Risk-Bearing Contracts Are Pushing Health Systems Into Adjacent Areas of Business– With New Back Office Needs

An recent interesting HBR blog discusses what I think is an important lesson for health systems migrating to risk-bearing insurance contracts.

311526846_24b03feedf_zThe blog isn’t actually about healthcare. It’s about manufacturing and the changes to back-office infrastructure that manufacturing companies have had to make as their products become connected to the “internet of things.” The blog’s takeaway is that as products migrate from analog to digital, companies often find themselves competing in a new sector of business– ones that they weren’t initially designed for.  In this new world, even when the back office was adequate through decades of incremental analog product improvements– when products become digital the legacy back office is often suddenly inadequate to need.

An example: The blog describes the pillbox company, Glowcap, which developed an Internet connected pillbox that would send alerts when a dose of medication was missed. Glowcap (and other IT-connected businesses) quickly found that running an electronically-connected manufacturing company was far more complex than running a traditional medical equipment provider.

For example, being IT-connected meant that companies had to deal with compliance issues such as HIPAA. They had to deal with new financing models (per click and subscription revenue) in lieu of one-time sales. They needed to hire IT engineers and figure out software outsourcing deals.

In essence, what these companies found was that their product innovation had pushed them (unexpectedly perhaps) into a new sector of business (a migration from medical device manufacturing to IT) requiring a lot of back office and support service refinements if they wanted to compete with incumbents in the new business sector. With one innovation too many, companies fell down a “rabbit hole” into a new business reality. 


Finding oneself unexpectedly in an adjacent industry has a lot of resonance for those of us in risk-bearing healthcare. In today’s era, health systems migrating to risk contracts can easily find themselves out of sync with their legacy back-office infrastructure. The back end in risk-bearing systems resembles that of some insurance companies, and relies heavily on actuarial and analytic services that most provider groups don’t have.

In risk, the back office looks a lot different that it does in fee-for-service. Population management is emphasized. Finance needs to build budgets not just on revenue and direct costs, but also on expected medical expense savings using complex ROI calculations. Companies need risk reserves. Recruiting is a whole different animal.  IT doesn’t just deal with an EMR, but also with the need to manage complex data analysis.

Unlike Glowcap and other analog-to-digital migrations where one innovation pushes the company past the tipping point and down a rabbit hole from one day to the next, healthcare’s migration will be subtle and will track the percentage of revenue that companies earn from risk.  I do think that for most health systems, there is a point (as the number of risk-based insurance contracts grow) when the numbers don’t work until the back end is transformed to reflect the demands of the new business model.


Photo: Valerie Hinojosa via Flikr, Creative Commons license