In the early part of this decade, the market was suffering from a cost, utilization, and value problem. Consumers were using more and more, and yet their real-world outcomes weren’t improving—if anything, they were getting worse.
Providers had no incentive to change, though.
Even though the value of their product was degrading (with consumer costs up but results not following suit), providers’ revenues were consistently rising. Therefore, the structure of the market, and the products offered to consumers, stayed virtually the same, year after year.
If you think I’m talking about health care, think again. This is the story of the laundry detergent market. But what happened next has direct implications for hospital and health system strategy.
The dirty truth about detergent
In case you aren’t a laundry expert, let me explain a bit further.
People tend to use too much detergent when they wash clothes. Over time, manufacturers have made their detergents more and more concentrated, but that has resulted in even greater overuse of detergent.
Clothes washers don’t work as well when people overuse detergent, but manufacturers haven’t had a compelling reason to address the "too much detergent" problem; after all, more detergent used per load translates into more sales.
Innovation agitating the market
In early 2012, market leader Procter & Gamble launched Tide Pods, the first pre-measured liquid laundry detergent product. P&G didn’t do this because they had to—sales of its Tide and Gain detergents were strong and growing, though competitors had been gaining market share lately. Their motivation was to create a product that was easier to lift for the elderly and less messy for busy parents.
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At any rate, introducing Tide Pods was by any measure a risky move; P&G jeopardized its own robust sales with a product that virtually ensured that consumers would use less detergent.
Indeed, the overall consumption of laundry detergent fell in 2012 for the first time in many years, as consumers flocked to the new, convenient Tide Pods product.
But P&G’s gamble paid off for them, as they captured a commanding portion of the new "unit-dose detergent" category, taking market share from other manufacturers as well as their existing customer base. The losers in this scenario? The other detergent manufacturers, who stuck to their old approaches and were caught flat-footed when Tide Pods swept through the detergent aisle.
Tensions bubbling up for health systems
Based on what we have been seeing around the country lately, the acute care health care market is undergoing a shift similar to what detergent manufacturers experienced.
Certain health systems are investing in the equivalent of Tide Pods—what we call "care transformation" or "value-based care delivery."
Through care management, by supporting better patient decision-making, and by encouraging insurance benefit design that rewards consumers for making financially responsible choices, these health systems are improving outcomes while reducing utilization and costs.
At least some of these investments in care transformation are making a measurable impact; in many parts of the country, inpatient admissions are significantly below expectations.
If we take the detergent market as an analogy, the first-mover health systems will nonetheless end up better off being in the vanguard of industry transformation. The lesson of the Tide Pods introduction suggests that if there is a major transformation coming, it’s better to be a participant in the transformation rather than just a downstream recipient of the results.
Of course, a sound first-mover innovation strategy requires a plan to accrue business value from transforming the market. Just as P&G realized success with the Tide Pods introduction by shifting market share as well as raising price, health systems need a mechanism for getting paid for their innovative activities.
Creating an intentional strategy
Given how health care purchasing works today, one viable strategy could be to become an insurance company, controlling the entire premium dollar and thereby sharing directly in the benefits of improving value. Some of our progressive members have been publicly exploring insurance company capabilities, a shift which requires building new administrative and marketing competencies.
Becoming an insurance company isn’t for everyone though. And from what we’ve seen, not all "first-mover" health systems are aspiring to redefine themselves as insurers. Others have been building accountable care organizations, participating in shared savings models, or pursuing other novel risk-sharing arrangements.
But they are all thinking about their businesses differently than they did when their principal business was operating acute care hospitals, and doing it not because they have to, but because they can. These innovators are creating an intentional strategy for the future, rather than waiting for their biggest customers or their biggest competitors to act.
The story of Tide Pods offers a cautionary tale about the risks of "wait-and-see" choices. Health systems still focused on hospital volumes as a primary metrics of success are effectively at the mercy of "value-based care" innovators, whose efforts to transform care delivery have only just begun.