Before I dispense any supply chain wisdom, however, I think it’s important to disclose that I’m taking on a slightly different columnist role this year. Once every quarter, I will analyze current events, and with the help of my crystal ball, assess the possible impact on medtech companies as well as their supply, value, and care chains. Think of it as a proactive planning tool, of sorts.
Faithful MPO readers know I’ve worn many hats during my 35-year tenure in the healthcare industry. I’ve held supply chain roles in Fortune 100 companies like Medtronic plc and Dow Corning, and I’ve also led contract manufacturing firms. I have been a consultant too, and now own a business that supplies emergency CPAP products to major U.S. healthcare providers. I will draw upon this wealth of experience to dispense some advice and a few Chris Tips (CTs).
This quarter’s topic is the death of the individual healthcare insurance mandate and the ensuing premium squeeze. I’ll start by reiterating a prediction I made last fall at the MPO Summit— before open enrollment began and insurance premiums skyrocketed. I showed a bell curve (Exhibit A) to depict three population groups who will profoundly impact both payor P&Ls and the entire care chain.
Group 1—The Millennials: Most healthy millennials cannot justify spending thousands of dollars on medical insurance. “There’s no way I’ll pay $4,000 for healthcare coverage while I’m renting an apartment and driving an old car that’s barely limping along,” this generation is likely to contend. “I’d rather spend the money on day-to-day expenses. Besides, if something happens, there is so much fine print in my insurance plan, it probably won’t be covered. I’ll just roll the dice and forego health insurance even if I have to pay a small penalty.”
Group 2—The Baby Boomers: Healthy or not, baby boomers are unwilling to bear the costs of high insurance premiums. Well-off boomers take comfort in knowing they can afford emergency care and choose their own doctors, while those struggling to make ends meet are unlikely to afford Obamacare. Regardless of finances, though, boomers have a similar mindset to millennials: “The fine print prevents payors from covering so many things, I’ll be paying for issues whether I have insurance or not. I’d rather forego health insurance even if I have to pay a small penalty.”
Group 3—Everyone Else: Pity Generation X, the population cohort caught between the boomers and millennials. This group is really feeling the squeeze of skyrocketing insurance premiums and stagnant or declining net pay, prompted primarily by the mass exodus of older and younger generations opting out of healthcare coverage. Although companies are absorbing much of the costs of insurance dropouts, their bottom lines will eventually be affected. Something has to give.
Without an individual mandate and subsequent penalty, the squeeze to Generation X will only accelerate as more people exit their healthcare coverage plans. Hence, those who are covered by their employers or themselves will pick up the tab for all canceled plans. Quite generous, no?
It’s shameful (and ironic) that baby boomers who have paid into healthcare for decades now cannot afford coverage. This generation has nothing to show for all the years they helped finance their insurance plan. Indeed, boomers are consciously forgoing coverage, but it’s downright criminal they were forced to choose between economic security and health insurance. Millennials are making a similar choice and risking financial ruin by opting out of coverage. Neither group, however, is in as tough a spot as Generation X, which is being penalized for these bad decisions.
So what does all this mean for the healthcare eco-system? Cost pressure. This cost pressure will almost certainly manifest itself in two types of scenarios; and while there are opportunities to thrive or fail in either one, both require a different operating modality for companies.
Scenario 1—Eat or Be Eaten: Aggressive Cost Pressures Rolling Downhill
Each element of the eco-system is now more pressed than ever because payors are losing funding from those renouncing coverage. And that payor “rock” rolls downhill. Since one of the payors is still responsible for a very large portion of America’s healthcare plans, the loss of funding will have a material impact on caregivers through their reimbursement strategies. Those caregivers then aggressively drive cost reduction requirements downstream. Expect this cost pressure to accelerate due to the unprecedented squeeze taking place.
Keep in mind, this pressure was high when the single mandate was in place. Now that it’s gone, funding is coming from payors’ profits and losses, and such a practice is unsustainable (short of insolvency). Therefore, be prepared for more aggressive and creative approaches from payors.
Scenario 1 CTs: OEMs should consolidate their supplier bases and seek cost reductions based on volume cost absorption savings. The well has run dry for low-margin contract manufacturers and suppliers that have steadily been losing margin surplus in recent years due to cost down requirements and the lack of additional volumes. With their margins squeezed, OEMs must pick their “go-to” suppliers, make them primary partners, and drive consolidation to them. It’s a simple concept, yet a challenging one to execute from a quality and regulatory perspective because of the qualification requirements associated with changing suppliers. Nevertheless, it’s an effective strategy and a feasible goal.
Additionally, work with payors to ensure products are an in-network reimbursement item rather than out-of-network co-pay merchandise. Suppliers should consider taking a creative approach with payors and caregivers to create more volume for their OEM customers.
Scenario 2—Care Chain Consolidation: The Free Enterprise System at Its Best
I believe that care chain consolidation is inevitable. In the not-too-distant future, major portions of the healthcare system will conjoin to create “in-network care chains” with all the necessary players: caregivers, OEMs, payors, manufacturers, pharmacy providers, etc. This one-stop shopping model represents the free enterprise system at its best. In early December, CVS Health announced it would buy Aetna for $69 billion in a deal that potentially could reshape the healthcare industry. Who will pair up next? United Health and Boston Scientific Corp.? Blue Cross Blue Shield and Medtronic? It’s quite possible. Care chain consolidation makes sense—systemically and economically.
Scenario 2 CTs: OEMs should start thinking about life in a consolidated care chain world. In such a system, their products will be considered “go-to” items within the care chain since they’ll be the only in-network products. Alternatives will be non-existent. Back orders will be filled by a competitive care chain, which will be costly and potentially damaging to a company’s reputation. To avoid this misstep, suppliers should start aligning themselves with the OEM partners with which they want to navigate this new world. Some of the best opportunities may be in generic devices, as they will enable suppliers to fill in products missing from their own care chains with those from competitive chains. OEMs may play a larger advisory role, since suppliers will no longer be competing against partners within their own care chains but rather against other chains.
CT: Free Enterprise System Please!
The free enterprise model allows for multiple care chains to form and vie for supremacy. Simply stated, it gives payors the opportunity to cleverly market their insurance plans—selling the quality of the complete care chain, for example, rather than pitching a plan based solely on price.
If the free enterprise system is allowed to operate unreservedly (i.e., without governmental interference), it will create a competitive environment where care chains will compete for patients by selling value instead of cost. It would be a historic change if open enrollment was a time to think about wellness or recovery rather than new doctors and/or rising premiums.
Eliminating the individual mandate and supporting the free enterprise system is exactly what the U.S. healthcare system needs. Obamacare must undergo a further restructuring though, to allow the free enterprise system’s competitive powers to work. The Affordable Care Act must be repealed and/or re-configured differently so uninsured patients can obtain quality, affordable coverage. Maybe the reconfiguration can feature a governmental supported care chain that improves the use of the V.A. system or perhaps a health savings account plan that helps the less fortunate instead of providing funding to states to purchase policies that will never be used.
Care chain consolidation should be encouraged and supported because competition will help reduce healthcare costs. It makes everyone a better player because it emphasizes value-based care over price. The ultimate victory will be achieved the day patients choose quality over cost. I think that day is looming somewhere in our future, as long as politicians are willing to listen and accept help. If anyone in Washington is listening (or reading this), I’d like to quote Bill Murray in “Ghostbusters” and say, “I’m here to help.” Just ask.
Happy New Year!
Chris Oleksy is founder and CEO of Oleksy Enterprises, Next Life Medical and Emergent Respiratory. He can be reached at firstname.lastname@example.org or email@example.com.