Spiraling Healthcare Costs  

Mergers are not the answer, innovation is.

POSTED BY Robert McDonald and Charles E. Root Jr. MS. AT 3:12 P.M. July 14, 2015

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If you have recently gotten a doctors bill or had sticker shock while shopping for health insurance, you know that the cost of healthcare in America has continued to grow unabated. One of the attempts to control cost has been through mergers, by both health insurance companies as well as hospitals and health systems.

There are five major health insurers in the United States: Anthem, Cigna, Humana, Aetna and United Health Group. In some form or fashion in the past month all five have looked to merge with one of its rivals. Anthem has made a $47 Billion dollar offer for Cigna. Humana and Aetna have been reported to be in merger talks*. UnitedHealth may be interested in either Aetna or Humana.

In some respects these merger talks are the fallout from the Affordable Care Act (Obamacare). Though one of the laws stated goals was to create efficiencies through consolidation, Obamacare constrains the amount of profits that hospitals and insurers can make. When cost control is inserted in to a free market, producers have three choices: attempt to find cost cutting measures, ration the product being offered, or go out-of-business. The last two options aren't very appealing for a variety of obvious reasons, thus insurance companies, hospitals and health systems look at the common practice of a business merger. A merger allows for cost cutting by the elimination of duplicate efforts, reduction in staff and office consolidation. So how is this going at stabilizing or reducing consumer cost?

Robert McDonald, President of ipCapital Group, and previously Chairman, Health Care Industry of Coopers & Lybrand L.L.P, has extensive experience in the subjects of healthcare and mergers. "Rarely does the activity of a business merger end up in cost savings. You merge businesses to obtain something specific such as equipment, customers, data, and real estate. Not many CEO's say, 'let's buy that business over there for $40 billion dollars because that will save us money.'" Indeed the American Academy of Family Physicians agrees. In a letter written in June to the Federal Trade Commission they had this to say about mergers, specifically regarding insurance companies: "seldom does consolidation result in reduced costs for consumers. Bigger insurance companies mean increased leverage and unfair power over negotiating rates with hospitals and physicians. More often than not, consolidation increases costs and reduces options for consumers and we believe this would hold true in the health insurance market" 1 2

So what is really required to make a significant change to the overall cost of healthcare delivery and its associated industry of health insurance? The answer is innovation, both in how people are cared for and how they pay for it.

When you consider the healthcare landscape and all its moving parts, getting sub-parts to be more innovative is not a trivial challenge. Insurance companies as a whole have not demonstrated much interest in innovation. Why? They offer a product that is essentially math-based, specifically, the Law of Large Numbers; where they spread the risk of payment to a larger population of insured. This causes them not to be inclined nor equipped to get in to areas like delivering new and cheaper ways to provide healthcare. This shouldn't necessarily preclude them from being innovative though. They might consider using advances in technology, such as the "Internet of Things" where a treadmill and wearable health tracker sends data back to a centralized data base, and then cross references that against a customer's food purchasing habits via a shopping loyalty card. Imagine the useful insights in to a customer's health behaviors. Such data management is an opportunity to deploy a new business model that harvests data, analyzes it, and rewards customers for specific behaviors.

The question is which segments of the industry are likely to innovate in this way? This maybe a prime example of innovation that self-insured employers might consider.

Hospitals are unwieldly; they were created to deliver excellence in clinical care and not to be focused on innovation in delivery of care. They are also territorial, and have created their own lingo to protect themselves (198,000 terms and growing3 ). But hospitals also face significant pressures that push them towards the need to be more innovative. Changes in insurance reimbursement and the aforementioned Obamacare price controls are resulting in hospitals not getting paid as much as they have in the past. Is innovation to improve/ reduce cost an option?

Doctors are also changing, working for hospitals instead of setting up individual practices. They are happy to do a 9 to 5 shift instead of dealing with the overhead of entrepreneurialism. As a result the medical staffs of many institutions are also not structured to be more innovative.

The two other large segments of the healthcare system in the U.S. are "big pharma" and medical device manufacturers. In these sectors you can observe exceptional use of innovation protected by Intellectual Property to help drive extremely robust margins and profits.  Why? Both of the sectors have long understood that an unrelenting focus on innovation will yield remarkable financial results. Unfortunately these economic results also generate a big cost impact to the insurers and ultimately the consumer.

So what can be done to push the economic benefits to the consumer? Is some new business model an option? Let's take a look at the medical device company Theranos. Theranos is working to cut the huge costs associated with healthcare in the area of diagnostics. They have developed technology that can test blood for over 250+ maladies that you do at home and for the fraction of the cost of going to a doctor or traditional lab.4 There's the added bonus that you get your results in hours instead of days. Once again the challenges will be to get the insurance and care components of healthcare to accept this type of innovation.

Could/should hospitals be working closely with these types of diagnostic technologies in order to cut cost? Imagine a small box attached to your computer via a USB cable. You place your hand on the box and it takes your vitals.  You then put a small strip of paper in that contains a drop of your blood, and in an hour or so, you are securely emailed a results paper. The results could even include follow-up recommendations such as 'come to the ER immediately', or 'you're fine you just have a cold.'

Combine that with telepresence healthcare where you can interact over your computer or phone via video chat with a real doctor, and you've just eliminated 70% of doctor office and 40% of emergency room visits.5  The cost savings to hospitals passed on to insurance companies and consumers could be enormous. When you push the "healthcare boundary" all the way out to the consumer's home, not only have you improved healthcare, but you've also dropped its cost. Imagine the care and cost impact of these types of innovations for someone who has a chronic disease such as diabetes. Such technology is also potentially attractive to a large population group in the country, millennials, who grew up in an age where everything is digitized and readily available to them.

When you look at the potential for areas of healthcare where innovation can improve quality, reduce cost and use new delivery models that create savings that then get passed on to consumers, using business mergers instead pales in comparison.

ipCapital Group has a record of providing services which allow for innovation extraction across any industry sectors, including health insurance and healthcare. Contact us today for more information.


1 Dr. Reid Blackwelder; Letter to the FTC,  June 4th 2015; AAFP Website http://www.aafp.org/dam/AAFP/documents/advocacy/legal/antitrust/LT-FTC-InsuranceMergers-060415.pdf

2 See Also: Andrew Ross Sorkin, "Health Care Law Spurs Merger Talks for Insurers", June 22, 2015; New York Time Website, http://www.nytimes.com/2015/06/23/business/dealbook/health-care-law-spurs-merger-talks-for-insurers.html

3 All Acronyms Website, As of June 25th 2015, http://www.allacronyms.com/_medical

4 Theranos Test Menu, As of June 23 2015: https://www.theranos.com/test-menu

5 National Ambulatory Medical Care Survey 2006 (Aug 2008), CDC Website as of June 23 2015: http://www.cdc.gov/nchs/data/nhsr/nhsr003.pdf

*-Whoops, we were right, since this article was produced Humana & Aetna have merged.



TAGS: Creativity | Innovation | Charles E. Root Jr. MS. | Robert McDonald | Wearables | Health Care
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