October 01, 2013|Categories: Healthcare Policy and Reform
Have you experienced these symptoms at your organization?
- Years of growing and consolidating your advantage.
- The anxiety of thinking there is nowhere to go but down.
- A Board comprised of the makers of manner; regulators seeded with alums, dripping with understanding of your “point of view.”
- Having both non-profit/tax free status AND millions of dollars in profits and salaries.
- Laudable market share, strong brand.
- Sleepless nights realizing the strategy you’ve carried out grows earnings at the expense of your client base and suppliers.
- Fear… that your college-age children will ask you if you’re making health care more affordable for those who need it… or less affordable.
If these seem familiar, your organization may be suffering from a health care strain of URQS, “Upper Right Quadrant Syndrome,” referring to the “upper right quadrant” of a market competition chart.
URQS has infected numerous other industries – consumer, packaged goods, petroleum, financial services – and seems to be spreading to health care. Here’s how: As industry sectors mature, competition kills some players and allows others to get extremely strong. As those strong players grow in power, they attract the attention of regulators and thus engage in constructive dialogue. This results in regulation to keep them “in check.”
But it also prevents new, unseen players from emerging due to these newly born state-sponsored barriers to entry. Board members and executives slip from “innovate, compete, grow” strategies to “consolidate, protect, defend” strategies. These strategies, enhanced by market dominance and regulatory protections, create a series of behaviors I’ve come to think of as URQS: the activities of companies trapped in the upper-right quadrant of the marketplace. These companies are very hard to kill—but they also have great difficulty growing.
Companies with URQS have so much market share, yet regulation constrains what they can sell, and how to sell it. As such, they tend only to grow through incremental efficiency by extracting wealth from existing clients and existing production.
Here’s how: With a URQS strategy, companies raise shipment size just a little (as in Marlboro 100s, 16 oz. Pepsis, Merrill Lynch wrap accounts). They raise prices incrementally for their core consumer (the $8 cigarette pack, $2 soda, 2% management fee plus 20% “carry” fee). As this happens, the company loses allegiance with their core consumer, and loses the passion for their purpose. They become what Nick Taleb, author of The Black Swan, would call “giant but fragile.”
But these companies don’t suffer decline until market pressures and regulators, and the actions of core consumers all result in negative conditions that could not be forecast. These shifts create what Taleb would call “black swan” crashes of these URQSs, in which these unforeseen conditions cause massive consequences. A drop from invincible heights to irretrievable depths.
So how does this play out in health care? Well, some drug companies and large academic medical centers (AMCs) appear to be caught up in an infectious wave of URQS. Drug guys focus on orphan drugs that save lives, but for which they can charge literally hundreds of thousands of dollars per bill. Large AMCs have bought up medical groups and put them on closed electronic medical record systems that only connect with their ancillaries—for which they now charge 200-300% more than they charged ten years ago for the exact same services. Pretty amazing for a market with a 40% oversupply of ancillaries and hospital beds.
If your organization (or a loved one’s) is suffering from URQS, what can you do? Keep monopolizing and collaborating with regulators to keep little guys out, and pray that a “black swan” event doesn’t hit you? Many pharmaceutical companies and AMCs will certainly choose this path. After all, how would you even take an alternative direction? Eviscerate yourself? Cut your own prices or volumes voluntarily? We aren’t Vulcans after all… only Mr. Spock blows himself up for the common good!
So what then? It turns out that while URQS will be fatal to some, it doesn’t have to be for all. The key is twofold: incentive alignment and market definition. Step One: Ask yourself, “How could we make more money but be less expensive for each consumer covered?” If you are an AMC which performs rare heart procedures and charges a fortune for them, how much less could you charge and still make 20% more per dollar of fixed cost at the end of the year? You can’t apply this to everything you do—but you will surely find instances where you can.
This takes us to market definition and Step Two: Spread out a map. Then, take a pen and some string, and draw a wide enough circle around your AMC so you have essentially quadrupled the market size for those rare procedures you have looked at. Got it? Okay, that’s your new market.
Now get a sales team, and get a jet for travel if you have to, and go peddle those high end procedures across your newly redefined market. Given your planned increase in volume, offer this new market’s employers and payers 20% off your current price and the promise of better outcomes. Do not add fixed cost to accommodate this volume. Rather, let go of secondary and ancillary cases that community hospitals and physician clinics around you could do just as well or better. I know this will be scary, because this will affect some of your easiest high-profit margin work. But it’s not your highest total profit work, just margin. Let it go and replace it with higher acuity stuff. By doing so, you’ll make yourself a smaller player just by increasing your pond size. Then, you’ll have room for growth and promotion and innovation and pay raises — all within the context of reducing the cost of that procedure!
It’ll be a story worth telling your grandkids. Not to mention a major reduction in sleepless nights and some of the other URQS symptoms that have been nagging you.