Top-down Opportunity Analysis in US Healthcare
Alternatively, 'how to design your healthcare business strategy'
tl;dr-
Two major opportunities exist in healthcare - 1) treating patients as costumers & capturing revenue via direct spend; and 2) obtaining reimbursement from a third-party payer - e.g. insurance company, employer, etc. - on behalf of patient-level use
Obtaining reimbursement is fundamentally around disintermediating spend from existing therapies & interventions by proving greater efficacy or demonstrating a lower budget impact
This is by design as third party payers often operate off of a set budget based on either how much an employer wants to spend, and how much a payer collects from premiums & employer contracts
This results in a highly competitive industry because all healthcare products & interventions - at some level - compete with each other for reimbursement; increasingly everyone is competing for a larger share of the pie
An innovation’s competitive set increasingly no longer confined within the product vertical (i.e. drug vs. drug) but against all types of care for that patient (i.e. drug vs. hospitalization, care vs. medical device, etc.)
Examples: drug vs. hospitalization1, coordinated care vs. drug2, digital therapeutics vs. traditional drugs3, diagnostics vs. procedures4, NP / PA managed care vs. physician-managed care5
Strategists should explore these dynamics by leveraging top-down analyses starting with total budget impact in order to flexibly identify key areas of unmet need, illuminate competitors, and design sustainable strategy
Success in the modern US healthcare environment requires navigating increasingly complex competitive dynamics. After all, while drugs competing against drugs and doctors competing against doctors have been well-travelled roads, how does a drug company compete against a medical device company? How do new care models compete against existing interventions? How do companies maximize their share of the nearly $4T pie of national health expenditure?
Let’s be clear - we’re all here to help improve the lives of patients around the world. That being said, it is the ‘where to play’ that is increasingly thorny as healthcare markets collide under the watchful eye of payer budget holders. Identifying the right area to play in will require looking at healthcare holistically - and finding the right areas where the cost of care is better served paying for your innovation than your competitors.
One key first step is deciding who do you want to make money from.
There’s a great deal of excitement about direct-to-consumer models for healthcare6 and no shortage of commentary on how sidestepping payers is revolutionary,7 but numbers don’t lie - market access & payer reimbursement is by far the largest opportunity. Even though access to these markets do require more upfront costs - such as dealing with ‘the bureaucracy,’ or having demonstrable proof via clinical studies & potentially regulatory approval - obtaining reimbursement is far more defensible than going after D2C because of the presence of a standard in assessing value (i.e. clinical trials, the payer P&T committee, etc.). In contrast, because the D2C market does not currently have an ‘objective’ standard for proving & understand value to patient, adoption of new innovation is as much about hype & marketing as it is about actually moving the needle for patients. While going D2C may be attractive for investors to drive quick ROI, it is less sustainable currently than the alternative - and, in the long run, potentially less lucrative.
Let’s say you’ve decided to make money from payers - you’re not done! The next step is identifying the market you’re looking to disrupt. Is it diabetic care? Is it surgery? Is it Alzheimer’s? While the question seems rather open, it is actually rather simplistic - what current products & services do you want to disintermediate and capture that cost as your company’s revenue?
The above data showcases hospital, non-hospital provider, and prescription drugs as the largest areas for spend - and, accordingly, the largest areas to disintermediate spend with a new innovation. Incumbent companies too look to disintermediate spend ‘cross-pie,’ with providers for instance stating they can reduce prescription drug expenditures, drug companies touting their products as reducing hospital resource utilization, and hospitals trying to drive greater dollars to their sites of care compared to independent providers. Ultimately, it’s a bit of a three-way free-for-all where different companies continually put out solutions in order to capture a larger percentage of NHE for their ‘team’ so to speak.
Great strategists will built upon this frame with more nuance - how much of the $401B is being spent on mental health providers, or how much of the $160B or so on prescription drugs goes to brands vs generics? While this analysis will play out different across specific therapeutic areas & slices of healthcare - diabetes, for instance, looks very different than mental health, which looks very different from telehealth as its ‘own’ industry - the core aim is therapeutic-, supply chain-, and market-agnostic. How can I capture more of the pie?
This sort of top-down analysis is increasingly necessary to drive success in healthcare. For one, it automatically gives you a sense of your maximum financial opportunity since the opportunity for any innovation is capped on how much cost it can realistically displace. A second benefit is it creates a proto-KPI for business planning & product development by framing up who you need to beat. Innovation increasingly is about how solutions compare to each other vs. in isolation - and this analysis automatically leads to deeper understanding on what existing players your solution needs to beat. Finally, it sharpens your vision. Healthcare is tactically complex from a ground-up perspective, leading to many innovators feeling overwhelmed as they begin tackling the industry. Top-down analyses like this serve as a map, keeping innovators focused on exactly what they need to do to create sustainable businesses.
Healthcare is tactically complex - but rather strategically simple. In these cases, design your strategy from the top-down, starting with the shape of the market itself, to keep you focused & alert. By maintaining that holistic view, innovators can begin to drive not only better financial performance, but ultimately realize our common goals of improving healthcare for patients everywhere.
https://bmcmedicine.biomedcentral.com/articles/10.1186/s12916-018-1104-9
https://www.virtahealth.com/blog/reversing-the-trend-of-diabetes-pharmaceutical-spending-with-the-virta-treatment
https://hbr.org/2016/11/simple-digital-technologies-can-reduce-health-care-costs
https://www.sciencedaily.com/releases/2021/11/211118203054.htm
https://www.hfma.org/topics/operations-management/article/nps--pas-could-reduce-the-costs-of-caring-for-complex-patients.html
https://medcitynews.com/2021/07/d2c-in-healthcare-why-now-is-the-perfect-time/
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/fast-agile-digital-direct-to-consumer-companies-are-transforming-healthcare-63108036