1. Disruption, Consumerism and Demand-Side Incentives

2. From Volume to Value Profit Time Volume Driven Value Driven Chaos Zone

3. Supply Side Incentives (or risk sharing) FFS P4P VBP BP ACO Full Capitation Type of Plan Level of Provider Risk

5. Model of Disruption: Steel Industry Two ways of making steel – Massive integrated steel companies $10 billion to start – Mini Mills Melt scrap in electric furnaces Don’t have to scale up the down stream process Make steel at any given quality 20% lower costs Steel is a commodity – If you were a integrated company would you adopt the mini mill?

6. Flee or Fight Prior to the late 1960s, integrated mills were doing all types and were making buckets of money Late 1960s mini mills came on to the market – Melting scrap, quality was low and could only participate in rebar market – about a 7% margin

7. Flee or Fight Integrated mills were happy to get out of rebar – Why fight for a 7% gross margin? Profitability of integrated mills increased as they left rebar Profitability of mini-mills increased as they entered rebar Everyone was happy But then in 1979 last integrated mill exited rebar – Price of rebar collapsed – Competition drove prices down to where mini mills were barely making money. – Becoming more efficient only a recipe for survival – Looked up!

8. Flight or fight? Same thing happened Mini-mills entered “bars and rods” Integrated mills were happy to leave (higher profit margins in higher quality steel) Mini-mills were 20% cheaper so made profit Until 1984

9. Guess what happened? 1975 1980 1985 1990 1995 QualityQuality Rebar Bars and Rods Structural Steel Sheet Steel Quality of integrated mill’s steel Quality of mini-mills steel 7%GM 12% GM 18% GM 24% GM

10. Eventually integrated mills only producing specialty steel All but one integrated mill has gone bankrupt “stupid manager”? No stupidity involved Innovators Dilemma

11. Innovator’s Dilemma Firms have a choice: – Make better products that we can sell for more profits to our current customers? – Or make worse products that none of our customers would buy and would ruin our margins? – Companies can put too much emphasis on customers' current needs, and fail to adopt new technology or business models that will meet customers' unstated or future needs

12. Innovator’s Dilemma How to defeat a giant? – Go after best customers? – Enter the bottom Giant is motivated to flee rather than fight Toyota – Entered in the 1960s Corona – Ford GM, were happy to let them have it Today Kia and Hyundia

13. Types of Firms Solution Shop – Built to diagnose and solve unstructured problems – Deliver value primarily through people Focused Factory – Transform inputs of recourses into outputs of greater value – Capabilities are built more into its processes than its resources Facilitated Network – Meant to enable people to exchange things via a platform. – ebay, Craig’sList, telecoms

14. Innovation in Health Care The successful innovators are those who will be able to un-jumble the mix – Simplify the process – Where is “the bottom”? – Minute Clinic: focused factories – Facilitated user networks? User networks shift care of chronic diseases out of intuitive based practices (solution shops) PatientsLikeMe

15. Challenges to new business models Lack of a retail market – How to create Demand-Side Incentives? – Consumers need the proper incentives to shop Health Savings Accounts? Population Health Management? Regulatory barriers – CON and other laws make innovation difficult Incumbents will often use regulation as a cover – “What’s good for GM is good for America”

16. Demand-Side Incentives Value-based purchasing are all supply-side innovations – Some explicitly prohibit financially incentivizing consumers As an alternative there are various movements which are giving consumers greater incentives to produce health more efficiently

17. The Unique Health Care Consumerism Challenge Information asymmetry between the medical professional and the patient – The shopping problem Uncertainty – Demand is irregular and unpredictable – Often during highly stressful and emotional times The dichotomy between the consumer and the payer – Price isn’t always the signal it is in other markets Difficulties teasing out both demand and need – Quality is hard to define/measure/agree on

18. The Rise of Consumerism Increased cost sharing and transparency – Patients are being forced to be better consumers Increased options for the consumer – Demanding higher quality services New types of entrants and diseconomies of scope – Opportunities abound for entrepreneurs

19. Particularly Severe for Out-of-Network Care Employer Shifting Risk by Increasing Cost-Sharing Average In- and Out-of-Network Deductibles for Group Plans n = 1,100 employers Percent of Covered Workers Enrolled in a Plan with a $1,000+ Deductible by Firm Size Single Coverage

20. HDHP/HSAs on the Rise

21. Low-Wage Employers Most Active Today, but Skilled Industries in the Wings Source: Accenture, “Are You Ready? Private Health Insurance Exchanges are Looming;” privatehealthexchange.com; Health Care Advisory Board interviews and analysis. Huge Growth Forecast for Private Exchanges Potential Growth Path for Private Exchange Enrollment Prominent Employers Using Private Exchanges For Active Employees: For Retirees: (Medicare Advantage, Medigap plans) Private exchange operators as of October 2014 172

22. Catalyzing a Shift in Network Demands Market Forces Turning Patients into Consumers Traditional MarketRetail Market Growing number of buyers 1 Proliferation of product options 2 Increased transparency 3 Reduced switching costs 4 Greater consumer cost exposure 5 Passive employer, price-insulated employee Activist employer, price-sensitive individual Broad, open networksNarrow, custom networks No platform for apples-to- apples plan comparison Clear plan comparison on exchange platforms Disruptive for employers to change benefit options Easy for individuals to switch plans annually Constant employee premium contribution, low deductibles Variable individual premium contribution, high deductibles Characteristics of a Traditional vs. Retail Market

23. Rising Consumerism What people want is changing – Consumer expectations of better services and experiences are rising – New choices and options Choices of services, products, devices, and providers Clinics in retail stores, convenient care, telehealth, mHealth, etc

24. Primary Care: A Growing Network of Immediate Access Choices Markets Responding to Unmet Needs Traditional Access Points Consumer- Oriented Access Points Retail Clinic Urgent Care Center Virtual Visit Primary Care Office Low AcuityHigh Acuity Emergency Department Consumer-Oriented Service Delivery Sites Filling the Gap Driving Provider Questions (Fight or Flight?): Should we partner to establish retail clinics? Should we build or expand our urgent care footprint? Is virtual care something that we should provide? When should we enter into partnerships to meet patient demands?

25. Facilitated Networks strong networks of personal support and industry influence – Open Research Exchange – Data for Good

28. Direct Primary Care About 4,400 physicians today, as compared to 146 in 2005 Monthly fee, allows physician to be the shopper for the patient Are these “risk bearing entities” and should therefore be licensed and regulated as such?

29. Rising Consumerism New entrants view health care through a different lens – Targeting specific markets/problems Clinical delivery Health and wellness Population health Data analytics – Helping the consumer (or employer) to overcome the shopping problem

30. Price Transparency Driving access to cost and quality information to help consumers make better choices and manage expenditures https://www.youtube.com/watch?v=sPWVoNbn82s

31. Price Transparency – Creating open marketplaces where consumers and providers negotiate and agree upon the price for procedures

32. Patient Engagement Carrots and sticks of motivational and behavioral change levers

33. Patient Engagement Behavioral Change Therapy Mobile software gamification

34. Smoothing the interface between Patients and the health care system physician locator and scheduler streamlines appointments and scheduling text messaging service that links patients and providers with personalized reminders, education, and support

35. Economies of Scope Health care typically packaged as one-stop shop – large economies of scope in traditional health care system All these innovations are pointing to a change – Maybe much more specialization

36. Demand Side vs Supply Side Note these may not be compatible – HSA vs Capitation – Supply side movement suggest we will have fewer large health care systems delivering care – Demand side movement suggest the opposite – lower barriers to entry Increased Information Transparency Consumers are better shoppers More narrow product lines

37. Conclusion Health (r)eform – the market experimenting with alternative financing models – Provider driven? Give providers incentives to keep people healthy – ACOs, Population Health Management, etc. Give providers incentives for price competition – Narrow Networks, private exchanges – Consumer driven? Give consumers incentives to stay healthy – Health savings accounts, technology, entrepreneurism.