Cross currents in the health economy

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Across the healthcare landscape, we are witnessing frenetic levels of activity. New products and business models are emerging, while some well-established players are considering reinvention. Although venture capital investment in healthcare has seen sharp declines since reaching peak levels in 2007, investment in health-related services reached $196 M in the first three quarters of 2010, the highest level in three years.1

Much of the movement marks an acceleration of ongoing industry trends, fuelled by the weak economy and rising healthcare costs. Some of the change however is in direct response to the Affordable Care Act.

Over the next several years, the insurance market will not only grow significantly, but will refashion itself to contend with new types of purchasers, new pricing rules, and new regulations. Employers, now responsible for providing coverage to 153 million Americans, face a complicated decision in whether to change or redesign company benefits or to discontinue offering insurance. Those that do provide benefits will have unprecedented leverage to induce healthier behaviors through premium adjustments. As a result of health reform, 55-100 million Americans are expected to change their insurance coverage between 2010-2016 according to MPACT, the McKinsey Predictive Agent-Based Coverage Toolkit, which simulates the behavior of individuals and employers to forecast coverage levels. The number of Americans purchasing insurance directly—primarily through new state-based Exchanges— is likely to grow by 23-62 million people by 2016.2

Across the healthcare value chain, economic forces are leading incumbent firms and attackers to reassess their business strategies. In some cases, this is driven by a perceived opportunity to gain share and grow while in others it is driven by a need to preserve revenue, manage margins, and minimize risk.

In this issue brief, we have identified five emerging themes shaping how participants are responding:

  1. Reallocating medical risk and a shift from “extracting value” to “delivering value” on the provider side;
  2. Accelerating pace of vertical integration and coordination among providers;
  3. Expediting the transition from “business to business” models to “business to consumer” models;
  4. Intensifying productivity pressures on delivery systems;
  5. Re-evaluating employer benefit strategies.

Whether these emerging themes will alter the healthcare system in a manner that contains cost inflation, improves quality and expands access depends on several factors that we take up in the second section of the paper.

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