Why Healthcare is a Squid Game

Or 'why healthcare stakeholders keep trying to punch each other in the face'

Which one are you?

tl;dr-

• Improving US healthcare systemically is challenging because of the mismatch between how revenue is generated vs. how value (i.e. a healthier population of people) is measured;

  • The most common method to generating revenue is to generate cash flow per ‘unit of economic activity’ (i.e. $ / product, $ / use, $ / visit, $ / procedure); increasing cashflow depends on increasing activity (i.e. more visits = more $s)

  • However, one core measurement of healthcare value (i.e. ‘a healthier population’) is decreasing healthcare economic activity (i.e. a healthier population = less visits / procedures)

  • This is true on a per capita basis; one would expect a healthier patient vists the doctor less than a patient with a chronic condition that requires active management

  • This is especially true for health insurance companies, who serve as the primary source of revenue for most healthcare innovators via the US healthcare system’s reimbursement-based economic model

  • Ultimately, this incongruence is one of the fundamental drivers behind misaligned incentives in US healthcare; increasing insulin usage, for instance, is beneficial if your cash flow depends on insulin sales but is also a sign that the health of your population overall is declining

• This creates an inherently hyper-competitive market because the value of an innovation is often dependent on declining utilization of other products & services at the population level - even if they’re not in the same vertical

  • Common examples including value of healthcare services linked to declining use of pharmaceutical products (e.g. Virta), value of pharmaceutical products based on replacing hospitalization or procedures (e.g. COVID-19 therapeutics), or value of primary care models defined in part by reducing hospital resource utilization (e.g. home health vs. hospital care)

  • While it is true that reimbursement for different interventions (i.e. drug vs. care) have traditionally been segregated into different channels (e.g. medical benefit vs. pharmacy benefit), there is increasing interest in defining value as impact on total cost of care - the total spend per patient per period of time regardless of the reimbursement channel, end payer, or intervention (i.e. ‘sum all’)

  • Accordingly, new products & services - be it a drug, a diagnostic, or a service - are increasingly measured by how much they reduce total cost of care i.e. the sum of all other costs associated with that patient from their use of other healthcare resources

  • The result is that drugs do not compete with only drugs anymore, or that providers compete only with providers; everything competes with everything else for cash flow from payers, regardless if those payers are healthcare insurance companies, employers, or patients

  • Another way to think about this is that healthcare products & services on a per capita level are mostly one-of-one’s; unlike streaming services, where a consumer can subscribe to an infinite number capped only be available buying power, a patient will generally have only ‘one’ of certain healthcare products & services (i.e. one drug for one condition at a time, one primary care HCP at a time, etc.)

• This hyper-competitive environment results in ‘Squid Game’ dynamics, including:

  • Emphasis on acquiring access to resources, such as people, dollars, processes, or contracts (e.g. vertical integration)

  • Competition for influence on stakeholder behaviors & cultural norms (e.g. controlling public perception of what should & should not be paid for)

  • Favoritism of control over collaboration to mitigate risk (e.g. acquiring companies vs. remaining partners)

• Ultimately, systemic improvements to healthcare will likely only come from savvy navigation of this hyper-competitive environment, though it remains to be seen what business model(s) will be the most successful

***

I’ve been struggling with articulating my thoughts on this for some time. Part of it is because every other healthcare innovator is talking about how there is some ‘limitless opportunity’ in healthcare - nearly always measured in dollars, of course - and my continued bewilderment on why I found that perspective not just jarring, but offensive. So over the last few weeks I’ve been asking myself why did I find the idea of healthcare being an area of unlimited economic growth quite so dissonant with the rest of my mental machinery. In my mental sojourns, I found myself constantly going back to a key thought - that the best healthcare system in the world is one that doesn’t need to exist. Why? Because no one needs care if everyone was healthy.

Healthcare from its earliest conception has always been reactive. Break a leg, get care to get better. Get sick, take this; get better. It is a system designed to assume that people are healthy as a base state. Needing care is because something is wrong - a disease perhaps, or an accident. This leads to a conundrum - how do you appropriate compensate people for providing healthcare when the broader societal focus should be on having as few opportunities for them to provide care as possible? Easy - super, duper high prices for each time they deliver care so it works out across a population & over a period of time.

Oh wait, doesn’t that mean individual people may not be able to afford it all the time? Don’t worry; let’s pool all of their economic buying power together (as a population) under a third, neutral party and use it when necessary. Boom - the reimbursement-based healthcare system. Seems simple, effective - maybe even elegant - on paper. It may even work in practice for a little bit of time! The challenge is that the picture I painted above doesn’t account for one, very big behavioral driver.

Growth.

If we call the above scenario Time = 0, for instance, and you tell the HCP that he or she deserves more year on year, how do you think that HCP will go about growing? One view is - get more patients! But you know, the cost of getting a new patient is probably so much higher than just getting more from my current ones. So maybe instead of getting new patients, I just focus on getting my current patients to visit me more.

While this situation is great for the HCP, it’s maybe not as great for the system, especially if the pooled economic buying power doesn’t become enough. That’s when the payers come in and say hey, this growth is unsustainable. Maybe the HCP accepts it. Maybe the HCP doubles down, and says well I already invested so much in getting patients to visit more - and now you want me to lose money? Maybe the HCP even points a finger at his or her colleague and say but wait, you paid that person more than me last year! What evidence do you have that I should be paid less? I provide more value because look - my patients want to visit me more! (Basically, this very well written article about primary care innovation from four years ago.)

Run this simulation a few thousand more times - throwing in biopharma companies, medtech, and now a set of modern innovators from other industries - and you end up with the Squid Game healthcare environ of today. Whenever all efforts are focused on increasing activity - ‘take more drugs,’ ‘engage more with your HCP,’ ‘do more with this digital platform’ - but success (historically) in the industry is rooted in doing less, you end up with a great deal of discord, fragmentation, and backstabbing that makes for great TV but an absolute travesty for patients. After all, if the secret of healthcare is that ideally, patients never have to use a solution (be it a new drug, a new medical device, a new healthcare service, whatever) - then innovators will do everything they can to be the one thing patients use when the opportunity presents itself. Some may even go so far as to try and create more opportunities (and why healthcare marketing is a thing).

So what should you take away from all of this?

Unfortunately, I don’t think there’s an easy answer, or is there an easy way to find that answer. The only counsel I can offer is that it starts with you - as a person, as an innovator, and as a professional in healthcare. Being aware of these competitive dynamics & how systemic structures influence stakeholder behavior (and vice versa) is critical, regardless of whether you’re trying to 10x revenue, create a new innovation, or tackling systemic challenges at HHS. Equally important, however, is the internal awareness of why you & your organization are doing certain things - and the impact they may have. It’s always a hard calculus on whether to trade the opportunity for financial performance & sustainability at the cost of value to patients - and there is oftentimes no conclusively right or wrong answer - but awareness of when & why your organization makes those decisions helps. At the very least, it keeps healthcare companies honest by forcing them to realize just how deep of an impact their strategy may have on the patients they’re trying to serve.

After all, aren’t patients the reason why we’re playing this Squid Game in the first place? Think about that.

-WY