| Good morning, Dailies, and thank you for beginning another year with us in your mailbox. As I mentioned in yesterday's note, I spent much of the holiday break pondering the big ideas and trends that are going to drive the healthcare revolution in the coming few years. And over the next several weekdays, I'll share them all in this newsletter. At the heart of each, however, is really one big idea: value. To put it in the argot of Middle-earth, it's the one idea to rule them all. In an essay for the New England Journal of Medicine some seven years ago, the eminent management scholar Michael Porter famously asked, "What Is Value in Health Care?" His answer can be summed up in two paragraphs, which I've stolen below: Value should always be defined around the customer, and in a well functioning health care system, the creation of value for patients should determine the rewards for all other actors in the system. Since value depends on results, not inputs, value in health care is measured by the outcomes achieved, not the volume of services delivered, and shifting focus from volume to value is a central challenge. Nor is value measured by the process of care used; process measurement and improvement are important tactics but are no substitutes for measuring outcomes and costs. Since value is defined as outcomes relative to costs, it encompasses efficiency. Cost reduction without regard to the outcomes achieved is dangerous and self-defeating, leading to false "savings" and potentially limiting effective care.
These central tenets, I believe, will continue to propel the healthcare transformation that is now underway—even if you can't quite see the impact yet. (I'll have more on that in a future commentary.) Science and technology will be the tools that carry us forward, inevitably, but it is this driving idea—of customer-centered value—that will spur the most meaningful changes in the realms of healthcare systems and medical technology. For some of the trends and themes that I'll discuss over the next week or so (including the two below) you'll see that customer value is clearly at the core. In others, recent breakthroughs in science and technology are leading to quick adoption of a medical innovation or approach, which in turn, is helping to drive more investment in the field and creating a virtuous cycle. But even with these trends, I believe, consumer and patient value lies at the center of gravity. With that said, here are the first two major health industry drivers for 2018: 1. SELF-AGGREGATION. Step away from the healthcare universe for a moment and consider a phenomenon that has dominated public chatter these past many months: Bitcoin. For all the prognosticating and opining about Bitcoin mania—and we do a fair amount of both in FORTUNE's January cover story (please read !)—there is one aspect of the cryptocurrency that I believe can teach us something important about the future of healthcare: Bitcoin and its coinish ilk are self-organizing systems that operate utterly outside the traditional structures and rules of financial engagement. Normally, when we think of money—the dollar, the euro, the yuan, whatever—we think of governments, and central banks, and mints printing up paper bills behind fortified walls. Bitcoin and its rivals have none of those things—and, it turns out, they don't need them to function. You might even say the same thing about the Internet—though, to see the parallels with Bitcoin, it helps to stroll back to New Year's Day 1983. That's when the pioneering developers of ARPANET adopted a set of communications protocols called TCP/IP, allowing a community of computer scientists, academic researchers, and others to create a self-organized system for sending messages and data. Here, in effect, was another universe built from scratch, with its own set of governing rules and conventions. The question is whether healthcare can likewise be wrenched free from its rigid, decades-old payment and provider constructs and be re-formed into new self-contained, efficiently run ecosystems that put the consumer at the center. I believe the answer is yes—and that we'll start seeing business models (both for-profit and not-for-profit) emerge and evolve around this idea. Indeed, the early makings of such an ecosystem can be seen, to some extent, in Kaiser Permanente, which integrates coverage and care for its nearly 12 million policyholders. KP still works through a traditional network of hospitals and medical offices in a smattering of states—with 23,000 non-employee physicians offering care exclusively through its own health plans. But within this healthcare biodome, the old rules of insurance, copays, appointment-making, and office visits are changing quickly, as customers now routinely consult with their physicians through email exchanges and video chats. The recent move by CVS to acquire Aetna in a nearly $70 billion deal is another step toward self-aggregation, combining a retail pharmacy chain, a pharmacy benefits manager (PBM), and an insurer under one roof—and I doubt they're done building by any stretch. Look for this health combine in the coming year or two to absorb one or more physicians groups, and maybe enrich CVS's in-store " Minute Clinics" with an independent network of neighborhood walk-in centers as well. UnitedHealth Group has been on the same path. Last month it announced it was buying DaVita Medical Group for nearly $5 billion—a union that would give UnitedHealth some 300 clinics around the country, bolstering its current associated network of 30,000 physicians. (Both deals are subject to regulatory approval.) What will continue to drive self-aggregation, however, isn't the same thing that has driven consolidation in the past—that is, to find cost savings through "new efficiencies" (a worn conceit that rarely produces what it claims to). The aim, again, is (or ought to be) to create an ecosystem—one strong enough, and independent enough, to write its own rules. And if those rules ultimately benefit patients, providing more value at less cost, then the system will thrive. Otherwise, these new multibillion-dollar constructs will collapse under their own weight. 2. DE-HOSPITALIZATION. What are already collapsing under their own weight are many hospitals. As the always-incisive Bryan Roberts, framed it for me in a conversation around this time last year , hospitals "are essentially big capital assets trying to stuff people through them." These often-gargantuan, sprawling structures are filled from floor to ceiling with fixed costs—pricey beds, CT scanners, MRIs, and other giant machines, nursing staffs, laboratories, etc. And while, for many decades, capital assets such as these were a strategic advantage for hospitals, says Roberts, "we are entering a time, because of the liquidity of data and analytics and software, when…all of those capital assets are now actually really constraining. Obviously, they cost a lot of money and depress margins. But I think they could also dramatically constrain business models, too." To keep their inefficient 12-cylinder engines chugging, hospitals must consume a ton of financial fuel—roughly $1.1 trillion of national spending in 2016, or more than twice what the U.S. spent in the year 2000 and four times what we spent in 1990. Today, in this country, we spend 32 cents of every healthcare buck on hospital care. But in an era when businesses, insurers, and governments are increasingly balking at these charges—and when patients themselves are bearing a larger share of the cost—that model no longer works. As I mentioned above, Kaiser Permanente is finding more ways to engage with patients outside its hospital walls. Kaiser CEO Bernard Tyson told me not long ago: "They built [the hospital], and then they built everything in and around it, and then everybody had to come in to the hospital [to get the care they needed.] We're saying, 'No you don't. There are multiple access points and the hospital or doctor's office is just another access point.'" In the health ecosystems to come, though, a substantial number of these new access points are likely to lead to care that bypasses traditional medical centers altogether. Already, smaller specialized surgical facilities and high-end outpatient clinics are drawing patients away from the old downtown medical centers. Look for that trend to accelerate rapidly. At the same time, better homecare options—largely made possible by digital health innovations, telemedicine, and (hopefully) new payment structures—will keep many patients out of the hospital to begin with. (Or if a patient has to be admitted, get her home much sooner.) The medical systems that embrace these changes will thrive, in my view; those that don't, won't. Still, the most dramatic shift for hospitals, I predict, will come to the ER. In 2014, the most recent data available from the CDC, Americans visited the emergency room 141 million times, with fewer than 8% of these trips resulting in a hospital admission. (In nearly 99 million of these visits, no diagnostic or screening procedure was even ordered.) Leaving aside the matter of who pays (and overpays) for this invariably very expensive form of care, and how much hospitals make or lose from their emergency departments, it's hard to find anybody who thinks the ER system doesn't need a radical rethinking. So one thought: Start from scratch. Over the next few years, count on some walk-in urgent-care centers to evolve into true standalone emergency rooms and for ambulances to increasingly head there instead of to hospital ERs, particularly in the case of certain types of injuries (such as wounds or broken bones). The move to de-hospitalization may at first seem at odds with the recent frenzy of hospital mergers. (And speculation that nonprofit heavyweights Ascension and Providence St. Joseph Health are also in merger talks, as the Wall Street Journal reported last month , have only spiked that fever.) But as with the progression toward self-aggregation discussed above, the ultimate aim even with these mega-medi-deals isn't to get bigger for bigness sake—or at least it shouldn't be. Rather, it's to gain enough share of the patient market to thrive during an era when the fundamental business model of healthcare is transforming. The day's news is below. |
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