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Healthcare may be buoyant now but a zombie economy is driving the sector to a new model of payment by results

24 November 2009

PA Consulting Group launches new book The zombie economy: leadership in times of uncertainty    

The healthcare sector is insulated from the effects of the economic crisis as a result of its ability to generate cash and the attractive liquidity that this provides.  People still get sick in a recession. But we are living in an economy of half-dead-half-alive banks, governments, consumers and companies. This downturn in the economy and the continuing growth in demand for healthcare will have a major, negative impact on healthcare payers’ willingness to pay high prices for new therapeutics.  This will accelerate a move towards new business models in the sector, according to PA Consulting Group’s book The zombie economy: leadership in times of uncertainly.  

Why a changing dynamic in healthcare

The effect of this zombie economy may be indirect and follow on the tail of the current crisis, but the impact of the zombies cannot be understated. In the zombie economy the banks, which finance healthcare companies, are too weak to support lending, government finances are too stretched to support expanding healthcare policies, consumer wealth is too depleted to allow them to pay from their own pockets, and companies are saddled with debt they cannot service. These organisations all have roles as payers in the healthcare economy and are increasingly unable or unwilling to pay the prices suppliers seek. The zombie economy is forcing prices and reimbursement prices, set by zombie governments and insurers, down.  

This downward pressure on prices is set to be intensified by a windfall the payers are about to receive. Many companies face imminent patent expiries on the biggest brands. While this will bring savings to healthcare budgets, it will also mean healthcare companies will lose a large share of their revenues.  

The new healthcare model

Many companies are exploring new elements to their products; predictive tests and approaches that support the correct usage of new drugs, together promise to provide better value for money. However, these new, more complex products bring complex pricing systems.   We are seeing a trend towards payment by results, with perceived value for money defining prices and reimbursement levels which may be variable over time.   

Today healthcare companies are paid for providing inputs – diagnostics, drugs, medical devices and some related services.  In the future, the healthcare payer could pay companies for delivering an outcome for the patient.  This has the potential to open the industry up to a different set of players providing a new wave of information technology innovations, products and services converging, and new business models appearing.

Ken Fyvie, healthcare specialist PA Consulting Group, says:

“While the healthcare industry appears buoyant relative to other industries, the combination of the recession and the dynamics of the sector will impact in the first half of the next decade. 

“If they are to avoid the effects of the zombie economy, healthcare companies must prepare for lasting and fundamental change in how they source and develop the next generation of products, and how they engage with their more diverse and demanding customers. Payment by results could become more a part of how companies are compensated for their products and services.”  

You can request a copy of The zombie economy: leadership in times of uncertainty here

-ENDS- 

Notes to editors

About Living with Zombies: Leadership in times of uncertainty

Living with Zombies: Leadership in times of uncertainty is written by Mark Thomas, head of strategy and marketing at PA Consulting Group, with contributions from PA sector and function specialists.  The book is based on a detailed analysis of the 2009 half-year results for over 600 US and UK companies, using data drawn from the Bloomberg database.

Who are the zombies?

We use the term ‘zombie’ because these individuals and institutions do not cease to exist, but they do become unable to perform the functions that we expect of them in supporting growth of the economy: zombie banks cannot lend as we need; zombie governments whose finances are stretched, zombie consumers cannot consume and zombie companies who are saddled with debt that they cannot comfortably service.

The book identifies winners and losers and the likely impact on industry restructuring, sector by sector.  This analysis is based on two critical factors – the liquidity factor and intrinsic value. The liquidity factor is a compound index made up of a weighted average of: Acid-test ratio; Dividend cover; Gearing; Interest cover; with the greatest weight on interest cover. Intrinsic value is estimated using a simplified (and slightly conservative) form of the discounted cash-flow model assuming: long-run ROE equal to the average of the last 5 years’ ROE for each company; long-run growth rate in line with economic growth at 3 per cent nominal; cost of equity at 10 per cent.

About PA Consulting Group

PA Consulting Group is a leading management and IT consulting and technology firm. Independent and employee-owned, we operate globally in more than 30 countries and transform the performance of major organisations in both the private and public sectors.

From initial idea generation and strategy development through to detailed implementation, we deliver significant and tangible results. We have outstanding technology development capability; a unique breadth of skills from strategy to performance improvement, from HR to IT; and strong expertise in communications, media and entertainment, defence, energy, financial services, government and public services, healthcare, international development, manufacturing, transportation and logistics, and water.

   
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