Retail Clinics Industry Coming of Age

Retail health clinics cannot be seen as an exotic phenomenon anymore. What was originally just a new business concept, pioneered by Minuteclinic and enhanced by some very savvy followers, has become a new category, a new channel for delivering healthcare services.

Media coverage of this new model has trascended the blogosphere and the occasional note in the general press. In the past few weeks we have seen The Economist ("McClinics"), The New England Journal of Medicine ("The rise of in-store clinics...") and Strategy & Business ("Health care´s retail solution") running very positive articles on this emerging industry. It seems that the idea has finally landed in these higher grounds. Retail clinics are now in the spotlight of academics and consultants, who will surely dig into the business fundamentals of the model.

Young as it is, this industry segment is entering a new phase of development. Life cycles in today´s fast paced economy are compressed. Gone are the placid days of just "testing the waters" that were valid in the introductory stage. Each player needs to have a sound, differentiated strategy in order to navigate the rapid growth of today and the transition to a more mature market. So far, we have seen a homegeneity of business models. The collective action of all industry players has contributed to drive primary demand stimulation: the "enemies" were (and still will be for some time) the traditional channels (emergency services, primary care practices). In the near future, we will see more divergence in business models and competitive strategies. Other retail clinics groups will become actual "competitors".

The current business model has indeed proven itself. The economics are compelling:

- Lower labor costs, lower overhead (from limiting the scope of services) and potentially lower unit costs (from learning economies) than traditional channels (i.e. emergency departments).

- Furthermore, a chain of clinics beats the stand-alone physician practice: greater bargaining power vis a vis insurers, efficiencies from economies of scale (spreading fixed costs of IT, advertising, product development) and economies of density (several clinics in the same area achieve advantages from pooling labor and from capitalizing word of mouth). The implications for primary care physicians are significant. Contrary to what some medical associations are proposing, they just cannot compete with retail clinics for minor ailments just by extending their hours of operation or improving their scheduling methods. It would be a lost war, like bank branches trying to compete with ATMs for the cash withdrawal business.

As of today, the leading retail clinic operators are focused on geographical growth, entering new markets and perhaps consolidating those in which they already have a presence. However, in a more competitive environment, they will probably be forced to explore new avenues for growth and value creation (expanding the scope of services, entering new client segments). Growing up, a fact of nature, has these "side effects".

Concierge Medicine: back to basics

Concierge ("boutique", "VIP") medicine has received much criticism, mainly on the grounds of its questionable (for some) ethics. In my view, it also deserves some praise. Even if its business model is not all that sophisticated, it is nonetheless an attempt to break with the homogeneity in private practice models.

Its emergence signals dissatisfaction, from both physicians and patients, with an insurance-imposed system that leaves them with few degrees of freedom. For physicians, CM changes the economics of their practice but also the very nature of the service they provide. Through a retainer model (as it used to be the norm in the past, by the way), the physician becomes again an agent for the patient, and not for the insurance company. For patients, CM is an answer for a service level that the insurance-mediated system doesn´t provide, one in which the physician is not subject to any restriction by a third party in terms of accessibility or utilization of resources. A doctor that also doubles as a counselor that helps them navigate an increasingly complex healthcare system (a service for which there is an unmet demand that Revolution Health intends to address in a different manner).

CM changes the incentives inherent to the prevailing practice model. The current reimbursement methods are skewed towards the attention of the acutely sick, resulting in episodic, disconnected care. Two major segments are neglected in this scenario:

- The "healthy", who face difficulties in accessing relevant preventive and wellness services, screening programs and counseling.

- Those with chronic diseases, who would benefit from more frequent encounters with their doctors and a higher accesibility through non-presential communication (telephone, web ... channels that are not adequately exploited because they are not reimbursed). The life of diabetics, asthmatics, etc., would be far easier if they were able to consult with their physician the many doubts that arise on a day-to-day basis (should I adjust my medication?, should I worry about this funny new symptom I am having?). Not to mention the fact that this model is likely to be more effective and efficient (even small improvements in the control of chronic diseases yield huge benefits: fewer complications, fewer ER visits).

CM is obviously not "the" solution for all the maladies in private practice, it would be unfair to judge emerging business models against such a high standard. But it may prove to be a very appealing proposition for some physicians and some consumer segments. We are probably just seeing the tip of the iceberg, a latent rebellion against a system that forces uniformity in practice patterns against the diversity of preferences of both physicians and patients. Despite the controversy around it, CM will probably continue to evolve and even permeate beyond its current boundaries of primary care.

Revolution Health: ambitious, as it should be

Revolution Health has finally launched its preview version. And it looks good. It is one the first serious attempts at building "the" healthcare 2.0 site, offering much needed, still missing features in healthcare such as consumer ratings of providers (which ideally should be coupled with hard data on outcomes) and social networking tools.

They are making a lot of noise, too. Steve Case is everywhere and so are many of RH employees, actively commenting on every blog that mentions their company. There seems to be a strategy behind this. Like all things web 2.0, RH´s play is subject to a significant network effect. They are in a race to build a large base of installed users before competitors-to-be make their moves. They also need to manage consumer expectations. And they are playing it by the book: using penetration pricing (free memberships and other inducements to participate), leveraging Case´s reputation (as someone who built something so big as AOL), making product preannouncements. They are ambitious and very active in communicating and praising their company - the right way to play this game.

Among the many challenges they face, two stand out. First, how to engage consumers of healthcare services and have them coming back regularly in a matter that is not recreational. Second, how to create synergies among the different service lines they offer (a must in order to compete with pure plays that might attack each of its components).

And of course, there´s also always the tricky issue of how to make money, with a business model that appears to be based on ad revenue, with subscription services as a much smaller complement. If they do succeed in becoming the market leader, though, this model is not only viable but also potentially very profitable, by providing access to very targeted audiences of highly valuable and motivated consumers.

Strong retaliation from WebMD is coming. Google Health (as of today!) is still in the works ...

Alea iacta est ...

The case for Focused Factories in Healthcare

Focus is a major competitive weapon. This fact, well known in manufacturing and service industries alike, is still underexploited in healthcare.

A key insight comes from framing the problem not as how to increase productivity but rather as "how to compete", as Skinner put it in his seminal article (W Skinner. "The focused factory". Harvard Business Review. 1974; May-Jun:113-122): "... a factory [hospital] that focuses on a narrow product mix for a particular market niche will outperform the conventional plant [general hospital] which attempts to be everything for everybody. Because its equipment, supporting systems and procedures can concentrate on a limited task for one set of customers, its costs and especially its overhead are likely to be lower than those of the conventional plant. But, more important, such a focused plant can become a competitive weapon because its entire apparatus is focused to accomplish the particular manufacturing task demanded by the company´s overall strategy and marketing objective" (the brackets are mine, not Skinner´s).

Regina Herzlinger is the mind behind the Consumer-Driven Healthcare concept as the way to achieve system reform (as opposed to top-down initiatives proposed by others in the 90´s and still held by many). Her ideas may be consulted in the numerous books and articles she has published on the subject (and in a not-to-be-missed recent presentation). She believes that true change will only be achieved through an organic, bottom-up process in which each person takes charge as a consumer of health care and entrepreneurial forces will create delivery models and insurance products aimed at better meeting the needs and preferences of consumers (rather than those of providers as it is currently the case). It is in this scenario that focused healthcare factories (a central topic in Herzlinger´s writings) will flourish. Not everyone agrees, though, that this outcome is likely or even desirable.

The competitive advantange of focused factories derives from embracing a specific, differentiated positioning and from gearing operations to exploit it. The focus could be on an illness, on a procedure or on a defined population target with unique needs. Focused providers outperform generalists, both in terms of quality and costs. The well-known volume-outcome relationship helps make the case for focused provider models, regardless of the direction of causality in this relationship ("practice makes perfect" vs. "selective referral patterns"). Costs are also lower, both overhead (due to a lower complexity and variability in operations) and unit costs (that go down with cumulative experience in similar cases through learning economies).

Healthcare´s supply-driven nature is reflected in the homogeneity of provision models and their inertia to change (the organization of hospitals today, for instance, is not too different from what it was decades ago) despite the great advancements in medical and information technology and changes in the relative prevalence of diseases and in the needs and preferences of consumers. Hospitals are very complex organizations designed to treat acute, serious conditions, and whose structure mirrors the division of Medicine in specialties. This self-centered approach is not only anachronic but also a limitation to innovation in itself (ie, by setting barriers to the creation of cross-functional services). Further complicating these matters, in this insurance-mediated market, what doesn´t have a "code" is not reimbursed, thus raising additional barriers to innovation. Email or telephone consultations, patient-provider communication through web applications and many other alternatives, more convenient and potentially more cost-effective, to presential encounters, are not offered because they are not reimbursed.

The specialty hospitals (with a focus in cardiology, oncology, orthopedics) that have emerged in the past few years represent a step in the right direction, if only still just a baby step in terms of what can be achieved. The fierce criticism they face , though, gives us a taste of what may lie ahead: going against the tide in healthcare comes expensive. Specialty hospitals, many of them physician-owned, are in the midst of an angry policy debate over their supposedly cream-skimming tactics (that is, carving out a niche of higher-margin services at the expense of general hospitals). Although there are many other angles to this debate, it is noteworthy that what in almost any other industry would be called "beating the competition" through a more appealing value proposition for consumers is, in healthcare, a questionable strategy.

The future reserves only a marginal role for general hospitals as we know them. Even it they persist in their positioning as generalists, they would do well to incorporate the focused factory approach, creating "plants within a plant" (separating organizationally and even physically the different service units). Also, the hospital of the future will probably not be a "place", as it is today, but rather a collection of diverse focused inpatient and outpatient services (including electronic delivery models) in different locations, networked through a shared information infrastructure.

The most innovative focused factories, though, will be outside of the hospital business. Regulation permitting, we will probably see a rebirth of disease management through a variety of products aimed at managing chronic diseases, new delivery outlets and a marked increase in the offering of preventive services (the healthy are the most neglected segment in the current system). Even more targeted delivery models, focusing on a very specific target population, condition or procedure, will emerge with time.

Focus is a powerful concept that, along with a shift of decision power towards consumers, will result in a much needed redefinition of healthcare services. It will bring greater diversity in provider business models and a broader range of medical services. A new system, more responsive to the evolving consumer needs.

Retail Clinics: a New Delivery Channel

The Retail Clinics movement, a prominent example of a "low technology" and yet revolutionary new business model, has received much media attention. Consumerism is on the rise in healthcare, which creates newly viable positioning options along the axis of "accesibility". The irruption of clinics located in convenient, high-traffic places has proven to be very appealing to both consumers and media.

This emerging industry was pioneered by MinuteClinic (which was recently acquired by CVS) and has a large number of competitors, notably RediClinic and TakeCareHealth. These clinics treat, on a walk-in basis, acute, non-life threatening conditions, and also provide preventive services such as vaccinations. They are usually staffed with non-physician providers such as certified nurses or physician assistants, and they are located in non-traditional settings like pharmacies, grocery chains and "big box" retailers. This industry already has created an Association to defend its collective interests and has a number of dedicated blogs .

These clinics are seen by many as a prime example of disruptive innovation in healthcare. Indeed, they represent a low-cost, highly accesible option (due to both their locations and their extended hours of operation that include weekends) to receive routine medical services. What is more, quality is not only not sub-par: where it has been measured, it has been proven to be higher than that of competing providers. By adhering to protocols, using electronic health records, and by sheer "repetition" (the limited scope of services they offer means they get to see large numbers of patients with the same condition), these clinics could in fact become the provider of reference for solving basic, common ailments. In the process, a new delivery channel for healthcare services is created, a sort of ATM for easy care that could potentially have the same impact for healthcare that the ATM had in retail banking a few years ago.

A most interesting aspect of this new business model is that it is actually building an industry out of providing basic services that have largely been neglected by the incumbents (that is, services not usually viewed as a business opportunity per se, but rather as feeders for higher-margin diagnostic or specialized services). The medical establishment is still wondering how to respond to this innovation. The American Academy of Family Physicians welcomes it (as does the AMA) as long as the clinics stay within their current limits in terms of scope of services and they establish a referral network with local primary care physicians. The American Academy of Pediatrics clearly opposes it, mainly on the basis of the lack of continuity that retail clinics offer (although one must wonder what level of continuity is present in the current system). These clinics mean new competition for PCPs, pediatricians and urgent centers. Practice patterns will be affected in areas with high penetration of retail clinics. Insurers, on their part, are widely embracing this development.

It is probably too soon to know whether Retail Clinics (whose numbers are already in the hundreds) are here to stay or not, although the CVS-MinuteClinic deal somehow validates the early steps of this industry. They face significant challenges, very well described in the excellent study published by the California Healthcare Foundation and authored by Mary K. Scott. Their economics, with high fixed costs and minimal variable costs, and prices around $50 per visit, forces them to have a high capacity utilization (2 to 3 patients per professional per hour to break even).

I believe that some degree of higher concentration in the medium-term is likely and desirable (there are significant economies of scale and density) but I also expect new entrants with slightly different positionings and operating models from the one that today prevails. For instance, nothing prevents new players from staffing the clinics with primary care physicians, thus countering the reaction by medical associations and others.

Google Health: it will be Big

The much talked about Google Health, whatever it is, whenever it comes, will be big news for healthcare.

Google VP Adam Bosworth has recently begun posting on this issue and has presented his ideas at a recent Conference. He wants patients to be able to create their own "health URL"
("...an online meeting place where their caregivers — with express permission from the ill person — can come together, pass on notes to each other, review each other’s notes, look at the medical data, and suggest courses of action. This isn’t rocket science. It is online web applications 101"), as a building block of a plattform that interconnects patients and providers.

The concept surely needs some refinement and there are significant regulatory issues that need to be addressed. I believe they still don´t know exactly what they want to do in this area, they are just testing the waters. But the idea is powerful. In its simplicity lies its revolutionary potential. And the company behind it has all the credibility and a proven track-record of tackling complex problems with simple, user-friendly solutions.

Healthcare is an information-based industry that, increadibly, is light-years behind other industries in the use of information technology. Even today, most information is kept in disconnected silos. Change, if it is to happen, will come from a combination of initiatives aimed at pushing the widespread use of electronic health records. Some will be top-down, such as Dossia, an online patient information system sponsored by big employers (WalMart among them) planned to launch next year. But the bottom-up movement by Google (getting patients to feel the need to own and manage their health information and providing them with the tools to do so) probably has a greater potential to be "the" breaking point: a "pull" tactic that, once the established base of users is large enough, may force other stakeholders (physicians, but also insurers and others) to jump into this new scenario.

Welcome!

Welcome to the first post of Healthcare 2.0, a blog that aims to provide information and commentary on a new generation of companies that could revolutionize the way healthcare services are conceived and provided.

And a revolution is badly needed. Many of the maladies present in most healthcare systems across the World (spiralling costs, poor quality, inequalities in access, lack of customer focus) derive primarily from the inertia that characterizes the behaviour of their participants. Things are done the way they were always done ... period. Paradoxically, an industry that is eager to incorporate new technology (drugs, devices, diagnostic equipment) is also painfully slow to adopt innovation in the way services are organized and provided.

We need healthcare companies that dare to be different. Companies able to challenge the status quo and do things differently than the incumbents or even do entirely different things. It could be firms that make use of the great advancements in medical and information technologies to design new services that respond better to the necessities and preferences of the consumers. Or it could be companies that while using "low technology" are revolutionary in their business models. Either way, their collective influence, if and when they gain traction, may help create a more dynamic sector.

This new wave of healthcare startups (some of them already up and running, most still in the works) will be the focus of this blog, while also profiling initiatives in this direction from traditional, established players.