Wednesday, April 10, 2013

Healthcare Industry Leaders: “What is profitable today is not going to be profitable tomorrow”

I had the good fortunate of being accepted into the Startup Health Incubator last week. At the inaugural CEO Summit, Startup Health brought together several healthcare industry leaders to share some profound insights about drivers of healthcare innovation in the years to come. The overarching inference from the summit is that the Affordable Care Act (ACA) has unleashed a furious dash toward value-based care delivery business models among provider and payer organizations. Although I suspected it before, I have empiric proof that the ACA is an enormous catalyst for companies that aim to transform population health.

Two specific themes emerged that may be a harbinger for what hospitals face in the next few years. The first theme was beautifully stated by an executive at a major hospital system in NY: “What is profitable today is not necessarily going to be profitable several years from now based on changes in regulation and reimbursement.  Profit centers can become cost centers quickly.” [1] By some estimates, hospitals are poised to have their annual revenues contract by 5-20% over the next 5-8 years as fee-for-service (FFS) is displaced by pay-for-performance (PFP) reimbursement models. The challenge that hospitals face is that they are inherently risk averse organizations.  “People are holding onto the past because it’s simply what they know,” according to one pharma executive. [1] With narrow profit margins of 2-4%, it makes sense that hospital CFOs are reluctant to take much investment risk. Unfortunately, slow and steady will not win the race as an investment thesis in this healthcare reimbursement environment.

The second theme that was reinforced several times is the importance of listening to customers. Another pharma executive stressed that “Organic movement with data will drive change in the system, and the little guys/consumer knows the answer.” [1] Furthermore, we heard a cautionary tale to about making market assumptions. According to one of the thought leaders at the AARP, it is important to “Know your market, but don’t make assumptions about it – be open to finding out new things about it.” [1] Both comments reinforce the underpinnings of lean startup methodology which is to build something that a customer is willing to pay for. Adopting the startup mentality within hospital walls is an effective way to ensure responsiveness to customer needs. This is particularly important when up to 30% of Medicare value-based bonus payments will be contingent upon patient satisfaction scores.

Although the audience of these presentations were 13 startups, the takeaway lessons apply to innovation within hospital walls as well. The old way of reimbursement is going away. Hospitals need to find new ways to create value, both in the form of revenue and improved health. By taking down barriers to innovation and updating IP policies, ensuring flexible and fair conflict of interest standards, and keeping an open mind towards entrepreneurism, hospitals have an opportunity to experience substantial financial and social returns with very little up front cash investment. Although one speaker gave very pointed advice to "avoid using the word 'disrupt'" because it makes hospital executives nervous, I think forward thinking hospital c-suites will suck up the anxiety and start incorporating more of a startup culture into their innovation portfolios in the interest of staying afloat. And if it makes that (understandably) disruption-phobic hospital executive feel better, I can change the name of this blog to

1) Startup Health CEO Summit. April 2013.

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