The Healthcare Ecosystem - Capturing Value in the U.S.'s Evolving, Convoluted Industry

By Liz Christianson, Billie Sterrett, and Paul Campbell

The healthcare system is “an interconnected web of public and private insurers, hospitals, pharmaceutical companies, and medical device manufacturers, all operating within layers of government regulation” (Professor Craig Garthwaite, Kellogg Magazine Spring/Summer 2019). If you try and “follow the money” you see the complexity of the industry’s reimbursement and compensation schemes, like Clark Griswold and his set of tangled Christmas tree lights. 

Society demands innovation in healthcare, but considering the efforts put forth, change, and revolutions within the industry tend to arise and progress slowly. Disruption requires that a firm create and capture value within the ecosystem – when this happens rapidly and repeatedly, we recognize industry progression.

To understand how a firm can create and capture value in healthcare, one must first be able to understand the entire value chain across the ecosystem. This is because the healthcare industry is uniquely hard to enter for many reasons, including regulatory barriers, patent protections, and economy-of-scale benefits.   

New entrants must understand the unique features of the existing healthcare ecosystem to effectively create a novel value proposition and integrate. Understanding the ecosystem view is equally important for incumbents. An ecosystem-wide, strategic view can allow for defensive moves against entrants and can birth combinations of incumbent firms that offer new value propositions and business models.

Ecosystem-level trends that demand ecosystem-level strategic responses include, but are not limited to, the following:

·    New Entrants - Amazon in retail pharmacy and Google in biopharmaceuticals are changing the competitive landscape.

·    Payment Reform – The shift in incentives because of value-based contracting (volume to value) requires understanding new business models and how firms respond to different incentives.

·    Vertical Integration – Insurance companies are moving downstream and owning more of the value chain. Prime examples of this are historic mergers like CVS/Aetna and Cigna/Express Scripts where larger private payers are integrating all the way up to the door of the hospital.

·    Multi-Sector Partnerships - The recognition that Social Determinants of Health (SDoH) requires different partnerships across government, private, and non-profit sectors.   

Over the past decade, we’ve seen that integrated systems and large payers seem to be winning time and time again when it comes to financial success. The common thread here is that these are players that regularly evaluate and consider their relationships with other ecosystem members – they are notorious for not staying in their swim lane. For example, UnitedHealth Group has seen strong financial numbers over the past four years - their adjusted share price has risen 121% over 4 years while the Health Care Select Sector SPDR Fund ETF (XLV) has only risen 41% over the same period. Some of their offerings include Optum provider clinic care, Sanvello digital and tele-mental health solutions, and more traditional actuarial functions of health insurance.

On the other hand, we’ve seen rural community hospitals struggle. Is this, in part, because they are geographically and culturally unable to integrate across the ecosystem? According to the National Rural Health Association, as of 2019, “46% of rural hospitals were operating at a loss, compared to 44% in 2018 and 40% in 2017. [Further] due to financial strains, [as of 2019] nearly 700 rural hospitals were financially vulnerable and at high risk of closure”. These numbers do not reflect the additional hardships and closures associated with the COVID-19 pandemic.

The evolution of a biological ecosystem takes millions of years. Granted, change in the healthcare ecosystem is not driven through genetics but through policy change, invention, and financial incentive alignment. However, given the vast number of players in the space and the interwoven complexities between each, we cannot expect robust shifts to come quickly and with minimal force unless business leaders learn how the different players across the value chain collide and create opportunities.

We’ve attempted to describe the ecosystem as a collection of 12 “P’s” defined below. As a summary, these include People/Patients, Plan Sponsors, Payers, Pharmacy Benefit Managers, Providers, Purchasers, Pharmaceuticals, Producers, PE/VC, Pioneers, Pundits/Consultants, and Policymakers/Government. 

We’d love to hear from you! Is the “P-framed” layout of this ecosystem generally helpful for your understanding of the healthcare space? Are there additions/subtractions you would use to revise either for understanding or for prediction of future player actions? What traditional or non-traditional partnerships are you forming to achieve affordable quality? Further, as a healthcare professional, do you spend time understanding the other players in the ecosystem, pondering potential partnerships and defense strategies, or innovating to push disruption of the existing ecosystem?

Business model transformation and leading non-traditional partnerships will be the greatest challenge in healthcare over the next decade. In this series of articles (with help from audience comments and feedback), we will work to discuss the historical responsibilities of these ecosystem players. Through interviews with prominent Kellogg alumni and industry experts, we will dig deeper into the theory that understanding the healthcare ecosystem is critical to successful progression. In doing so, we will evaluate traditional and non-traditional approaches to disruption discussing what makes each strategy (in)effective when it comes to value creation and capture.

Stakeholders in the Ecosystem:

(1) Policy Makers & Government: Legislators and regulators that shape the legal and regulatory environment in which the ecosystem exists. Examples: FDA, HHS, CMS, Federal, State and Local Legislature and Administration

(2) People & Patients: People who interact with the healthcare industry as a patient, caregiver, or representative (i.e., everybody). Examples: Patients, Caregivers, Patient Advocacy Groups (e.g., American Heart Association)

(3) Plan Sponsors: A designated party—usually a company, employer, or labor organization—that sets up a healthcare plan for the benefit of the organization's employees. Examples: Aon Hewitt, Walmart, Starbucks, Accenture

(4) Payers: Entities that pay or administer the payment of health insurance claims or medical claims to providers. Examples: Aetna, Humana, United Health Group, BCBS

(5) Pharmacy Benefit Managers: Companies that negotiate and contract with manufacturers and pharmacies to manage prescription drug benefits on behalf of payers. Examples: Express Scripts, CVS Health, OptumRx

(6) Providers: Organizations engaged in the provision of medical, surgical, or other healthcare services. Examples: Kaiser Permanente, Northwestern Medical, UPMC

(7) Purchasers: Companies that manage the pharmaceutical, medical supply, and medical device supply chain on behalf of providers. Examples: McKesson, Cardinal Health, AmerisourceBergen

(8) Pharmaceuticals: Companies that research, develop, and commercialize pharmaceutical and biotechnological therapies. Examples: Pfizer, Merck, Johnson & Johnson

(9) Producers: Companies that research, develop, and commercialize diagnostic devices, therapeutic devices, and digital solutions for the healthcare industry. Examples: Medtronic, J&J, Becton Dickinson, Epic Systems, Apple, Thermo Fischer

(10) Private Equity & Venture Capital: Individuals or managed pools of capital investing in healthcare companies throughout the ecosystem. Examples: F-Prime, Kleiner Perkins, Veritas Capital, KKR

 (11) Pioneers: Companies, mostly early-stage, developing new therapies, devices, and digital solutions for the healthcare industry. Examples: Grail, Oscar, 23&me, Heartflow, Tempus, Cerevel Therapeutics

 (12) Pundits & Consultants: Academics, consultants, journalists, and other thought leaders generating and disseminating insights and recommendations to improve the system for various stakeholders. Examples: McKinsey, Higher Education Professors, Kevin Pho (of KevinMD.com)