Moving toward a retail model of healthcare: Designing for discretionary dollars

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1 Moving toward a retail model of healthcare: Designing for discretionary dollars Spring 2014 PwC and Healthspottr recently convened a select group of innovators, thought leaders, and investors to exchange perspectives on the changing healthcare marketplace and debate how new and established players can capitalize on retail opportunities in the New Health Economy.

2 Designing for discretionary dollars Third-party reimbursement from Medicare and Medicaid will continue to play a major role in US healthcare for the foreseeable future, but as discretionary health spending continues to grow, the marketplace is responding with new players, with new products and services for customers. PwC has identified these new growth trends and the new business models they are driving as underpinnings of the New Health Economy. PwC and Healthspottr recently convened a select group of innovators, investors, and thought leaders in the healthcare and retail sectors to exchange perspectives on the changing healthcare environment and to debate how new and established players can redesign their business models to capture the new health consumer s discretionary spending. This gathering in our 2014 series of Innovation Salon Dinners, took place in Chicago. Our guests represented a broad spectrum of the healthcare industry, including new and established players in the financial, provider, payer, data, technology, and consumer health sectors, as well as representatives of leading retail organizations. How less becomes more

3 We put this question to our guests How can new and established players redesign their business models to capture the new health consumer s discretionary spending in a competitive retail marketplace? The salon dinner conversation that took place saw four key themes emerge: 1 Recognize that most health-related spending choices will be made by the consumer. The lines between patient and payer are blurring, as consumers pay an increasing portion of the healthcare tab. New and established players must develop new services and products to capture health consumers discretionary dollars. 2 Identify market segments based on what consumers want, not what you think they need. To determine what services and products to deliver, players must segment their markets, just as retailers do, and view the market from the consumer s perspective. In the emerging retail health market, differentiating between consumers wants and needs, and addressing their wants, will be a key to success. 3 Develop value propositions and deliver services or products that consumers value based on their wants. There are certain universal wants, such as convenience. Beyond these, players should address consumers aspirational needs, which are powerful drivers of behavior and customer loyalty. 4 Experiment with choice, transparency, and guidance. With heavy competition from other retail offerings, players must develop strong value propositions, provide transparency, and offer guidance to help consumers navigate a complex healthcare system. The path to success is not always clear, so players must experiment and learn from their results. New forms of collaboration will emerge to help organizations to compete. 1 Moving toward a retail model of healthcare

4 1 Recognize that most health-related spending choices will be made by the consumer. The lines between patient and payer are blurring, as consumers take on more financial responsibility for their health. As high-deductible plans become ubiquitous, consumers are more likely to think about healthcare services as a retail spend, whether or not insurance is involved. In the future, all healthcare spending will be discretionary, said Scott Kornhauser, founder and former Chief Strategy Officer at Healthation (now Aldera): The entire market is going through a retail transformation. Everyone is fixated on moving the consumer out from behind the current system, where they blindly buy services, don t know how much they cost, and don t care until they get their Explanation of Benefits (EOB) 90 days later, to a true consumerism-focused market where they will care because it will be a true retail market in which everything is discretionary spending, including the premium they pay for insurance. The field of behavioral health is at the forefront of the trend as consumers take more financial responsibility for their health. Bill Whitely, CEO of Tamber Health, noted that most spending in this area is already discretionary, and insurance payouts are being combined with consumer dollars: In a field like behavioral medicine, some services are covered by insurance, some services aren t, some channels are covered by insurance, some are not. We ve decided to be very transparent with patients about coverage gaps, and we ve been successful when we have asked patients to combine their insurance dollars with their out-ofpocket dollars [Behavioral medicine is] at the leading edge of benefit erosion, and that may be why we ve had success combining patient and payer dollars. Consumers have shown they are willing to spend big money out-of-pocket for health-related products and services they value, said Ceci Connolly, Managing Director of PwC s Health Research Institute: Health and wellness is another area where Americans have shown they are very willing and able to spend discretionary money. HRI calculates the total spend at about $267 billion in There are clearly instances where consumers are willing to shell out their own money for something they believe has value to them, whether it s a gym membership or diet or wearable you name it. I think the challenge for the traditional healthcare industry is, how do you become the value item that consumers will spend those dollars on? Lyle Berkowitz, Associate CMO of Northwestern Memorial Hospital, said he recognizes that his patients are spending their own money on a range of healthcare services. The challenge, he says, is to determine how to capture some of those discretionary dollars: I know my patients have discretionary spend for non-acute medical issues. We know they may spend 50% of their healthcare dollars outside of my medical system. They go to a chiropractor in uptown. They get their vaccines at Walgreens, they do psychiatric care over there. And they get their hip replacement at a competing hospital. Much of that spending is discretionary spending, and we want to do our best to keep it in our system since we can provide the best continuity and of course it benefits us economically. By recognizing that consumers are willing to pay out-of-pocket for healthcare services they value, new entrants and established players can develop services and products that capture the new health consumer s discretionary dollars. 2 1 PwC Health Research Institute 2014 report: Healthcare s new entrants: Who will be the industry s Amazon.com? healthcare-new-entrants

5 In 2012, Americans spent more than $2.8 trillion on healthcare, and another $267 billion on other health-related products and services, such as dietary supplements, weight loss programs, sporting equipment and gym memberships. Americans spent nearly $3 trillion, or almost $10,000 a person, maintaining health and wellness in Ancillary services $267B Health and wellness and fitness $1.30B $40.33B $61.6B $11.25B $93.62B $59.20B Mobile health apps Fitness Weight loss Alternative medicine Nutrition Sporting goods and apparel $0.26B $0.64B $6.85B $7.31B $25.27B $1.02B $16.80B $30.40B $45.40B Fitness DVD production Boxing gyms and clubs Pilates and yoga studios Personal trainers Gym membership Nutrition and energy bars Functional beverages Vitamins & nutritional supplements Natural & organic food Source: PwC s Health Research Institute 2014 report, Healthcare s new entrants: Who will be the industry s Amazon.com? 3 A dialog about how to succeed in the New Health Economy

6 2 Identify market segments based on what consumers want, not what you think they need. By addressing what consumers want, providers can become trusted partners, winning customers loyalty and confidence, so that when the provider makes a recommendation or referral, the customer accepts it. That s the key to success in the emerging market for retail health, according to Matt Hermann, Senior Managing Director of Ascension Health Ventures: The person who can activate the patient and integrate services and technology around them, to help guide and navigate through their life, is the winner in this retail world. For each person, it could be different. This is not about what the healthcare ecosystem thinks is right; this is about what the patient thinks is right. In some instances it is, I need help because I m caring for my husband or wife who has Alzheimer s. For somebody else, it is an entirely different problem. It is helping people solve the problems that they have right now, anticipating future problems and preventing them from happening. The discussion turned to differentiating between needs and wants. Scott Cotherman, CEO and President of CAHG, described the concierge approach to cataract surgery developed by one of his clients. Patients are picked up at their homes and accompanied throughout their visit to the surgery center. There s no medical need for such white-glove treatment, but it addresses patients desire to be cared for. Cotherman encouraged the group to consider this example of how care is delivered and value is delivered. Dr. Berkowitz joined in the conversation, noting that Northwestern Memorial Hospital is also taking steps to address patients wants, by exploring a membership program that will provide a higher level of service for a $200 annual fee: If we re looking for an example of an industry that has done a really good job of segmenting the market, so that there is an appropriately priced and appropriately scaled product for the customer across a range of stages of life, it is financial services, from consumer banking all the way up to high net worth financial advisory All the data is there for us to use. There is so much for us to learn by looking at that industry. -Carleen Hawn CEO, Healthspottr Your care is going to be the same, but if you want to call and get someone on the phone right away, are you willing to pay for that? The patient-doctor relationship is not different, but for $200 a year, are you willing to get a little more service? Because we have to start competing with the concierges, we do almost everything they do, except when someone calls us, they don t get a person. And that is a clear, easy thing that we can start with. To determine what services and products consumers want, players should look at the market, not from an analytical, intellectual standpoint but rather from the consumer s point of view, said Brian Cooper, Senior Group Manager at Target, adding that this is what smart retailers and consumer products companies do. For instance, retail clinics have become the product of listening to the needs of busy parents and meeting their needs for convenient services on the spur of the moment. Organizations that don t make the effort to understand what consumers want may end up developing solutions that customers don t adopt. Matt Downs, Managing Director of Sandbox, cited the example of some telemedicine providers who poured money into their high-tech services but could not get significant adoption because patients preferred phone calls. 4 How less becomes more

7 Segmentation Not all consumers have the same healthcare needs. For instance, 20-somethings view healthcare differently than 60-year-olds, and healthy consumers have different needs than those who are ill. Healthcare players must segment the market and determine which consumers to target. The group discussed various segmentation schemes for instance, by age and health status. Berkowitz suggested there are two curves beyond basic segmentation of the young/healthy and the older/sicker. One curve represents consumers whose health is stable; the other, those who contract a new illness. These segments need very different approaches, said Berkowitz: The sicker patients get, the bigger their issues and the newer their issues, the more they care about having that specific physician And the idea they want to come in and see their doctor and talk to them is very powerful So we cannot discount that part, but think about what other parts of the patient experience can we commoditize. Because I m of the philosophy that we don t have a shortage of doctors, particularly primary care doctors; we have a shortage of using them efficiently. 3 Develop value propositions and deliver services or products that consumers value based on their wants. What consumers value can vary significantly from one segment to another, or from one affinity group to the next, but it s fair to suggest that convenience is a universal want. This is something that successful retailers recognize. Which way would you prefer to shop for health and medical services, such as doctors, procedures and hospitals? 43% of people prefer to use an online healthcare shopping website Source: PwC s HRI consumer survey, December A dialog about how to succeed in the New Health Economy

8 Beyond convenience and location, aspirational needs are among the most powerful drivers of consumer behavior. So it s critical for healthcare providers to understand those needs when developing products and services. Attendees discussed that many consumers have a desire for products and services that make them feel better about themselves, suggesting the potential for cosmetic surgery and dermatology is enormous. There s clinical evidence that when people feel better about their appearance, this improves their mental health as well. There s also evidence that providers who help patients feel better about themselves gain tremendous customer loyalty. For instance, Cotherman of CAHG noted that in the cosmetic dermatology marketplace, physicians are starting to put their own brand on their products because patients are so pleased with the miracles that the doctor performed on them. He concluded: That s where discretionary spending is going. It is not going to a place that makes you feel sicker, which is your typical physician s office Why would you spend any discretionary dollars in a place where everybody is sick? I don t want to be there but I do want to be in this other place where everybody looks great and they come out feeling great and they tell everybody how great it is. And these are the kinds of things I think we need to start focusing on in healthcare. 4 Experiment with choice, transparency, and guidance. Healthcare is competing with a broad range of retail products and services (including those of competing health providers) for consumers dollars. One study showed that consumers, when faced with a decision, were more likely to pay their mobile phone bill than their rent, because the phone is so important to their social lives. Where does an annual check-up or other healthcare service fit within the pecking order? With consumers facing so many choices, a strong value proposition is needed to capture discretionary spending and help consumers to make good decisions related to health, said Vaughn Kauffman, Principal and Health Industries Global New Entrants Leader at PwC: The retail marketplace is a completely different battlefield, one in which retailers have played for decades but healthcare has not. Now, I m not just making a decision around my healthcare, but weighing spending more money on entertainment, food, cool technology, or going to my annual checkup? What is the value proposition healthcare is providing to help consumers make the right decisions? They re only going to make the right choice if they understand the value, because payment is coming out of their own pocket. So do I give up a good meal to go see my primary care physician, or do I skip the visit and have the meal? To make intelligent choices, consumers need price transparency. Health insurance exchanges, which are a first foray into the retail marketplace, have shown that consumers will make rational economic choices about healthcare based on the information given to them. The recent CastLight IPO highlights growing recognition of the need for more transparency something which is common in retail but lacking in healthcare, Mr. Hermann noted: 6 How less becomes more

9 Americans have historically felt that we re all entitled to the latest, greatest healthcare in the world for free. -Ceci Connolly Managing Director, Health Research Institute, PwC When we talk about buying a consumer product like a TV, cell phone, or car, there are many review and analysis sources. The world of healthcare is still incredibly opaque. One of the huge opportunities is to provide consumers with better information about plans, products, or services that is integrated into one or two locations. In addition to transparency, as consumers become more financially responsible for their health, they will need guidance to help them purchase coverage and navigate a complex healthcare system. Consumers need the same sort of tools and education that the financial services industry offers, so they can evaluate their options and make intelligent choices. The tools aren t there yet, said PwC Principal Mark Williams, who believes the healthcare industry hasn t really prepared the general consumer for the role they need to play in the New Health Economy. Experiment and observe Tamber Health s Whitely cautioned against trying to predict outcomes in a market that s in flux: When the market is changing quickly, it is hard to predict which products or services will win. Experimentation and observation are essential. Sometimes you observe unexpected results I think one of the interesting, unexpected results from the ACA is the revealed behavior that we saw. For example, I think we saw that people are not going to buy until the last minute. That is a very interesting result and it has profound implications for insurers. There was a lively debate about whether consumer behavior is predictable or rational, but one key point emerged from the discussion: with enough behavioral data and the right analytical tools, it s possible to gain insights into behavior that can help in designing products and services that consumers want. Retailers gain these insights by tracking customers shopping behavior to understand what drives them. 7 A dialog about how to succeed in the New Health Economy

10 The need for collaboration New forms of collaboration can help organizations to compete. Large companies can leverage the convenience they offer to build powerful relationships with consumers. For instance, Walgreens has 100 million people who have loyalty cards that reward them for every purchase, and for uploading blood pressure, glucose readings, or other health data from wearable devices. The reward points can be redeemed for cash. Now health plans and employers are approaching Walgreens about purchasing blocks of reward points to use with members and employees to incent healthy behaviors. Donald Potter, Vice President of Client Relations at United Healthcare, agreed that health insurers could benefit by collaborating with retailers that have trusted brands and a better understanding of how to engage with consumers. He proposed an example of a potential collaboration: Imagine a patient who enters the healthcare system with high cholesterol and goes to a large retailer to buy chips, but should be on a prescription for a statin and doesn t buy the statin. The power of a health insurance company to engage with the retailer to engage with that patient to get them on their regimen of statin is where we see the value on a go forward basis. Are you open to trying new, non-traditional ways of seeking medical attention or treatment? Yes, if the price is right Yes, regardless of price No, regardless of price 64% 18% 17% Source: PwC s HRI consumer survey, December How less becomes more

11 Conclusion The move toward a retail model of healthcare presents major challenges but also significant opportunities for new and established players that are willing to design or redesign their business models to capture consumer s discretionary spending. The innovators, investors, and thought leaders who joined PwC and Healthspottr at our Innovation Salon Dinner in Chicago offered suggestions for moving forward, and examples of organizations that are already forging a path to the future. Who will compete successfully in the retail health marketplace? The answer is unclear, but Mr. Hermann summed up the qualities they will require: Future competition will come from someone we have not even thought about; someone who has perfected how to reach out and understand what each individual wants, who has figured out how to engage with that person in an impactful manner, and finally who has figured out how to deliver a high quality, low cost service. The movement toward a retail model will transform the market for health products and services in the United States in the coming decades. When most health spending is discretionary, the consumer will be king. Players that redesign their business models with consumers at the center will be most likely to capture the discretionary spending of the new health consumer in a competitive retail marketplace. 9 A dialog about how to succeed in the New Health Economy

12 More information To find out more about PwC Health Industries New Entrants and Innovation practice please contact: Vaughn Kauffman Principal, US Health Services (216) Ed Yu Principal, US Pharma & Life Sciences (415) Carleen Hawn CEO, Healthspottr (415) Tom Delay COO, Healthspottr (415) Joe Albian Principal, US Health Services (312) Andrew Sofield Principal, US Health Services (917) Derek Gaasch Director, US Health Services (406) Todd Hall Director, US Health Industries Marketing (508) PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. We are proud to be an Affirmative Action and Equal Opportunity employer. BS