A Chartis Expert Looks at the Stumbles of “The Disruptors”

June 17, 2024
Chartis’ Eric Mayeda explains why “disruptors” have stumbled in trying to reorganize healthcare

For several years now, there’s been a great deal of talk about “the disruptors”—companies coming into healthcare from outside the industry—and disrupting the operations of traditional “bricks and mortar” hospitals, clinics, and health systems. But, as Senior Contributing Editor David Raths reported on April 30, “After five years in the business, Walmart Inc. (NYSE: WMT) has had enough. It announced that it is closing 51 Walmart Health centers as well as Walmart Health Virtual Care. The Arkansas-based retail giant said that due to a challenging reimbursement environment and escalating operating costs, it is not a sustainable business model to continue. The company will continue to operate 4,600 pharmacies and more than 3,000 vision centers.”

As Raths noted, “As recently as last year, the division was in expansion mode. In March 2023, the organization announced it would expand to Missouri and Arizona in 2024.and open 28 new Walmart Health Center locations, nearly doubling the organization’s footprint. Walmart also had partnered with Dayton, Ohio-based CareSource, a nonprofit managed care organization, to address racial health disparities. The three-year deal planned to combine Walmart’s position as a health and wellness services provider and CareSource’s role in administration and delivery of Medicaid, Medicare, and other health plan benefits.”

What’s more, as Contributor Geert de Lombaerde reported on May 2, “A sharp rise in Medicare Advantage members’ use of the healthcare system put a big dent in CVS Health Corp.’s first-quarter results, leading the company’s leaders to significantly lower their 2024 forecast. CVS’ healthcare delivery portfolio, which features recent acquisitions Oak Street Health and Signify Health, was a relative bright spot in the quarter—but also couldn’t avoid the impact of higher MA utilization. The medical loss ratio in the company’s Aetna insurance division popped to 90.4 percent from 84.6 percent in early 2023 and the company’s total medical costs for the first three months of this year came in about $900 million above expectations. Executives expect around $400 million of those expenses will persist in each remaining quarter of 2024 as insurance plan members continue to tap their benefits.”

Because of those developments de Lombaerde noted, “President and CEO Karen Lynch and her team lowered their full-year outlook for Rhode Island-based CVS’ adjusted operating profits by more than $2.1 billion to at least $14.75 billion. Lynch told analysts on a May 1 conference call that plan members’ use of outpatient services and supplemental benefits topped CVS’ projections—extending a trend that began late last year—while inpatient and pharmacy emerged as new pressure points for the company. CVS leaders are ramping up cost-savings efforts in response and pledged to put profitability over insurance plan membership growth.”

In other words, healthcare is hard. And though he says he cannot comment on specific companies or organizations, Eric Mayeda, a managing partner at the Chicago-based Chartis, says that it’s clear that the idea that disruptor companies would simply sweep into healthcare and overturn the established order was always a bit misguided. Mayeda, who is based in Chicago, is leader of the consulting firm’s strategic transformation area, which encompasses the areas of strategic growth, academic alignment, private equity advisory, value-based care, partnerships and mergers and acquisitions, and the firm’s oncology services group. Below are excerpts from a recent interview with him.

There’s been some fear about disruptors coming in, but with high labor costs, nurse shortages, etc. But now, some of them are pulling back, at least temporarily, per the Walmart announcement.

Yes, you saw a wave of new entrants and capital entering the area, but now we’re seeing some retrenchment. There are some differences between and among the disruptors. But broadly, the way I think about it, is this: I’ve been digesting the news of late and talking with clients about it> Three main takeaways for me. First, this is a reminder that primary care and direct-care delivery is hard; this is a hard business. The traditional players have known it for a long time, and the disruptors are finding that out: this is difficult. And two, per the retail arm of disruptors, the strengths that they typically have in their core businesses, don’t directly translate into healthcare. Retail chains: purchasing power. That works well for goods, and doesn’t necessarily translate well into healthcare delivery, the logistics.

That only takes organizations so far, correct?

Yes, on both the tech side and the retailing side, those efficiencies in terms of being able to move goods around—that will become more advantageous as healthcare transitions to a more digitally enabled environment. So some of those advantages may emerge more fully, later on. But some of the core advantages of the disruptors, the purchasing power, the supply chain logistics, don’t fully translate well. And the third is the purchasing power. They can use their analytics and say, if the cost per unit of an item goes up, we can move that around. Well, you can’t replace Medicare. And the nursing shortages, labor costs, etc., they can’t get around those in healthcare. They’re facing the same challenges as the traditional providers.

Microsoft and Google ended up leaving the PHR [personal health record] area. Is that pattern repeating itself?

It’s a reminder that this is difficult, and that the advantages don’t translate. But I would be careful about writing epitaphs on tombstones for the disruptors, simply because healthcare is such a big target. And the reason that Walmart initially got into it was because of employee healthcare costs. And the impetus for Haven was that, we’re spending so much money as employers, on healthcare, and wouldn’t it be great to work together on this? And that motivation is still there. So yes, there are some speedbumps appearing in the road. But will the next 20 years look like the last 20? No, I think we’re going to see a more diverse ecosystem of care delivery continuing to emerge. Traditional providers will move forward alongside tech-enabled platforms. We’re sort of in the awkward teenage years around this.

One concern has been over the growing gap between innovative patient care organizations and those with very passive leaders. Per that, do you see the more innovative patient care organizations moving forward to meet healthcare consumerism and consumer needs and demands?

Some of this is driven by means; there are health system executives who see where the future is going, but who are limited by their means. But those with the means and the wherewithal realize that they need to transform as organizations. As wage pressures and expense pressures have mounted, they’ve recognized the need to be more consumer-oriented, and that requires investments on the digital side, but also the transformation of clinical and care delivery models; those are tough transitions. The other part of it is that there’s a recognition—I’ve seen it among our clients—among health systems, that there are a myriad number of capabilities, and that health systems don’t need to provide everything. So we’re seeing a much greater willingness to determine what organizations’ core competencies are; creative partnerships are becoming more common, realistic assessment of what are core operational areas and not, is happening. Just before the pandemic, they would say, anything that’s worth doing, we believe we need to own it. And now, for certain services on the post-acute side and in terms of certain ancillary services, they’re seeing themselves more as a convener.

And even around which service lines to maintain—maternal health versus orthopedics, etc.—some rearrangement of priorities might well be needed by health system leaders. Are we seeing the emergence of the realization that not every patient care organization can or should do everything?

We’re certainly seeing systems starting to think as systems, rather than hospital by hospital. And we can consolidate our capabilities in certain facilities. But you mentioned maternity services: every time a hospital shuts down maternity services because they don’t have scale, that impacts the community.

Isn’t that why consolidation will move forward apace?

Yes, but it’s part of the overall picture. If you’re talking rural healthcare, well, healthcare works best at scale, but all healthcare is also local. And those two concepts conflict in rural areas, where you lack population density. And so we’re seeing companies that are driving technology to support care efficiency in less-dense areas. We’ll have to see new supports for independent hospitals and rural providers. Simply changing the ownership status doesn’t fix this. And virtual care brings more benefit frankly to rural areas than to urban areas. That starts to address the fundamental issue, which Is lack of scale.

It's become increasingly difficult for standalone and rural hospitals to continue forward as they have been, though, correct?

Absolutely. And at Chartis, we have the Chartis Center for Rural Health, which was created and organized to address those issues.

What are the top things that hospital and health system leaders should be thinking about right now?

A couple of things: one of the elements that virtually all of these disruptors have in common is a laser focus on the healthcare consumer. So that mentality is an important one for healthcare organizations. The idea of transforming the concept of the patient to that of the consumer; that helps move organizations forward around services. And a second part of it is that I do believe that there’s an efficiency play in this; it goes back to the fact that health systems have to think about what they’re particularly good about, versus having capability partners—on the technology side, on the community side around accessing particular services. The level of competition in most markets is only going to increase. And hospitals and health systems with limited margins are going to have to become ever more efficient and effective in deploying resources.

Is there anything you’d like to add?

Much of this discussion is driven off recent news headlines. And yes, this is hard: it’s not that we got there because traditional patient care organizations didn’t know what they were doing; this was hard and is hard. And this is hard for the disruptors. But this is early innings. Amazon has had multiple forays into healthcare, has stood up companies and taken them down. And just because one endeavor doesn’t appear to succeed, the disruptors are learning from the experiences. The healthcare market is simply too big, and the lure is too great. So I think that healthcare is going to be a more diverse ecosystem than in the past. It will be the traditional providers, the tech-enabled disruptors, and others. So we’re moving towards the healthcare system of the future, but it’s early days, and everyone will learn and move forward.


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