// . //  Mission Requires Change //  Responding To New Industry Realities

Economics say we can’t afford the healthcare system we have today. Demographics say we can’t staff it. And consumer preferences say it might not be relevant anyway. How do we reinvent ourselves before it’s too late?

We’ve spent decades launching experiment after experiment. While there have been pockets of success, truly transformative change has alluded us. We can apply lessons from the past few years to create an industry that is more agile and responsive to uncertain economic conditions, evolving consumer expectations, and the inevitable new operational and operating model norms.

Consumer Expectations Have Changed

Consumers are becoming more demanding, seeking tailored solutions versus a one-size-fits all that the industry has been offering. More specifically, consumers are looking for convenient access for routine and specialized care from health systems — 49% of consumers said that having convenient locations is a primary driver of their healthcare decision-making and 52% said it was the second most important factor, trailing insurance coverage, according to the 2021 NRC Healthcare Consumer Trends Report. Healthcare leaders are becoming more cognizant that convenience and personalized care are important differentiators.

And the definition of convenience is expanding. It’s not just more locations in strip malls. They expect omni-channel and on demand access that is convenient. From insurers, consumers are looking for tailored product design that meets their needs and doesn’t break the bank. And from pharmaceutical companies, consumers want affordable access to basic drugs, as well as innovative therapeutics.


Exhibit 1: Healthcare consumerism is increasing
Patients are demanding more convenience at lower costs and innovative healthcare services that are tailored to their specific healthcare wants and needs

Supply Side Composition And Dynamics Are Evolving

Nearly 60% of health systems in the US are not-for-profit. They were created as mission-driven organizations to serve broad populations with broad needs of their communities. That resulted in a business model focused on local population, serving all their needs.

But the nature of competition has changed over the past few years, creating a different playing field that puts traditional players at a disadvantage. Competitors, mostly for-profit organizations, coming from outside of healthcare — retailers including Walmart and CVS, as well as tech companies such as Amazon and Google — can pick and choose which care space to occupy where they can create scale and competitive advantage. In addition, they are not encumbered with high legacy fixed costs and can start with a much more favorable cost position.

Other players in the sector present a different set of challenges. Health insurance companies are diversifying too as evidenced by slew of acquisitions where health plans are entering into selective parts of delivery system or retail space to generate revenue while managing total cost of care by direct intervention in delivery system. UnitedHealth Group is a great example: owning the largest number of physicians in the nation; merger of Aetna and CVS, along with its recent $8 billion bid to buy Signify Health, the largest home health business is another great example.

We are seeing some positive movement from incumbents, like those that have launched or funded an innovation center. And there’s an increased appetite to advance hospital-at-home programs, with 53% of health systems telling the American Hospital Association that they are likely to add that service by 2027.

Human Capital Shortages Persist

Shortage of skilled staff in healthcare, especially clinical staff, has been a challenge for many years. The pandemic intensified the imbalance of supply and demand that is likely to endure if we continue historic practices.

Today, staffing shortages are threatening access to and receiving quality care. It is also exasperating affordability issues. Many health systems have started to see the impact on their bottom line with negative operating margins. Health plans will be next, although with a slight delay compared to health systems.

Acquisition and retention of workforce, especially clinicians and frontline staff, will require a fundamental shift in the human capital value proposition, including a rebalancing of monetary and non-monetary aspects. Some believe that we must re-set the definition of value. The re-set should be aligned with the value that we need to create for the consumers who seek care. And it must address the needs of all segments of the labor including nurses aids, nurses, nurse practitioners, nurse navigators, physicians, etc. Today’s supply pipeline doesn’t paint a promising picture. The younger generation sees a career in healthcare as high risk, high burn out rate, low pay, and where the majority of the workforce is under-valued. Solving for that equation is a long-term journey starting in high school. In addition, the fact that the average age of nurses in the US is over 50, adds to the acuity of the challenge.

Until we tackle the problem, one can be resigned to the fact that the unit cost for care is likely to stay high. Therefore, it will become imperative to rethink ways that precious human capital resources can be deployed to capture the highest value. The result will be rethinking the ecosystem of business and operating model for the industry.

For health systems, it will mean creating a purposeful and hybrid model to provide access and treatment to patients. A hybrid model will leverage artificial intelligence and technology to remove waste from the system, replace some of the tasks performed by human capital today, and become a forcing function for standardization. (My colleagues Deirdre Baggot and John Rudoy examine how leaders can restore trust
with their workforce in this article. And Oliver Wyman’s Tom Robinson talks with Houston Methodist executive Roberta Schwartz about ways the health system is using technology to create a more sustainable workforce in this podcast).

For health plans it could mean reassessing the value of traditional functions such as utilization, care, and case management in their current form. Again, a hybrid model combining AI and targeted human intervention will be key.

Economics And Financial Sustainability At Risk

Changing consumer expectations, an evolving competitive landscape, and human capital challenges have led to deteriorating financial position for many traditional players in the industry as evidenced by negative operating margins for many health systems in 2022. Left to their own devices, deterioration will continue and could result in an unsustainable financial position.

While the cost of care is on the rise, some of the traditional profit pools generated by commodity services, such as eligibility for the 340B drug pricing program or preferred sites of care, may erode. The case for re-inventing the industry is overwhelming and the winners will be the ones who embrace the crisis as a catalyst for transformation since incremental changes will not be sufficient.

One could argue that healthcare industry had been immune to previous recessions. What’s different today? The answer: evidence of negative margins, an industry under distress, an ever-growing labor cost and an intense focus on affordability.  

If we finally believe that we must solve for affordability, are we willing to let go of status quo? What would that mean? A value reset for workforce as discussed earlier? Innovation that allows for a hybrid solution between human capital and technology? Further specialization of care versus the one-size-fits all? New drugs aided by AI that will substitute for costly hospitalization and other forms of intensive and costly care? Better yet, using AI to predict disease before it happens?

These are all much easier said than done. But we must start playing a new game for our industry to survive and thrive in the coming years.