Outdated Revenue Models | Deloitte US has been saved
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By Felix Matthews, MD, MBA, managing director, and Christopher Murray, senior manager, Deloitte Consulting LLP
The COVID-19 pandemic drastically disrupted health care revenue and business models, and transformed consumer behavior and care delivery models seemingly overnight. For many Research Leaders (e.g., esteemed academic medical centers, cancer centers, and children’s hospitals), the pandemic exposed the vulnerabilities of an outdated system that has long been used to generate and sustain research revenue. However, the pandemic has also opened the door to new approaches and opportunities.1
Research Leaders are typically seen as digital health innovators that are committed to research and therapeutic transformation. Their research tends to be fragmented, siloed, and sub-scale, which can make it excessively inefficient and costly to produce. The whole operating model might need to be reconsidered if the system is to operate at scale and deliver greater output and value.
One of the most significant challenges Research Leaders face today is an unsustainable and outdated cross-subsidy model. In recent years, grant revenue has been steadily declining and has been covering an increasingly smaller share of research costs. Although funds from the clinical enterprise have been able to make up the difference, the financial burden on a clinical business that grows each year cannot continue indefinitely.2
These issues aren’t new to Research Leaders, and exectutives from these organizations have run into a variety of roadblocks when trying to change the operating model. Margin optimization—and the need to compete on price—is next to impossible given the traditional cost structure of an expensive research operation. For example, when attempts are made to optimize the research wing, a stonewall might be raised by principal investigators (PIs) who are often accustomed to governing their fiefdoms.3 Collaborative technologies are often simply unable to meet both PHI (protected health information) requirements and analytic capability at a price point that is less than than the cost of post-doc labor.4 As a result, institutional inertia has pushed the status quo along for years, and executives have tended to focus on low-hanging fruit that offers a higher rate of return.
Three propositions for Research Leaders
We have identified three approaches that Research Leaders should consider to help them transition away from outdated revenue models:
1. Develop new research partnerships to help generate new revenue: Competing on the price of clinical services is a fool’s game for academic health systems and other Research Leaders. Although margin optimization is always worthwhile, optimizing cost is merely table stakes. Academic centers might never be able to bring their costs down to a point where price differentiation is a winning strategy when competing against cherry-picking specialty care providers or large-scale community health systems. Both of these competitors tend to have better revenue-to-cost ratios than academic centers are ever likely to achieve. We propose that Research Leaders double-down on their mission of discovery and care delivery innovation, and focus on ways to drive scale in research operations. They should try to forge partnerships that have the potential to transform medicine. While Research Leaders are the engine of life sciences innovation, they generally have not yet received their fair share of the life sciences revenue pie. While some licensing agreements have generated much-needed financing, the value capture of discovery tends to disproportionately benefit life sciences organizations.
This situation appears to be changing, and we are beginning to see shifts in the market. Some technology companies have begun to acquire data and apply their nascent, but increasingly powerful, artificial intelligence (AI) engines to drug discovery and development.5 Some of our Research Leader clients have entered into agreements with tech giants that have planted the seeds for revenue diversification.6 This dynamic is bringing some life sciences companies to the negotiating table to discuss similarly novel agreements. We recommend that Research Leaders seek out such partnerships and determine if they might be beneficial.
2. Modernize existing technology: Over the past few decades, many of our Research Leader clients have found it challenging to drive productivity or efficiency gains.7 Even as researchers push to advance medicine, attempts to update their own research technologies have sometimes been stifled by high costs and diverging opinions from PIs. This is largely due to a combination of organizational inefficiencies and insufficient technology. As a result, many researchers continue to rely on data stored on hard drives. Moreover, time is often wasted cleaning data that is typically discarded after use.8 Modernization could reduce inefficient use of skilled post-doc labor and enable data to be structured in a way that could facilitate wider collaboration and accelerate innovation.
A number of tech giants have introduced cloud-based solutions that address security, flexibility, and cost concerns and are suitable for research institutions.9, 10 These platforms promise efficiency gains from AI-powered data cleansing, and interoperability that could give researchers the ability to seamlessly partner within and outside of their institutions. These solutions are typically more efficient and less expensive than post-doc labor. While there are pros and cons to consider, the results we have seen from early partnerships could be game changers. Research Leaders should evaluate these solutions to potentially modernize their research operations and technologies.
3. Fix internal processes to stay above board: Research Leaders are widely recognized as market leaders because they sit in a prominent market position. But this recognition can be a sharp, double-edge sword. While these organizations are often seen as a prized partner, the visibility brings with it heightened scrutiny and reputational risk. Several prestigious institutions have recently been investigated over conflict-of-interest situations and alleged improper ties to “foreign state actors.”11, 12, 13 Lawmakers have introduced legislation that would increase the liability for Research Leaders in these situations.14 The people who head these institutions might have been unaware of these ties if the activities developed within research silos.15,16 But many such conflicts were only a matter of time given the convoluted and opaque nature of traditional research operating models.
We expect this risk could continue to grow, and grow rapidly. New technologies that enable data interoperability and data exchange could lead to a proliferation of conflict-of-interest issues.17, 18 Research Leaders should consider developing flexible risk-monitoring and risk-mitigation capabilities. There are two keys to the solution. One is risk and regulatory expertise. But more important is the vision to anticipate risks that that could emerge as we move toward the future of health. Research Leaders should seek a solution that is both robust at monitoring risks and able to evolve and adapt as technology advances.
Innovative disruptors and deteriorating incumbents
The COVID-19 pandemic has made it clear that maintaining the status quo could be a path to failure. Reliance on clinical margin to support the research enterprise has long been an Achilles heel for Research Leaders. But the pandemic has created a window through which we can get a glimpse into a future where clinical margins decline, care at home becomes the norm, and convoluted organizational structures expose Research Leaders to reputational and legal risk.
We believe Research Leaders have reached a pivotal moment. They have a rare window of opportunity to deliver gains in scale, expand into untapped virtual markets, unlock exponentials through technology, and collaborate effectively while managing risk. As gaps open in the market, we expect the vacuum will be filled. Innovative disruptors could supplant the aging, deteriorating incumbents.
The questions is—which will you be?
Acknowledgements: Michael Schwartz, Matt Shoemaker, and Harry Han
1. COVID-19: Financial Stress Test for Academic Medical Centers, National Institutes of Health, April 22, 2020
2. Electronic Health Record Adoption In US Hospitals: Progress Continues, But Challenges Persist, Health Affairs, December 2015
3. Crossing the rubicon, Science magazine, August 10, 2012
4. The Postdoctoral Experience Revisited, National Academy of Sciences, National Academy of Engineering, Institute of Medicine, 2014
5. How artificial intelligence is changing drug discovery, Nature magazine, May 30, 2018
6. Mayo Clinic selects Google as strategic partner for health care innovation, cloud computing, Mayo Clinic, September 10, 2019
7. How to measure research efficiency in higher education, Journal of Higher Education Policy and Management, May 2018
8. What Data Scientists Really Do, Harvard Business Review, August 15, 2018
9. Ascension and Google working together on healthcare transformation, Ascension press release, November 11, 2019
10. Azure for the healthcare industry, Microsoft Azure
11. Inside DOJ's nationwide effort to take on China, Politico, April 7, 2020
12. China’s Thousand Talents Program Finally Gets the U.S.’s Attention, Bloomberg Businessweek, December 12, 2019
13. US prosecutor leading China probe explains effort that led to charges against Harvard chemist, Science magazine, February 3, 2020
14. Bill Aims to Stop Theft of U.S. University Research by China, Others, The Wall Street Journal, June 3, 2020
15. Fifty-four scientists have lost their jobs as a result of NIH probe into, Science magazine, June 12, 2020
16. Former Cleveland Clinic Researcher Allegedly Failed To Disclose Ties To China, National Public Radio, May 14, 2020
17. Google defends use of patient data on Capitol Hill among scrutiny of Ascension deal, Fierce Healthcare, March 4, 2020
18. Google Ascension Partnership Fuels Overdue HIPAA Privacy Debate, HealthITSecurity, December 2, 2019
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Dr. Matthews is a Managing Director and physician leader at Deloitte Consulting LLP. Felix is the National Lead for our Academic Health / Research Leaders practice. He advises his clients on strategies to succeed in an increasingly competitive market. His clients include academic health systems, national health plans, and life sciences companies. He is experienced in corporate strategy, care model innovation, physician engagement strategies, clinical affiliation strategy, value-based payments, operating model design, and digital strategy, among others. He also advises his clients on strategy implementation and enabling capabilities. With over 20 years combined experience in medical practice and health care consulting, Felix brings to his clients a unique blend of clinical understanding and business insight. Felix trained in trauma surgery and accident medicine and has led research focused on clinical technology innovation at major academic centers in the US and abroad. Felix is also a published author in peer-reviewed medical journals and a columnist on virtual health.
Chris Murray is a senior manager in Deloitte Consulting’s Health Care practice. He has over 10 years of experience advising health systems on operational and financial performance improvement in the area of clinical revenue cycle. Murray has experience leading large-scale transformation helping organizations leverage human-centered design and digital platforms to drive financial, operational, and consumer experience improvements.