Industry Outlook 2018

Dynamics to Watch

On the vanguard of thought. The future of healthcare requires nothing less. INDUSTRY OUTLOOK 2018 Dynamics to Watch

As we reflect on this past year and with a new year underway, there are several dynamics that hold great promise to materially alter the healthcare landscape. In particular, a number of mega-deals To put it announced in late 2017 and early 2018 have captured the market’s attention – both individually and as a constellation of activity that may portend what is to come. simply, the While the motivations for each of these deals vary, there are some overarching contextual dynamics that create an atmosphere wherein this type of integration is not surprising and suggest we should industry expect continued movement of this nature. Namely, the traditional healthcare delivery and purchasing industry is large, typically cautious and slow-moving, with a high degree of fragmentation at the national level – even if some local markets and regions are fairly is ripe for consolidated – and is noted both for unsustainable cost growth and mounting capital needs. Meanwhile, the first year of the Trump administration saw continued clamor in Washington but little disruption. material policy change, contributing to persistent uncertainty around what will come from government payment and regulation. To put it simply, the industry is ripe for disruption.

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Horizontal Integration Vertical Integration PROVIDENCE ST. JOSEPH CATHOLIC HEALTH INITIATIVES OPTUM CVS HEALTH ASCENSION DAVITA MEDICAL DIGNITY HEALTH GROUP AETNA

These big horizontal integration moves suggest Vertical integration and convergence suggest an opportunities to capture untapped value by securing the opportunity to secure more of the healthcare dollar by benefits of a national brand well-suited to serve national capturing and utilizing relationships with members – and payors, realizing the scale necessary to serve and manage their data – to influence the delivery and economics of populations and positioning the organizations to weather care in ways that have not been seen before. The CVS- disruptive forces. These deals are far less about the cost Aetna deal couples the Aetna membership base with synergies often touted in provider-to-provider consolidation CVS’s extensive network of highly-convenient access and more about the market opportunities they create. points and recent forays into a variety of clinical offerings, including primary care through its MinuteClinic and infusion services. The combination creates an interesting opportunity to expand clinical services quickly and capture Non-Traditional Competitors more of the premium dollar by offering services at a lower cost relative to traditional providers. Perhaps even more powerful is the potential to harness medical and pharmacy GOOGLE AMAZON claims data in a more integrated fashion. For Optum and DaVita, the organizations are building a national model IBM that equips medical practices with the information, APPLE resources and expertise to manage healthcare risk and deliver care in lower cost settings, promising to derive more value for patients and insurers alike. These players are positioned to harness a wealth of data to learn and predict the needs of healthcare consumers, surfacing opportunities to apply their unparalleled capital resources and core competencies to upend segments of the value chain as they have already done in their respective industries. The ballooning costs of healthcare act as a hungry tapeworm on the American economy. Our group does not come to this problem with FOR EXAMPLE answers. But we also do not accept it as inevitable. Rather, we share the belief that putting our On January 30, Amazon, Berkshire Hathaway and JPMorgan Chase announced a partnership to address rising healthcare collective resources behind the country’s best talent costs for their combined one million U.S. employee base, though can, in time, check the rise in health costs while their specific plans to do so are not yet clear. Explained Berkshire concurrently enhancing patient satisfaction Hathaway Chairman and CEO Warren Buffett: and outcomes.1

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What Does this Mean for Providers? The first quarter of the year is a natural time to set the leadership and organizational agenda and refresh areas of priority and focus. In this process, we suggest teams begin to actively discuss several key dynamics and organizational implications. There is not a one-size-fits-all answer, but a discussion of the potential implications of each dynamic warrants leadership time and attention.

1 Preventing Disruption is Futile — but Preparing for it is Prudent

Major disruptive forces in any industry are challenging to predict­ — where they will come from, what the change will entail, and what the timing of impact will be. The players most certainly entering into the healthcare mix are large – Amazon, Google, Apple, IBM – and there are countless smaller entities with brands that are not quite household names but could rapidly become so. And, most providers are not well-positioned to compete with these players head-on. These companies can make big bets and take risks that an average provider would not begin to entertain, even if it had the financial ability to do so – which most do not. Even with uncertainty abounding, organizational leadership can prepare for changes to come. Delivery systems will surely benefit from bolstering their core business, but this alone will be insufficient to head off new entrants. Provider organizations also are seeking to leverage the insights and capabilities that such disruptors offer. Leadership teams may consider: if we cannot beat these players, is there a way to join them by positioning to partner in new ways? Delivery systems may be able to engage directly with a leading innovator APPLE LAUNCHED THIS EFFORT WITH A DOZEN by serving as a learning lab or pilot site. Through such efforts, provider HOSPITALS ACROSS THE organizations may surface opportunities to evolve their existing business or COUNTRY, INCLUDING: advance new services to truly create demonstrable value for the market. • Cedars-Sinai • Cerner Health Clinic • Dignity Health FOR EXAMPLE • Geisinger Health System Apple announced in mid-January that it will begin to test a version of a health • Johns Hopkins Medicine app that will let users download their health records and store them safely on • MedStar Health their phone.2 Ultimately, Apple intends to enable any provider to sign up to • Ochsner Health System participate directly. However, these early participants will both inform this new • OhioHealth solution and get a head start to learn how this type of disruption may impact • Penn Medicine care delivery, the patient experience and consumer relationship management • Rush University Medical Center more broadly. • UC San Diego Health • UNC Health Care It is also important that leadership teams begin to align around the most likely range of potential future states and the implications for the organization. Scenario planning can offer boards and executive teams an opportunity to explore the ways in which competitive dynamics could change if any of these companies are able to reconfigure the market. This shared understanding will then inform critical questions such as: how will we be positioned with new entrants disrupting control of patient relationships? Of data? Of the healthcare dollar? And, what do we do to secure – or redefine – our position over the near- and long-term?

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Vertical Integration Will Continue — and Lead Providers 2 to Revisit their Own Relationships

In addition to new entrants, payor-provider convergence and other vertical integration has been gaining momentum, in some cases blurring the lines between traditional stakeholders and roles. In many markets, these relationships are beginning to shift competitive dynamics.

FOR EXAMPLE With the Optum-DaVita Medical Group deal, many provider organizations will contend with UnitedHealth Group not only as a leading payor but also as a major delivery network.

Some providers may choose to pursue vertical integration themselves through acquisition or building out a health plan. This pathway offers increased degrees of freedom to align economics, data and member/patient experience, with the promise of more effectively and efficiently caring for their member/patient populations. Mature payor-provider organizations such as HealthPartners and Kaiser Permanente offer a compelling example of what integration can offer. Yet, the complexities and investment requirements of entering a completely different business model should not be understated. In addition to the substantial capital commitments and need for new capabilities and competencies, most providers struggle with the inherent tensions in operating in a vertically integrated manner. These include disputes over internal transfer pricing, payor strategy and contracting, and acute capacity expansion/contraction, among others. The answer for most providers will not be to buy or build a health plan. We do suggest that leadership teams actively examine their payor portfolio and consider options for how to advance relationships with the payors in their markets. The transactional, negotiations-oriented tenor of many traditional payor- provider relationships creates a win-lose situation for most. We are seeing early signs of success associated with new and innovative models – from those who are merely establishing more collaborative working relationships centered on sharing of information and constructive dialogue, to full joint-venture models, plus a variety of shared accountability and risk reimbursement arrangements.

Healthcare providers can consider: What do we bring to the table – including our clinical data and expertise – and what do we need from payors, to more effectively innovate new care models and drive performance?

Leaders can also look beyond their payors, plus the market disruptors described above, to consider options for enhancing their relationships with other types of healthcare services, products and technology companies. Extending too far beyond the core delivery business to pursue full vertical integration through acquisition may not be a viable option for most providers, yet collaboration and partnership may offer new opportunities for many.

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Scale Continues to be Paramount — and Providers that do not have 3 Traditional Options of Achieving Scale May Seek New Pathways

Many local markets have seen significant horizontal consolidation activity over the past decade, in some markets in a gradual march and in others at a relatively rapid pace. For those provider organizations that have already reached significant scale locally, the path to continued local market growth may be hampered.

FOR EXAMPLE There may be limitations to the remaining population available or regulatory concerns preventing further activity. With more traditional approaches to growth constrained, leadership teams may need to entertain geographic expansion; broadening their perspective from local to regional views of potential opportunities, or in some cases, applying a multi- regional or national lens.

Technology may open new pathways for collaboration and drive increased value in these relationships, while simultaneously re-framing the options for organizations to extend geographic reach and enhance patient access and engagement. For organizations growing through consolidation – whether locally, regionally or nationally – the ability to create meaningful value will require purposeful planning and execution to move from the aggregation stage to true integration. For smaller, more financially constrained organizations where driving to scale is not an option, leadership teams may instead need to reassess their existing portfolios to allow for more focus in support of long-term sustainability. Some organizations may find that the most likely pathway to continuing to uphold their overall mission and vision will be through a careful and considered system reconfiguration and in some cases, rationalization. Others may seek to position for acquisition.

Irrespective of position, leadership teams that proactively identify and assess their options for scale – and understand what their market competitors may be contemplating – can define their pathways rather than being reactive to local, regional and even national moves.

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4 Focus on Performance is Essential in any Market Scenario

Over the past several years, we have seen providers renew their focus on achieving and sustaining increased levels of clinical, operational and financial performance. The market dynamics described above plus continued reimbursement and cost pressures will only amplify this performance imperative. Many organizations will go “back to basics” to secure their foundation and address persistent and longstanding issues associated with revenue optimization, cost, access, quality, and patient and provider experience. Yet incremental approaches to performance improvement will not be sufficient to achieve the level of transformation required for success moving forward. Providers will need to purposefully tackle large-scale, organization-wide performance improvement initiatives in a manner that addresses organizational alignment, change management and clinician engagement to achieve sustainable results. Providers also should consider how to set and execute against big, audacious goals.

High performers are looking to the next frontier: • How will we engage with patients in 2018 by leveraging technology and non-clinical resources as part of the care team to provide more timely, convenient care?

• How can we fundamentally reposition our cost base through creative partnerships and restructuring our asset base away from traditional facility-based, high cost modes of care?

• How will we address growing provider dissatisfaction and burnout and improve the provider’s health and experience?

Across the board, technology stands to be either part of the challenge or part of the solution – depending on how an organization is able to deploy it in service to the organization’s strategic and operational imperatives. Those organizations that can harness the power of data, informatics and technology effectively will make it core to their efforts to reduce operating and care costs, create the next generation of care models, and improve overall operational effectiveness and organizational position to win in the market.

The changes afoot can be daunting. Yet, they also hold great promise for helping to solve many of the persistent challenges in healthcare – including cost containment, quality, the provider experience, and health equity and equality. Continued internal focus on sustainable, meaningful performance improvement and value creation is essential. We also encourage leadership teams to prepare to act in both response to and anticipation of several external industry dynamics already underway and likely to unfold in the coming months and years. For many, this will push organizations outside of their comfort zones. Leaders should prepare to consider hard questions, drive to informed decisions albeit with imperfect information, and make timely, bold moves.

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Sources

1 Berkshire Hathaway. (2018). Amazon, Berkshire Hathaway and JPMorgan Chase & Co. to partner on U.S. employee healthcare. Retrieved from http://www.berkshirehathaway.com/news/jan3018.pdf. 2 Apple. (2018). Apple announced effortless solution bringing health records to iPhone. Retrieved from www.apple.com/ newsroom/2018/01.

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For media inquiries, contact: Amy O’Brien Principal and VP of Strategy and Business Development 312.932.3060 [email protected]

Page 8 About The Chartis Group

The Chartis Group® (Chartis) provides comprehensive advisory services and analytics to the healthcare industry. With an unparalleled depth of expertise in strategic planning, performance excellence, informatics and technology, and health analytics, Chartis helps leading academic medical centers, integrated delivery networks, children’s hospitals and healthcare service organizations achieve transformative results. Chartis has offices in Boston, Chicago, New York, Minneapolis and San Francisco. For more information, visitwww.chartis.com .

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© 2018 The Chartis Group, LLC. All rights reserved. This content draws on the research and experience of Chartis consultants and other sources. It is for general information purposes only and should not be used as a substitute for consultation with professional advisors.