A Healthy Diagnosis

The U.S. healthcare system offers endless figures for consultants who appreciate data points: the country spends by far the most of any developed country on healthcare—2.4 times the average that other developed nations spend, or a total of $4 trillion (20 percent of gross domestic product) by 2015; roughly 20 percent of the population remains uninsured or under-insured; and yet "we have a significant number of hospitals in grave financial condition," notes Rob Merkel, the healthcare industry leader for IBM global business services (GBS).

These and many other dispiriting numbers add up to a clear prognosis: "The current U.S. healthcare system is on an unsustainable trajectory," Merkel asserts.

Ivo Nelson, a former IBM GBS healthcare industry leader who launched IT healthcare consulting firm Encore Health Resources in February, agrees. "The core issue is: how do we reengineer our health system and provide incentives to stakeholders … so that they have the motivation to keep people healthy as opposed to only fixing them when they're sick?" explains Nelson, the chairman of his firm and a 27-year industry veteran. "That rhetoric has been floating around since I've been in healthcare. What has changed is that people are waking up to the fact that the cost of our system is not sustainable. It literally will bankrupt our country."

This bad news represents good news for healthcare consultants, at least experienced, prepared and responsive ones. "This is going to be a gold mine for firms that have the right experience in healthcare," Nelson notes. Mark Wietecha, chairman of Kurt Salmon Associates, agrees that the industry's challenges and the looming reform will provide "great opportunities for consultants," but he clarifies that "these won't be the same opportunities" that previously existed for healthcare consultants. "I think consultants will have to make some significant changes to adapt to what will be a new order," Wietecha adds.

Reform, Not a Remedy
The recession may have magnified the industry's woes and accelerated the drop-dead date for a fundamental industry overhaul (one that prevents the system from bankrupting the country), but the healthcare reform currently emerging on Capitol Hill appears to represent the most dramatic change confronting the industry in nearly 45 years.

To date, the bulk of the discussion has centered on health insurance coverage and, to a lesser degree, cost. Providing a federally sponsored insurance plan for 40 million to 60 million people will add massive cost to an already expensive and inefficient system. While legislators and policymakers are no doubt aware of the need for massive efficiency improvements, there are no quick fixes given the complexity of a healthcare system whose budget makes it the equivalent of the seventh or eighth largest country in the world.

Claiming that a change or a set of changes can quickly remove waste from the system, Wietecha asserts, "is like saying. 'I'm going to go to France and in a couple of years I'm going to eliminate all the waste here that occurs from people driving too much or baking too many loaves of bread in their ovens.' The scale is just so big. I think we can make progress, but anyone who's saying, 'We can cut 30 percent of the waste, and that's how we'll pay for it in the next five or six years'—that's just a humongous stretch. The diversity, scale and numbers involved here are gigantic."

Regardless of the scope of change the final healthcare reform bill calls for, Wietecha expects healthcare companies to need help responding to a number of new realities, including:
• New Customers: If universal health insurance coverage for Americans becomes a reality, or near reality, the provider community—hospitals, primary care physicians, specialists, pharmaceutical companies, and other medical products and services providers—will see an influx of new customers. Additionally, large numbers of current customers (millions to tens of millions) could switch insurance providers and become fundamentally different customers. That means providers will need to understand these new, and newly insured, customers and then adjust their strategies, processes, products, and services accordingly. "This will be a huge change, and providers who previously have not thought much about these folks will now need to think about them," says Wietecha.

• Different Profit Margins: Fundamental changes in how healthcare is financed will alter profit margins, and providers will need help from consultants in identifying and understanding these shifts. Generally, doctors and hospitals currently make the vast majority of their profits from commercially insured patients, break even (at best) on Medicare patients and lose money on Medicaid. What if large groups of commercially insured patients switch to a new federal health insurance plan that looks (and reimburses) more like Medicare? "It's unclear where these margins will be right now," Wietecha says. "Finding the margins in the new healthcare system will be very important. If you're consulting, you need to find profitable clients."

• A Labor Shortage: If, as expected, U.S. healthcare reform insures tens of millions more citizens, the country will also need to address a supply and demand imbalance. "We are not going to instantly create more doctors, nurses, and pharmacists," notes Wietecha, who recently returned from a conference in New Delhi where it was clear that several large companies there view healthcare sourcing, and healthcare outsourcing, as the next great opportunity in the U.S. market.

• A Larger Federal Presence: Regardless of the scope of reform that ultimately occurs, chances are that a much larger federal presence will be introduced into the U.S. healthcare system. If Blue Cross Blue Shield of Texas customers (like this writer) think getting straight answers on coverage and billing is infuriating now, wait until they become federal plan policyholders and call Washington about billing issues. "Having a much bigger federal presence in an environment where people expect some degree of capitalism and timely service," Wietecha adds, "will be a huge challenge for both consumers and the provider community."

For this reason, Accenture global managing director of health and life sciences Russ Nash says, "this is a very important time for healthcare consultants to stay very close to the consumer." Nash's team is currently tapping expertise from Accenture's retail practice in preparation for helping healthcare clients establish profitable connections with new and existing customers as reform reshuffles the system.

EMR vs. Value from EMR
Nash also knows his own customers well. Accenture is one of the largest implementers of electronic medical records (EMR) in U.S. hospitals, and Nash and other consultants believe there is a crucial difference between putting EMR in and getting value out of EMR.

"I think there is a clear risk of getting everyone wired and still not getting the benefits from all of the information in the system," Nash emphasizes. "In our practice, we focus on leveraging the data—getting wired, but then getting real value out of the information." Merkel agrees with the risk Nash mentions and notes that deriving value from EMR hinges on the interoperability of these systems: any doctor should be able to access any patient's complete medical history regardless of where the doctor works and the patient lives.

The promise of EMR is nearly as old as some of the industry's major cost and coverage challenges. What's different today is that the American Recovery and Reinvestment Act of 2009 (ARRA), the stimulus bill, allocates tens of billions of dollars to the ongoing adoption effort. The bill's language also rewards hospitals and physicians for achieving "meaningful use" from EMR system and punishes (in the form of reimbursement reductions) for failing to achieve that state, which, by the way, awaits additional clarification by the government.

The funding process also complicates the picture: the majority of EMR funds within the stimulus bill will not be available until late 2010 or early 2011, so cash-strapped providers need to foot the bill.

While hospitals have made significant EMR implementation progress, physician practices have not. Most physician offices are too small to afford consulting services. Although the stimulus plan's EMR section earmarks as much as $50,000 per physician practice, that probably covers only half of their cost.

"Plus, the stimulus is just that, a primer," says Mark Roman, vice president, global healthcare industry with EDS, an HP company. "It doesn't account for the ongoing maintenance and operations of these systems. That burden will fall to the providers. There must be a business case in the future that provides a sustainable benefit to the healthcare system. Even if it doesn't accrue to the providers as a single group, it must help repay their investments over the longer term, or we will see cost increases again in future as providers recoup their investments … EMR adoption will become widespread, but the timeframe is more like ten-plus years in the future—not five, as was originally predicted. This will be a massive undertaking."

Despite these issues, the stimulus appears to being achieving its aim of stimulating EMR adoption. "There will be a huge amount of activity for the next five years because of the stimulus money promoting the implementation of electronic medical records," says Nelson. Merkel agrees. "The amount of energy around EMR and capitalizing on stimulus funds is very, very high," he reports. "While a significant amount of money is being poured into health information technology in the United States, we're also seeing other countries, like China, make big investments in healthcare as an industry, which will also have an impact on EMRs in the U.S."

Consultants Without Borders
All of the industry's current undertakings that require outside expertise are pushing healthcare consultants beyond their traditional borders. It's no longer enough to specialize in one healthcare sector or area, such as insurance or pharmaceuticals.

"To thrive as a healthcare consultant today, you really need a cross sub-sector view," van Biesen says. "It's no longer sufficient to be a specialist. For example, if you want to truly understand a medical products manufacturer, you need to understand the provider space and how they buy pacemakers, gloves and any other product."

Van Biesen and others also emphasize the growing need to bring beyond-industry ideas and experience to healthcare clients. Accenture's Nash mentions the importance of applying retail insights. Van Biesen talks about applying lessons learned from fast-moving consumer goods companies, such as computer makers that have adapted previously high-margin businesses to successfully contend with lower-price competitors, to the pharma and medical products sectors. "The need for true, disruptive changes is here," van Biesen emphasizes. "The status quo is probably the most certain path to disaster in this market."

That holds true for healthcare clients and the consulting firms and practices that serve them. IBM, EDS and Accenture have established centers of excellence for EMR to help lower implementation fees (Accenture's is located in India). IBM has announced it is making up to $5 billion available through its global financing unit to finance IT initiatives in key economic stimulus projects, including those involving health information technology, around the world.

These and many other efforts like them should bear fruit extremely soon. Nelson expects to see a "major, major, major increase in consulting activity" beginning in the fourth quarter as the imperfect storm of stimulus funding, reform and other regulatory requirements compel healthcare companies to start spending.

"There are so many different sets of activities that will need to take place at the same time," Nelson observes. "Consulting firms that are positioned for this are going to do incredibly well. I can't imagine any other industry being able to touch what healthcare is going to provide to consulting in the next three years."

Ailment: Healthcare Delivery

While the healthcare reform debate centers on cost and coverage, it neglects a more fundamental problem, according to physician Richard Bohmer: "the creation and application of medical knowledge to solve individual patient's health problems." His new book, Designing Care: Aligning the Nature and Management of Health Care (Harvard Business Press, 2009), asserts that more attention needs to be focused on the design and management of healthcare processes organizations.

In the book, Bohmer explains why and how healthcare delivery problems could be fixed:
• We don't know what to do: Bohmer notes that medical providers' "uncertainty about what to do in any given clinical situation remains a fact of life for most practitioners." The problem: the medical science necessary to make better decisions for patients does not exist yet.
• We don't know what we do know: When the medical science does exist, it often is not applied, writes Bohmer. "Interventions demonstrably without benefit continue to be delivered, and known beneficial therapies are underprescribed, both resulting in measurable patient harm."
• We do it wrong: "Healthcare delivery remains fraught with errors, of commission and omission," Bohmer notes. "Estimates of harm resulting from medical error place it as the leading cause of death, ahead of motor vehicle accidents, breast cancer and AIDS."

At the risk of demonstrating an insensitive bedside manner: What's the consulting angle here? Bohmer, who is also a member of the Harvard Business School faculty, makes a well-argued case that the solution to the delivery problem hinges on improved processes and knowledge management—areas consultants know a thing or two about.
"There is too much variability in the way that care is delivered around similar diagnoses," says Russ Nash, global managing director of Accenture's health and life sciences industry practice. "From a provider standpoint, we think that's critical to address." —E.K.

Ailment:  Regulatory Compliance

Besides adapting to healthcare reform, providers must also contend with other regulatory changes. In January, the U.S. Department of Health and Human Services (HHS) released ICD-10, which is designed to help facilitate the country's transition to an electronic healthcare environment through the adoption of a new generation of
diagnosis and procedure codes. The codes describe illnesses, patient situations, the medical products or services that were provided in treatment and the appropriate reimbursements.

"This is dramatically expanding the number of codes as well as the size of the fields [in the information systems used to store and track this information]," reports Encore Health Resources Chairman Ivo Nelson. "In terms of the impact of these format changes, it will be similar to Y2K." HHS set October 2013 as the ICD-10 compliance date.

The new rule is well-intentioned, says Tim van Biesen, the head of Bain & Company's healthcare practice in North America. "The intent is to bring more specificity to billing and reimbursement," he adds. "But at the same time, it adds significant complexity."

In addition to ICD-10, healthcare providers and insurers can expect to see HHS make potentially major modifications to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) in response to new privacy and security issues that arise with growing adoption of electronic medical records (EMR). —E.K.

Ailment: Pipeline Problems

Most of the healthcare practices at the largest consulting firms include services for pharmaceutical and medical product companies, two sectors confronting "innovation stagnation," according to Tim van Biesen, the head of Bain & Company's healthcare practice in North America. U.K.-based research firm Datamonitor projects the branded pharmaceutical sector will suffer an annual revenue decline starting in 2011. It will mark the sector's first revenue drop in four decades.

Drug and medical products manufacturers need help doing more with less. Large pharma companies already have begun acquiring generic drug companies (e.g., GlaxoSmithKline purchased India-based generics company Dr. Reddy's Laboratories in June), but these acquisitions only mark the start of the transition.

"This will be hand-to-hand combat in the trenches, trying to sort out what the most appropriate alignment of incentives is to get efficiency into the system," says van Biesen. "Manufacturers facing increasing margin pressure need to come down their cost curve as quickly as possible to maintain their margins as they face competition. That's not something they had to do in the past." —E.K.