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Reinventing the wheel: How and why healthcare execs should rethink business models

bret schroeder | healthcare tech outlook | 7 december 2015

Healthcare isn’t what it used to be.  The fundamental business model of healthcare is dramatically changing.  Successful business models of the past will not hold up in the world of tomorrow. We are shifting to a performance-based system where outcomes (not procedures) will be rewarded. Revenue streams, new markets, and business models will need to change not only to survive, but also to thrive. Healthcare executives will need to evaluate current revenue concentration and explore new revenue sources. As payment models shift from “fee for service” to “fee for value” the existing business models will need to evolve as well. Aggressively evaluating new products and new markets will be more important than ever, as current revenues shift. 

There are healthcare organizations that have been successful in rethinking their business models. Montefiore Medical Center is a good example of a company that looked carefully at how to change their revenue mix. Montefiore was the pioneer accountable care organization (ACO) and is perceived by many as perhaps the most successful. They changed to a value-based payment model prior to government intervention, and have completely revamped their business model. They created an integrated provider and care management organization and are currently responsible for over 350,000 patients. As a result of their vision and change in business model, their monthly per beneficiary spending is $104 USD less than their market competitors. The financial success is a direct result of evaluating the market, predicting demand and moving quickly to change.

The healthcare landscape will continue to evolve in the coming years and companies that take the changes seriously will be at an advantage. There are a number of actions executives can take as they rethink their business models. 

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Four Steps to Rethinking your Business Model

Step 1 – Understand your current revenue mix. This may seem obvious, but few executives actually understand the details of their revenue. Revenue growth trends, concentration by customer, allocation by product or service are not well understood and sometimes hard to measure. Having a true understanding of these factors will help in decision making.

Step 2 – Focus aggressively on costs. Many executives take a very high level look at costs and make quick and sometimes meaningless cost reduction decisions. Fully understanding your company’s (or your department’s) true cost is vital to success. Actual costs as well as cost trends and cost comparisons to industry benchmarks are fundamental to successful business models. Evaluate procurement processes, sourcing and contracts, vendor mix and how much spend is happening outside of traditional channels. The results may be surprising. Costs include not only actual expenses, but also organizational costs. Many healthcare organizations have redundant functions, matrix decision making and limited accountability which bloats overall costs. Financial discipline and accurate metrics are key in truly understanding (and correcting) the high costs structures in healthcare organizations.

Step 3 – Evaluate the market and focus on emerging trends. The market is changing and the massive shift in focus for healthcare organizations from business to business to business to consumer will continue to disrupt existing business models. Montefiore was able to understand that the fee for service model was under pressure and it was only a matter of time before government intervened. The company focused on the emerging trend and successfully positioned itself for success. As demographics continue to shift, demand for healthcare and the trend of reduced reimbursement for inpatient services continues traditional “brick and mortar” revenue streams will decline. Another question to ask is - what is the future of virtual and home care and how will that affect your existing business?

Step 4 – Identify, define fulfill evolving customer needs. As the market changes, customer needs will also change. Finding new, uncontested opportunities will be critical. Developing new products and services will be critical for success. Providing the same service and product offering as customer needs change will be detrimental. The demise of Kodak is perhaps one of the most popular examples of a company that failed to adapt to changing customer needs and digital pictures. Understanding your customers, and their needs both today and in the future is critical as you rethink your business model.

Looking Ahead

The business of healthcare is shifting. Fee for service business models will evolve as economics, regulatory, demographic and consumer expectations put pressure on existing profit structures. As with any industry undergoing massive transformation, many companies will struggle and some will fail. Companies that seriously rethink their business models will have an advantage and perhaps gain footing as a significant player. While the days of pure monopolies like Standard Oil are over, companies like Montefiore Medical Center will be the success stories of the future.

The four steps to rethinking your business model, while perhaps are obvious on the surface are actually difficult to execute correctly. Change is hard for many organizations, but understanding the economic drivers to your business is key and executives that take them seriously will have an advantage.

 

Bret Schroeder is a healthcare expert at PA Consulting Group 

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