Healthcare’s version of the Industrial Revolution is well underway.
Over the last decade, five revolutionary forces1 have taken industry stakeholders by storm: the convergence of genetic and computer codes, advancements in mobile technologies, a negative return on capital, the integration of supply chains as the norm, and patient care that is moving away from hospitals and doctors’ offices.
Now, three foundational shifts are taking place at the same time: the moves from mandates to choice, regulation to competition, and subsidies to actuarial soundness. In this environment, the five revolutionary forces have picked up speed, and investors, lenders, providers, payers, and innovators all need to take notice.
Healthcare’s share of GDP is expected to rise from 17.8 percent in 2015 to 19.9 percent by 2025.2 The federal government currently spends $1 trillion annually on healthcare and state governments contribute another $600 billion, primarily through Medicaid, while employers and individuals contribute a combined $1.4 trillion.
This has not gone unnoticed by policymakers and regulators. U.S. Health and Human Services Secretary Alex Azar recently reiterated HHS’ commitment to transitioning to a value-based care system, even by intervening to an “uncomfortable degree” to incentivize change to foster competition and choice to lower costs.
Current fiscal and monetary policies are creating inflationary conditions. The federal budget requires an additional $450 billion in debt while the Federal Reserve, after accumulating $3.7 trillion in Treasury and mortgage-backed securities in response to the 2008 financial crisis, began a deleveraging process in October 2017. The resulting activity creates more supply, lower prices, and higher yields in the bond market.
Higher costs for healthcare and capital (either because of limited access or interest rates) are indeed inflicting some pain in the market. The Polsinelli/TrBK Health Care Services Distress Research Index spiked to 281.67 in the fourth quarter of 2017, up 58 points from the prior quarter, which indicates a significant increase in bankruptcy or restructuring activity.3 Those who invest wisely in healthcare stand to create $10 trillion of wealth by 2025, but those who invest poorly in the sector stand to lose $4 trillion.
Highly regulated industries by their nature have high barriers to entry for new entrants. However, regulatory, political, financial, and health debates surrounding costs and outcomes of healthcare in the United States are converging on a common theme: the status quo is neither sustainable nor tolerable. Enter Amazon.
Here are some relevant and important distinctions to frame a clear shift that is occurring, disruption that can be considered the “Amazon-ing of healthcare.” Healthcare is focused on providers and payers; Amazon focuses on consumers. Healthcare has pushed prices higher, shifting more payment responsibility to employers and individuals; Amazon drives prices lower in markets in which it competes. Healthcare is largely delivered outside the home; Amazon delivers to the home. Healthcare operates with regulations, mandates, and government subsidies like Medicare and Medicaid; Amazon operates in a world of competition, choice, and free-market pricing.
Amazon has announced that it is ramping up its medical supply business, and the company has already secured drug wholesaler licenses in 14 states. In addition, Amazon, Berkshire Hathaway, and JPMorgan recently announced their intention to form a healthcare company with a goal of reducing employee healthcare costs, while pharmacy chain CVS announced in December that it was acquiring health insurer Aetna for $69 billion. Such moves suggest that major changes in the U.S. healthcare system will be accelerated by new entrants or by vertical alignments.
What’s driving these changes? Five revolutionary forces are disrupting—and improving—healthcare delivery for patients, providers, payers, drug companies, and investors.
Advances in molecular biology and computer science allow for the development of new therapies to repair DNA “software defects” that cause cancers and other serious diseases. These innovations will create the ability to “reprogram” immune systems to fight off a broader variety of diseases and harness stem cells to repair and regrow body parts. Combining gene editing technology with machine learning and artificial intelligence will increase the ability to improve the “software of life” exponentially, leading to better decisions and lower costs.
Implications of these innovations include:
Digital technologies are coming into their own for monitoring, detecting, and preventing disease. Digital devices can be found on desks, in pockets, and on peoples’ wrists. Someday it may even be routine for people to have digital devices implanted in their bodies.
Examples and implications of these changes include:
It used to be said that one should never talk about money when it came to treating patients. Now, money is nearly always a topic of discussion when it comes to healthcare—e.g., the impact of copayments, the size of deductibles, and the price of drugs. The drugs prescribed for a patient are often influenced by what the individual can afford.
Healthcare used to be a relatively simple business; few providers lost money in the sector. Now, signs of increasing risk are everywhere—hospitals are going bankrupt, payers and providers are merging, and more employers are self-insuring.
Some observations on and implications of this change include:
With so many opportunities to lose money, investors will need to understand the implications of both clinical and financial data—together, not separately.
Integrated supply chains—encouraged by the movement to value-based care—are becoming the norm, while individual healthcare silos are disappearing. Providers, drugmakers, and distributors in the supply chain are being encouraged to organize and manage care far beyond the four walls of their facilities, making them responsible for the cost and quality of care they provide to consumers. As these forces continue and profit margins are squeezed, radical strategic alliances will continue to take shape.
Some examples and implications of this shift include:
In the past, people who got sick went to a hospital. That’s where all the knowledge was concentrated—the doctors, medical records, equipment, and drugs needed to help the patient get well. Similar to a library, all the information needed to address the patient’s condition was in one place.
But today, consumers don’t have to go to a library to gather information—they can obtain material from a variety of decentralized sources via the internet from their homes and offices. Something similar is happening with healthcare, which is becoming increasingly decentralized. Much of the care traditionally provided in hospitals and doctors’ offices is now being provided in other settings.
Some examples of this phenomenon include:
These changes beg serious questions. How many hospitals are really needed? How will hospitals manage their debt? What will be the role of the modern hospital in the future?
Innovation in healthcare is happening faster than anyone could have predicted. Traditional healthcare players are merging with members of their supply chains and even former competitors at a clipping pace to stay afloat as the five revolutionary forces take hold.
Amazon is showing the way in this new world. Healthcare companies that refocus their services and adapt their business models accordingly stand to prevail. Those who don’t may soon find themselves on the terminal list.