Healthcare 2020 - an analytical report by BAIN & Company


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Healthcare 2020 - an analytical report by BAIN & Company

  1. 1. To win in a shifting profit pool, companies need to improvehow healthcare is deliveredBy George Eliades, Michael Retterath, Norbert Hueltenschmidtand Karan SinghHealthcare 2020
  2. 2. Copyright © 2012 Bain & Company, Inc. All rights reserved.George Eliades is a partner with Bain & Company based in San Francisco anda leader in the firm’s Global Healthcare practice. Michael Retterath is a Bainpartner based in New York and a leader in the Global Healthcare practice.Norbert Hueltenschmidt is a partner based in Zurich and the head of Bain’sGlobal Healthcare practice. Karan Singh is a partner based in New Delhi andhead of Bain’s Asia-Pacific Healthcare practice.
  3. 3. Healthcare 20201We have been talking about healthcare costs for morethan 40 years, but the worldwide financial crisis andsubsequent climate of austerity are finally catalyzingchange. Payers are searching for all available tools tostunt the growth of a sector that has successfully resistedcost containment for decades. Adding to the urgencyfor action is an anticipated global surge in demandprecipitated by several factors: an aging population withchronic care needs, population and income growth inemerging markets and the potential for insurancecoverage expansion due to health reform in the USand around the globe.An increase in demand—even one accompanied by costpressures—is generally good for companies supplyingproducts to the healthcare sector. But in this case, it isconcomitant with a precipitous decline in research anddevelopment productivity for pharmaceutical and medicaltechnology companies, leading to a more than $100 billionloss in product exclusivity by 2015.1Despite ongoingmedical need across many diseases, these players canno longer depend on their innovation engine and pricingpower to drive ongoing profit growth. The net result willbe an unprecedented decline in the share of the overallhealthcare profit pool captured by innovation-drivencompanies in favor of lower-margin sectors like genericmanufacturers and providers.2We do not suggest that healthcare will be less innovativeover the coming decade, but rather that the focus ofinnovation will shift from the product arena to healthcaredelivery. A demand surge in an environment of fiscalconstraint and slower product innovation will create aclimate that favors investment in new ways of deliver-ing care, in part by applying the power of informationtechnology—long overdue in healthcare, relative to othersectors. Indeed, the shift in emphasis from managinginputs, like the rate of adoption of new products and thenumber of physician visits, toward delivering outputs,like patient satisfaction, clinical outcomes and overallsystem savings, is already well underway.Going forward, the critical question for companies willbe how they can evolve their business model and thrivein a world of shifting profit pools by focusing on deliver-ing better outputs, rather than by simply generatingmore inputs—more products, more procedures andultimately more cost to the payers.All of these disruptive changes will have two significantimplications for the global healthcare market:• There will be radical changes in the relative size andgrowth of the various parts of the global healthcareprofit pool. In the past, growth by sector has beenrelatively consistent, but by 2020 and beyond, growthrates across sectors and geographies will diverge.• The basis of competition in the marketplace willchange as well. Different therapeutic areas will beaffected in distinct ways by two significant trends:growing consumer engagement and increasingstandardization of care (“protocolization”).3How will you compete as global profitpools shift?Even though the global profit pool will expand over thenext 10 years, most players will need to develop newbusiness models to win. We believe the total profit poolwill grow at a compound adjusted growth rate (CAGR)of 4%—from $520 billion in 2010 to $740 billion in2020—but lag overall healthcare expenditure as profit-ability declines in aggregate worldwide4(see Figure 1).Your business plans for the next decade will require adeeper understanding of the sector and regional shiftsembedded in these global figures. For example, mostof the growth in the global profit pool will come fromincreased volume in the delivery of care, while anothersignificant source of growth will come from smaller sec-tors like contract research or manufacturing and nu-trition, which are experiencing significant growth froma smaller base, particularly in the emerging markets.Pharmaceutical companies will see low growth and somedecline in margins over the coming decade. Brand-namepharmaceuticals will grow only 1%, and the market willbecome increasingly fragmented, as the main source ofrevenue growth will be smaller items like targeted oncol-ogy products.5In the US the situation will be even worse,as the forecasted 1% growth rate will depend on substan-tial growth in the second half of the decade, overcomingpatent expirations and pricing pressures. At the sametime, generics will grow by 7%, driven by those same pat-ent expirations as well as increased volume in emergingmarkets (and a few underpenetrated developed markets).
  4. 4. 2Healthcare 2020Figure 1: By 2020, the global profit pool is expected to shift in several waysNote: Insurance US reflects total health plan premiums; CXO represents contract research, manufacturing and sales organizationsSources: IMS; Datamonitor; Business Insights; Freedonia; annual reports; analyst reports; CMS; OECD; Bain analysis0102030%23151814 4 4 5 56 6EBIT margin1616111412495 1,733 501 266 450 260 55 64230 100 260 44 62 850 890 2,280Revenue(2010, $B):Total=$520B0102030%19131616HospitalRetail pharmacyDistributionCXOIVDMedtechPharma OTCPharma Gx1Retailpharmacy3Hospital4Other providers4CarePBMInsurance USInsurance non USHC ITNutrition4 45 5EBIT marginPharmaRx1214665 2,826 897 324 733 466 143 115497 148 385 79 144 1,258 1,317 3,714Revenue(2020, $B):3% 5% 6% 2% 5% 5% 10% 6%7% 4% 4% 6% 9% 4% 4% 5%CAGR(10–20):Total=$740BGlobal healthcare profit pool (2010)Global healthcare profit pool (2020)PharmaRxDistributionCXOIVDMedtechPharma OTCPharma GxOther providersCarePBMInsurance USInsurance non USHC ITNutrition16
  5. 5. Healthcare 20203Global medical technology products will grow 3%, butwith lower profit margins due primarily to worldwidepricing pressure. The slowdown will come mainly frompeak penetration of products, such as stents, in devel-oped markets and competition everywhere from “goodenough” products. In China there is already fierce com-petition from locally produced stents, and this pricingpressure will continue as the Chinese and others developcheaper alternatives.6New healthcare value chain players will expand theoverall profit pool to some degree. While margins inalmost every other sector will slow, the growth in thesesectors will be dramatic. Contract research, manufac-turing and sales companies and healthcare IT companieswill see significant volume growth as pharmaceuticalcompanies outsource more functions and the demandfor data accelerates.7Contract research organizationswill expand through greater use of strategic alliancesand risk-sharing arrangements with pharmaceuticalcompanies. Contract manufacturing organizations willsee 8% CAGR, in part due to their expansion into Chinaand India.Because of the uncertainty of health reform in the US,payers are not likely to experience the growth they haveexperienced in the past. Even if there is more insurancecoverage, there will be lower margins because of pres-sure on premiums. In fact, the traditional businessmodel of US health insurers is increasingly cominginto question with the rise of accountable care organi-zations (ACOs). The net result is that the expansion inworldwide insurance coverage will come largely fromemerging markets, with growth in Europe remainingfairly stagnant.Providers of care worldwide will see the largest volumegains, but not necessarily any increase in their overallmargins. These volume increases will drive 30% of theoverall profit pool growth (about $70 billion), but prof-itability will be flat or will decline. In fact, the overallprofitability of healthcare players is expected to decreaseby about 1% by 2020.8The slower growth in US and European markets will beoffset to some degree by expansion in emerging marketslike China and India, specifically for generic drugproducts. Rapid economic growth and the rise of chronicdiseases will produce substantial gains for price-sensitivegeneric products, but weak medical insurance and gapsin delivery capability in rural areas will remain chal-lenges for these economies.China’s healthcare profit pool will grow from about$22 billion in 2010 to $113 billion in 2020, a CAGR of18%,9suggesting appealing opportunities for newinvestments, but hospitals and other providers will drive40% of that growth (see Figure 2).10Those providerswill benefit from an aging population and a risingmiddle class, and there are also some signs of govern-ment policies that are favorable to private investmentin the sector. Pharmaceutical and medical technologycompanies will continue to realize attractive earningsbefore interest and tax (EBIT), but brand, generic andover-the-counter products will shrink by one percentagepoint because of government-enforced price cuts andthe increasing purchasing power of distributors.Likewise, in India, the delivery of care and pharma-ceutical sales will make up most of the fragmented$65 billion market.11Disruptive changes will alter the basis of com-petition, creating new opportunities to redefinebusiness models and enter new marketsThe sheer size of emerging markets makes them attrac-tive offsets to more stagnant growth in other regions ofthe world. But to be successful, companies will need newbusiness models to take advantage of the opportunitiesthere (see Figure 3). Profit pool shifts and the lack ofaccess to healthcare in many countries, for example,may spur some pharmaceutical and medical technologycompanies to meet the challenge by opening clinicsin the developing world, or even entering the privateinsurance market.In the developed world, providers and payers are alreadyentering the device or drug market. Companies likeFresenius Medical Care, which started out producingdialysis machines, have emerged to “own” an entiresegment of care—vertically integrated with machines,clinics and drugs. With global government spendingestimated at about $50 billion for dialysis products andservices, but with shrinking reimbursement per treat-ment, the vertically integrated model may be an effectivepath to capture a very specific part of the profit pool.12
  6. 6. 4Healthcare 2020Figure 3: Industry changes will create opportunities to redefine business models and enter new marketsGlobal marketsConsumer driven demand Professionalization of care• Co development with consumers• Home healthcare and tele healthcare• Patient journey treatment experience• Personal care platforms• Nutrition and wellness solutions• Personalized devicesIndividual engagementand experience• Own disease protocols• “Sell outcomes”• Integrated care (Rx, Dx, home, etc.)• Risk sharing with Rx, Dx, device,providers, payers, employers• Value solutionsHealthcare population solutionsProfit pooldriverImplicationsandopportunitiesSource: Bain & Company, Inc.Figure 2: Hospitals and other providers account for about 40% of China’s profit pool growthNote: OTC includes ~60% health nutrition; other providers include outpatient services, clinics and specialist services such as obstetrics and pediatricsSources: IMS; BMI; Espicom; annual reports; analyst reports; China Health Yearbook; National Bureau of Statistics of China; Bain analysis0255075100$125B201022202011317.6%China healthcare profit pool growth 2010–2020 (USD)CAGR(10–20)40% of profitpool growth28Hospital9Otherproviders17PharmaGx6PharmaOTC6PharmaRx13Medtech7Distribution2Retailpharmacy1CXO1Insurance
  7. 7. Healthcare 20205While the specificities differ by market, the overalltrend is that companies are seeking incremental growthin new profit pools that tie to disease knowledge ormarket know-how.On what basis will you compete? If you can no longerdepend only on increased volume or control pricing,where can you most profitably operate in the newlyconfigured global market? This is where the accelerationof twin trends—consumer-driven demand and stan-dardized and protocolized care—comes into play. Thesetwo trends are powerful and have the capacity to facili-tate the shift to outputs over inputs, stimulating newopportunities for profitable growth, if you can adaptyour business model.• With more information about treatments availableto an increasing number of consumers or patientsaround the globe, every company with a product tosell must understand how best to engage with con-sumers, in a way that speaks to their individualneeds and patient experience. Search engines haveproduced a vast engaged patient population wecould not have imagined even 10 years ago: 80%of Internet users now search for health informationonline, and more than half look for specific infor-mation about a medical treatment or disease.13The demand for more engagement is not limitedonly to the US and Europe. Mobile phones andInternet access are now available in most emergingeconomies. While there will continue to be culturaldifferences in the way consumers engage with theircare, the degree of engagement itself will only inten-sify globally. More than one-third of Indians, forexample, currently use the Internet to search forhealth information, with similar percentages ofyounger, more educated people seeking healthinformation online in Brazil, Mexico and China.14• Along with the trend toward increased consumerengagement is an increasing professionalization ofmedical care processes. We call this trend proto-colization because physicians and other providersare accepting and using more standardized proto-cols and guidelines for treating their patients. USproviders have been somewhat slower to embraceclinical protocols than their European or Asiancounterparts, but there is little doubt about thedirection of this change. No longer will the indi-vidual physician be the lone decision maker. Thecottage industry of medical care is being industri-alized, as payers and providers increasingly aligntheir businesses—and results—which may bethreatening to some, but may well produce bettercare at lower cost.Protocolization and consumerism will notaffect all therapeutic areas equallyThere are at least four “landscapes” where healthcarecompanies will have to make strategic decisions inorder to survive and win (see Figure 4).15On one axis of Figure 4, we included the conditions anddiseases for which consumer engagement will be themain market driver; on the other, we have shown thedegree to which standard protocol will guide treatmentdecisions. In some areas of treatment, both consumerengagement and protocolization will be in play, lead-ing to an opportunity for patient-provider “teaming.”Both of these trends translate into reduced autonomyand decision-making control for physicians for estab-lished conditions.Where there is a high degree of consumer engagementbut low protocolization, the patient experience willimpact the outcomes most strongly. Such treatmentoptions are often cash-based or lifestyle therapies, likebreast implants or erectile dysfunction. Brands willinitially rule for these types of procedures because oftheir familiarity and marketing clout, but prices may beforced down over time as the experience curve is appliedto these markets. The degree of protocolization forthese therapies will start out weak, but will increasewith competition, especially for treating conditionslike infertility, where buyers perceive proprietary pro-tocols to be an advantage.The more routine, protocol-driven therapies, such as forconditions like hypertension or procedures for knee orhip replacement, involve processes of care that aregenerally well accepted, but result in less physiciandiscretion and patient choice. Manufacturers of productsfor these conditions will need to have good data toaccurately price their products and ensure that they are
  8. 8. 6Healthcare 2020growth in those types of markets. Therapies for migrainesor attention deficit hyperactivity disorder (ADHD), forexample, have fewer accepted protocols, and thus payerswill continue to struggle to control utilization beyondmere cost shifting. New physician-driven therapies will,of course, continue to emerge, but the overall trend isclearly away from full physician control as marketsmature and consumers become more involved in theirown healthcare.Over time, more diseases will move up and to the right-hand side of Figure 4. Protocolization and consumerismwill increase, and payers will demand and use betterdata about outcomes. Although these changes will notguarantee increased revenue, good outcomes shouldresult in a better share of the profit pool for players thatcan shape the protocol development by demonstratinghow their products create value.Where can you play—and win—by 2020?Only transformational business models will enable futurewinners to capitalize on the disruptive market changesincluded in any protocols being developed to guidetreatment. Whatever patient marketing exists for thesetypes of conditions will largely focus on adherence becausecare management, not just the specific product, resultsin better outcomes.Where there is a high degree of consumer engagementalong with a high degree of protocolization for diseaseslike breast cancer or Type 1 diabetes, manufacturerswill need to be sure that they shape the protocols beingused and target their marketing to those preferred ther-apeutic options. The “teaming” between providers andpatients will be a significant challenge for payers andmanufacturers. In the area of breast cancer alone, theexistence of multiple effective patient advocacy organi-zations will inform patients of their options, and theyin turn will put pressure on doctors to find the optimaltreatment regimen. Payers will attempt to control the pro-tocol development in this area in order to control costs.The physician-driven quadrant, with its lower degree ofconsumer engagement and protocolization, is a “busi-ness as usual” state, and there is unlikely to be significantFigure 4: Trends affect disease states and procedures differently, creating distinct market dynamicsProtocolizationNote: We determined the placement of diseases or conditions in this figure by assessing the number of protocols available, adjusted for prevalence and total spending on that condition.For consumerization, we measured online presence and also adjusted for prevalenceSources: International Guideline Library; National Guideline Clearinghouse data; National Health Service (UK); Medtech Insight; Bain analysisDialysisPatientengagementBreast implants(aesthetics)T1 DiabetesBreast cancerHerniaErectiledysfunctionPharmaMedtechConsumer driven Patient and provider teamingProtocol drivenInfertilityLupusLivercancerPhysician drivenAsthmaDepressionContraceptionADHDHypertensionMigraineGastric bandStentsRAICD/PacemakerHIV T2 DiabetesMSSchizophreniaAsthmaAlzheimer’sOsteoporosisKnee/Hipreplacement
  9. 9. Healthcare 20207at play (see Figure 5). The models identified in Figure 5are very different from the business models being dis-cussed in boardrooms today. Becoming a consumermarketing powerhouse, a disease population manageror a successful integrated care company will requiredifferent organizational capabilities. For example, fortreatments and conditions where the degree of consumerdemand is high, like health and wellness programs, orfor treatments with high brand recognition, a consumerpowerhouse approach can help produce differentialgrowth and market share. For conditions with a highdegree of protocolization like hypertension, a popula-tion-manager approach may be the answer. The mostchallenging model of all will be to create integratedcare solutions that manage the full suite of productsand services across the patient journey. This approachwill require deep expertise in patient-centered care andthe tools that support that care, such as real-time feed-back, secure communication and digital technology toenhance patient participation.These new approaches require a fresh look across theprofit pool for each condition. Here are a few examplesto think about:• For businesses in the more traditional, physician-dominated quadrants of Figure 4, winners willbuild the capabilities to deliver risk-sharing models,potentially partnering with payers and providers—or even directly becoming more involved in thedelivery of care.• If you are operating in the top right-hand quadrantof Figure 4, patient-provider teaming, then you mayneed to partner or develop capabilities in datasharing and coordination to ”wrap around” thepatient and manage a population for a payer orprovider organization.• If you operate more in the consumer world, you mayneed to move beyond branding the product andstart branding the procedure by forming allianceswith certified providers that can perform the pro-cedure or provide medication, such as exclusive,branded and certified botulinum toxin clinics.Figure 5: Transformational models hope to capitalize on expected market changesProfit pool driverDescriptionConsumer drivendemandProfessionalization of careModel• Consumer driven health and wellness programs– Products for full economic spectrum• Consumer engagement to drive brand awareness and loyalty• Innovation oriented to consumer wants (beyond medical needs)– Global consumer insight and brand building skills• Focus on managing disease in populations– Facilitate access, compliance, outcomes, systems cost reduction• Partner as necessary to influence stakeholders across the continuum of care• Leader in science, protocols, global care norms– Epidemiology, policy, education, behaviors, actuarial• Integrated care management throughout the patient journey– “Closed” system to facilitate the full physician and patient experience• Full suite of products and services to deliver all aspects of the patient journey• Deep expertise in patient centric experiences and tools– Patient insight, self directed disease management tools, social networks– Secure communication, compliance 2.0, real time feedback, etc.• Ability to link patient experiences to outcomes– Clinical and actuarial data, risk management toolsConsumermarketingpowerhouseDiseasepopulationmanagerIntegratedcarecompanySource: Bain & Company, Inc.
  10. 10. 8Healthcare 2020ways to reduce cost and demonstrate improved qual-ity. For providers, it will be a choice of joining therush to become an integrated care company or tryingto find room to be a branded provider of choice.For a select few, the old models could work—break-through innovation will still drive profitable growth,but few, if any, have proven the ability to sustain thisover time. Cost pressures will force nearly every companyin the industry to rethink how and where it will growmoving forward. Good strategic choices will still yieldgrowth. A profit pool that is growing at a breakneckpace will no longer shelter poor choices. Executivesand investors can and must know where the profitpools are shifting—and how they will change courseto successfully compete.• Where the various components of the profit poolhave created silos, with products and patients beingpassed around among them, the trend toward pro-tocolization and consumerization will break downbarriers and create a more integrated approach fora given medical condition or procedure. Firms likeFresenius and DaVita are already doing this, and otherhealthcare companies will either participate in thistrend or risk becoming mere commodity suppliers.• The industry’s metrics will need to change. Usingannual budgets and per person savings will not reflectvalue adequately for either private or governmentpayers. Can payers stay involved for long-term gainwhen paying for chronic diseases? Public payersmay not be able to resist the pressures to simplyreduce their costs. Private payers will need to identify1 IMS Institute for Healthcare Informatics, “The Global Use of Medicines: Outlook Through 2015,” May 2011.2 The methodology Bain used for developing this profit pool analysis is based on detailed health sector revenue and EBIT margin analysis for US and global sectors. The sector revenuesare based and triangulated on latest market reports; the sector margins are based on company annual reports; the 2010-2020 CAGRs are based on market reports, where available, andBain estimates; and the margin changes from 2010 to 2020 are based on proprietary Bain analysis.3 The term “protocolization” refers to the application of proven standards of care and consistent protocols and guidelines to reduce variation in the delivery of healthcare.4 Sources: Bain analysis, IMS, Datamonitor, Business Insights, Freedonia, annual reports, analyst reports, Centers for Medicare and Medicaid Services (CMS), OECD5 Sources: Datamonitor; based on top 50 branded pharma companies6 Sources: Business Insights, Datamonitor, analyst reports, Bain analysis7 Sources: Business Insights, Datamonitor, Parexel, analyst reports, Bain analysis8 Sources: IMS, Datamonitor, Business Insights, Freedonia, annual reports, analyst reports, CMS, OECD, Bain analysis9 Sources: IMS, BMI, Espicom, annual reports, analyst reports, China Health Yearbook, National Bureau of Statistics of China, Bain analysis10 Sources: IMS, BMI, Espicom, annual reports, analyst reports, China Health Yearbook, National Bureau of Statistics of China, Bain analysis11 Source: Bain analysis12 Fresenius Medical Care, “Forward Looking Statements,” 2009, p.31.13 Susannah Fox, Pew Research Center’s Internet & American Life Project – Health Topics, February 1, 2011, “Indians Increasingly Use Internet for Their Healthcare Needs,” Express Healthcare, Sources: International Guideline Library, National Guideline Clearinghouse data, National Health Service in UK, Medtech Insight and proprietary Bain analysisThe methodology for determining the degree of consumer engagement and protocolization in Figure 4 was developed by collecting all the protocols on each disease from a varietyof sources, scoring the current level of protocolization on a scale of one to 10 and then adjusting for prevalence and total spending on the disease. For consumerism, we monitoredthe presence of topics for each disease on a variety of patient websites and corrected for prevalence.
  11. 11. Shared Ambition,True ResultsBain & Company is the management consulting firm that the world’s business leaders cometo when they want results.Bain advises clients on strategy, operations, technology, organization, private equity and mergers and acquisitions.We develop practical, customized insights that clients act on and transfer skills that make change stick. Foundedin 1973, Bain has 48 offices in 31 countries, and our deep expertise and client roster cross every industry andeconomic sector. Our clients have outperformed the stock market 4 to 1.What sets us apartWe believe a consulting firm should be more than an adviser. So we put ourselves in our clients’ shoes, sellingoutcomes, not projects. We align our incentives with our clients’ by linking our fees to their results and collaborateto unlock the full potential of their business. Our Results Delivery®process builds our clients’ capabilities, andour True North values mean we do the right thing for our clients, people and communities—always.
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