Exploring the Tipping Point of Explosive Growth in the Medical Industry — Institutional Perspective.
The potential market size of the medical industry has attracted the attention of many businesses. With advancements in various technologies, explosive growth in the medical industry is just a matter of time. However, when it will happen and what the tipping point will be is still uncertain. In this context, we will explore the tipping point of explosive growth in the medical industry from the perspective of the health insurance system.
Undoubtedly, the medical industry has always been the focus of attention for all new businesses. Besides being a perpetual human problem, its enormous market size is unmatched by other industries.
In addition to existing players, other industries are also eyeing this market. Everyone sees the potential, but the majority of industries are struggling to make significant progress in this field. Even the players who have been operating in this industry for a long time are facing growth bottlenecks.
Insufficient Payment Mechanisms and Lack of Rigid Demand
One example of an industry that has been highly regarded but has struggled to gain significant traction over the past decade is telehealth. In theory, telehealth is a means of reducing the burden on hospitals and clinics and improving the quality of healthcare. The technology has become increasingly sophisticated, but until recently, the industry has been struggling to gain widespread acceptance.
The root of the problem lies in two main areas: (1) the payment mechanism — who should bear the cost — there has been no appropriate system to address this issue, and (2) the rigid demand — before COVID-19, telehealth was considered a nice-to-have service, not a must-have. Only with the recent COVID-19 pandemic and the success of companies such as Teledoc has telehealth become a necessity.
This example illustrates that for a healthcare industry category to flourish, it must have a prerequisite of rigid demand, which is actually discretely distributed among different categories. To succeed, it is necessary to enter earlier than others or use disruptive technology to enter at the right time.
However, is there an opportunity, like the advent of the internet 20 years ago, to drive various industries and have everyone work together? This is a question that has been explored for a long time.
Another angle to explore is the payment mechanism from an institutional perspective. What kind of mechanism can be used to promote these effective solutions?
Starting with improving Fee for Service payment model
Starting from the issue of health insurance, many countries worldwide are facing the potential bankruptcy of their health insurance systems and searching for various solutions. The main cause of health insurance bankruptcy is often attributed to waste of medical resources and low efficiency. Clayton Christensen’s book “The Innovator’s Prescription: A Disruptive Solution for Health Care” identifies the Fee For Service (FFS) model as the basic cause of the problem.
Over the past decade, it has been a consensus among all healthcare reformers to move towards value-based care. Many startups have proposed products for value-based care solutions. However, as mentioned earlier, most of these solutions face the problems of insufficient rigid demand and payment issues, such as Telehealth.
In terms of payment system, capitation is considered to be the most promising reimbursement method. Under the capitation system, the National Health Insurance Administration calculates the annual health insurance cost based on the medical records of a group of patients and contracts with local medical groups to take care of these patients. If the medical group completes the care indicators required by the National Health Insurance Administration with only 8 million out of the 10 million provided, the remaining 2 million will be their bonus.
Unlike the FFS model, which pays doctors for each service provided, if a patient is cured, the doctor may receive less income, which often results in patients not being cured effectively. In contrast, under the capitation system, the better the care provided to the patient, the higher the incentive, which makes it easier to adopt a good value-based solution.
In theory, this payment system strengthens rigid demand and reduces unnecessary waste in health insurance. However, in reality, it is not so simple. Capitation, which is the common English term for this payment system, has been used in the United States for many years and has been controversial, receiving much negative criticism. HMO (Health maintenance organization）is the example.
Even Clayton Christensen’s book has a reserved attitude towards it, suggesting that it requires certain preconditions, such as integrated service providers, and may save costs but often harms the rights of patients.
But as time has passed, the financial crisis of the health insurance system has become more pressing, and the Capitation model has also been adjusted. For example, Intermountain Healthcare has introduced a new model called population-based payment (PBP). For more information on this case, I recommend the following article.
With the evolution of time, the financial crisis of the health insurance system has become imminent, and adjustments have been made to the Capitation approach. For example, Intermountain Healthcare refers to it as population-based payment (PBP). While the care service group still uses the Fee For Service (FFS) payment method, this type of modified Capitation establishes standards for service quality and measurement mechanisms. However, payment is adjusted every quarter based on the quality of service and patient satisfaction.
The advantage of this system over early Capitation is that it not only rewards doctors for improving quality, but also compensates for losses resulting from the reduction in the number of care services. The results and specific data can be found in the article recommended.
However, this type of payment method can only be implemented under an integrated service provider, such as an insurance company or healthcare provider that combines insurance and medical services.
Intermountain Healthcare, as mentioned above, not only has hospitals but also insurance companies. Improving service quality and reducing unnecessary surgeries can reduce service fees. However, when the group examines the profits and losses of insurance payments and service revenue, it may still generate positive income, which provides the motivation for continued development.
In addition, Intermountain Healthcare’s Capitation care account ratio was only about 35% in 2016, and not all services were paid through Capitation.
Personal point of view
(1) Because healthcare itself has a high degree of complexity and significant differences between medical specialties, there cannot be a one-size-fits-all solution. Rather, it requires a case-by-case approach and step-by-step adjustments to the operating method. Therefore, the US CMS still has various trial schemes for value-based systems, which are still being explored.
(2) Although it is a case-by-case approach, the shift from Fee-for-Service to value-based systems is irreversible, and there will be more and more successful individual cases.
As for the tipping point mentioned in this article, personally, I think it needs to be observed every five years based on the current experimental trial results. However, because value-based systems have begun to strengthen rigid demand and various platforms are becoming more and more popular, the focus will be on the content of the services built on these platforms. In other words, professional content that can improve healthcare service quality will be the mainstream in the future.
Postscript:
11/21/2020: Deloitte’s article “Equipping physicians for value-based care” is cited here.
4/30/2021: Health Care After COVID: The Rise of Telemedicine.
Due to COVID-19, telemedicine has become a necessary solution before lifting the lockdown. The US government has also included it in the insurance payment system. Even after the lockdown, users have found its benefits, such as avoiding unnecessary travel and potential infections. Additionally, as it has been included in insurance payment, this system has overcome its previous struggles and is worth observing.
10/2/2021：When researching the current emergence of healthcare unicorns, it was found that none of them were incentivized by the system itself.
The most suitable theoretical model is the Disruptability Index proposed by Scott Galloway in his book “Post Corona: From Crisis to Opportunity”, which is an important market reform driving force.
Several representative cases were cited, and it was believed that the advancement of technology such as RPA and AI, the increasingly popular platform business model, and the high disruptability index of the industry have accelerated the industry’s innovation.
