Opportunities for Providers during a Downturn

Opportunities for Providers during a Downturn

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Description: How bad was this Economic Crisis? How to manage under uncertainties and what is the impact on healthcare and healthcare providers? How governments responding and what are are the opportunities for providers in this current economic situation. Provider-side healthcare is among the least exposed industries. In the past there have been a decrease in healthcare spending follow a crisis, but are we about to unwind a “healthcare bubble?”.

 
Author: Dr. Nicolaus Henke and Ariel Simon (Fellow) | Visits: 1636 | Page Views: 1637
Domain:  Medicine Category: Practice Mngmnt Subcategory: Policy & Economics 
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Maxims of Tech: Rules of Engagement for a Fast Changing Environment
Contents:
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"Never Let a Good Crisis Go to Waste" � Downturn Opportunities for Providers
Dr. Nicolaus Henke Ariel Simon IFC International Private Health Care Conference

7 May 2009
COPYRIGHT MCKINSEY & COMPANY CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

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3 questions

How bad is this crisis?

How are governments responding?

What are the opportunities for providers?

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Contents

How bad is this crisis?

� Managing under uncertainty � Impact on healthcare
How are governments responding? What are the opportunities for providers?

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2008 was different . . .
Percentage change in S&P market index by year
2007 2005 1994 1993 1992 1987 1984 1978 1970 1960 1956 1948 1947 1923 1916 1912 1911 1906 1902 1899 1896 1895 1894 1891 1889 1887 1881 1877 1875 1874 1872 1871 1870 1869 1868 1867 1866 1865 1859 1856 1844 1842 1840 1836 1826 0 10

2008 1931 -50 -40

1937 -30

2002 1974 1930 1907 1857 1839 -20

2001 1973 1966 1957 1941 1920 1917 1910 1893 1884 1873 1854 1841 1837 1831 1828 1825 -10

2000 1990 1981 1977 1969 1962 1953 1946 1940 1939 1934 1932 1929 1914 1913 1903 1890 1887 1883 1882 1876 1861 1860 1853 1851 1845 1835 1833 1827

2006 2004 1988 1986 1979 1972 1971 1968 1965 1964 1959 1952 1949 1944 1926 1921 1919 1918 1905 1904 1898 1897 1892 1886 1878 1864 1858 1855 1850 1849 1848 1847 1838 1834 1832 1829 20

2003 1999 1998 1996 1983 1982 1976 1967 1963 1961 1951 1943 1942 1925 1924 1922 1915 1909 1901 1900 1880 1852 1846 30

1997 1995 1991 1989 1985 1980 1975 1955 1950 1945 1938 1936 1927 1908 1830 40

1958 1935 1928 1863 1843 50

1954 1933 1885 1879 1862 60

SOURCE: McKinsey

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. . . and this crisis will be different from ones that we have seen before
Total leverage in US at historic high US total debt as % of GDP 350 300 250 200 150 100 European debt level currently at 300% Debt markets have halted US AA financial commercial paper issued (2008)

1,616

1,483 1,359

1,663 984

81
2008 May Jun Jul Aug Sep Oct

1920 `30 `40 `50 `60 `70 `80 `90

World trade is decreasing sharply Baltic Dry Index (Cost of bulk shipping) 12,000 10,000 8,000 6,000 4,000 2,000 0 Dec Feb Apr Jun Aug
SOURCE: Morgan Stanley; Federal Reserve; BEA; MGI

Oct
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Several major uncertainties shape the future of the global economy
Key elements of uncertainty Critical uncertainties Depth and breadth of downturn How much will GDP fall? When will per-capita income return to peak? How much deleverage before growth is restarted? To what extent will global credit capital markets stabilize, reopen, and recover? What will be the cost and volume of financing, lending, and trade?

Recovery of markets

Policy wildcard Government intervention

Will fiscal and monetary policies succeed? Will countries pursue nationalist agendas or coordinate regulatory and trade policies?
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SOURCE: Center for Managing Uncertainty; McKinsey Global Institute

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Uncertainties suggest 4 potential outcomes

ILLUSTRATIVE

Scenario 2: Battered, but resilient

Scenario 1: Quick fix

Scenario 4: Long "freeze"

Scenario 3: Stalled globalization

SOURCE: McKinsey

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The crisis is affecting emerging economies in multiple ways
Capital inflows slow Net inflows to developing world fell from $929 billion (2007) to $466 billion (2008); will fall again sharply in 2009 Eastern Europe hardest hit, all regions affected Assets declined with lower risk appetite Equity markets sank nearly $10 billion Currency volatility spike Credit spreads have tripled in a year Emerging markets have nearly $1 trillion of debt to refinance in the next year Dried up demand from US and EU Exports in some markets fallen up to 30% Low commodity prices exacerbate impact
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Asset price declines, volatility Cost of capital soars Exports decline
SOURCE: McKinsey

Falling domestic demand and deteriorating credit quality

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Contents

How bad is this crisis?

� Managing under uncertainty � Impact on healthcare
How are governments responding? What are the opportunities for providers?

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Provider-side healthcare is among the least exposed industries
Autos

High

Consumer Services

Telecom Consumer Chemicals durables Paper/Forest products and other materials1 Transport Media Retailing Metals & Mining

Financing pressures

Moderate

Commercial Services

Capital goods Energy

Utilities Food and beverage Household products Pharma1 Medical devices Food retailing Semi-conductors IT software

Low

IT hardware

Healthcare providers

Low

Moderate

High

Economic pressures (demand/supply)
1 Includes: Constructions materials; paper/forest products; containers/packaging; bio-tech and life sciences SOURCE: McKinsey Copyright McKinsey & Company

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Declines in health care spend after past crises

United Kingdom, 1974-1983 Year Change in health spending Change in GDP Netherlands, 1981 - 1986 Year Change in health spending Change in GDP Denmark, 1988 - 1996 Year Change in health spending Change in GDP Finland, 1991 - 1996 Year Change in health spending Change in GDP Germany, 2001 - 2004 Year Change in health spending Change in GDP

1974 11.3% -1.3%

1975 3.4% -0.6%

1976 2.8% 2.6%

1977 -0.1% 2.4%

1978 2.8% 3.2%

1979 1.8% 2.6%

1980 4.8% -2.1%

1981 3.8% -1.5%

1982 -0.6% 1.9%

1983 7.3% 3.5%

1981 1.3% -0.5%

1982 2.0% -1.3%

1983 -0.4% 1.8%

1984 0.0% 3.1%

1985 0.7% 2.6%

1986 4.7% 3.1%

1988 1.6% -0.1%

1989 -1.3% 0.6%

1990 0.2% 1.5%

1991 -0.2% 1.3%

1992 2.7% 2.0%

1993 4.4% -0.1%

1994 2.9% 5.5%

1995 -0.7% 3.1%

1996 3.9% 2.8%

1991 6.9% -6.2%

1992 -1.5% -3.7%

1993 -9.2% -0.9%

1994 -3.1% 3.6%

1995 0.5% 3.9%

1996 5.7% 3.7%

2001 2.6% 1.2%

2002 1.9% 0.0%

2003 1.4% -0.2%

2004 -0.8% 1.2%

SOURCE: OECD

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Are we about to unwind a "healthcare bubble"?
Total spending on healthcare Percent of GDP, 1960�2006 16
14 12 10 8 6 4 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
1 Compound annual growth rate 2 Median excludes US; Sample size increased from 12 countries in 1960 to 29 in 2006 SOURCE: OECD Health Data 2008

Past recessions

Share CAGR1 Percent U.S. 2.5

US: GDP + 2.5% OECD median2 (excluding US) OECD: GDP + 1.9% 1.9

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Unfunded Medicare commitments

$ 36 T

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Contents

How bad is this crisis? How are governments responding? What are the opportunities for providers?

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We have seen a number of different responses

Stimulus included $153 billion in healthcare-related spend � $19 billion to information technology � $25 billion to COBRA Proposed budget has $634 billion "reserve fund for reform" Medicare price cut � and more to come...

Investment of $125 billion over next 3 years on basic governmentfinanced health insurance ("universal coverage" by 2020) Phasing out many charges from providers

Primary care trusts asked to contribute $4.5 billion of public sector efficiency savings Slowed NHS spending growth from 5-7% to 0%

SOURCE: Los Angeles Times; "Will Patients be Rewarded?", The Economist; Health Service Journal

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Governments have a menu of options

Pursue efficiency gains Prioritize the right settings and right procedures Invest in prevention and public health Better use of private sector Strengthen primary care Create basic package / backbone system

SOURCE: McKinsey analysis

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A stark difference in spend, but the same outcome

HC spend percent of GDP

Life expectancy

3.5 Singapore

77

US

15.3

77

SOURCE: McKinsey NHS practice

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German regulatory mechanisms increased economic pressures
Index cost-/revenue development Index 1997 = 100
150 145 140 135 130 125 120 115 110 105 100 95 90 1997 98

Non-personnel costs

Increasing gap between overall costs and fund budget Non-personnel costs increased heavily compared to personnel costs due to continued outsourcing

Costs per FTE Personnel costs Social health insurance fund budget

Index 1997

99 2000 01

02

03

04

05 2006
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SOURCE: McKinsey analysis

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Hospitals that did not make productivity gains disappeared
Hospitals in Germany, 2006
< 150 beds >= 150 beds

Hospital market since 1991
Figures for Germany Number of hospitals
2,411 2,242 2,087
-13%

Beds Thousands
666 560 507

-24%

1991
SOURCE: Federal Statistics Office (Germany), McKinsey analysis

2000

2006
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Private providers have substantial productivity advantages . . .
Productivity of staff1 of hospitals > 700 beds; N = 72 Average Cases/full time equivalent Non-private
Lowest performing hospitals Average performing hospitals Highest performing hospitals Private 17

34

83

43

53

22

78

1 Physicians and nursing staff SOURCE: McKinsey, Quality reports according to�137
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. . . and generate substantially higher profits
Percent
Public player Revenues1 Personnel costs Material costs Others Operating result -11
1 Physicians and nursing staff SOURCE: McKinsey, Quality reports according to�137 Copyright McKinsey & Company

Private player

Gap

100 76 17 18 20 10 62

100
14

3 8
19

8

| 20

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As a result, private hospitals have increased market share
Ownership structure of German acute hospitals Percent Number of hospitals

Number of beds
506,954 = 100% 16

2,411 Private for-profit Private non-profit

2,242

2,087 = 100%

15

22

30

39 41 38

35

Public

46

38

49

32 2007
2007
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1991

2000

SOURCE: Federal Statistics Office (Germany), McKinsey analysis

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Contents

How bad is this crisis? How are governments responding? What are the opportunities for providers?

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Conference participants shared a range ILLUSTRATIVE EXAMPLES Transform of ideas to capture the opportunity
Change
Build public-private partnerships � Manage/run state facilities � Comprehensive governmentpayor-provider systems Adjust product mix to meet unmet demand, particularly among the poor, e.g.: � "No-frills" child-birth � Provider brand segmentation � Price competitive packages with doctor revenue-sharing Pursue strategic growth/ expansion to unmet demand � Regions (e.g., Caribbean) � Small cities, rural areas � "Reach hospitals" Rebalance value/personalization equation (e.g., China vs. Switzerland, expatriates) Intelligent design of facilities Create new models for mobile, remote, and homebased healthcare (e.g., novel ambulatory surgical care) Take advantage of the penetration of mobile phone technology in emerging markets

Improve
Improve procurement and supply chain management � Form joint purchasing groups � Renegotiate vendor pricing (e.g., medical malpractice and property insurance) � Pursue economies of scale Adjust employment entitlements Drive operational improvements (e.g., high-volume MRI, managers per employee, infection and LOS mitigation) Adjust for new payment sources (e.g., work with other private players to extend credit for elective procedures)
SOURCE: McKinsey analysis; participant feedback

Winners in most industries get ahead by capturing the opportunity in bad times
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Nicolaus Henke Nicolaus_Henke@McKinsey.com

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