15 Reasons Why Healthcare Has A Business Model Problem

I’ve worked in start-ups my entire career. Part of the fun of working in a start-up is creating, testing and iterating your business model. In order to succeed you need a business model that both makes sense intuitively and works financially. If it doesn't make sense, it doesn't work. When I entered healthcare not too long ago (an industry that has existed in one form or another for thousands of years) and started to dive into the detail and understand the motivations of the different players in the market (providers, patients, payers, government, etc.), I quickly realized that something wasn't right.

The business model of healthcare didn't seem intuitive and clear to me like it did in other industries. So I sat down with a pen and paper and tried to scribble out the model. I was sure I could figure it out. I drew a box for each of the stakeholders and labeled them with their different motivations and then drew lines between them indicating the different money flows.

Trying to make the model make sense for all of the stakeholders literally made my head hurt.

I felt a little bit better last week when I heard Jonathan Bush, the CEO of AthenaHealth, state clearly in an interview at Duke University's business school that the problem with healthcare has never been a clinical problem or a scientific problem, the problem with healthcare has always been a business model problem.

This is so true. There are so many inherent challenges with healthcare that make the business model extremely difficult to figure out and get right. I came up with a list of 15 reasons why healthcare has a business model problem.  I'm sure there are many, many more, so feel free to add them in the comments.

  1. The vast majority of care is paid for directly by a third-party, so patients have little incentive to shop around, effectively averting supply and demand and a reliable market equilibrium
  2. If patients did have an incentive to shop around, on a practical level, it would be nearly impossible to do (without a clinical background, it’s extremely difficult to measure quality or evaluate what care is or isn’t necessary)
  3. Because of the way care is paid for, patients plan procedures months in advance (pregnancies, knee surgeries, etc.) but finance them like they're unexpected emergencies
  4. An enormous amount of patients have their care subsidized or paid for by the government (~21% of federal tax dollars go healthcare)
  5. Many patients are irrationally loyal/unloyal to their doctors because they're not impacted by costs or able to measure quality
  6. Sick patients jack up the price for healthier patients (payers pass on costs)
  7. There are for-profit, non-profit and government-funded providers competing to provide the exact same services to the exact same patients
  8. An endless number of moral issues surrounding care make consensus on a business model extremely difficult
  9. It's an extremely local industry and difficult to scale across geographies
  10. Financially speaking, providers and patients are at odds with one another (providers do well when patients are sick, at least in a fee-for-service market)
  11. It’s an extremely fragmented  industry (patients see different providers for different services – a patient could have more than 10 different doctors that don’t have to talk to one another); consolidation is desperately needed to bring down cost
  12. Death is an outcome of poor or insufficient care, so it’s impossible to cap prices -- healthcare prices are extremely elastic
  13. People don't want care unless it's urgent but when they want it they want the best
  14. By law, providers cannot turn some patients away and in many cases must provide care for free
  15. Unlike most insurance providers, health insurance providers generally pay for everything, not just catastrophes (this would be like your car insurance company paying for your oil changes and your gas)