How Much of Healthcare Business is Healthcare?

Editor’s Note: We’re excited to welcome Kyle Samani, Founder of Pristine, as a regular blogger here on EMR and HIPAA. I first met Kyle when he was a high school student working at his father’s EHR company. It’s amazing how far we’ve both come since then. You can find all of Kyle’s EMR and HIPAA posts here.

In The Great Re-Bundling of Healthcare, I argued that healthcare will be rebundled along new dimensions because technology will break assumptions that predicated bundling in the analog era of healthcare delivery.

In that post, I noted that a few industries have been completely dismantled and rebundled by technology:

The print publishing industry – newspaper and magazines – thought that their unique value was in their core product – news, editorials, and classifieds. But the unique value they delivered was in printing and distribution. When the Internet reduced the cost of printing and distribution to effectively $0 and free news became the standard, their businesses collapsed. Print publishers are left servicing the paper news market, which is a fraction the size of the overall digital news market.

Taxi companies thought that their local, retail, administrative, and regulatory overhead was necessary to solve the get-from-point-a-to-point-b problem. Using the Internet, Uber, Lyft, and SideCar proved that none of those overhead functions matter, enabling a new era of get-from-point-a-to-point-b solutions. Taxi companies are left servicing the I-haven’t-heard-of-Uber and there-aren’t-enough-Uber-drivers markets, both of which are rapidly shrinking.

Hotels thought constructing buildings and staffing employees was the only way to solve the get-a-place-to-stay-for-the-night problem. Using the Internet, AirBnB proved that anyone can solve the get-a-place-to-sleep-for-the-night problem for anyone else. Hotels are left servicing the high-end, premium service market in the get-a-place-to-stay-for-the-night business.

These examples beg the question: when healthcare is completely rebundled around digital delivery, what businesses will healthcare providers really be in?

In the examples above, the Internet empowered laymen to circumvent legacy establishments. Using the Internet, laymen performed the same tasks more affordably than traditional retail businesses.

With Watson-like self-diagnostics; an army of cheap, connected, sensors; and a wealth of freely available information on the web, laymen will increasingly self-diagnose and self-medicate whenever and however possible. This process will start at the low end – the simple stuff such as common colds, simple bumps and bruises – and increasingly move up market.

Over time, tri-corders (such as Scanadu), smartphone EKGs (such as AliveCor), smartphone ultrasounds, CTs, MRIs, and blood tests will empower patients to gather all of the necessary diagnostic information without ever visiting a retail medical facility. Patients will send data to providers electronically and consult with providers via video conference. The web will obviate the need for most retail overhead, capital expenditure, and labor cost associated with most care delivery.

Medicine will be disrupted from the bottom up. Hospitals won’t completely go away, but they will be left servicing the high-end of the market – ICUs, surgery, labor and delivery, and other high-acuity conditions – just as hotels, print publications, and taxis service the most expensive segments of their respective markets. The vast majority of care will be delivered as virtually and cost effectively as possible.

By circumventing retail establishments, medicine will centralize as geography loses relevance. Just as the hotel and taxi industries consolidated around mega-platforms such as Uber and AirBnB, healthcare will consolidate around provider hubs that service enormous populations. The mega healthcare systems will have the tools to centrally manage populations and interact with them contextually. The major health systems of the analog era that were bounded by geography will battle to become national behemoths as geography becomes irrelevant. Mayo Clinic, Cleveland Clinic, and others are already doing this by establishing virtual clinics across the country.

Why did the publishing industry, taxi industry, hotel industry, and travel agency industries collapse? Why will all of the old practices of medicine collapse? Cost. The most costly aspects of delivering care are labor and retail overhead. As increasingly small, localized, connected computers gather an increasingly large amount of data, computers will help patients self-diagnose and self-medicate without the need for expensive retail or labor overhead. Computers will automate inherently repetitive processes.

So how do I answer the question I posed in the title of this post? I’ll do some high level math. About 15% of the cost of delivering care is associated with billing and administrative overhead. About 40-50% is provider labor. There’s another 5-10% is spent on other miscellaneous expenses. And the remainder of costs are in capital expenditures including retail overhead. I suspect that 50-60% of total healthcare costs could be cut when healthcare is fully digital.

About the author

Kyle Samani

Kyle Samani

Kyle is CoFounder and CEO of Pristine, a VC backed company based in Austin, TX that builds software for Google Glass for healthcare, life sciences, and industrial environments. Pristine has over 30 healthcare customers. Kyle blogs regularly about business, entrepreneurship, technology, and healthcare at kylesamani.com.

7 Comments

  • Great, great insight into how other service businesses has been forced to change because of technology advancements and social media. I agree with every word.

    However, I think there is one very serious issue that we continually don’t address when we talk about delivering medicine technology — and that is the issue around the large population (that continues to grow) that is uneducated, low income with limited resources. Secondly, we still have a huge percentage of adults who have financial means in this country that are “technologically challenged” or adverse to engaging with technology. These are not just 85 years old. I know too many men and women in their 50s that still don’t have a smart phone, have never texted and are confused when sending an attachment in an email.

    This is the biggest challenge in my opinion for transforming healthcare. I think we make assumptions that “people will just come along as technology is adopted into medical practices.” I think if you were to do the demographics on those that read their news online, by-pass hotels for AirBnB and use sites like Sidecar for auto rentals you will find them to be highly educated, young and more often employed or financially stable. That’s a narrow audience and not the masses. I think shifting health care to serve the masses in a new way will require more then just new technology. It will require a transformation in how we train medical professionals to have skills in advanced adult learning and change management. And, most medical schools are not accepting students because of their dialogue, communication or creative skills — all needed in transformational learning.

  • Wow, Kyle and Kristi both make excellent points. But Kyle is comparing the health care industry to others that are truly competitive and which follow free market principles. Health care obviously does not.

    I would like Kyle to address whether or not he thinks new digital practices will open up the current closed nature of health care, which currently operates more like a public utility.

  • Kristi, your arguments about patient education are valid. My thesis is looking at a 20+ year timeline. There are plenty of 70+ year olds using iPads today. I don’t think technology acceptance will be a major issue in time. As things continue to go digital and providers expect to interact with their patients digitally, providers will begin putting pressure on patients who aren’t going digital.

    David, you’re correct that healthcare isn’t competitive. All that means is that the market will move slower. Healthcare still reacts to macro economic cost pressures just as all other industries do. There won’t be an Uber in healthcare that can go from 0 – $4B in 4 years, but the cost pressures coupled with the ability for technology to reduce costs will force change.

    Yes, digital health practices are already opening up. More will. See Teladoc, American Well, Doctors on Demand, and MDLive. These digitally native practices will compete with the retail behemoths over time. It’s unlikely that these digital natives will ever shut down the big retail health systems, but they will definitely change the scope of competition.

  • Retail and airlines and stock trading and diagnosing your car issues are other “demystified” industries.

    A major assumption for what Kyle says is that people actually care.

    The failed PHR initiatives by MS & Google tell me a super majority of people don’t really care.

    Then there are those that have to care (diabetics, etc). Most of them DON’T want to go it alone.

    Let’s not forget, though, that even with the disrupters mentioned, they still require people (many times experts) to make the end action occur (car mechanics still thrive even though we all can buy a devices that will tell us exactly what is wrong…yet have no idea how to fix).

    Still, my belief is the way to shake up the healthcare industry is to remove the lobotomy-like effects of “health insurance”.

    Cost effectiveness in healthcare won’t occur until people have a true financial stake in their health. Once people have to actually pay for what they get, true scrutiny will occur AND when docs have to actually compete for patients we’ll see increases in the quality of outcomes.

    Actual market forces will cure the industry.

    This could then drive innovations to healthcare like virtual visits and tri-corder like devices.

  • I think the digital age af electronic records has a long way to go. Albeit Government pushed forced EHR implementation has resulted in 60% physician utilization of EHR. Very few of these providers, less then 10%, use the EHR well enough to support patient engagement and data exchange. Portals and patient engagement have very low overall patient utilization and frankly high overhead and IT costs to implement and manage. Due to Medical Legal issues many end users are rejecting the very concept of patient messaging due to added legal liability. In South Florida, especially, where we are 1,2 and 4th in tort against providers and a very large market clearly providers will be held liable for communication between the office and patient. Couple the fact that all the MU carrots are mostly gone in stage 1, many providers wil not participate in.stage 2. Right now the talk in the Doctors lounge is about downed systems and 30%.losses in productivity after a year on a vertical software application.

    My point is stage 2 is a pretty world for patient portal vendors and hie advocates, but to get to this utopia place in 20 years we still have to get through the next 3-5 years. Patients and Providers overwhelming not driving this market, regulations and mandates are. Until that shift occurs all this is driven by a false insertion of capital and not truly easy to use productivity software that shows true value to the consumer. In addition, there will need to be billing capability added to pay for email and text to the patient, otherwise, every time a lab result is added to the portal, or patient has a cold they will email for free consults and you are at risk if you don’t reply, like Rush said “if you choose not to decide you still have made a choice”. Your damned if you do and dammed if you don’t.

    The financial costs and legal barriers are high on this matter, and Medicare/government is only one factor on providers overall decision to move past stage 1 or do anything at all.

  • I’ve been working for MDLive for several months and have seen the # of calls go up exponentially in the past month as more and more subscribers are seeing the benefit of digital healthcare. Our hospitals have also embraced online reservations for our emergency departments which will eventually evolve/melt into the online telemedicine model where patient’s will be digitally triaged and if they are sent to a clinic/office/ED they will already be registered, tests ordered and their care at least 50% done. I see an initial overuse of this resource which will settle into a standard of care that allows mom to touch her app and get an immediate opinion about where little Johnny that just fell and hit his head needs to seek immediate medical attention. This is an exciting time to be practicing medicine… healthcare is about go open source.

  • Robert: I love your comment. Especially, because of your positive enthusiasm. Healthcare is changing and for most people change is always bad– because it is not the same. However, it really is good that it is changing. We know that healthcare has been broken for a long time and we have continually fought against reform but I like you, see technology being the catalyst for change.

    Technology is going to impact the consumer by monitoring health forcing many of us to take better care of ourselves or “pay more.” New technology will truly enable physicians more access to more people — but they will have to truly need to learn how to communicate differently to ensure understanding, compliance, joint decision making. And, of course payers are going to have to help pay for all of this new technology or I suspect we will scratch the insurance system for a new one.

    I agree — new stuff is coming. Many of us will resist it till the end, but it is going to change and change faster then most of us can keep up with.

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