How Innovative Partnerships Are Changing Health Care Delivery

In this Q&A, adapted from a video conversation recorded this summer, Harvard Business School Professor Regina Herzlinger talks with MIT Sloan Management Review contributing editor Steven DeMaio about how companies in the health care industry are teaming up with unlikely collaborators to reduce costs, increase efficiency, and better understand and solve customers’ problems — a topic of interest to innovators in any sector. Herzlinger focuses specifically on partnerships between health retailers and insurers, such as the CVS-Aetna merger and the Walmart-Humana merger that’s in the works (details about these partnerships are evolving rapidly, particularly on the regulatory front). She also explains why hospitals and other providers must raise their game to compete.

MIT Sloan Management Review: Regi, to start, can you give our readers some basic background to explain why retailers like CVS and Walmart are interested in joining forces with large health insurers like Aetna and Humana?

Herzlinger: It’s spelled “Amazon.” Amazon scares the you-know-what out of everybody who might compete with them. And for a long time Amazon was like a shy bride — on again, off again, are they going to enter the pharmaceutical space? They finally did. They bought a company that does mail-order pharmaceuticals. So why is CVS concerned? Well, its pharmaceutical division is highly profitable. And Walmart is also in competition with Amazon, not only in pharmaceuticals, but in many merchandise categories.

So CVS and Walmart thought that by joining with health insurers, they could sell health insurance products in their stores — and they could expand their stores to provide more convenient, higher-quality, lower-cost access to people for health care services. Clearly, you won’t get your brain surgery done at Walmart, but if you have diabetes and you have very challenging daily needs, it could be helpful to go to Walmart, which has 4,800 stores conveniently located. You could go to CVS, which has 10,000 stores conveniently located.

MIT SMR: What’s the advantage for the insurer in merging with a retailer? In particular, I’m thinking of merging with CVS, which is both a pharmacy benefit manager and a health care service provider that offers vaccines and strep tests and other services. Why do insurers want to do this?

Herzlinger: Well, they’re pretty threatened themselves. Insurance profits — which were never that high — have dipped in the past few years. One of the reasons is that the Affordable Care Act (ACA), known colloquially as Obamacare, has insisted that insurers pay out a certain percentage of their revenue as medical benefits. How the insurers think about these medical benefits is indicated by what they call them. They call them the “medical loss ratio” — as if you’re losing money by providing health care benefits. Obamacare has required that a minimum of 80%, usually 85%, of revenues be paid out for actual medical expenses. The insurers typically spend much less than that on medical benefits, especially in the individual market — that is, health insurance that’s sold to individuals rather than employers. So they need to lower their costs. One way of doing that is to sell through stores rather than brokers or other intermediaries. They therefore have very good reasons for wanting to merge with retailers.

Florida’s Blue Cross and Blue Shield, called Florida Blue, is the only insurer in Florida that sold Obamacare policies everywhere in the state, so it’s a real mission-driven organization. It started health insurance stores. It has 21 of them. They sell insurance there, but they also provide health care services and have been a phenomenal success.

How would the patients themselves, the consumers, benefit from this relationship? If they shop for insurance in a store, for example — how is that superior to working with a navigator in a state that supplies health care navigation services?

Herzlinger: Well, everybody offers navigation services, whether it’s through the ACA or through commercial insurance. And people have different tastes. Some people may want to go online and use the navigator or similar products that the commercial insurers that are not on the Obamacare platforms use. But people who find buying health insurance confusing — it is, after all, an intricate financial product — may want to go to a store, so they can meet face-to-face with somebody who’s pleasant, informed, and nice. Someone who recognizes them as human beings.

Florida Blue found that many people prefer face-to-face interactions, and in its partnership with CVS, physical stores were structured to respect the preferences of each community. For example, in South Miami they serve Cuban coffee. People who work in those stores are of Cuban heritage and speak the language.

But that’s not all that CVS will do. CVS is transforming itself into a health care store, and it walked the talk: It threw out cigarette sales. That’s $2 billion worth of revenues they lost to make clear they’re concerned with wellness.

In CVS’s 10,000 stores, they now have 1,100 MinuteClinics, which are retail medical centers that provide medical care. And rather than only providing vaccines, which is very important — the rate of vaccination has jumped because it’s so convenient — they’re also going to help monitor chronic diseases, starting with diabetes, which is associated with so many other problems: heart disease, kidney disease, depression, hypertension (high blood pressure), high cholesterol, and other chronic diseases with which people need help.

There’s a terrific analysis that shows that people who go to get their chronic disease care at the top quartile of primary care physicians who are not connected with other parts of the health care system have much higher rates of hospitalization and cost about $4,500 more per person. CVS can help with that.

Primary care doctors are also tremendously overloaded and really burned out. CVS and other retailers can help leverage the primary care providers by delivering this kind of monitoring care.

When people get more primary care at a retailer, say, CVS, to manage their chronic diseases, there’s an overall boost in the use of the primary care services, as a recent study of more than a million Aetna enrollees showed. How should the companies that deliver these services — the insurer and the retailer — manage that transition?

Herzlinger: They must have good protocols. And they have to make sure that their medical staff — in the case of CVS, it’s the nurse practitioners, brilliant people who receive extra training to do their job — monitor that the protocols are fulfilled.

There was another study that showed that in three common diseases retail medical centers like CVS provide higher-quality care at a lower cost than emergency rooms and ambulatory care facilities.

I’m not touting CVS, or Walmart, or Walgreens. They’re actually not that great in customer service compared to a supermarket like Publix, a Southern chain that is continuously rated number one. So these retailers will have to up their game to do all of this, but it is not rocket science.

Can they learn from other organizations that have discovered how to do it well?

Herzlinger: There’s a lot to learn. Some people might laugh and say, “Gee whiz, Publix, a supermarket in these retail medical chains?” Well, consumers right now rate health care as the third-worst business sector. They’re very dissatisfied with it. Specifically, they are dissatisfied with having to wait 24 days for an appointment, and when they have an appointment it takes two hours — 20 minutes of which are spent on medical care. So there’s room for improvement.

The heads of CVS and Aetna understand that, so in a joint statement, they said if this merger goes through, they’re going to improve the customer experience. That’s very important. It’s not just retailer buzzwords. It’s making sure that people who need medical care get it promptly, get it in an integrated fashion, get it in a dignified way.

What are the implications of this vertical integration between a retailer and an insurer — and for health systems and care providers like hospitals and physicians? How will a merger like CVS-Aetna, for example, affect those folks?

Herzlinger: They’re kind of going into the business of hospitals, ambulatory care facilities, urgent care facilities, and emergency rooms. That’s good for society, because care will be provided in more cost-effective sites than those. The hospitals that have vertically integrated to have those facilities can do one of two things: Change and recognize that ambulatory care in general is happening less in hospitals, or fight it and simply say, “CVS can’t do brain surgery.”

Some visionary health systems have seen the handwriting on the wall. For example, Geisinger, an innovative health system in northeastern and central Pennsylvania, is building micro-hospitals, which are little hospitals with about eight rooms. The idea is people come there, and if they need an overnight stay, they’re going to be placed in that hospital, but most of the care will be on an ambulatory basis. That’s in contrast to the mega 500-bed hospitals that other systems are still building and that burden the U.S. health care system. A study of why health care costs are so high in the U.S. relative to other countries showed that a major reason is the prices at U.S. hospitals, which dwarf those of other countries.

Is it fair to say that, as insurers and retailers innovate, there will have to be a corollary set of innovative steps from hospitals and providers?

Herzlinger: That’s very well put. When you have competition, when you have different models of care delivery, all boats rise. The retail insurers are going to innovate, and they have to do better at what they do. And the hospitals will have to innovate.

In June, the American Medical Association (AMA) came out with a statement against the CVS-Aetna merger, citing downsides such as increases in drug spending and out-of-pocket patient costs, and higher insurance premiums when competition for insurance in particular markets goes down. Is the AMA missing something?

Herzlinger: The AMA has a point, but not in this case. CVS has managed Aetna’s pharmaceutical benefit service for many years. So this merger is not going to increase their share of pharmaceutical benefit management. The point in this case is a little puzzling, because there will be no change.

The general point, however, that the AMA makes — that when insurers consolidate, premiums go up — that’s virtually indisputable. It is a very serious challenge, and it’s a challenge that the Department of Justice and the Federal Trade Commission need to take seriously.

It is a particular challenge if your physician is in a solo practice or in a little practice with, say, nine other physicians — how are they really going to negotiate effectively with an insurer that’s dominant in their market? So kudos to the AMA for raising the flag on the dangers of health insurance consolidation, but in the CVS-Aetna case, I don’t get it.

Let’s say the CVS-Aetna merger and the Walmart-Humana merger go forward. Could the retailers refuse to offer pharmacy benefit management (PBM) services to insurers they aren’t partnering with? Or even start turning down contracts to fill prescriptions from other insurers’ members?

Herzlinger: Pharmaceutical benefit management is a fixed-cost business. So why would you turn away extra customers? Right now CVS manages the PBM service of Anthem, which is the second largest insurer in the United States. It’s conceivable, but it would be a very questionable business decision to turn away the business of other insurers, given the economics of this particular sector.

Even after the merger occurs, though, and Aetna and CVS are joined… you still don’t see that as a high risk?

Herzlinger: Right now, CVS manages Anthem’s pharmaceutical benefit management business. Anthem is a giant — Aetna is big, but Anthem is a giant health insurer. So, it’s demonstrating the business proposition that when you have a fixed-cost business like managing a PBM, you’re not going to turn away additional customers. The incentive will be to continue serving them.

Plus, remember, the scary one is in the business now. So Amazon bought a company called PillPack, a relatively little company. It had $100 million in revenue that’s in the mail-order pharmacy business. Amazon paid 10 times revenues for them — a staggering sum. So, your worst nightmare is competing with you-know-who in the PBM business. Are you really going to play hardball and turn away customers? I don’t think so.

When a merger between a health care retailer and an insurer actually goes forward, what should the merged entities do to mitigate what risks do exist? What should they do to rein in costs and quiet their critics, whether it’s the AMA or others?

Herzlinger: Strategy is great, but God, or the devil, or somebody important is in the details. You’ve got to execute well. That means being a very effective retailer and being a very effective medical care and health insurance provider.

How do you deal with the critics? Well, whatever you do that threatens the status quo in whatever industry it is, they’re going to go after you, and the stakes are enormous in this case.

One group that’s threatened by this are the primary care providers, and the AMA is a main representative of the primary care doctors. I think this merger will help those doctors, not hurt them, because it’ll take away administrative work that CVS could be doing instead and enable care providers to focus on their great skill set. There’s a shortage of these vitally important doctors, and most spend over 50% of their time right now on IT and billing, and much less on patient care. CVS can help them.

So now it’s up to them — CVS, Walmart, Walgreens, whoever enters the business — to structure relationships with primary care providers that make it clear that they’re not invading their turf, but rather enabling them to do what they studied medicine to do and have practiced so well for so many years. Assure them that they’re not in competition, they’re actually useful to them. These physicians are increasingly getting burned out. CVS is hooked up to an IT system that most of these physicians are on as well, so they can transmit the data very readily. That’s a plus, not a minus.

It’s the same thing with hospitals, although American hospitals are about a third empty on average. So, they’re not overworked the way the primary care providers are. But it is inevitable that this will happen, so you may as well work cooperatively with them. That means, for example, structure and referral. If someone with diabetes is in bad shape, that person is immediately referred and transferred to an advanced medical care facility that can help.

As in every industry, stakeholders are afraid that innovation will be disruptive. The innovators have to make clear to the powerful status quo that they’re not taking anything away, they’re leveraging capabilities.

So, what advice do you have for the innovators themselves?

Herzlinger: Mergers and acquisitions (M&A) typically don’t work, especially if the merged parties are in very different businesses. Being a retailer is very different from being an insurer. If you think of it simply, would you want somebody out of the health insurance business to become the CEO of, say, Walmart? No, you wouldn’t. It’s always a challenge in M&A to achieve the promised synergies, and that challenge is frequently not met.

When companies do merge or innovate in other ways, it’s important to be honest. It’s important that people get health insurance and more convenient, courteous, humanizing access to medical care. It’s important that our costs, which are leading a death march across the American economy, get controlled. It’s important to interact well with public policy and to demonstrate high quality, to demonstrate cost reduction, to demonstrate that consumers who rate health care so low are actually getting a better experience. So, it’s not just sending a million lobbyists down to D.C. to lobby the issue, but actually effecting the changes.