Disruptive change is now a fact of life for many industries. Healthcare is no exception. Although healthcare has been changing for decadesthink about the introduction of diagnosis-related groups (DRGs) or the initial push toward managed care in the 1980sthe Affordable Care Act (ACA) promises to accelerate both the rate of change and the level of uncertainty confronting the industry. Payors face navigating a difficult transition: from an industry in which the customer is often a corporation or small company and the business is paying claims to one in which consumers make healthcare purchasing decisions, the direct provision of care may be necessary for success, and consumer and retail capabilities really matter. Furthermore, payors must make this transition amid regulatory and consumer uncertainty and in a fairly short time frame. This industry and business-model shift is on a scale that few companies and few sectors in the economy have been through.
Over time, however, the transition should create new opportunities with significant upside. The entrance into the market of more than 30 million new consumers, many of whom have never bought healthcare products before, may ultimately trigger changes that drive real productivity improvements in an industry that has lagged in this regard. It may also allow new industry leaders with broader and more compelling business models to emerge.
The promise of opportunity creation and upside is far from certain. In fact, the historical record is unambiguous: incumbent companies are often unseated by industry disruption. Thus, we expect that many payors could be unseated in the years ahead. However, our research reveals two key insights for payors that want to thrive despite disruption:
- There are three strategic paths that companies in other industries have used successfully to thrive during and after disruptive change.
- Regardless of which path they took, these companies built the organizational capacity and agility required to lead during the disruption. They made big shifts in leadership focus and major changes to resource allocation, and they developed a faster organizational clock speed and leaner cost structure.
Understanding disruptive change
Industries change for different reasons. Sometimes, the cause is a crisis. The subprime mortgage meltdown, for example, rocked the financial-services industry. Institutions that had existed in some form for a century or more, such as Lehman Brothers, disappeared rapidly. More commonly, competitive dynamics (anchored in a variety of drivers, including product quality, performance, and cost) produce big changes in the competitive landscape over timethink about how Japanese competitors gained share in the US automobile industry over several decades. In some cases, a distinct catalyst triggers a discontinuous change. The iPod, for example, transformed the music industry, just as the iPhone and its applications changed the game in mobile handsets, demonstrating the power of creative destruction. Healthcare is facing such a discontinuous change.
The healthcare industrys disruption is taking place at a time when the overall pace of change in the economy continues to increase. Two measures highlight this long-term trend of increasing -industry leadership volatility-: the churn rate in the S&P 500 has more than doubled during the past 25 years (Exhibit 1). And the odds that an industry leader will lose its position during the subsequent five yearswhat we call the -topple rate-tripled during the 25 years from 1977 through 2002.1
