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Healthcare industry must embrace reform to thrive

The Times
24 November 2009


People still get sick in a recession. This means that the healthcare sector is defying trends, generating cash and delivering predictable and attractive liquidity.

This may not last. The economic crisis could have a significant negative impact on those who pay for healthcare. Healthcare payers — governments, insurers and individuals — face costs that are growing rapidly, driven by an ageing population, increasing expectations, the growing prevalence of lifestyle diseases and the development of treatments. Unchecked, healthcare spending could approach 20 per cent of GDP in the United States within ten years. Other developed countries will be close behind.

Those paying the bill increasingly are unable or unwilling to pay the prices sought by suppliers. This brings a downward pressure on prices and on the level of reimbursement set by governments and insurers. In America, the world’s largest healthcare economy, reform of the system has the potential to create a big shift in the economics of healthcare provision and product supply globally.

Many large companies are facing imminent patent expiries on their biggest brands. Those companies will lose a large share of their revenues as a result of lower-priced products from generic competitors. These challenges are not new, but the scale and pace of potential loss of future revenues is exceptional.

The priority for branded healthcare companies must be to develop propositions that are more aligned to the demands of all its customers — physicians, payers and patients. Many companies are exploring new elements to their products, such as predictive tests and approaches that support the correct usage of drugs. Together, these promise to provide better value for money.

However, complex products bring complex pricing systems. There is a trend towards payment by results, with perceived value for money defining prices and reimbursement that may be variable over time.

Today healthcare companies are paid for providing inputs — diagnostics, drugs, medical devices and related services. In future, the healthcare payer could pay companies for delivering an outcome for the patient. This has the potential to open the industry to a different set of players.

At the same time, the sector needs to increase productivity and reduce costs. This is driving more associations with external sources of technologies and potential products, more aggressive management, a concentration on core capabilities, identifying different sourcing options for non-core products and the realisation of cost and efficiency savings through mergers and acquisitions. M&A is also being used to secure new markets and opportunities: the value of corporate deals in the sector has exceeded $150 billion (£90 billion) this year.

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.

This article is the fourth of five based on: The Zombie Economy: Leadership in times of uncertainty (PA Consulting, £12.99).

To see the original article from the Times Online, please click here.

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