Strategic thinking in health care

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We don’t have a functional competitive market in health care in the U.S. Consequently, many of the attributes of competitive markets that are beneficial in our lives are not present in health care. One significant negative externality of a dysfunctional market is an inability to discern quality. Consumerism is critical. This presentation outlines the path toward better strategic thinking in U.S. healthcare. We must 1) embrace the Theory of the Firm – you’ll find you’re actually embracing your mission! 2) Institutionalize the promise of globalization 3) Build partnerships – become a market-maker not a market-taker 4) Be a contrarian 5) Focus on the consumer – make them smarter and they will reward you!

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Strategic thinking in health care

  1. 1. STRATEGIC THINKING IN HEALTH CARE JULY 18, 2008 DON MCDANIEL SAGE GROWTH PARTNERS STRATEGIC THINKING, QUALITY AND ECONOMICS IN U.S. HEALTHCARE
  2. 2. AGENDA <ul><li>Premise of this presentation </li></ul><ul><li>You call this a market? </li></ul><ul><li>Overall U.S. health care trends </li></ul><ul><li>Innovation and quality in health care </li></ul><ul><li>India: a case study </li></ul>
  3. 3. WORKING PREMISE <ul><li>We don’t have a functional competitive market in health care in the U.S., </li></ul><ul><li>Consequently, many of the attributes of competitive markets that are beneficial in our lives are not present in health care, </li></ul><ul><li>One significant negative externality of a dysfunctional market is an inability to discern quality, </li></ul><ul><li>Consumerism is critical. </li></ul>
  4. 4. YOU CALL THIS A MARKET? <ul><li>Government spending approaching 50% of total health care bill, </li></ul><ul><li>Competitive markets offer progressively lower unit prices, better quality, continuous innovation, but… </li></ul><ul><li>Healthcare offers increasingly higher costs , marginal quality , opportunistic innovation – the bad crowds-out the good, </li></ul><ul><li>Participants in the system are pitted against each other – no one is really winning. </li></ul>
  5. 5. CAUSES OF MARKET FAILURE <ul><li>Lack of price transparency </li></ul><ul><li>Major information asymmetry </li></ul><ul><li>Presumption that quality costs more </li></ul><ul><li>Very little consumer sovereignty </li></ul><ul><li>Health financing not health insurance </li></ul><ul><li>Entrenched, status-quo-loving constituencies </li></ul><ul><li>Very little accountability short of malpractice </li></ul><ul><li>Growth in expenditures that will double health economy every 8 – 10 years </li></ul>
  6. 6. WHY ARE WE ADDICTED TO THE HEALTH ECONOMY? <ul><li>Labor intensity </li></ul><ul><li>Geographic intensity </li></ul><ul><li>Political intensity </li></ul><ul><li>Administrative intensity </li></ul><ul><li>Recession resistant </li></ul><ul><li>Medical-technological arms race </li></ul><ul><li>The promise of science </li></ul><ul><li>Tremendous demographic and health status pressures </li></ul><ul><li>An unwillingness to ration care </li></ul>
  7. 7. TOTAL GDP 2007 <ul><li>United States $13.8 T </li></ul><ul><li>Japan $ 4.3 T </li></ul><ul><li>Germany $ 3.3 T </li></ul><ul><li>China $ 3.2 T </li></ul><ul><li>UK $ 2.7 T </li></ul><ul><li>France $ 2.5 T </li></ul><ul><li>US Health $ 2.2 T </li></ul>Sources: International Monetary Fund and Centers for Medicare and Medicaid. Note: Figures represent projections
  8. 8. TOTAL NATIONAL HEALTH EXPENDITURES Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2008
  9. 9. PERCENT CHANGE IN TOTAL NATIONAL HEALTH EXPENDITURES Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2008
  10. 10. NATIONAL HEALTH EXPENDITURES AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2008
  11. 11. GROWTH IN NATIONAL HEALTH EXPENDITURES (NHE) $2.02 trillion in 2005 $3.71 T $3.85 T $4.04 T Source: Based on C. Borger et al., “Health Spending Projections Through 2015: Changes on the Horizon,” Health Affairs Web Exclusive (Feb. 22, 2006):w61–w73. 20% of GDP
  12. 12. GROWTH IN MEDICARE SPENDING VS. PRIVATE HEALTH INSURANCE SPENDING Source: American Hospital Association via the Centers for Medicare & Medicaid Services, Office of the Actuary. Data Released January 8, 2008
  13. 13. AVERAGE PERCENTAGE INCREASE IN HEALTH INSURANCE PREMIUMS COMPARED TO OTHER INDICATORS, 1988-2007 3.7% 2.6%
  14. 14. STRATEGY FRAMEWORK: Improvement, Innovation and Change
  15. 15. THE THEORY OF THE FIRM <ul><li>The singular goal of the of the firm is to maximize profits - when they do so, they maximize social utility </li></ul><ul><ul><li>Bias against markets and profit seeking behavior despite overwhelming results – “the ineradicable prejudice that every action intended to serve the profit interest must be anti-social by this fact alone” - Joseph Schumpeter </li></ul></ul><ul><ul><li>What’s missing in health care? – the role of the consumer – competitive markets are great for consumers! </li></ul></ul>
  16. 16. WHAT DO WE EXPECT? <ul><li>Latest innovations – we want to facilitate them! </li></ul><ul><ul><li>Leads to greater choice, higher quality and lower costs </li></ul></ul><ul><li>High Quality/Hassle ratio </li></ul><ul><li>Stable prices – downward trends </li></ul><ul><li>We may pay more for a better experience </li></ul>
  17. 17. QUALITY SHOULDN’T COST MORE… <ul><li>More accurate diagnoses, </li></ul><ul><li>Fewer treatment errors, </li></ul><ul><li>Lower complication rates, </li></ul><ul><li>Less invasive treatment and faster recovery, </li></ul><ul><li>The diminution of the need for treatment. </li></ul>
  18. 18. Leading Causes of Death <ul><li>Heart Disease 652,000 </li></ul><ul><li>Malignant Neoplasms 559,000 </li></ul><ul><li>Potentially Preventable 238,337 </li></ul><ul><li>Medical Errors </li></ul><ul><li>Cerebrovascular 143,579 </li></ul><ul><li>Chronic Low Respiratory 130,933 </li></ul><ul><li>Disease </li></ul><ul><li>Unintentional Injury 117,809 </li></ul><ul><li>Source: Centers for Disease Control and The Fifth Annual Healthgrades Patient Safety in American Hospitals Study </li></ul>
  19. 19. WHAT COMPETITION HAS STARTED TO FOSTER <ul><li>A new emphasis on quality of care </li></ul><ul><li>Growing purchaser pressure on insurers </li></ul><ul><ul><li>Cost </li></ul></ul><ul><ul><li>Reporting on outcomes </li></ul></ul><ul><ul><li>Preventive measures pursued </li></ul></ul><ul><ul><li>Health status indicators </li></ul></ul><ul><ul><li>Development of report cards </li></ul></ul><ul><li>Much greater use and reliance on information technology and interoperability </li></ul>
  20. 20. EMBRACING GLOBALIZATION <ul><li>Demography and trends overwhelming – aging, preference and skills of domestic population doesn’t align with projected future needs </li></ul>
  21. 21. GLOBAL HEALTH WILL… <ul><li>Increase domestic and global competition </li></ul><ul><li>Commoditize a host of health services </li></ul><ul><li>Continue to open health labor markets </li></ul><ul><li>Create opportunities for U.S. innovations abroad </li></ul><ul><li>Drive deployment of meaningful health information technology </li></ul><ul><li>Drive development of additional medical schools, nursing schools, dental schools, allied health schools, etc. </li></ul><ul><li>Improve health status? </li></ul>
  22. 22. NATIONAL SUPPLY AND DEMAND PROJECTIONS FOR FTE RNS Source: National Center For Health Workforce Analysis, Bureau of Health Professions, Health Resources and Services Administration, 2004. Shortage of over 1,000,000 nurses in 2020
  23. 23. ASSETS SEEKING HIGHEST VALUE <ul><li>Employment for employment sake does not maximize social utility </li></ul><ul><li>Appropriate labor arbitrage is both profit seeking and socially responsible </li></ul><ul><li>Information technology is the key to the “choreography” – it may seem like a debacle now but the promise is real – waiting for Moore’s Law in health care! </li></ul>
  24. 24. Comparison of Spending on Health, 1980–2004 Data: OECD Health Data 2005 and 2006. Average spending on health per capita ($US PPP) Total expenditures on health as percent of GDP Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2006.
  25. 25. The World IS Flat!
  26. 26. HEALTH CARE AS AN EXPORT <ul><li>Demand for skilled labor has been driver but new trend now in play – supply-side influence of foreign economies that want to build “integrated health exports” </li></ul><ul><li>Developing countries embracing build-out of their health infrastructure to service the developed world presents many opportunities for “advanced systems” </li></ul><ul><ul><li>Partnering and joint ventures </li></ul></ul><ul><ul><li>Policy development and teaching roles </li></ul></ul><ul><ul><li>Labor exchange </li></ul></ul>
  27. 27. HEALTHCARE INDIA – A CASE STUDY <ul><li>Healthcare emerged as one of the largest service sectors in India </li></ul><ul><li>In 2004, national healthcare spending equaled 5.2% of GDP, or about US$ 34.9 billion </li></ul><ul><li>Healthcare spending in India is expected to rise by 12% per annum through 2005-09 </li></ul><ul><li>Expected to scale up to about 5.5% of GDP, or US$ 60.9 billion, by 2009 </li></ul><ul><li>Other estimates suggest that by 2012, healthcare spending could contribute 8% of GDP and employ around 9 million people </li></ul><ul><li>Only 12 million Indians currently have health insurance </li></ul><ul><li>BPO offerings proven to shave 20% - 30% off costs </li></ul><ul><li>Medical tourism is a target industry for build-out </li></ul>Source: Economist Intelligence Unit
  28. 28. <ul><li>180,000 patients in India in 2004 from across the globe for medical treatment </li></ul><ul><li>Medical tourism market in India estimated at US $333 million in 2004, grew by about 25% - Predicted to become a US $2 billion-a-year business opportunity by 2012 </li></ul><ul><li>India seeing a surge of patients from developed countries as well as from Africa, South and West Asia </li></ul><ul><li>Cost of comparable treatment in India is on average 1/8 th to 1/5 th of those in the West </li></ul><ul><li>Quality of Indian healthcare very high - India offers highly cost-competitive and technologically advanced treatments options </li></ul>Healthcare India – Medical Tourism
  29. 29. WHAT HAS TO HAPPEN <ul><li>Mandatory measurement and reporting of results, </li></ul><ul><li>Much broader and deeper information markets, </li></ul><ul><li>Get patients to access excellent providers, </li></ul><ul><ul><li>Deeper experience and shorting learning curve </li></ul></ul><ul><ul><li>Better efficiency </li></ul></ul><ul><ul><li>Greater scale </li></ul></ul><ul><li>Get away from one-size fits all medicine </li></ul><ul><li>Michael Porter – “Competition on results is dynamic and never-ending.” </li></ul><ul><li>Michael Porter, Redefining Health Care, 104. </li></ul>
  30. 30. SOME ADVICE <ul><li>Embrace the Theory of the Firm – you’ll find you’re actually embracing your mission! </li></ul><ul><li>Institutionalize the promise of globalization </li></ul><ul><li>Build partnerships – become a market-maker not a market-taker </li></ul><ul><li>Be a contrarian </li></ul><ul><li>Focus on the consumer – make them smarter and they will reward you! </li></ul>
  31. 31. THANKS <ul><li>Contact information: </li></ul><ul><li>Don McDaniel </li></ul><ul><li>[email_address] </li></ul><ul><li>(o) 410.534.1161 </li></ul><ul><li>(m) 443.904.2882 </li></ul>

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