America’s Newest Oligopoly

Healthcare in the U.S. obtained a new designation in the last two decades, as hospital systems, third party payors, pharmacies, pharmacy benefit managers (“PBMs”), and the like all race for scale.  That designation is one of oligopoly.  Take a look at the stats below for supporting evidence:

 

Regulators tapped with ruling on issues of antitrust in relation to mergers are grappling with how big is too big and what does it mean for pricing in an already cartel-like, opaque market.  Walgreens and Aetna are currently awaiting the answer, as they try to close on their respective purchases of Rite Aid and Humana.

Competition Is For Suckers[1]

Healthcare as an industry always maintains its own idiosyncrasies.  We are, after all, talking about the system tasked with general maintenance and repair of our species.  Limited competition has been the model for decades, as education, apprenticeship, and licensing has restricted the supply of doctors, nurses, and radiology techs for years.  In previous generations, single shingle practitioners were the norm and hospitals were typically single location.  Increasingly, that is not the case.

Splash 4 Partners aggregated a rather non-exhaustive list of dental practice management transactions from 2007 through 2014 that totaled nearly 30.  In the last decade, more than 25 private equity firms have invested in dental practice management companies.

On the hospital side, Community Health Systems acquired Health Management Associates in 2014 to create the largest for-profit hospital chain in the U.S., with hospitals operating across 29 states [2].  Owning market share (patients, or covered lives, if you prefer) means greater negotiating power with the payors. 

Healthcare 2.0

Healthcare 2.0 is a thing and investors are actively putting capital to work to give birth to companies that will shape the future.  In 2014, more than $11.2 billion in venture capital backed over 907 healthcare deals according to CB Insights[3].  However, the bulk of the investment is not going to structurally upend the system and the clearly well entrenched players mentioned above.

For the most part, the entrepreneurs behind Healthcare 2.0 are building products and services that serve these well entrenched market participants.  No one can really blame them, because it is the old Willy Sutton move of B-lining it to where the money is.  iCare is striving to become the dominate cloud based electronic health record (“EHR") for sub-200 bed hospitals.  Kit Check provides hospital pharmacy inventory management systems.  HoneyInsured is one of several new online insurance brokers that help customers shop for insurance plans on the exchanges.  These new market entrants are offering significant improvements and/or differentiated solutions compared to their predecessors for sure.  Yet, they will not be changing the makeup of the industry participants anytime soon.

In fact, many large hospital systems, health insurers, and pharmacies are investing and supporting the escape velocity of these young, fast growing companies.  Kit Check is backed by Kaiser Permanente’s corporate venture fund, amongst others.  CVS just invested $5 million in the online health community, MyHealthTeams.  Horizon Healthcare Services, invested $3.7 million in Cota, a big data company focusing on oncology patients.  Cota sells data and analysis to pharmaceutical companies, oncology practices, and health insurers.

By now, I hope it is clear how competition in healthcare is not increasing even in the face of Healthcare 2.0.  Today, the remaining participants mostly fight over market share and who absorbs what cost. 

Market Relevance for Healthcare 2.0 Firms

In general, there are four ways Healthcare 2.0 firms can prove themselves to be relevant to the large and entrenched market participants.  Healthcare 2.0 companies can:

  • Offer a way to acquire new patients;
  • Lower costs for third party payors, providers, or patients;
  • Improve patient compliance and help drive better patient outcomes, satisfaction, and retention; or
  • Provide healthcare providers or pharmaceutical and medical device manufacturers with reliable means to develop new products or services.

A Market for Access & Potential Discovery

Concierge medical practices are rapidly growing in direct response to the opportunity that scale driven healthcare has created.  In general, primary care physicians are price takers, accepting the fees set by insurers, and  many working for a hospital or practice group are dependent on their employer to drive patient volumes to fund operations (e.g., the doctor’s salary).  To maintain their salaries and decrease daily patient volumes, many physicians are opting for the membership based, pay-to-play concierge model.  The Harvard political philosopher Michael Sandel calls it a form of line jumping.

Some may argue that pay-to-play medicine is bad for America.  Others may argue this is yet another data point reflecting the growing income divide in this country.  I will leave everyone to their own opinions on those points, but I will share one point of view from a business perspective.  It is Potential.  Potential for innovation to carry forward in healthcare by developing products, processes, and services for luxury markets. 

Luxury or premium goods and services have a way of becoming cheap and making their way toward the masses over time.  Personal computers, microwaves, maid services, and black car drivers have become main stream products and services overtime.  All originally marketed to luxury or pay-to-play consumers.

Where Else Should We Look for Innovation?

So, we have an oligopology for a healthcare system.  How do we best help support the healthcare consumer (patients) and the overall health of the system?  Take advantage of the motives of the remaining market participants seated at the helm.  That is to say, focus on cost reductions.  This is why it is time to go looking for solutions in the developing world, where innovation with significant cost constraints occur.   

Grameen Bank and Grameen Phone were created with great resource contrasts in a country where capital mobility was low and so was GDP per capita.  Now money moves quickly and cheaply in Bangladesh.  Increasingly, our healthcare system is rich in patient data, but poor in individualized healthcare answers, in part due to siloed information systems.  What can we learn from examples like Garmeen?

Proctor and Gamble developed a water filtration system they parachute into disaster zones at a cost of pennies per unit.  What high cost system or instruments can be replaced when designing for function and savings?

One example comes from Re:Motion.  Re:Motion is developing prosthetics limbs for less than $100, compared the tens of thousands on the market today[4].

Searching in the developing world for solutions is not enough.  In order to do so, the innovators will need to find allies within the FDA, the AMA, the ADA, and the health insurers and largest hospital systems.  It is likely some of the products and treatments developed will not meet current standard of care guidelines of treatment.

If any of this raised questions for you as how to manage for growth or streamline your current operations, given the environment healthcare businesses operate in, please contact Splash 4 Partners at jgrosshandler@splash4partnres.com.

 

[1] Or so would argue Peter Thiel in his book Zero to One.

[2] http://www.beckershospitalreview.com/hospital-transactions-and-valuation/9-things-to-know-about-the-chs-hma-merger.html

[3] https://www.cbinsights.com/blog/healthcare-startup-funding-trends/

[4] http://www.popularmechanics.com/science/health/g456/7-medical-upgrades-for-developing-countries/?slide=

 

Jacob Grosshandler