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November 30, 2022
Authors
David Burda
Topics
Economics Innovation System Dynamics
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4-Minute 4sight

Diversification, Health System-Style

Businesses in every industry diversify for economic reasons: to generate new revenue or protect existing revenue. It’s not any more complicated than that.

Hospitals and health systems are businesses in the healthcare industry. They, too, diversify for economic reasons: to generate new revenue or protect existing revenue. It’s not any more complicated than that.

A new survey of health system executives by McKinsey — yes, the same McKinsey that aided and abetted the opioid crisis and separately taught prominent health systems how to extract every dime from poor patients — buttresses the fact that hospitals and health systems are the same as other businesses when it comes to business model diversification.

Given McKinsey’s no-holds-barred resume, I’d say the survey results are pretty credible.

The results are based on a survey of 76 health system executives — two-thirds from not-for-profit systems and one-third from for-profit systems. More than 70 percent of the execs said their system intends to invest more dollars in diversification over the next three years.

Why? Here, in ranked order, are their cited “primary objective” for diversifying:

Grow and generate additional cash flow, cited by 35 percent of the respondents.
Create value or capabilities for the core acute-care business, cited by 34 percent of the respondents.
Diversify risk away from acute care, cited by 15 percent of the respondents.
Build partnership and collaboration opportunities for future M&A activity, cited by 12 percent of the respondents.
Defend volume against disruptors, cited by 3 percent of the respondents.
Recruit differentiated talent, cited by 1 percent of the respondents.

Like I said, generate new revenue or protect existing revenue.

McKinsey then asked the execs to rank their “most desired” areas in which to spend their diversification dollars. The consulting firm gave them 21 choices. Here are the top four areas:

Telehealth and remote patient monitoring, ranked in their top five by 56 percent of the respondents.
Value-based care services, ranked in their top five by 53 percent of the respondents.
Ambulatory surgical centers, ranked in their top five by 36 percent of the respondents.
Health plans, ranked in their top five by 34 percent of the respondents.

The bottom four were:

19  (tie): Pharmacy benefit management, ranked in their top five by 11 percent of the respondents
19  (tie): Pharmacy, ranked in their top five by 11 percent of the respondents
20  Core hospital administration, ranked in their top five by 9 percent of the respondents
21  Human resources or workforce management, ranked in their top five by 8 percent of the respondents

So much for workplace well-being! But I digress.

After the why and what comes the how as in how are health systems going to execute on their desired diversification plans? In ranked order, it’s:

Mergers, acquisitions and joint venture, cited by 55 percent of the respondents.
Build innovation capabilities, cited by 53 percent of the respondents.
Strategic venture investments, cited by 47 percent of the respondents.
Co-development with non-health system partners, e.g., technology vendors, cited by 47 percent of the respondents.
Build a new business, cited by 36 percent of the respondents.
Monetize existing capabilities, e.g., commercialization of shared services, cited by 34 percent of the respondents.

Buy over build. Partnerships over flying solo.

“Partnerships can accelerate growth and could allow health systems to tap into otherwise hard-to-access resources or expertise,” McKinsey said in classic McKinsey speak. “However, health systems could benefit by thoughtfully considering the value they bring to the table in an effort to secure the right partners.”

In Burda speak, it’s all about the Benjamins. It always has been. It always will be unless we have a customer revolution in healthcare. It’s time to change the diversification game.

Thanks for reading.

About the Author

David Burda

Dave Burda began covering healthcare in 1983 and hasn’t stopped since. Dave writes this monthly column “Burda on Healthcare,” contributes weekly blog posts, manages our weekly newsletter 4sight Friday, and hosts our weekly Roundup podcast. Dave believes that healthcare is a business like any other business, and customers — patients — are king. If you do what’s right for patients, good business results will follow.

Dave’s personal experiences with the healthcare system both as a patient and family caregiver have shaped his point of view. It’s also been shaped by covering the industry for 35 years as a reporter and editor. He worked at Modern Healthcare for 25 years, the last 11 as editor.

Prior to Modern Healthcare, he did stints at the American Medical Record Association (now AHIMA) and the American Hospital Association. After Modern Healthcare, he wrote a monthly column for Twin Cities Business explaining healthcare trends to a business audience, and he developed and executed content marketing plans for leading healthcare corporations as the editorial director for healthcare strategies at MSP Communications.

When he’s not reading and writing about healthcare, Dave spends his time riding the trails of DuPage County, IL, on his bike, tending his vegetable garden and daydreaming about being a lobster fisherman in Maine. He lives in Wheaton, IL, with his lovely wife of 35 years and his three children, none of whom want to be journalists or lobster fishermen.

 

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