1Digital Healthcare or Bust in America

Digital Healthcare or Bust in AmericaDigitization is bringing a sea change to a U.S. healthcare industry already facing waves of uncertainty. By taking the right steps, this can be a major opportunity for industry players.

2Digital Healthcare or Bust in America

Forecasting the future of any industry is difficult, none more so right now than healthcare in the United States. There are countless reasons why healthcare will look different in the near future, not least of which being the country’s movement toward national coverage. However, digital transformation—the cumulative change that comes when digital technologies are introduced wholesale into an established industry—is poised to have an even bigger impact. For the U.S. healthcare industry, digital technology will be transformational, cutting healthcare delivery costs, eliminating errors through improved electronic medical records, and establishing routinized, evidence-based approaches to treatment.

Digital forces are pulling at the industry and significantly altering services, products, innovation, delivery, and remuneration (see figure on page 3). There are digitally integrated healthcare providers, digital medical devices and technologies, and digital delivery and monitoring of home healthcare. In addition, new ideas are emanating from developing markets, agile competitors are embracing technology, and a digital-friendly federal administration is pushing innovation. And don’t forget the digital consumer who is used to digital banking, digital retailing, and digital education, and expects digital healthcare.

Digital represents a tremendous opportunity—and a significant threat—for the various participants in the U.S. healthcare industry (see sidebar: The Digital Players). No one in this industry can afford to fall behind.

The Digital Players

Just about everyone will be affected by digital healthcare, from doctors, patients, and hospitals to Big Pharma and medical device companies. The following outlines some of the larger issues for the bigger players.

• To qualify for Medicare grants, a typical office-based physician already needs to certify level-one completion of “meaningful use” for in-office clinical systems. Failure to invest in these could lead to financial losses and the risk that patients move on to physicians with more sophisticated practices.

• U.S. hospitals are at the forefront of the country’s march to quality and effectiveness and advanced clinical systems. For example, failure to keep pace with HCAHPS scores will result

in both economic penalties and a poor report card on the HCAHPS website.1

• Pharmaceutical companies are discovering that nimble competitors are investing in mobile applications and innovative tools that support patient groups in their daily drug administration. All efforts to become patient-centric may eclipse the traditional marketing method of pushing drugs through physician detailing.

• Medical product companies are discovering that patients and providers are increasingly comparing their product experiences with other users and challenging product claims. Already, medical systems have adopted a single-vendor knee replacement device based on reviews of patient outcomes and costs.

• U.S. consumers are managing their healthcare interactively through a range of applications available for chronic diseases such as diabetes and respiratory conditions, and for less critical needs such as headaches, fevers, and weight loss.

1 HCAHPS provides the national, standardized, publicly reported surveys of patients regarding hospital care. The website is www.hcahpsonline.org.

3Digital Healthcare or Bust in America

U.S. Healthcare: Big, Expensive, and UnpluggedBy many measures, the U.S. healthcare industry in all its dimensions is large and successful. From major integrated healthcare providers and pharmaceutical companies in New Jersey to biotech firms in Boston, San Francisco, and San Diego to hospital equipment manufacturers in Indiana and Illinois, the United States has large, R&D-intensive operations that produce leading-edge products and offer tremendously high expertise and treatment.

In many ways, the U.S. healthcare industry is successful. But it suffers in the wallet.Where the United States suffers is in the wallet. The United States spends a larger percentage of its GDP on healthcare than any other country in the world—18 percent, or $2.5 trillion out of a total economy of $14 trillion. By comparison, health spending is 6 percent of GDP in Singapore and 12 percent in Canada. Perhaps more concerning, the spending has not led to consistently positive outcomes. U.S. life expectancy ranks 27th in the world, infant mortality ranks 34th (behind Cuba and Croatia), and the quality of healthcare practices varies widely by region. Not surprisingly, those without regular and continual healthcare tend to be less healthy.

The state of digital technology in the U.S. healthcare market is also languishing. In 2008, before the concerted push to connect physicians, only 10 percent of physician offices used electronic records—very low when compared to the UK, where the use of digital primary care records is at 100 percent. While progress is being made, with about half of U.S. physician offices now using electronic records, the use of email remains a rarity and monthly treatment and billing summaries for insured healthcare consumers is still confusing, especially when compared to monthly integrated bank and credit card statements. And administrative costs are much higher in the United States than in single-payer jurisdictions or regions with universal healthcare (however it is delivered).

Notes: EMR is electronic medical record; EHR is electronic health record; HIE is health information exchange; ACO is accountable care organization

Source: A.T. Kearney analysis

Figure Five trends are reshaping the healthcare IT market

Integrated provider solutions

The growth of EMRs,EHRs, and HIEs and the IT backbone envis-ioned for ACOs are expected to increase clinical quality, improve communication, and reduce errors once caregivers are fully trained.

Digital andsocial media

Consumers, health-care providers, and health and wellness businesses are turning to digital and social communities to con-nect, learn, and engage.

Health at home

As the world population ages and copes with chronic conditions, home care is becoming more relevant. Homecare is a safe, viable, and cost-e�ective alternative for many patients and health systems.

IT-driventechnologiesand devices

Emergingmarkets

As innovators and global healthcare companies shift their attention to emerging markets, they are finding new ways to use IT to provide low-cost solutions

Advances in compu-ting and mobile technologies are creating revolutionaryproducts and proce-dures, such as robotic-assisted surgical devices, handheld sonograms, and smartphone apps

4Digital Healthcare or Bust in America

Pressure Is on to Eliminate Costs and InefficienciesWhy does the United States spend more on healthcare than any other country? Although there are numerous reasons and opinions for this (along with a similar number of proposed fixes), most agree that the following are major contributors:

• A “fee for service” system that rewards activity rather than outcomes and offers little pricing transparency for patients

• An overreliance on specialists rather than generalists and routine community care

• Administrative expenses from a complex multi-payer system, billing fraud, and inefficiency

• A focus on treating acute episodes rather than preventing disease

• An emphasis on new, innovative treatments and products without rigorous economic assessments against older, established methods

Pressure to cut healthcare costs through more preventive measures and more effective treatments is continuing to rise. All healthcare organizations, from pharma to equipment providers to services, are shifting away from a model based on market share (patient visits) and revenues (delivering reimbursed treatment) to one that produces superior health outcomes at lower costs.

We are moving toward a time when market share (an unfashionable term for many in the healthcare industry) is influenced by positive outcomes and the cost to achieve them, rather than location and geographic coverage. New product development processes, services, IT use, service locations, measurement, and early intervention will look very different in the future.

A shift to outsourcing services and treatment approaches may push full-service healthcare providers to disaggregate activities and contract with specialists to provide certain services. There are digital implications to this disaggregation, as digital is a means to:

• Ensure seamless interactions with contract suppliers via electronic communications

• Measure outcomes of specialist organizations that provide services

• Manage outcomes of preventive programs that require direct interactions with patients (requires more retail-oriented IT scaling and more traditional institutional IT communications)

Can Digital Mend U.S. Healthcare?Where does digital belong in the effort to improve U.S. healthcare? Some areas are obvious (providing more communications channels and the ability to measure outcomes), while others are less so (creating entirely new ways of doing business). The following are several ways in which digital will impact the healthcare industry:

Healthcare gets an information backbone

Digitization is an opportunity for healthcare providers to improve their information backbone and integrate disease life cycles and relationships with patients. For example, an integrated perspective on patients with diagnosed diseases and risk factors (such as a prediabetic

5Digital Healthcare or Bust in America

patient with metabolic syndrome) makes it possible to monitor disease progression, increase treatment effectiveness, reduce costs, and facilitate prevention and wellness programs. Getting to this integrated view in a cost-effective manner requires electronic health records (EHR) that organize medical diagnoses and treatments. Digital data collection and analysis are then used to evaluate a treatment’s effectiveness and track performance through pre-treatment and treatment.

The U.S. government has been a big proponent of electronic medical records (EMRs), which are digital versions of the paper charts that contain a patient’s medical history. Through the American Recovery and Reinvestment Act (best known as the economic stimulus), the Department of Health and Human Services will spend over $30 billion on improving EMRs. Proponents say computerized systems will reduce medical errors, paperwork, and unnecessary tests. As a result of this investment, companies are emerging to centralize records and to reduce the cost of “big medical data” and evidence-based research, prevention, and optimization. The landscape of companies ranges from large, established hospital-based suppliers such as Epic, McKesson, and GE (with its Centricity) to newer start-ups such as Athenahealth and Carefusion, which have focused on physician billing and practice management with simpler, cloud-based offerings. Similarly, the leading insurance companies, such as United Healthcare’s Optum, Aetna’s ActiveHealth, and Humana’s Anvita Health, all aspire to integrate data from disparate sources (pharma claims, medical claims, lab results, formulary data, and eligibility information) so that they can identify gaps in care, duplications, and counter-indications.

Alternate channels transform provider-patient relationships

Digital and social media are altering interactions among patients and healthcare institutions, and patients’ use of the Web is allowing access to information about healthcare alternatives. Access to information comes with higher expectations and demands for more informed interactions.

Through the American Recovery and Reinvestment Act, the U.S. government is spending billions of dollars on improving electronic medical records (EMRs).Kaiser Permanente is well known for gaining first-mover advantage in digital and social media.2 The company uses secure email between patient and institution—a simple step—to reduce costs and improve timeliness. Digital interactions allow information to be delivered to multiple locations (for example, outside the hospital), reducing costs and improving the quality of information as every medical professional has accurate data no matter where the interaction takes place. Of course, this can only happen when there are secure information hubs for com- municating among disparate providers and patients. One example is Merck’s non-promotional Univadis website, which provides medical information, support services, and education around the world. Its more than 1.3 million registered users account for nearly 30 million interactions per year.

2 See A.T. Kearney’s interview with Kaiser Permanente chairman George Halvorson.

6Digital Healthcare or Bust in America

Alternate delivery approaches will gain favor

Historically health services were delivered at one of two locations: the hospital or the doctor’s office. A new delivery location is emerging: wherever the patient is. Patients are growing more comfortable with using enabling technologies such as online chats to receive health services, and healthcare providers are looking to take the benefit of changing incentives. A good example is PatientsLikeMe. Founded by three MIT engineers, this radical healthcare business model provides a data-driven social network to allow patients with rare conditions (such as Lou Gehrig’s disease) to exchange information and experiences.

New medical process models will emerge—outside of the United States

This may be the most surprising trend. New process models, similar in concept to the idea of business models in other industries, will be designed, tested, and rolled out on a large scale in less litigious, less developed countries, and in places with more mature and established universal coverage.

Several innovative companies are already experimenting with different styles of healthcare delivery to provide effective, low-cost care to fast-growing but disadvantaged populations. SafePoint Trust is a global charity that promotes the use of auto-disable syringes to fight the spread of infectious diseases. InterSystems, a healthcare information systems leader, has had significant success in developing countries such as Brazil, India, and South Africa. TeleVital has succeeded in emerging markets by offering telemedicine capabilities to link specialists with remote locations, and one million families in Mexico have used Medicall Home, which offers medical advice over the phone.

For well-established healthcare suppliers and providers, digitization means that new competition will come from non-traditional vendors with a technology-based approach—including startups and well-known technology players such as Intel and Google. More foreign companies have entered the U.S. market with low-cost systems that have already proven effective in other markets.

Management Implications: Where and How to InvestThe pervasive use of the Internet and mobile devices is of course altering how data is collected, analyzed, used, and monitored. It provides more frequent data at a more granular level and provides the basis for refined analysis of treatments, drug interactions and iatrogenesis, and drug efficacy. All of this has implications on healthcare management, particularly in terms of IT and business portfolios.

It is useful to think about the implications in terms of investments. There will be compulsory investments to comply with government mandates (EHR for example) and strategic investments in vital systems, capabilities, and processes that are essential to business strategy. Many of these strategic investments could be experiments requiring different investment criteria. For example, the experiment could be new treatment protocol support software designed to lower the cost of care. The initial efforts may not bring many short-term benefits, but they usually provide infor-mation and experience that can lay the groundwork for transformation down the line.

What is clear is that executives have an enormous range of choices. A recent MarketsandMarkets report pegged the U.S. healthcare IT market at $21.9 billion in 2012, with astounding 7.4 annual growth expected through 2017 (when the market reaches $31.3 billion). We estimate that more than 4,000 companies operate in this space, most with revenues of less than $100 million.

7Digital Healthcare or Bust in America

Thus, executives need to figure out where to place their bets. In such a dynamic market executives have a broad range of investment approaches to consider, along the lines of the “build, buy, borrow” options:

• Build. Existing IT platforms, redesigning core processes and adding sophisticated analytical capabilities will likely require building onto existing systems.

• Buy. In some cases, an innovator in the field may present an attractive buying opportunity, particularly when the buyer has access to a broader client base and can justify the current steep valuations.

• Borrow. Outsourcing has been common in the industry. What is new and increasingly common in areas such as mobile health is that companies are negotiating cooperative agreements that allow them to “borrow” their customers or software functionality. Pioneered by Apple with its iPhone apps, companies such as Aetna (with its CarePass) are applying it to healthcare by encouraging various health applications to link to Aetna consumers.

A recent report from the Institute of Medicine frames America’s healthcare future as a path to continuous learning and improvement. Learning requires measurement and easy access to data. It also requires effective deployment of preventive programs and treatment processes, both of which require more digital capabilities. For every player in the U.S. healthcare industry, the next few years will bring substantial change. Those ready and willing to adapt to digital technologies will have a leg up on the competition. Those that fail to adapt could find themselves on the wrong side of the “digital healthcare or bust” mantra.

Authors

Chris Paddison, partner, Dallas chris.paddison@atkearney.com

Craig Kane, principal, Dallas craig.kane@atkearney.com

Bob Haas, partner, New York robert.haas@atkearney.com

A.T. Kearney is a global team of forward-thinking partners that delivers immediate impact and growing advantage for its clients. We are passionate problem solvers who excel in collaborating across borders to co-create and realize elegantly simple, practical, and sustainable results. Since 1926, we have been trusted advisors on the most mission-critical issues to the world’s leading organizations across all major industries and service sectors. A.T. Kearney has 58 offices located in major business centers across 40 countries.

Americas

Asia Pacific

Europe

Middle East and Africa

AtlantaBogotáCalgary ChicagoDallas

DetroitHoustonMexico CityNew YorkSan Francisco

São PauloTorontoWashington, D.C.

BangkokBeijingHong KongJakartaKuala Lumpur

MelbourneMumbaiNew DelhiSeoulShanghai

SingaporeSydneyTokyo

Abu DhabiDubai

JohannesburgManama

Riyadh

A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea.

© 2013, A.T. Kearney, Inc. All rights reserved.

The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring “essential rightness” in all that we do.

For more information, permission to reprint or translate this work, and all other correspondence, please email: insight@atkearney.com.

AmsterdamBerlinBrusselsBucharestBudapestCopenhagenDüsseldorfFrankfurtHelsinki

IstanbulKievLisbonLjubljanaLondonMadridMilanMoscowMunich

OsloParisPragueRomeStockholmStuttgartViennaWarsawZurich