Innovate or Wait and See: Which Path Will Health Stakeholders Follow? | Deloitte US has been saved
By Joshua Lee, principal, and Bradley Allan Gallaher, senior manager, Deloitte Consulting LLP
In a recent blog post, our colleague Neal Batra drew parallels between the disruptive forces that altered the music industry 20 years ago and the outside organizations that are beginning to gain a foothold in health care. Health care certainly isn’t the first industry to undergo a major disruption, but it could be the most monumental. The health sector makes up nearly 18 percent of the gross national product (GDP)1 and touches all of us.
To gain a better understanding of industry disruption and its impact on incumbent organizations, we examined 30 companies within 12 different markets not related to health care. How did incumbents react to disruptive forces, and where did those reactions lead? While many incumbent players did not survive the disruption, some thrived by staying ahead of it. Others were able to keep pace with changes by partnering with or acquiring outside organizations.
We then extended our research to the health sector where we analyzed more than 1,000 transactions among the nation’s 20 largest health systems over the past two decades. We found that over the past 10 years, non-traditional investments have more than tripled—from eight percent to nearly 25 percent. Many of the largest health systems have set up venture-capital funds with the intention of investing in non-traditional assets. For example:
In response to disruptive forces, many health care and life sciences organizations are beginning to invest in non-traditional capabilities, which are not directly related to their traditional core lines of business. But will those investments position them for the future of health?
Three paths diverge toward the future: Which will incumbents follow?
As disruptors from outside of the health industry gain traction, we have concluded that most incumbent organizations are likely to respond in one of three ways:
Path A—Incumbents build a moat: In this scenario, incumbent organizations resist the changing market and urge the government to preserve the established order. Incumbents that take this path might help lead a backlash against technology-based industry disruptors. If this situation were to play out (which we think is unlikely), we estimate that health spending could reach 24.9 percent of GDP by 20402—up from 17.8 percent today.3 As a result, health spending would be unsustainable. Many incumbents would not survive in their exiting form, and government regulators might be forced to intervene.
Path B—Non-traditional organizations dominate the market: Organizations from outside of the health sector enter the market with size and scale and with technologies that are not yet being used in the industry. Incumbent players along this path lose market share because they are slow to react to changing market demands. Retaining the core customer base will likely require companies to develop or acquire new capabilities that improve efficiencies and allow the organization to stay a step ahead of outside disruptors. Along this path, companies will need to develop new business models. Stakeholders that choose this path should understand that outside entities are likely to pull away some existing customers, which will likely result in a smaller market share. Incumbent players will need to find growth elsewhere to make up for the smaller core customer base. Companies that succeed will be those that avoid being wiped out altogether, although that are likely to experience a loss in market share to disruptors. Consider the retail industry. Over the past five years, many large retailers have struggled to build their ecommerce business organically. Retailers that have acquired or partnered with companies that had a proven online delivery platform in place tended to be more successful.
Path C—Incumbents transform themselves: In response to non-traditional organizations entering the health space, incumbent organizations adapt quickly to changing market demands. Some incumbents leverage partnerships and alliances to respond the changes being pushed forward by outside organizations. A health system, for example, might acquire a consumer-services company, or a health plan might launch a subsidiary around population health, analytics, or innovation. Consumer technology firms are also making investments that could help them enter (or expand their presence in) the health sector. Such deals are already underway, and some are accelerating. This trend aligns with the future of health that Deloitte envisions. Research has determined that if incumbents are willing to adapt their revenue streams they are more likely to be a part of the overall growth of a market.
As incumbent organizations pave and follow this path toward the future of health, they need to consider the role or archetype they intend to follow. Will organizations differentiate themselves through their collection and use of data? Will they enable the health care ecosystem as an intermediary, financer, or regulator? Determining this future-facing role could help organizations determine the capabilities they will likely need to develop over the next 10 to 20 years. This will help drive near-term investments or partnerships that can serve as waypoints to the future of health that capitalize on existing strengths and lay the foundation for long-term transformation.
In 2012, online retailers disrupted the retail market, negatively impacting big-box stores such as Best Buy.4 Rather than trying to compete in the online retail space, Best Buy reinvented its customer experience. Management cut costs, cleaned up its balance sheet, and revamped customer service. The company implemented in-store price matching, which boosted sales among customers who were only coming to the store to view products before buying them online at a better price. Best Buy also started home advising, an initiative that helps consumers plan purchases based on the unique features of their home.5 By creating a customer-centric business, Best Buy was able to retain traditional retail customers.
The pace with which the market moves to the future of health will be determined by how boldly incumbents respond to the threat from outside organizations and whether public policy promotes, or resists change. In upcoming blogs, we will examine some of the trends health care providers face, how disruption typically affects a market, and the various pathways health organizations can pursue to navigate the future of health.
1. US national health expenditure as percent of GDP from 1960 to 2019, Statista (https://www.statista.com/statistics/184968/us-health-expenditure-as-percent-of-gdp-since-1960/)
2. Deloitte’s baseline spending estimate is based on data from the World Bank, the Organization for Economic Co-Operation and Development, and projected growth trends based on the average GDP growth rate 2010-2018.
3. Forecasting the cost of US health care in 2040, Robert Fogel, National Bureau of Economic Research (https://www.nber.org/papers/w14361.pdf)
4. Why Best Buy is Relevant in the Age of Amazon, Forbes, August 28, 2018 (https://www.forbes.com/sites/andriacheng/2018/08/28/why-best-buy-is-relevant-in-the-age-of-amazon/#6201a4ac1462)
5. Best Buy Rising from Ashes to Lead New Retail Paradigm, Forbes, June 7, 2018 (https://www.forbes.com/sites/greatspeculations/2018/06/07/best-buy-rising-from-ashes-to-lead-new-retail-paradigm/#76cab405b443)
Josh, partner, Deloitte Consulting LLP, leads the firm’s health care strategy practice. He holds extensive experience in strategy formulation, large-scale transformation, operations, and organization strategy in the global health care industry.