Investments in mutual funds (MF) are subject to market risks – thus reads a typical MF prospectus. I venture to say, investments in healthcare stocks are subject to business model risks. You pick the winning business model, you are likely to pick the winning stocks – simple said than done. 

Along the entire value chain, seismic shifts in healthcare industry are altering the power equations. Those who act upon these changes and alter their business models recognizing and abetting consumer power will be rewarded while those that cling to old business models face the risk of extinction. 

Companies need to challenge the existing business models 

First let’s look at hospital business models. Today’s Hospitals are the products of yesteryear's business models. They have become one-stop solution shops for the consumers, housing costly equipment, lab technicians, general physicians, specialists, and a host of other connected people. As a result, establishment costs have become so enormous that a simple treatment for even a common ailment has become too pricey. Even though, hospitals increased their bed count, economics of scale didn’t translate into benefits for patients beyond a point.

Moreover, the consumers are neither happy with diagnosis nor with the treatment offered. Essentially these hospitals combined two different business models (a diagnostic center and solution delivery center) whose economics are different. Their profit formulas are different as well. Solution shops need to get paid on a fee-for-service basis. Their fees cannot be based on outcomes, because many factors beyond the accuracy of diagnosis affect the results. In contrast, value-adding process businesses can routinely sell their outputs for a fixed price, and they can guarantee their results. 

It is not just hospital business model that needs to be changed. A root cause behind many of the problems with today’s health care system is the seemingly haphazard integration of very distinct business models under the same roof. For instance, the health care sector lacks the kind of modern payment system found in retailing. Physicians, hospitals, and laboratories have designed their pricing and billing systems around wholesale (business-to-business) relationships with insurers. Transactions move in batches, long after patients have left their doctors’ offices. Providers have only a limited ability to estimate their patients’ liabilities at the point of service. Even when they do, few can present bills at the time of treatment and process credit or debit card payments. As a result, none in the payment cycle is satisfied with the outcomes. 

Big Pharma’s traditional fully integrated business model enabled them to rely on ‘block-buster-profit alone’ model successfully for many years. The current role of the pharmaceutical industry’s sales and marketing workforce has to be replaced by a new model over the next ten years as the industry shifts from a mass-market to a target-market approach to increase revenue.

Today’s army of sales representatives, the billions of dollars in free drug samples, the millions spent on TV advertising and aggressive marketing to doctors and patients will no longer be practical as the industry shifts its focus from pushing pills to demonstrating through products and services that it can promote health, improve quality of life and reduce healthcare costs. 

So which are the evolving business models across the value chain? 

In order to make healthcare more affordable and deliver more value for dollar spent, the different business models need to be separated. Companies can still follow ‘everything for all’ model at macro level. However, at micro level they need to separate their business models. For instance, hospitals can still follow a commingled business model of diagnostic center and solution provider. But, they should make their value proposition clear to consumers. Diagnostic center services should not be forced on consumers for availing solution to the diagnosed health state. 

Payers will need to construct business models tailored to emerging value propositions.