Last week’s announcement that Amazon, Berkshire Hathaway and JPMorgan Chase will collaborate on a new venture to provide simplified, low-cost, high-quality health and wellness care for their more than 1 million employees caused a sell-off for many healthcare stocks and captured the imagination of pundits.
However, this new company is just the latest in a series of mergers and collaborations that many believe could disrupt healthcare in the United States. And the industry has for years seemed ripe for disruption. In 2017, $2.7 billion was invested in healthcare equity deals to develop tools to remake health and wellness for consumers, providers, hospitals, insurers, post-acute care settings and medical researchers, according to the New York Times.
These new alignments have included organizations like the Cleveland Clinic and Oscar, Humana and Kindred Healthcare, and a consortium of health systems that are forming their own nonprofit drug manufacturer.
Proponents of such initiatives believe that blurring the lines between what traditionally have been distinct sectors (providers, health plans, retail pharmacy and employers) will allow innovative approaches to emerge that will ease the transition from fee-for-service to value-based healthcare.
However, other healthcare leaders caution that many well-known companies have attempted to disrupt the American clinical delivery system and failed, according to another Times article. They also point out that most disruption in other industries occurs with lower-value, lower-cost products, and note that consumers don’t want to settle for low-value healthcare.
Still, that doesn’t mean healthcare organizations should ignore the winds of change. Consider the fact that since 2000, 52% of the companies listed on the Fortune 500 have gone bankrupt, been acquired, or ceased to exist, according to Constellation Research.
Indeed, the same forces that have affected other industries in the United States also apply to hospitals, and yet many hospital executives continue to lead as though nothing has changed. At a time when the core inpatient business for hospitals is declining and technology offers the ability to migrate care away from centralized hospitals, hospital executives must make sure that there is a place for their organization in the new world order of clinical care delivery.
The proposed vertical merger of CVS and Aetna represents a major challenge for all hospitals located in cities where CVS has its 9,700 retail pharmacies and 1,100 walk-in clinics. By combining organizations from different parts of the healthcare industry, the new company can realign incentives to benefit the consumer. If the new CVS can use its pharmacy benefit manager to lower prescription prices and encourage the use of less expensive drugs, the health insurance division could lower premiums so that enrollees could afford to visit their walk-in clinics to access care.
This development poses a challenge to competing hospitals because they have been making up for declines in inpatient reimbursements by raising prices in the outpatient clinic. It is hard to see how community hospitals will be able to compete with the likes of CVS and Amazon when Medicare, Medicaid and commercial health plans are cutting rates for outpatient care.
The new Tax Cuts and Jobs Act that President Donald Trump signed into law in December will also affect hospitals. Moody’s Investors Service predicts that the tax law will increase hospitals’ uncompensated care, decrease operating margins and lower cash flow. It also predicts that reimbursement rate increases will be below the inflation rate and that these factors will “put a damper on not-for-profit and public healthcare” in 2018.
The same week that Amazon, Berkshire Hathaway and JPMorgan Chase joined forces to disrupt healthcare delivery for their employees, Xerox ceased to exist as a company because Fujifilm took over the once-iconic American company, Reuters reported. Xerox was unable to cope with newer technologies like Google Documents and the Cloud. Maybe hospital leaders are staring a relevant teachable moment in the face.
Hospital leaders must seriously consider how they will respond to competition from the innovative organizations that will emerge from mergers and collaborations. Following the same old playbook will not suffice. Executives must make hard decisions about what services they will no longer offer and how they will convince their communities that they offer value that can be measured in a rapidly changing health and wellness environment.
Kent Bottles, M.D., is a lecturer at the Thomas Jefferson University School of Population Health and chief medical officer of PYA Analytics.