New Rules: Business Model Evolution in the Healthcare Industry · delivery of healthcare services,...

SESSION 115New Rules: Business Model Evolution in theHealthcare Industry

COPYRIGHT © 2001 BY THE HEALTHCARE INFORMATION AND MANAGEMENT SYSTEMS SOCIETY. 1

David M SalazarPresidente-SI

Proceedings• • •

PaperSlide

Presentation Handouts Case Study

BACKGROUND

Increased interest in the healthcare industry has focused on the impact of the Internet on both thedelivery of healthcare services, and on supply chain issues. Today, there are an estimated 20,000healthcare-related sites; and an estimated 30% of the American population has accessed the Internetfor healthcare information. The major concern in the industry continues to be cost reduction.Additional issues arise around trust, cost and timeliness of healthcare services.

Clinicians, patients and suppliers have increasing access to information on-line and a number of pure-play Internet sites such as Neoforma, Medscape, and WebMD have started to build brand recognitionin the market. On the supply chain side, current practices revolve around using EDI versus Internettechnology. Distributors further complicate the mix with their attempts to simplify the procurementprocedure without clear, value-added initiatives The current supply chain involves a large number ofintermediaries between the manufacturer and the end-user, each player crafting a separate digitalstrategy. It is our opinion that the healthcare industry will have to embrace integrated, networkedbusiness models to fully succeed in the future.

MARKET OVERVIEW

The healthcare market in the USA was approximately $1.2T in 1999, and is expected to almost dou-ble to $2.1T in spending by 2007. This makes it the “single largest service industry” in the US today.

Inefficiencies, redundancies in administrative costs are estimated to be approximately $250-$400Bper year according to studies conducted by HCFA and Robertson Stephens (8-3-99).

The Balanced Budget Act (BBA) of 1997 calls for a reduction in healthcare spending of approxi-mately, $115B by 2002.

The allocation for reductions will be as follows;

Hospitals-38%

MD’s-4%

Managed Care-17%

Outpatient/homecare-22%

Also, HIPAA, Health Insurance Portability and Accounting Act—which addresses the adoption oftechnology and administrative procedures to ensure the security and confidentiality of health datawill have a major impact on the industry. It is estimated that the costs to comply with HIPAA legisla-tion could surpass that of Y2K compliance initiatives.

Other influential market factors include widespread information access, technology advancements,educated consumers and medical ethics

These compelling factors and others are driving the healthcare industry into The New Economy.

2001 HIMSS Proceedings: Volume 3 Session 115 /

Figure 1: The existing healthcare value chain

The current healthcare value chain provides a great opportunity for significant cost reductions andinnovation.

Approximately, $300B worth of medical supplies, services and pharmaceuticals was purchased glob-ally in 1999, with approximately, $100B sold in the US.

It is estimated that 18-45% of the cost of sales, in the supply chain, could be saved using “state-of-the-art” technology, according to Forrester Research.

The Efficiency Healthcare Response Initiative (EHCR), a 1998 industry study conducted byproviders, suppliers and industry associations, determined that approx. $11B could be saved, if man-ufacturers, distributors and providers were linked electronically and commercially;

$6.7B in the more efficient movement of products (less warehousing, etc.)

$1.7B in more efficient order management

$2.6B in more efficient information storage

In addition, administrative costs for healthcare payers are estimated to be approximately $75B in theyear 2000.

Benefits eligibility, claims adjudication and payment processing depends on paper records and EDI.Medical management Asp’s are integrating payers, providers and employers, into real time eligibilityand claims settlement at the point of service which could save the system approximately $3B over thenext 3 years

…However the healthcare industry does have some unique characteristics when compared to otherevolving industries, such as;

-Third party payers

-Highly fragmented and regional in nature

-Price insensitive customers

-Information sensitive customers

-High degree of government regulation

HEALTHCARE E-MARKETS

E-Markets DefinedE-Markets are independent Internet destinations specifically designed to facilitate the buying and sell-ing of goods and services between numerous customers and suppliers.* Healthcare is moving towardsa networked value chain as new intermediaries streamline the purchasing, delivery and paymentprocesses. An example of the Healthcare Value Chain with the addition of e-Markets is shown below.


Figure 2

E-Markets have also been referred to as vortals, category portals, trading communities, exchanges,affinity sites, e-malls, auctions and bid systems, and electronic communications networks or ecn’s. E-Markets provide the content, governance and business services necessary to successfully completebuying and selling transactions over a shared internet facility.

E-Markets create value by

• aggregating buyers and sellers

• creating marketplace liquidity

• reducing transaction costs

Research:Cambridge recently researched healthcare E-Markets, both in procurement and in delivery of serviceto the patient. We classified the sites based on content, commerce and community ( the three “C”simportant for a fully integrated e-commerce site). We also evaluated the current vertical and horizontalmarketplaces and their likely impact on hospital and healthcare supply chains. We compared the newmodels to the traditional industry supplier and distributor attempts at forming on-line business models.

Each of the sites were rated (1 to 5 stars) based on their level of integration and unique value propo-sition (Please refer to the Healthcare E-Markets Summary). It should be noted that this evaluationwas based on information available as of August 2000.

There were approximately 70 exchanges (does not include manufacturers. distributors, consulting firms,media cos.) as of July 2000. At this time, less than 1% of medical supplies sales were procured “on-line”. However, by 2004, on-line procurement is expected to reach $27.3B…growing at a rate of 200%.

A large number of B2C and B2B health sites are offering significant content but their revenue gener-ation ability remains in doubt. Sites such as WebMD and Medscape, offer full width content, with alarge number of sites providing specialist information. The consumer also has a wealth of content-rich sites, providing information about products, diseases and pharmaceuticals. A fewer number ofB2B healthcare players exist with the potential of significant cost savings still untapped. A lot of thetraditional players have adopted some form of e-market, but must still consider how the rest of thebusiness must change to handle the greater information flows. Healthcare providers have not solvedthe problem of integrating the buy and sell sides of their businesses as yet.

Manufacturers are banning together with sites such as The Global Healthcare Exchange (GHX).Distributors are attempting to come together to form their own e-markets such as The New HealthExchange (NHX), but it is not apparent if they want a channel supporting strategy or a channelreplacement strategy. New entrants have formed their own auction or pure exchange market places inan attempt to steal business from the traditional players. The payers lag far behind the industry inmapping out a new business model to deal with the upcoming changes. Insurers still process claimsbased on paper as opposed to real time, on-line payments. Clinicians and physicians do not drive theprocurement and delivery process yet, but hold the key position in the supply chain as they controlthe choice of the medical products and also deal directly with the end-consumer.

Hospitals still use EDI as their main buying technology channel, and so far, are resisting using theInternet based e-markets.

ResultsWe found that even though some of the sites are building brand awareness from both a B2B and B2Cperspective such as Neoforma and WebMD, very few of the sites were offering all three, of therequirements needed, content, community and commerce, to be considered full service e-markets

Also, most of the sites are not providing “New Economy” business models, which will be necessaryto transform the value chain in the industry. It also appears that the established E-Markets are actingin a more supporting role rather than as fully integrated virtual channels.

Findings Summary:Business models continue to evolve, with increasing information being displayed on both business tobusiness and consumer oriented sites. We believe that clinicians hold a key position in the future, andwill continue to be a key influence in the supply value chain. Companies can cut costs on their digi-tal supply chains by solving their channel conflicts. Distributors and manufacturers have the power tocooperate in an attempt to cut transaction costs and simultaneously deliver better service to the nextlink in the supply chain. The proliferation of E-Markets in the medical supply market confuses manyhospital groups that cling to old EDI systems, claiming the Internet cannot deliver the cost efficien-cies. The full service healthcare sites continue to grow in popularity, while uncertainty still reigns inthe patient-facing segment of the market. Providers, payers and many suppliers are still trying to


grasp the influence of fully -integrated networked business models in the healthcare industry. It is ouropinion that the industry must continue to evolve to fully integrated, networked business models inthe New Economy.

THE NEW ECONOMY AND NETWORKED BUSINESS MODELS

New Economy Definition: “A period of increasing global activity marked by sustained deflation-ary pressures and technology-driven interactivity which simultaneously support higher rates ofconsumption and investment”—Cambridge Technology Partners

The New Economy will have three major implications;

• Dis-intermediation

• The Internet has changed the interface between supply and demand giving customers personal-ized attention, which has segmented markets on a more granular level


Figure 3

• Transparency

• Eliminates asymmetries of information

• Reduces searching costs for customers

• Lowers switching costs

• Importance of Information

• As intermediaries emerge (e.g. E-Markets) they will capture all transactional information,which gives then the best knowledge of the downstream/after market

There currently are and will continue to be new drivers affecting new business models:

• Digital technology is re-defining business and marketing strategies.

• The customer is the new “driver” in the business equation

• Creating new customer-perceived value is required for differentiation

• “Co-opetition” will be a necessary tactic

• Business globalization will continue to influence the industry

The Internet’s role in the new Economy

• A shift from a computing-centric world, to a communications-intensive one

• The value investors place on innovative new business models

• In most instances, the Internet enables and hastens the move into the New Economy

• The Internet as such will be the end game for a few companies, including dot.coms and slowadopting traditional businesses

The evolution of the organization of economic activity is being driven by a change in environmental cir-cumstances: the rapid adoption of the Internet. Its speed, ubiquity, and transparency are propelling thenatural selection of organization forms into specialized value-producing and value-exchanging entities.

We are going from a period marked by large hierarchies that were self-contained value producing andvalue exchanging entities whose economies of scope lowered transaction and coordination costs…

. . .to a period marked by narrowly focused value-creating entities networked together based on well-understood boundaries of complementary skill sets…


Figure 4: Mass Markets Support Large HierarchiesThe Extended Enterprise Emerges

. . . to a community of hyper-competitive value-creating entities networked together by specializedvalue-exchanging entities, or e-markets, serving highly informed and empowered customers.

Which ultimately creates an extended enterprise between you…your customers…your suppliers…and your partners.

“Economic activity in the New Economy will be organized around discrete value creating entitiesnetworked both directly and through “E-Markets”.


Figure 5: Personalized Markets Fragment SupplyNetwroked Entities Lower Operational Risks

Figure 6

NETWORKED BUSINESS MODEL EXAMPLE

The networked development and distribution of Lipitor by Pfizer, Warner Lambert and Wal-Mart pro-vided much greater profitability and customer value than a hierarchical model could have provided.

CONCLUSION

Networked Business Models will emerge organized around shared customer acquisition and fulfill-ment mechanisms. These net leveraged models will yield greater economies of scale and scope withlower capital investment. Technology strategies will focus on trusted, low cost integration of net-worked entities and they will mandate new value creation strategies.

Strategy and VisionAs the healthcare industry evolves to embrace New Economy business models, it is essential that adigital strategy be created to provide a “roadmap” for future investments and implementation. The“winners in the Healthcare industry, will be those leaders, that have a strategic digital business plan,based on a vision, not only for their own corporate goals, but for the entire healthcare industry valuechain.

That is;

• Focused on Core Competencies–Borrowing assets and skills where required

• Building Networked Business Models–Connecting value-exchanging entities

• Realizing Sustainable Economies of Scale–Applicable to both discrete and network basis

• Forging Trusted Relationships–Between customers and partners


Figure 7

New Rules: Business Model Evolution in the Healthcare Industry · delivery of healthcare services,...

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