Health and Accolade which create a digital entry point into the health system and act as a virtual health concierge. Employers are also offering on-site healthcare services through innovative companies like Virtudent (bringing dental care to the office), Catapult Health (offering work site preventative check-ups) or Paladina Health (which offers Direct Primary Care).
As the battle continues to wage, the system, and especially ever-pressured primary care physicians, are scrambling to keep up, as these new alternatives often pose direct competition for patient flow to their offices. Over the next few years, an increasing number of providers are likely to directly offer telehealth solutions in an effort to recapture some of this market share.
Why should Digital Health companies care?
- Strategic impact: Digital Health companies should embrace these new channels as opportunities to increase the market size for their offerings through access to new target markets and new customers arise. Some important considerations for success include: understanding the patient/consumer need and how to properly target the product/offering and marketing, awareness of an expanding competitive set (as other innovators will also take advantage of the growing opportunity), and clear sales strategy combined with sales capability and focus.
- Impact on leadership skill sets: Digital Health companies that play in the “entry point to healthcare” space want leaders who have experience working with multiple constituents (consumers, payers, providers, employers, etc.). Leaders with demonstrated success in consultative sale environments and who can bridge the gap between B2B and B2C (which is quite a rare combination) will be paramount and, in some cases, healthcare experience may even become secondary to digital experience as companies look for individuals who know how to attract consumers.
Large scale mergers and vertical integrations, innovation by large employers, and the battle for the entry point to healthcare will affect strategy and leadership roles for HealthTech and Digital Health companies in 2019. We’re looking forward to seeing how these trends develop over the course of 2019 and how the healthcare ecosystem responds.
Finally, we would be remiss without mentioning the potentially gargantuan impact of the traditional tech companies (Amazon, GOOG, AAPL) entrance into this market at last. We’re looking forward to seeing how that trend develops in 2019.
Are there other mega-trends you feel are affecting the HealthTech and Digital Health landscape in 2019? Please share your thoughts below—we’d love to hear from you.
Need to find executive and strategic leaders that can help navigate the shifting sands of Digital Health? The Bowdoin Group can help. Or if you need to develop or refine an operational, capital, or M&A strategy, ST Advisors can help there.