MedCity Influencers

The lines that define healthcare industry segments are blurring, but what will be the result?

Take a giant step back and you can see that all of the major players are undergoing major material changes in how they define themselves and what they offer to the market. The lines between retail and insurance companies and the pharma and technology industries are melting away.

Well, I’ve been afraid of changing
‘Cause I built my life around you
-Landslide, Stevie Nicks

Some of you may remember that old Calvin and Hobbes cartoon where Calvin builds a “Transmogrifier.” Basically, it’s a magical cardboard box that, when you step into it, allows you to turn yourself into anything you want to be.

Well, it seems that, after decades of ignoring each other unless absolutely necessary, all sorts of healthcare companies are lately shedding their fear of strangers and walking willingly into the Transmogrifier. While I am often whining that it seems nothing ever really changes in the healthcare field, it’s actually not true at all.  Take a giant step back and you can see, and particularly acutely right now, that all of the major players are undergoing major material changes in how they define themselves and what they offer to the market.

I think a change (a change) would do you good.

-Change Will Do You Good, Sheryl Crow

It used to be that if you were a healthcare provider, you provided healthcare services. End of story. If you were a payer/insurer, you provided insurance. If you were a retail pharmacy, you sold pharmaceuticals and consumer products.  If you were a medical device company, you sold widgets. If you were a drug company, you sold, well, drugs. If you were a tech company, you sold computers or phones or whatever gadget was popular. The prevailing attitude was, “this is my business and my handy dandy old school business model, thank you very much –back off.”

But today, if you look around you, it’s pretty clear that those rules have entirely faded away. Nothing is as it once was and few of these entities are as they used to be. It as if some giant magician has stood over the industry, said “presto chango,” and turned everyone from women to tigers, Sigfried and Roy style. It’s so weird and at the same time so appealingly logical for some of these changes to take place. But on the other hand, we are, as they say, at the beginning of the beginning where the end of the story has yet to be written. Nevertheless, you don’t have to look far to see examples of the wild transformations underway in our industry.

Health system becomes a drug company 

Tired of what they perceive as price gouging, a group of 300 hospital systems, led by Intermountain in Utah, have banded together to start a generic drug company. Rather than buy from the usual pharma companies or pharma distributors, they are going for the home grown version. This is pretty radical stuff.  While hospitals have done some pharmaceutical compounding for their own physicians’ use, it is unprecedented for them to start a company to create drugs that they will both use and distribute to others.

Tech companies become healthcare companies

And speaking of the widespread perception that there are too many middle-men in the supply chain from drug maker to consumer which are driving up costs, Amazon has decided it will become a drug distribution enterprise selling directly to, well, we are not exactly sure who, but let’s assume health systems and consumers.  This will allow those customers to bypass traditional pharmaceutical benefit managers and distributors who layer on cost as each entity touches the pharma in the supply chain.  Oh by the way, Amazon, a tech company, is also a major seller of private-labeled medical devices and supplies.

Not to be outdone, Apple Computer acquired Beddit, a sleep tracking company and has been working very assertively to become a core health tracking company and a leading participant in the clinical trial process through ResearchKit.  Alphabet acquired Senosis a health sensor company that screens for various biomarkers. Hell, Alphabet has spun out an entire healthcare company, Verily Life Sciences, which is working on so many different things from clinical trial software to medical devices that I can’t keep track. If you go back say 5 years, no one would ever have thought that the Googles and Apples of the world would be holding meetings with the FDA for products they intend to launch.  Go figure.

Pharmaceutical companies become software/services companies

Drug companies, wanting in on the transmogrification, are becoming software companies.  While nary a data scientist had ever graced the halls of most of the large pharma enterprises before the last couple of years, pharma companies are now buying up software properties left and right and entering into the data services, physician decision support and population health businesses. Witness Roche’s ’ recent acquisition of Flatiron and MySugr, both software companies that have entirely different roles in the treatment process and business models than do pharmaceuticals. Oh, and these acquired entities provide services too, something that has not been the traditional bastion of pharma.

And speaking of weird services providers…

Medical device companies become services companies

Medical device companies have, in my view, been the most isolated and inward-looking entities in healthcare, rarely venturing outside their usual circles. But a few years ago, recognizing that if you control the services delivery you can affect what it purchases, Medtronic entered into the business of outsourced management of cath labs and other core clinical operations in a number of hospitals, primarily outside the U.S.   The service offering is intended to improve efficiency, productivity and cost management inside of hospitals and is not inherently tied to the sale of devices.  I am also aware of another major medical device company that is in deep discussions to integrate AI predictive analytics software into their device offerings, adding a key service capability to their bag of tricks to help payers and providers predict risk.  I’m sure it’s not the only one.

And right back atcha…

Retail pharmacy company becomes a medical device company

CVS has just announced that it will be developing and selling medical devices, starting with an in-house effort to develop a product for at-home kidney dialysis.  Yessireee, they are going to the FDA with their product (eventually), brought to you by the same folks that sell cheetohs, diapers and makeup while you wait for the pharmacist to fill your scrip.

Which makes total sense because…

Retail pharmacy companies are becoming health insurance companies: CVS has been busy.  It is also in the process of finalizing a merger with Aetna, one of the nation’s top insurers.  And in response, Walmart has announced their interest in purchasing Humana, yet another leading insurer.  This vertical integration strategy is, in my view, incredibly interesting, particularly because…

Retail pharmacy companies have become healthcare providers: Retail pharmacies such as Walmart, Walgreens and CVS have had outpatient clinics buried inside the stores for about a dozen or so years now. But now they are also managing clinics jointly with major providers, such as Advocate and Providence (in the case of Walgreens) and the Cleveland Clinic (among others) in the case of CVS.  And this control of the front door of healthcare makes a lot of sense if you want to build an integrated health system because….

Insurance companies are also becoming healthcare providers

Obviously the CVS/Aetna merger puts Aetna in the direct mix of being an outpatient provider if they are co-mingled in the CVS mix. But how about this factoid:  UnitedHealth Group now has purchased hundreds of outpatient practices (employing well over 30,000 providers) and outpatient surgery centers (over 1 million procedures per year) and have the ability to serve as much as 70% of the US population.  Humana is hot on their heels; rumor has it they are hoping to acquire several hundred outpatient practices in the nearish term (and they have already begun the march in Texas and Florida) and have already acquired a large stake in Kindred Healthcare, a company that provides home healthcare to over 130,000 people.  If you want to keep people out of high cost hospitals and you own one of the two primary front end access points of the home and outpatient clinic, you have a good shot at achieving your goal and being pretty damned selective about the hospital contracts you negotiate.  Basically we are talking good old Karl Marx-style controlling the means of production.  And that should make the big health systems very, very nervous.

And of course…

Providers are becoming insurers

Hundreds of Accountable Care Organizations, essentially mini-insurance entities, have been formed by providers seeking to take advantage of favorable payment models that have, at least in theory, better profit margins than the hospitals they tend to inhabit. And other provider-owned health insurance companies have been quietly growing.  In 2016 it was estimated that health system-owned insurance plans represented 52 percent of health insurance products

And for all we know, retail pharmacies (Walmart), married up with investment bankers (JPMorgan Chase) and Internet retailers (Amazon) may well be on their way to becoming insurance companies too.  Or providers. Or both.  Or some sort of mythical beast we have not yet seen and which is making healthcare hearts everywhere flutter with anticipation and/or fear the reaper.

So far I have not seen any insurance companies turning into pharmaceutical companies but hey, it’s only April.

The future’s in the air
I can feel it everywhere
Blowing with the wind of change

-Wind of Change, Scorpions

I can see, at least in theory, why the true integration of consumer-friendly, front-end systems (CVS, Walmart, Amazon) with extensive outpatient networks and telemedicine, wrapped in an insurance plan and directly controlling pharma flows, would have the potential to make things better for patients and more efficient for the system overall.  But I can also see how the savings would just quickly transmogrify into added profit for the sponsor organizations, not cheaper prices.  Let’s get real, monopolistic practices are well-known to raise prices, not reduce them.  We are already seeing this with the hospital system mega-mergers that have taken place over the last few years.  It used to be that if you were a player in healthcare and you figured out how to reduce costs, you also reduced someone else’s profits.  It’s rapidly changing to a world of deep vertical integration where if you figure out how to reduce costs, you raise your own profit.  Yes, you could pass those savings on to consumers, but that’s no fun.  Or is it?Phew, I’m exhausted.  That is a lot of transmogrifying!  But here’s my question:  is all this disruption changing things for the better or is it just moving around deck chairs on the U.S. health system Titanic?  It’s very hard to say considering how early we are in the cycle.

I was at a San Francisco Business Times event last week and listened to Dr. Amir Rubin, now CEO of One Medical, talk about an observation about health care “change.”  He said that when he started in the industry, healthcare made up 10% of GDP and everyone said it was unsustainable.  Then it grew to 15% and everyone said it was unsustainable.  And now it’s nearly 20% and people are screaming that it’s unsustainable.  And you know what I say to that?  Those people are right! Those low numbers were entirely unsustainable and we have solved that by pushing them up and up!

So if we are really going to reduce costs in the system and, more importantly, improve the quality of output of the system and value for dollar spent, we better hope the metamorphoses we are seeing are more like caterpillars turning into butterflies and less like worms turning into beetles then back into worms (yuck).  Change for the sake of change is no better than just moving around the deck chairs on the Titanic. We need to not just hope, but expect and demand that change leads to better.

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