Business Model Clarity in Disrupted Times

by Phil C. Solomon on December 9, 2013

in Revenue Cycle Management

Note: This is a thought-provoking article that highlights the changes in healthcare we are experiencing today and what we can expect in the future. I hope you enjoy reading this article. PCS 

Betting the Company:

By David Johnson, Managing Director and Sector Head, Non Profit Healthcare and Higher Education – BMO Capital Markets. davidw.johnson@bmo.com

Health systems are at the crossroads. Historically, providers have operated within narrow regulatory guidelines and pursued strategies that optimized reimbursement for services rendered. This “fee-for-service” payment mechanism creates perverse incentives that distort service provision, facility distribution and practitioner supply.  The result is an expensive, fragmented delivery system that over-allocates resources to acute treatments, specialists and commercially-insured patients at the expense of prevention, primary care professionals and lower-income communities.

As health reform unfolds, market pressures are leading companies to reconfigure business models to improve outcomes, eliminate redundant care, reduce medical errors and keep customers healthier.  This “disruption” creates opportunity for health companies to pursue wide-ranging business development strategies.  It also increases failure risk for sub-optimal repositioning and execution.  More than ever, health leaders must understand their companies’ strengths, customer needs and market dynamics when making strategic “bets” for post-reform success.

Steve Jobs Return to Apple1

“Deciding what not to do is as important as deciding what to do.  That’s true for companies and it’s true for products.”  Steve Jobs

Eleven years after his ouster, Steve Jobs returned to Apple in 1997.  The company was a shadow of its former self.  Its market share had fallen from 16% in the late 1980s to 4%.  Its stock price had fallen from $70 to $13.  As Jobs took the helm, Apple posted a $1 billion loss and was ninety days from insolvency.  Clearly it was time to “Think different.”

Jobs undertook an intense three-week business and product line review.  Apple had become a bloated company with multiple business lines, numerous licensing agreements and dozens of inferior products tailored to the “whims of retailers”.   Product teams couldn’t provide simple answers to the question “which ones should do I tell my friends to buy?”   Jobs exited the printer and server businesses, stopped providing software upgrades to Macintosh clones, eliminated 70% of the products and was still exasperated.  Finally he drew a quadrant with “consumer” and “professional” columns and “desktop” and “portable” rows.  Jobs decided to bet the company’s future on the Power Mac and PowerBook for the professional market and the iMac and iBook for the consumer market, all seamlessly integrated into the Internet.

Through massive layoffs and corporate restructuring, Jobs narrowed and sharpened Apple’s business focus.  He rekindled the magic and reconnected with consumers through imaginative products and the inspiring “Here’s to the Crazy Ones” marketing campaign.  Under his leadership, Apple became immediately profitable and ultimately the world’s most valuable company.

What Business are We In?

Before Apple could recover, Jobs had to define the company’s problem and its causes. As legendary journalist Walter Lippmann observed, “For the most part, we do not first see and then define. We define first and then see.” Once Jobs identified the sources of Apple’s deep financial trouble, he was able to restructure, refocus and reinvent Apple.

Health systems confront a similar, if less dire, challenge. Most acknowledge unsustainable business models yet struggle to realize meaningful change. Transformation begins with problem definition. Bill Thompson, SSM Health Care’s CEO, spoke earlier this month on The SSM Experience: Imagine a New Reality at a leadership breakfast sponsored by St. Louis University’s John Cook School of Business. He began with the simple statement, “The American healthcare system is badly broken.” Having defined the problem, Thompson chronicled its causes and implications before describing SSM’s transformation strategies. It was a powerful, persuasive presentation. Cleveland Clinic CEO Toby Cosgrove distills the Clinic’s strategic vision as follows, “We’re in the sickness business. We need to be in the health business.” According to Banner Health’s CEO Peter Fine, Banner is a clinical outcomes company: focused on reducing care variability and increasing care reliability to deliver consistently superior outcomes. Strong messages from gifted leaders, who understand the need to define problems before tackling them. Strategic clarity creates paths to success.

Advocate’s Chief Strategy Officer, Scott Powder, recently described their senior-team’s initiative to define the company’s current and future core business.  Asking “what businesses are we in?” and “what businesses should we be in?” mirror the question “what problems are we trying to solve?”.  Advocate’s leadership believes strategic clarity is essential to long-term success.   Powder identified three potential business models:

  • Owning and operating acute care assets
  • Managing care for distinct geographies and populations
  • Developing and licensing intellectual property

While not mutually exclusive, these businesses have different customers and competitors.  They require different strategies for growth, capital formation and risk management.  Advocate is asking the right questions.  Lacking a clear business definition leads to muddled decision-making and sub-optimal resource allocation.  Here are other potential business models:

  • Elite referral centers
  • High-volume surgical centers
  • Post-acute care
  • Wellness
  • Medical tourism
  • International delivery
  • Healthcare venture capital

No company can operate all these businesses. American healthcare has deep problems that encompass lifestyle, treatment, engagement and effectiveness. Companies that define problems, narrow focus and deliver solutions will succeed where others stumble.

Going Through the Wall

Health companies are pursuing a wide range of post-reform business models.  Reform is pushing health companies into new business, new partnerships, new forms of capital formation and new forms of risk-taking.  Transformation is hard, but offers breakthrough potential.

Given their orientation, governance and visibility, non-profit health systems are inherently conservative, strategically defensive and slow to change.  This makes the disruption roiling the health industry particularly challenging for these companies.  Inbred instincts battle against market-changing strategies.  Powerful constituencies fight to maintain outdated privileges.  In extreme cases organizational paralysis overwhelms mandates for change.  The stakes are high, and transformation failure could lead to bankruptcy.

Near the end of the movie Moneyball, Boston Red Sox owner John Henry offers to make Billy Beane baseball’s highest paid general manager.   With his low-budget Oakland A’s, Beane had challenged baseball orthodoxy by using statistical science to optimize his team’s performance.  In a remarkable scene, Henry explains disruption’s unrelenting logic, its impact on incumbents and their emotional response:

You won the same number of games as the Yankees, but they spent $1.4 million per win and you spent $260,000. I know you’ve taken it in the teeth, but the first guy through the wall always gets bloody, always. It’s not just threatening to the way they [baseball executives] do business, but in their minds it’s threatening the game.  But what it’s really threatening is their livelihood. It’s threatening their jobs.  It’s threatening the way they do things.  Every time that happens, whether it’s in government or business or whatever, the people holding the reins, those with their hands on the switch, go crazy.  Anybody who’s not tearing their team down right now and rebuilding it using your model is a dinosaur. 

Enlightened health companies are reconfiguring business models. Their leaders are defining and attacking problems that plague American healthcare. Some have been bloodied working within a payment system that doesn’t uniformly reward innovation and value. The risks are real but so are the opportunities. The challenge is large but so are the rewards. The quality and sustainability of U.S. healthcare ride on their success.

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