Health-Care Reform: Let's Get Started

Yes, the President signed a bill that will enable almost all citizens to receive health-care insurance. Yes, there are a lot of consumer protections in the new law, such as banning preexisting-condition rules and lifetime payout caps. Yes, there may be even more regulation to come. And finally, yes, this law is only the start of our nation's long journey to finding the best way to provide, pay for, and deliver health care for all.

Contrary to what the health-care reform opponents want you to believe, this law leaves the basic structure of the health-care industry intact. Insurance companies will continue to write policies—for many new customers in addition to current ones. There will still be a high level of government involvement through Medicare and Medicaid. There will still be doctors and nurses and a large cast of other players in the health-care industry. There will still be public policy written at the federal and state levels.

Most important, 300 million or so individuals will, at various points in their lives, need health care. That's 300 million consumers involved in accessing insurance and selecting providers. Again, contrary to the opposition's claims of a government takeover, this sounds like a marketplace to me. The big question is how industry will respond to the challenge of meeting real consumer demand with products and services that provide true value.

It's easy to be pessimistic on health care. After all, it's been a tough couple of years. However, to paraphrase one of our leading politicians, this is a big deal. It will be a big change. It's hard to imagine that any of the current components of the industry will remain unaffected. This law sets the stage for new opportunities for an immense amount of innovation. I am convinced that over time our creativity combined with this incredible demand will produce unique solutions. (After all, just a few years ago, who would have thought I would be writing the bulk of this article on a handheld device that enables me to talk on the telephone and search the Internet at the same time?)

How might these innovations shake out in the health-care industry? Let's talk about a few.

Consolidation Drive

Consolidation will happen: On the health insurance side, adding 30 million or so customers will require an infrastructure and organization capability that many organizations still lack.

In all likelihood, this will accelerate the external consolidation as well as the internal consolidation in organizations that have already gone through the initial phases of a merger or acquisition. On the delivery side, there has been a large amount of consolidation at the local level. Many hospitals have purchased, employed, or recruited a significant number of physician practices. Hospitals that haven't done so already are now linking these practices with state-of-the-art information technology to create the early stages of a system that can deliver services under the current payment models as well as be prepared to respond to alternative payment models such as bundled or global payments.

Suppliers to the health-care industry have been consolidating, too. Thanks to driving efficiencies and rounding out product lines, consolidation of pharmaceutical and medical supply companies has taken place. Leveraging scale has and will continue to be a critical avenue of success for supplier companies. Given the increased number of paying customers, the price per unit of service is not likely to rise. Therefore, existing organizations and consolidating ones will need to drive efficiencies.

We hear a lot about how this law doesn't "bend the cost curve." Yet, clearly, it creates the opportunity to do just that. One big reason health care costs so much is that we use a lot of it. Unlike in other industries, using a lot of something in health care fails to decrease the cost. Even with technological innovations, the labor-intensive nature of health care suggests that increasing demand will not result in cost reductions. How to bend the demand curve? The law mentions many possibilities for innovation.

While there is much debate, it is clear that an aggressive rollout of evidence-based practices can influence the rate of use, quality, and outcomes for patients. Evidence-based practices require a technology infrastructure within a culture of continuous improvement. They would clearly be helped by changes in the payment system, tort reform, and better integration of providers at regional and local levels.

Health Incentives

As we know, the current payment system rewards volume, not value. In certain instances an aggressive move to performance-based pricing, bundled pricing for common procedures, or global pricing could yield significant improvements. For example, nothing is holding back providers, insurance companies, or employers from experimenting with multiyear insurance relationships. The normal practice of drawing up annual contracts virtually negates any rationale for investing in work to improve the health of an individual. What if an investment in wellness were to pay off for all concerned? The law keeps access to health savings accounts and high-deductible plans. What if you combined them with incentives for each owner to stay healthy? There have been some experiments with providing incentive payments to individuals for changing to healthier behavior. Could it work on a broader scale?

Controlling or eliminating Type 2 diabetes, for example, would significantly reduce overall demand for health care. The statistical implications of just this one improvement are overwhelming. Let's start with reeducating people about how the food we eat can make a difference. Kudos to First Lady Michelle Obama! She took on the obesity epidemic in her "Let's Move" campaign. Leveraging your political influence at the state level can accelerate local policy change. And that can significantly affect the amount of health care we consume.

Over the past decades, each major change in public policy has made health care an attractive place to enter. This one is no different. With a higher percentage of insured people, health care can be attractive to nontraditional organizations.

We may have seen the first of many last week when Cerberus Capital Management announced its acquisition of Caritas Christi. Certainly, Wal-Mart (WMT) and CVS (CVS) may now be willing to be more aggressive. It is very possible that insurance companies may find the delivery side of the business attractive. Providers may discover that in certain circumstances it makes sense to return to the insurance business. It's also possible that suppliers could find it interesting to move into different spaces. Clearly, there will be an opportunity for nontraditional players. For example, what if insurance companies contracted nutritionists, massage therapists, and chiropractors—and linked that practice with a high-deductible catastrophic plan? What could that do to demand? How would it affect the more traditional health-care providers?

Management Implications

Adding 30 million or so new customers to the existing system and not doing anything else will create a problem. In theory, covering almost everyone will reduce the distortions in the market for paying for this population and put all on a leveler playing field in which innovation across multiple fronts can take place and reap rewards.

The management implications are enormous. Throughout the industry, strategy matters greatly right now. Almost across the board for the past several years, we have focused on internal issues, customer service, quality, and efficiencies within narrow definitions. Now, real choices will need to be made and resourced.

Every participant in the health-care industry will be affected. How you create and sustain innovation internally and provide value to your customers will prove vital to your organization's success. Health care has been known for its reliability. For good reason, it has been bred into all aspects of the industry. The industry will now need to learn how to make itself reliable and also take risks. This is not easy for an entire generation of managers who learned how to manage reliability. New strategies and risk-taking mean everyone will have to learn to manage change better. Creating and sustaining a narrative around the justification for change, identifying and influencing key components of an organization to change, and ultimately holding people accountable will all be critical to successfully navigating these years of transition.

Most important are optimism and hope that this legislation will create a healthier society. The law just gets us started. Many leaders will say we can't. But the future will be written by those who say we can.

Before it's here, it's on the Bloomberg Terminal.