November 4, 2019
Interviewed by: David Snow
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Disrupted Healthcare: Is Your Business a Netflix or a Blockbuster?

Two healthcare business experts from RSM discuss important disruption trends that will leave many legacy companies in the same position that Blockbuster’s video-rental business found itself as Netflix grew in popularity. Patients increasingly expect the same types of experiences in healthcare that they receive in consumer businesses. Please download the RSM healthcare M&A e-book here

Two healthcare business experts from RSM discuss important disruption trends that will leave many legacy companies in the same position that Blockbuster’s video-rental business found itself as Netflix grew in popularity. Patients increasingly expect the same types of experiences in healthcare that they receive in consumer businesses. Please download the RSM healthcare M&A e-book here

Privcap Transcript

“Sorting the Netflixes from the Blockbusters in Healthcare”

Privcap: Let’s talk about trends in the healthcare business. Obviously healthcare is being disrupted in a major way and there are some business models that might be headed for the fate of, let’s call it Blockbuster, and there are others that are the disruptors and they might be if you will, considered to be Netflixes, so it’s very important for people who are placing long-term capital into the healthcare industry to be able to sort out the blockbusters from the Netflixes.

Matt Wolf, RSM: Netflix started out as basically a different type of Blockbuster. It didn’t do anything that Blockbuster didn’t do or even really couldn’t do you. Yes, it had a website where you would go and that was more convenient maybe than heading to a physical store but then on the other hand you had to wait a couple of days to get the disc in the mail, if you remember how it used to work. That wasn’t really digitally transformative. That was using technology but to do the same thing that had been done maybe in a slightly different way. Now, Netflix does something that before cloud computing just couldn’t have been done. This is a new service that could not have existed without the cloud computing infrastructure that is available in the world today, and that’s really what digital transformation is. As you’re evaluating investments and you want to understand, well how viable will it just be going forward.

As you’re trying to separate out the Netflixes from the Blockbusters, it’s important to understand, well, is this doing the same thing, but maybe just in a little bit different, maybe a little bit more efficient way, or is it truly using technology to do something that just couldn’t have existed even 10 years ago? I would tell investors to think about the patient expectations and the analogy of Netflix versus Blockbuster is a good one. When you’re looking at different investment opportunities, whether they’re delivery models or technology disruptors, try to understand how they fit within the changing patient expectations. Patients want to access their healthcare, interact with healthcare providers whenever they want to, wherever they want to – sort of an on-demand healthcare model. If the investment you’re evaluating helps achieve that vision, helps meet that patient expectation, that’s one kind of fact pattern or delineation but if it really is kind of more of the same – think of long waiting rooms, bad patient expectations – that’s more in that kind of Blockbuster camp of the way that healthcare is operated historically for the past several decades. In 2019 patients want to be able to access their healthcare on demand, wherever they are, whenever they need it, just like they do with entertainment or shopping, transportation. Healthcare is really no different, it just took longer in coming along.

Privcap: Rick, what are some examples, without necessarily naming names, of some interesting business models that you’ve seen arise in healthcare that you think are really aimed at the future versus perhaps some more antiquated business models that will stand the chance of getting Blockbustered?

Richard Kes, RSM: We’re seeing a lot of startup activity around digital health portals and platforms and those terms get used quite a bit. Sometimes I think people look at a digital health business and say, “Well, that’s a platform or a portal.” But really what I think we’ve seen commercialized today is oftentimes maybe a very specific delivery service. Maybe we provide primary care via a digital tool and that’s great. That might answer part of the platform question, but a platform really would be able to deliver more than just primary care. It would also deliver behavioral health, it might also deliver wellness coaching, other pieces of what we would define as a healthcare ecosystem.

One thing I would say to incumbent organizations today that perhaps offer primary care via some sort of digital front door is, how are you willing to provide other services and how quickly can you do that? The opportunity for an investor or a startup organization would be finding new services that can be delivered digitally or at least enhanced the delivery using an app. How can you advance that quicker than maybe the incumbent organizations that are focused on, providing specifically primary care or specifically some other type of service? How can you branch out and and do that quicker than some of the incumbent organizations? This is where the opportunity for an investor-led organizations could be right now.

Wolf: This concept of a platform I think is really important too, just to kind of drive it home. The one that people are probably most familiar with would be Amazon and they started out just selling books, but they realized the benefits of offering other, not only goods but now services too. The only thing you can’t really get on Amazon is healthcare, but they’re definitely moving in that direction so it’s a really important concept for investors and really anybody in the industry.

Privcap: How are you seeing older groups like that adapt if indeed they are adapting? Is it primarily through internal adoption of new technologies or are they going to the M&A market and actually acquiring younger, more nimble companies to help them transform themselves?

Kes: We see data that shows that there’s increased investment by these health systems in startups or venture-backed organizations. Maybe these health systems aren’t buying 100% of that new startup or a venture-backed company, but they are acquiring some ownership interest and perhaps using that technology in how they deliver healthcare or at least informing them on how delivery of healthcare could adapt and evolve into the future. I think that’s where we’ve seen the incumbent organizations really look to broaden the ability for them to really move quickly in digital health. 

Privcap: Can you describe the sense of urgency that healthcare CEOs have to adopt these newer technologies and to adopt some of the business practices that have already completely overrun the consumer market? Wolf: I think there’s a wide dispersion in that sense of urgency among executives. I don’t know, Rick, if you have a different perspective or maybe slice it a little bit differently, but that’s at least been my observation.

Kes: They seem to have been moving really slow at first and now all of a sudden, you start to see these executives, like Matt said, stand up and pound on the table at a speaking event and say that, “We need to disrupt ourselves and this is our problem to fix.” I think that type of articulation of the issue wouldn’t have happened maybe 18 months ago, but now all of a sudden you’re starting to see health systems in basically every market start to talk that way about how this digital revolution is coming from healthcare and we need to do something about it. Health systems have historically had a culture of very risk-adverse organizations and part of that is because their community boards are very focused on lots of things. They’re focused on patient care, the sustainability of their organization, they’re focused on keeping their name out of the newspaper because of bad publicity. Then, business models and business issues sometimes may not be at the front of their list of things that they want to protect their organizations around. Now I think they’re looking at this business model of shifting from a business-to-business type of organization to a business-to-consumer type of organization. Plus, this consumerism effect across all the industries in the United States, but in particular within healthcare has an erosion of their sustainability. I think now you’re getting those boards and those executives to say, “Okay, now this is a risk to me sustaining my organization, now I need to worry about it.”

Privcap: There are many private equity investors who specialize in healthcare who are quite vocal about saying that they would prefer to invest in healthcare businesses that have minimal reimbursement risks. Can you talk a bit about that, has the thinking changed is, are there business models that do have reimbursement risk that are nevertheless attractive to private equity buyers?

Wolf: There has been a whole transition from Fee-For-Service Reimbursement to value-based purchasing and bundled payments. It has again these legacy providers who really understand reimbursement very well and have understood it for decades, it has them kind of scrambling to try to figure it out and how they are going to weather that storm. I think unless you’re pretty deep in that, you may want to just stay away, I think, unless you’re willing to build a core competency there. It’s my view, I don’t know, Rick, if you have anything else you want to add.

Kes: One interesting project that we’re evaluating today as a firm is helping a well established private equity group build a model around how reimbursement should be accounted for and predicted upon, so they’re looking to us to build a data analytic tool to help them really evaluate the reimbursement risks that their organizations are under. I think the ones that, like Matt said, that are looking to build that core competency, the tools, the resources behind how do you understand the reimbursement, that risk that you’ve taken on and how do you operationalize that and ensure that there aren’t risks that you are not aware of or if there is, you are totally aware of all of the revenue that maybe is subject to risk and how that would be ultimately collected, using analytics and other types of tools.

Privcap: What are the impediments to preventing many of these businesses from just fast forwarding to the level of consumer experience that is so available to people on the consumer side of the industry?

Kes: Most healthcare providers would probably tell you it’s either privacy laws in that state or the HIPAA laws that govern us from a national perspective. The privacy laws are different state by state and can be more restrictive than HIPAA or HIPAA itself could be used as a barrier to enable some of that technology advancements. Sometimes there’s ways to perhaps accept more risk around HIPAA compliance, but ultimately most providers take the position that there is no risk that they are willing to take as it relates to complying with HIPAA. They might look at a specific piece of the HIPAA or the privacy laws that are in that state and say, “Because of this, the way that this law is written, we don’t want to expose ourselves to send emails to our clients because we don’t know if that will stay encrypted throughout the entire delivery cycle of that email. Instead of exposing ourselves to that risk and we will just avoid that risk and use other technology like fax machines or no electronic communication whatsoever to do that.”

Wolf: Historically in healthcare, at least from the provider perspective, the customer and consumer were different. Patients were consuming care, but the customer, the person who’s actually paying the provider was largely commercial health plan. The deductibles continue to increase year over year, and now we finally have this kind of awakening with patients as they become both the consumers and the customers of healthcare and saying, “Well, wait a minute, this experience that I’m having, that I’m spending a ton of money on, is very different than every other way I interact with companies in my day-to-day life. I want something different and I’m going to begin to demand something different.” That kind of alignment is just now starting, whereas in the past it really wasn’t that same motivation.

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