Evolutionary Struggles of Supply Chain Strategy in Home-based
Health Care Delivery
by
Katherine Szabo Fowler
B.S. in Business Administration
The University of Tennessee, 2005
Submitted to the Engineering Systems Division
in partial fulfillment of the requirements for the degree of
Master of Engineering in Logistics
at the
Massachusetts Institute of Technology
I _
Signature of the Author
Master of Engineering in Logi•tics ProgranEnnin ring Systems Division
May 9, 2008
Certified by
/
'
Mahender Singh
Research Director, Center for Transporttion and Logistics
Accepted by
Yossi Sheffi
MASSACHLýSETTS INStITEME
OF TEOHNOLOGY
AUG 0 6 2008
LIBRARIES
Professr, En eering Systems Division
Professor, Civil and Environmental Engineering Department
Director, Center for Transportation and Logistics
Director, Engineering Systems Design
Evolutionary Challenges of Home Based Healthcare
by
Katherine Szabo Fowler
Submitted to the Engineering Systems Division
On May 9, 2008 in Partial Fulfillment of the
Requirements for the degree of
Master of Engineering in Logistics
Abstract
As the healthcare industry in United States continues to be constrained by increasing costs, new
delivery channels are coming into practice.
One such channel is home healthcare.
Home
healthcare presents challenges on the basis of acceptability by the medical community, insurers
and patients, availability of care in fragmented locations and affordability of the product or
service in comparison to other healthcare modes. This study analyzes these challenges in an
attempt to suggest strategies to allow home healthcare to grow as an industry and the successful
sustainability of that growth. Methods used to analyze home healthcare include the study of two
home healthcare firms, one pharmaceutical manufacturer who used home healthcare to augment
their product, and in-depth interviews with several stakeholders within the healthcare system.
Thesis Supervisor: Mahender Singh
Title: Research Director, CTL
Acknowledgements
There are many people would like to thank for their contribution to this thesis.
First and foremost, I would like to thank my thesis advisor, Dr. Mahender Singh, for his
continued guidance throughout this process. I would also like to thank Ken Thomas, Tom
Lowry, and the ABC Dialysis team for their contribution to this research.
I would like to thank my father for his unwavering confidence in me, and my mother for her
continued support and patience during this process.
Table of Contents
ABSTRACT
ACKNOWLEDGEMENTS
TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
1 INTRODUCTION
1.1 Research Scope
1.2 Research Design
2
LITERATURE REVIEW
3
THE HEALTHCARE INDUSTRY
3.1 The Home Health Care Segment
3.2 Drivers of Home healthcare
3.2.1 Sociological Drivers
3.2.2 Economic Drivers
3.2.3 Technological Drivers
4
CASE STUDIES
4.1 ABC Dialysis
4.1.1 The Home Dialysis Market
4.1.2 The Product
4.1.3 The ABC Value Chain
4.2 T2 Biosystems
The Diagnostic Test Industry
Simplicity and Automation
The POCT Market
T2 Biosystems Growth Plan
T2 Biosystems Product
T2 Biosystems Self Assessment
31
34
36
39
41
42
4.3 Eli Lilly and Zyprexa
4.3.1 The Problem of Patient Compliance
4.3.2 Eli Lilly's Solution to Patient Compliance
43
43
44
5 SYNTHESIS: CHALLENGES AND STRATEGIES FOR STAKEHOLDERS
46
5.1 The Dynamics of Home-based Health Care
5.1.1 Prescriber Acceptance
5.1.2 Patient Acceptance
5.1.3 Insurer Acceptance
5.1.4 Manufacturing for Acceptability, Availability and Affordability
48
48
51
53
55
5.2 Evaluation of Current Infrastructure
5.2.1 Evaluation of the Alternative: In-Center Care
5.2.2 Evaluation of Case Studies
56
56
59
5.3 Strategies to Achieve Optimal Interrelation
60
6 CONCLUSION
66
REFERENCES
68
4.2.1
4.2.2
4.2.3
4.2.4
4.2.5
4.2.6
List of Figures
Figure 1: Traditional Stakeholder-Demand Relationship ..........................................
....... 14
Figure 2: Stakeholder-Demand Relationship with Home healthcare .................................... 16
Figure 3: U S Population Trend ........................................................................ ................... 21
Figure 4: Community Hospital Beds per 100,000 Population, 1975-2003.........................
. 22
Figure 5: Home Health Growth by Volume of Providers..............................
............ 24
Figure 6: Map of the Physical, Informational and Financial Flows of ABC Dialysis ................. 30
Figure 7: The Clinical Diagnostic Testing Market by Test Type .....................................
. 32
Figure 8: The Landscape of the Diagnostic Testing Industry ......................................... 34
Figure 9: The Labor Trend of Diagnostic Technicians ......................................
........ 35
Figure 10: The Point-Of-Care Diagnostic Market .............................................. 37
Figure 11: Traditional Diagnostic Testing versus POC...................................
.........
38
Figure 12: T2 Biosystems Products versus Competitor..............................
............ 40
Figure 13: T2 Biosystem Market Penetration Strategy ......................................
........ 41
Figure 14: Prescriber Acceptance Causal Loop Diagram................................
.......... 49
Figure 15: Patient Acceptability Causal Loop Diagram .....................................
........ 53
Figure 16: Insurer Acceptance Causal Loop Diagram ......................................
........ 55
Figure 17: Price Index Comparison: Hospital Care vs. Home healthcare .....
...............................58
Figure 18: Plot of Firms on Acceptability, Availability, and Availability ............................... 59
Figure 19: Cost Quality M atrix ............................................................... ............................ 63
List of Tables
Table 1: Stakeholder Value Proposition
Table 2: In-Center Care Rating of Availability, Acceptability, and Affordability
Table 3: Barriers and Strategies
47
56
64
1 Introduction
The healthcare industry is plagued with increasing complexity, regulation, cost, and
capacity constraints. In 2003, an expected 109 million Americans suffered from the eight most
common diseases in the United States: stroke, hypertension, cancer, diabetes, heart disease,
pulmonary conditions, and mental disorders. The estimated annual cost of treatment for these
diseases was $277 billion accompanied by a productivity loss of nearly one trillion dollars.
Historically, healthcare costs have grown at double the rate of inflation, 6.1% in 2007 and 7.7%
in 2006 (Plunkett Research Ltd. 2007). Current spending on healthcare in the United States is
roughly 16% of our nation's current GDP, more than any other industrialized nation. To combat
such losses in productivity and increases in real cost, both public and private firms are exploring
a variety of healthcare practices. To be sure, a successful healthcare option must be affordable,
acceptable, and available to its patients. One such emerging option is home healthcare.
Demand for healthcare is projected to become more complex as it fragments, becomes
more consumer specific, and increases in volume. In general, over the past few decades, the
increasingly demanding consumer with heightened product expectations are creating a buyers
market. Customization on a massive scale is now the norm, resulting in the practice of several
permutations of individual products. The current "one stop shop" model of large hospitals is
beginning to experience capacity issues as the nation braces for the 78 million baby boomers to
begin turning 65 in 2010. Customers, as patients, are demanding more convenience coupled
with a higher standard of care.
Such changes in patient preferences are allowing private healthcare providers to compete
by differentiating their services and offering patients more options. As competition becomes
more intense, it is expected that firms will use their cost structure and their breadth of services
for competitive advantages. Likewise, as consumers shape the market, new channels of
healthcare delivery will become more acceptable. The healthcare playing field is widening to
allow for non-traditional models to emerge, such as home healthcare services, that can
potentially provide more customized services to the patient at lower costs.
The Massachusetts Institute of Technology has launched a research group, The MIT
Efficient Healthcare Delivery Research Group (MEHD) to envision the future state of the
healthcare system. This group has three tiers of focus. Tier I focuses on the healthcare system
dynamics and its enterprise architecture. Tier II of the MEHD research framework focuses on
healthcare delivery models and is charged with prescribing strategies that encourage demand
driven frameworks in the future. The focus of tier III is industry specific and implored to
facilitate strategy development in the various sectors of the healthcare industry including
pharmaceuticals, medical devices, surgical devices and diagnostics.
The research scope of this thesis is aligned with Tier II of the MEHD group framework
and charged with defining current delivery models within the home healthcare arena as well as
propose future models that can be used to incubate successful growth. In this study, we examine
the current strategies and value propositions of three firms in varying home healthcare segments:
diagnostic testing, pharmaceuticals, and treatment based medical devices. The strategies of these
firms are then evaluated using different frameworks including Porter's typology and competitive
strategies as well as the Mills and Snow's classification. More importantly, a framework is
proposed to guide the development of effective solutions in the healthcare industry. Based on
these comparisons we project the strategic evolution of home healthcare firms.
1.1 Research Scope
The overall scope of this research can be divided into three parts: defining home
healthcare, understanding the challenges facing home-based healthcare, and identifying business
strategies to overcome the challenges of making home healthcare affordable, acceptable, and
available. Broadly speaking, these challenges include patient compliance in self administered
home healthcare; managing highly fragmented demand; acceptance of new methods by the
medical community; and the miniaturization of medical devices. This thesis examines these
challenges from the point of view of different stakeholders. Those stakeholders whom this
project will represent are limited to physicians, insurers, patients, and home healthcare providers.
1.2 Research Design
This thesis proposes strategies for the continued sustainability and future growth of the home
health segment within the healthcare industry. These strategies are derived from the examination
of home health care's strategic "fit" within the healthcare industry and through the perspective of
two home health firms. Recommendations are based on in-depth literature review, company
case studies and interviews with industry experts.
The companies and industry experts were chosen based on their first hand experience in the
home healthcare market. These companies are trying to take treatments typically performed in
hospital or outpatient setting into the home. The interview process for these companies was
aimed at gaining a deeper understanding of their business models and uncovering underlying
assumptions made by the companies. To accomplish this, interviews were loosely structured and
focused on the joint creation of understanding
Specifically, three companies were chosen for this research based on relevance and access.
First, Ken Thomas, an ex-director of Supply Chain at Eli Lilly, was interviewed concerning the
role of home healthcare services used to augment the pharmaceutical drug Zyprexa. Second,
Tom Lowry, a scientist at T2 Biosystems, was interviewed about his company's vision to bring
point-of-care diagnostic testing into the home. Lastly, two high level supply chain employees
were interviewed at a home dialysis machine manufacturer who wishes to remain anonymous for
confidentiality reasons. This thesis discusses the company under the pseudonym "ABC
Dialysis".
The research process for this study was iterative. The process began by defining home
healthcare which guided the initial review of the relevant literature. As the scope of the home
healthcare definition narrowed, further literature review revealed specific insights into the type
of companies to be targeted for in-depth interviews. Upon selection of these companies, more
research was performed to gather background information on the company and the industry.
Finally, based on the companies' experience and interview results, more topics concerning home
healthcare were researched for clarity and inclusion in the study. For instance, given that
Medicare is the single largest insurer in the United States and accountable for roughly 18% of the
market's revenue, it became an important aspect of the investigation.
2 Literature Review
A key question that initiated this research inquired about the strategic fit and relationship
of home healthcare firms with key stakeholders in the healthcare industry. Porter describes three
types of strategic "fit", which can be used to classify the relationship between the stakeholders of
home healthcare. The first type of"fit" is strategic alignment on a centralized goal. The second
type of "fit" occurs when functions, communications or activities interact in reinforcing ways.
Lastly, the third type of fit is the optimization of the relationships among different activities
(Porter 1996).
Based on this classification of fit, home healthcare's place within the healthcare industry
was defined using a socioeconomic perspective. In order to do so, research of the following
areas was undertaken:
o Overall healthcare industry in the United States,
o Types of home health care,
o Main types of providers of home healthcare,
o Drivers of home healthcare, and
o Regulation of home healthcare.
In gathering this information four types of sources were utilized. The first two sources
reviewed included various industry publications and statistical reviews of the overall healthcare
industry and the home health segment of the healthcare industry. Lastly, academic journals and
empirical studies were reviewed to gain an understanding of strategy, identification of
stakeholders, recent trends, and drivers of home healthcare.
It is important to note that while home healthcare is a timeless activity, very few formal
research studies have explored the strategic implications of widespread acceptance of home
healthcare in the twenty-first century on the segment's stakeholders. This study seeks to identify
these implications primarily through the case studies of two firms entering the home healthcare
market with distinctly different products, and a third company who used home healthcare
services to augment their current pharmaceutical product. Thus, the research reviewed in
preparation for these studies reflects the current roles of stakeholders in order to identify areas of
value creation and the dynamics of stakeholder relationships affecting value creation.
3 The Healthcare Industry
The healthcare industry is a complex structure with stakeholders whose activities are highly
interrelated. Figure 1 depicts different stakeholders within the healthcare industry from a
demand flow perspective.
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Figure 1: Traditional Stakeholder-Demand Relationship
14
Traditionally, the patient only interacted with three stakeholders: the insurer, the pharmacy,
and the point-of-care stakeholder including hospitals, physicians, and clinics. The patient is
shielded from other segments of the healthcare industry by the hospital; namely the medical
device segment, the surgical device segment; the capital equipment segment, and the
radiological/laboratory equipment segment.
At the heart of the home healthcare model is the medical device and laboratory interfaces
with the customer to bring point-of-care into the home. This observation is reflected in Figure 2,
which illustrates the relationship between the consumer and medical devices introduced by home
healthcare with dashed lines. In this home healthcare model, the medical device and laboratory
equipment segments have direct channels to the patient eliminating a number of visits to various
facilities.
!
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flstrtbutor
tier
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Figure 2: Stakeholder-Demand Relationship with Home healthcare
The United States healthcare industry is described as a highly decentralized and fragmented
means-tested model (Burau, 2007). A means-tested model dictates that a person's financial
status determines their ability to receive public healthcare. For instance, Medicaid is a public
healthcare program offered to low income individuals under the age of 65 and Medicare is the
public medical insurance platform for individuals over the age of 65, individuals with certain
disabilities and all individuals with end-stage renal disease (Medicare & You, 2008). As a result,
Medicare is the singe largest insurer, accountable for 18% of the revenues within the insurance
16
market. For the purpose of this research we assume that Medicare is the insurer in all instances
depicted in this study.
3.1 The Home Health Care Segment
Tester defines home healthcare as "any type of care and support offered to people in their
homes, whether ordinary or specialized settings, by formal or informal caretakers" (Tester,
1996). Under Medicare, home healthcare is defined by activities such as "skilled nursing care,
homemaker/health aides, personal care aides, respite care, medical equipment, home repair and
modification and hospice." Medicare also defines the dual goals of home healthcare in terms of
the mortality of the illness. For temporary illnesses or recoverable injuries, Medicare defines the
goal of home healthcare to reinstate an individual's self-sufficiency and independence through at
home treatment. In contrast, Medicare considers the goal of home healthcare for long-term
chronic or terminal illnesses to "maintain your highest level of ability or health, and help you
learn to live with your illness or disability" (Medicare and Home Healthcare, 2007).
Home health care is a truly complex activity that stretches beyond formal care provided in
the healthcare industry to informal care provided by the family as dictated in the social hierarchy
of a family, community, or society. However, there are two constants in every definition of
home healthcare; the assumptions that the activity occurs at the home and that the activity could
be conversely undertaken in a carefacility such as a hospitalor long term carefacility and
therefore is not unique to the home.
Historically, home healthcare has consisted primarily of informal care. Informal care is the
care provided by a caregiver who is usually a family member and not a medical professional. At
present, informal home healthcare represents an estimated four-fifths of home healthcare
activities rendered (Burau, 2007). Formal care is restricted to care provided or administered by a
licensed professional or entity. Such care can be administered by a machine, the patients
themselves or by a licensed professional such as a nurse, technician, or physician. Furthermore,
home healthcare can consist of the following medical activities: treatment, diagnosis, monitoring,
and medication administration. Based on these definitions, for the purpose of this research, home
healthcarehas been defined asformal care servicesprovidedin the home of the patient that can
be performed by the patient.
Currently, there are five main providers of home healthcare: proprietary agencies, hospitalbased agencies, government-based agencies, voluntary not-for-profit agencies, and private notfor-profit agencies (O' Donnell, 1994). Within the United States, proprietary and hospital based
agencies are the predominant providers of home healthcare and the focus of this study. The
specific products or services offered by such agencies to the consumer can further differentiate
these providers. For instance, one of these offerings includes care provided by people including
sitters, nurses, physicians, homemakers, or companions. Yet another form of product
differentiation is the delivery of pharmaceutical items or services including prescription drugs
and infusion therapies to be administered at home (O' Donnell, 1994). Finally, medical devices
capable of use within the home frequently and for long periods of time are considered another
form, these devices could be used for tele-diagnosis, tele-monitoring, and treatment dispersion.
3.2 Drivers of Home healthcare
Changes in society, regulation, technology, and consumer preferences have helped to
create a more viable market for home healthcare agencies. Key societal trends include women
entering the workforce and the approaching baby boomer population coming of retirement age.
These trends are also prompted by the advent of new technologies that are allowing consumers
ease of access to research their physician, insurer, disease, therapy, hospital, or lifestyle.
Consumers are now shopping for health care options and are making more informed decisions
based on this research.
On the delivery side, a more developed communication infrastructure can facilitate real time
medical monitoring, tele-diagnosis, and medical support outsourcing. Other technological
developments are allowing patients to take their treatment and care home with them through the
miniaturization of medical devices. These drivers have set the stage for a new market segment
within the healthcare industry that is set to explode onto the scene in the near future. In the
following sections, we will consider individual drivers in greater detail for a better understanding
of this opportunity.
3.2.1 Sociological Drivers
Prior to the 1950's, the home was the primary site for medical care. However, there has
been a paradigmatic industry shift towards hospital treatment over the past fifty years (O'
Donnell, 1994). As the healthcare system braces to greet the 78 million baby boomers that will
begin to turn 65 in the year 2010, there is question about who can service these unprecedented
numbers as illustrated in Figure 3. As the volume of elderly patients increases so will the
frequency of care needed for these patients, considering that 80% of all seniors have at least one
chronic condition and 50% have at least two (Plunketts, 2007).
Percentage of U.S. population 65 years or older
25%
-
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Source: National Inatitutes of Health
Figure 3: US Population Trend
At the same time, hospital capacity shows no sign of increasing. Figure 4 illustrates the
downward sloping trend of the average number of hospital beds per 1000 population. As
hospitals become overcrowded, patients and doctors will seek other locales for treatment
including the home (Burau, 2007).
Community Hospital Beds per 100,000 Population, 1975-2003
I
OWuU
400
290
300
mllMa
285
•
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1985
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1995
2000
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Source: Kaiser Family Foundation, http://www.kff.org/insurance/7031/ti2004-5-2.cfm
Figure 4: Community Hospital Beds per 100,000 Population, 1975-2003
Burau, Theobald and Blank argue in GoverningHome Healthcare,that a major driver in
the increased demand for home healthcare is the fact that over the past 35 years more women
have entered the workforce. According to the U.S. Bureau of Labor and Statistics, there has
been an approximate 16% increase of women in the workforce since 1970. Burau et al. continue
to argue that the traditional structure of a male breadwinner and female caregiver allowed the
primary female family member to compensate for formal home healthcare demand as the female
performed informal care activities. The evolution of the dual breadwinner, single parent family
and the onset of institutional care facilities have displaced the supply of informal care thus
feeding the demand for formal home healthcare products and services (Burau, 2007).
22
3.2.2 Economic Drivers
It is easy to detect the impact of an increasingly demanding consumer transcending from the
private world of business to healthcare. Now patients are demanding quicker response times, a
more customer service centric atmosphere and better user interfaces with medical professionals
(Morath, 2003). The soft skills of the medical profession are being tested and ranked by the
evolving consumer. The U.S. Department of Health and Human Services publishes data
comparing hospitals on standard metrics of care such as mortality rates, good practices and
counseling on health habits (Plunkett, 2007).
The 1965 enactment of Medicare launched formal home healthcare as a healthcare industry
segment. The segment grew threefold between 1967-1985 and then began to plateau citing a
Medicare administration burden and unreliable payments. After the success of a 1987 lawsuit,
the National Association for Home healthcare(NAHC) was granted a participating role in the
rewriting of Medicare's coverage policies (NAHC Fact Sheet, 2007). The representation of the
NAHC and the restructuring of Medicare is cited as the key reason for the nearly doubled growth
in home agencies in the late 1980's and early 1990's.
Although Medicare fueled the initial growth of the modem home healthcare industry segment,
it is also responsible for the current limitations facing home healthcare. The 1997 Balanced
23
Budget Act (BBA) introduced a per beneficiary limit on the cost of home healthcare services and
excluded a two year inflation adjustment. It was estimated that 90% of existing home healthcare
firms in 1997 had an average cost that exceeded the BBA limits by 32% (NAHC Fact Sheet,
2007). The BBA limited the market of the home health segment and forced many firms to exit.
The Medicare Payment Advisory Commission reported a reduction of 1.3 million home health
patients between 1997 and 2001. In 2000, the Home Health Prospective Payment System
(HHPPS) reduced the financial risk the BBA introduced. The HH PPS is a web site that allows
home health providers to predict payment for services they plan to provide or calculate the
payment they will receive for a particular claim and validate that they have received correct
payment for a claim (NAHC Fact Sheet, 2007). Figure 5 depicts the cumulative number of home
healthcare firms by year highlighting the historically stimulating events in the industry segment.
Number of Medicare Certified Agencies 1967-2006
:2000
:0000
6000
4000
2000
0
1967
1980
1990 1996 1997
1998 1999
2000 2001
2002 2003 2004 2005 2006
NA5: Home Health Growth by Volume of Providers
SFigure
Figure 5: Home Health Growth by Volume of Providers
3.2.3 Technological Drivers
Technological advances are allowing real time monitoring of patients. New monitoring
devices are considering consumer preferences by designing simpler interfaces (Dunn, 2006).
The most recent and renowned development in monitoring devices include the "at home bloodglucose" monitors. These monitors have been a major success in the healthcare market and a
testament to the possibilities of future home health devices (Dunn, 2006).
For this thesis we have defined home healthcare and argued that there are three key
drivers of home healthcare. First home healthcare is defined as formal care that occurs in the
home and could conversely occur in the hospital. Secondly the drivers of home healthcare are
classified on the basis of social, economic, and technological developments.
4 Case Studies
Three companies were researched to better understand their home healthcare businesses.
First, ABC Dialysis was studied for their in-home dialyses machines. Second, T2 Biosystems
helped us to learn about their point-of-care diagnostic testing concept. Third, Ken Thomas, a
former supply chain executive at Eli Lilly, shared the success of at home services to augment the
sales of Zyprexa, a pharmaceutical used to treat psychotic disorders.
4.1 ABC Dialysis
ABC Dialysis is challenging the way dialysis is delivered with the goal of improving the
lives of people with End Stage Renal Disease (ESRD). The company specializes in home
dialysis machines and dialysis solutions. ABC allows the patient to perform dialysis more
frequently for less time from the comfort of the patient's home rather than the in-center
alternative.
Dialysis is a process that filters the blood of harmful wastes, salt and water. The process of
dialysis is performed when a patient enters ESRD. ESRD is defined as the progressive loss of
kidney function over a period of months or years. Dr. Willem Kolff developed the first dialyzer
in the Netherlands during World War II. Kolff's dialyzer was only focused on treating patients
26
with acute renal failure and required surgical incisions for each treatment. The advent of
Teflon® in the 1950's allowed for the use of the Schribner Shunt to be attached to the patient
thus removing the need for surgical incisions prior to each treatment. The first dialysis center in
the United States was opened in the 1960 and home dialysis became a recommended treatment
delivery mode in the early 1980's.
4.1.1 The Home Dialysis Market
The customer in the home dialysis market is the dialysis center which prescribes a
treatment plan for the patient who is the end consumer. There are roughly 5000 dialysis centers
in the United States treating more than 450,000 patients with ESRD. The American population
of ESRD patients is forecasted to double over the next decade. Of the 5000 dialysis centers in
the United States, 2000 offer dual delivery modes for treatment in the center or in the home.
ABC operates in 334 dual mode delivery centers giving patients the option to perform treatments
daily for one to two hours at home rather than treatments of six to eight hours one to three times
per week at the dialysis center. The firm expects to penetrate 100 more centers in the upcoming
year.
ABC's market penetration strategy is to enter through treatment centers that are "homeready". "Home-ready" centers are already Medicare certified to deliver in-home treatment, have
the staff to deliver in-home treatment or training, and currently manage an existing in-home
27
program. ABC cites the conversion of single delivery mode centers to dual mode delivery
centers as one of the largest hurdles to overcome in growing market share. Conversion from
single delivery to dual delivery requires physician acceptance, a viable population of patients
who are willing and able to perform in-home treatment, and a support staff to train patients.
ABC's target market is one-fourth of the total ESRD population. The remaining threefourths of ESRD patients are either unable or unwilling to perform home dialysis treatment.
The unable patients are either too ill to remain at home, have an unreliable mental state to
regularly perform home treatment, or have failed to comply with regular treatment schedules
during previous attempts at home dialysis. In contrast, the unwilling patients are of relatively
sound mind and body but choose not to participate because of personal preference.
4.1.2 The Product
The products offered by ABC dialysis have revolutionized the home dialysis market
through the miniaturization of home dialysis machines and by offering concentrated dialysis
solutions. ABC provides compact dialysis machines whose size is comparable to a small cooler
and weighs less than 70 lbs. ABC also offers concentrated dialysis solution delivered in sterile
packaging that can be mixed with tap water prior to the treatment. None of the wastes produced
by ABC's product require special handling and thus eliminate a need for reverse logistics.
4.1.3 The ABC Value Chain
ABC Dialysis' value chain comprises six stakeholders, namely the patient, the dialysis
center, the manufacturer, the distributor, the payer, and the sales and training team. The
manufacturer and sales stakeholders are internal to ABC. Their distribution is outsourced to a
third party provider.
There are three distinct flows that take place among these stakeholders: financial flows,
information flows, and product flows. Financially, ABC leases its home dialysis systems to the
dialysis clinics. These clinics then bill the patient's insurer for the reimbursement of products
and services rendered. Information flows take place in the form of sales and training from ABC
to the clinics that then pass the knowledge to their patients. There is also an upstream
information flow of prescription details from the dialysis clinic to ABC. Physically, ABC ships
their systems to both patients and clinics. ABC has an extended physical relationship with the
customer to whom they provide dialysis solution over time in accordance to the amount
prescribed by the dialysis clinic. Figure 6 maps these flows.
Information Flow
Physical Flow
·
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Manufacturing
Distri )ution
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Figure 6: Map of the Physical, Informational and Financial Flows of ABC Dialysis
ABC's distribution system consists of three manufacturing facilities and one distribution
facility all of which are outsourced. The transportation and warehousing operations are also
completely outsourced.
O
4.2 T2 Biosystems
T2 Biosystems is working on miniaturizing diagnostic testing equipment to provide a
competitive point-of-care diagnostic testing unit. The company aims to provide products that are
easy to use and operated by either the patient or medical professional.
4.2.1 The Diagnostic Test Industry
A diagnostic test is a medical test performed on a patient's bodily fluids, tissue and/or
genetic material to aid diagnosis or detection of diseases. Currently, dagnostic testing accounts
for less than 5%of healthcare expenditures in the United States, but is believed to influence over
85% of all healthcare decisions (Lawson, 2007). More importantly, the diagnosis testing market
is worth $34 billion and is growing annually at 6-8% per annum (Lawson, 2007).
Today there are three segments of the diagnostic market, characterized by type of testing:
chemical diagnostics, pathological diagnostics, and molecular diagnostics. Chemical diagnostics
encompasses the basic testing of bodily fluids. Pathological tests examine cells and tissue to
provide results. Molecular tests probe genetic material to diagnose specific conditions.
Clinical Diagnostics Market, 2005
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A
W-10
Manual Mncrn
Culture
Point of C
Hernmatoogy
Cytometry
Molecular 7%
Diabetes 26%
Sorce: Compan- reports and Thomas Weisel Partners LLC estimates
Figure 7: The Clinical Diagnostic Testing Market by Test Type
Chemical diagnostic testing is the largest segment in the clinical diagnostic market as
illustrated by Figure 7. Chemical testing is also the most mature sector of diagnostic testing
industry with the smallest growth rate of 5-7% annually (Lawson, 2007). This sector is highly
consolidated as manufacturers attempt to respond to increasing pricing pressures mainly
attributed to the expiration of technological patents. To further respond to pricing pressure,
manufacturers have increased their test and manufacturing automation as well as the scope of
tests a unit can provide in order to achieve economies of scale and scope.
Molecular diagnostic testing is considered to be the sector with the most growth potential.
The mapping of the human genome has lead to proactive testing for various cancers as well as
diagnostic testing for viruses such as HIV. This is a $3 billion segment of the overall industry
with a 10-20% annual growth rate (Lawson, 2007). Currently there is less pricing pressure
within this sector due to significant patent coverage. However, as the molecular testing market
matures, it is expected to mimic the growth trends of the chemical testing market resulting in
consolidation, automation and scale economies.
Molecular and chemical diagnostic testing sectors share competitive landscapes as outlined
by Figure 8. Some of the most consolidated competitors include GE, Dade Behring, BeckmanCoulter, Siemens Roche Diagnostics, and Johnson & Johnson.
Competitive Landscape
S
':
i lo
'
;
iL
J
I
A
"
Life Sciee
clinical Chemistry
Immunoassays
Hemostasis
Motecular
Microbiology
Histology
BloodScreening
Biothreat
No
Bi
Fidusial
Industrial
Micaoscopy
Diabetes
Posopy
D
Diabetes
Devices
Devices
Point ofCare
Poant
of Care
Part of TWP diagnostic
es covarage
Not paer
of the diagnostics w iuverse
Source: Thomas Weiel Partners LLC and compalany &epo
Figure 8: The Landscape of the Diagnostic Testing Industry
4.2.2 Simplicity and Automation
In the diagnostic testing market, the end consumer is the patient and the customer is the
laboratory that performs the test, which could be located in a hospital, primary care offices, or in
stand-alone laboratories.
As the diagnostic testing industry matures, two trends are becoming evident:
simplification and automation. There are three main drivers of these trends, namely an aging
population, labor shortage and the expected increase in the demand for quality of disease
management. As the baby boomers begin to turn 65 in 2010, the demand for diagnostic testing is
expected to increase proportionately. At the same time the number of qualified lab technicians in
34
V
a
the workforce is decreasing by 3-4% per annum as illustrated by Figure 9 (Lawson, 2007).
Therefore a sharp focus on simplicity and automation is necessary for the diagnostic test industry
to continue to thrive.
The Rise and Fall in the Number of Trained Medical Technicians
8000
0
>-
7000
6000
1
-
17
-
- - - - - - - - - - -
S5000S4000-.
3000-
~ 2000Z
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
Source: American Society of Clinical Pathology"and U.S. Department of Healkh and Human Services
Figure 9: The Labor Trend of Diagnostic Technicians
The demand for better quality disease management is also pushing the diagnostic test
industry towards simplification and automation. The need for increased quality of disease
management equates to faster turn around times and smaller sample sizes, convenient testing,
and more immediate interpretation. These dual forces will further drive the industry towards
automation and simplicity through increasing the scope of tests performed from a single sample
and decreasing the testing time.
4.2.3 The POCT Market
As its name suggests, point-of-care diagnostic testing (POCT) is performed at the place
where the patient receives treatment. These tests can be performed in hospitals at the bedside,
within the trauma unit, at the nursing station or in the home. The near-patient POCT testing
segment is defined as testing that occurs in physicians' offices or hospitals in close proximity to
the patient therefore eliminating the need to transport samples to a laboratory (Espicom, 2006).
POCT performed by the patient in the home is termed in-home POCT. The total POCT market
is valued at $10.6 billion. Figure 10 illustrates the breakdown of the POCT market as a part of
the total diagnostic testing market. At present, the in-home POC testing product lines primarily
consist of blood glucose monitors, pregnancy tests, and similar over the counter tests to comprise
a $6.3 billion POCT market segment.
POCTRelatid
t the GlobalIn Vitro Diagnostics Mret, 2005
IVD
U•S$2bn
NPT
$3.6bn
$6.3bn
Other Consumer
(cl
I.e
JI
US$40.bn
IVD - In Vitro Diagnostics
POCT- Point of Care Testing
NPT- Near Patient Testing
BGM - Blood Glucose Monitoring
Souwe: Espicon, Companydata.
Figure 10: The Point-Of-Care Diagnostic Market
It can be argued that the consumer, the insurer, and the physician are likely to share the benefits
of POCT. POCT testing has the potential to decrease per patient medical costs since near-patient
testing will allow the physician to diagnose and make care decisions quickly and avoid
unnecessary follow-up visits and repeated visits to medical facilities. POCT will also allow the
physician to reduce their cost by minimizing their need to outsource diagnostic testing to third
party laboratories. Additionally, Figure 11 illustrates the estimated timesavings per patient with
near-patient testing. From a patient's perspective, POCT can provide a quicker response and
thus allow them to begin treatment earlier.
Physician requests test
I
QI
II
Tess Meeme an set
I
Source:T2 Blosyste• n
Figure 11: Traditional Diagnostic Testing versus POC
Indeed, there are several immediate challenges facing the POCT domain. These
challenges include accuracy of POCT, relative connectivity of POCT results, inventory control
of POCT devices, and competition from traditional laboratories. First and foremost, accuracy of
POCT must be proven and improved. Currently, 88% of all cardiological diagnostic tests are
performed in centralized labs due to superior quality (Espicom, 2006). Connectivity is also a
high hurdle for POCT technology. The ability to easily transfer results to hospital information
38
systems is an attribute that can increase quality, reliability, and simplicity. Unconnected POCT
devices force the user to manually record test results, a process that can result in the false
transcription of results, lack of transcription of results, and the misinterpretation of results by
other participants in the diagnostic process. Most near-patient POCT 's are not performed by
trained laboratory technicians, but rather by patients, nurses, and other healthcare staff, thus the
risk of error is greater for POCT. This risk reinforces the need for higher quality control
standards for the POCT . The risk of error in POCT also reinstates user compliance that can be
achieved through simplification of the user interface and accompanying instructions provided by
the manufacturer.
4.2.4 T2 Biosystems Growth Plan
T2 Biosystems business strategy is simply stated in their motto "Bringing medical
diagnosis where it belongs, everywhere" (T2 Biosystems, 2007). To bring medical diagnostics
into to the home, T2 is using innovative technologies to miniaturize diagnostic devices. Such
technologies include the use of nanoparticles to expand the scope of testing and miniaturization
of magnetic resonance imaging (MRI) to increase the portability of testing devices. T2's
products encompass the three types of diagnostic tests: chemical, pathological and molecular.
General Electric
T2 Biosystems
Source:
www.t2biosystems.com
&
www.ge.com
Figure 12: T2 Biosystems Products versus Competitor
T2 Biosystems is currently targeting the near-patient testing segment in order to enter the
POCT market. The near-patient POCT diagnostic segment include retail clinics such as Minute
Clinics©, physicians offices, outpatient clinics, and nursing homes. These facilities typically do
not have in-house diagnostic labs and thus turn to POCT to reduce cost and test turnaround time.
Upon entering the near-patient segment, T2 Biosystems plans to diffuse their product from the
hospital to the home and military use. Their vision is to enter in-home POCT within five years.
Figure 13 illustrates T2's market penetration strategy.
T2 Biosystems Market Penetration Strategy
Near-Patient
4
Military
Hospital
Home
Figure 13: T2 Biosystem Market Penetration Strategy
4.2.5 T2 Biosystems Product
T2's current prototype is a bench top device approximately the size of a shoebox and able
to test biological samples using cartridges. The cartridges are used to define which tests will be
performed from the sample. The variation of test cartridges can be leveraged to increase the
scope of the product. After the initial purchase of the testing machine, the sale of cartridges can
provide a steady source of revenue and provide an on-demand testing process in contrast to
periodic order patterns often seen for the purchase of large capital-intensive in-center machines
designed for test batching. T2's pricing goal is one dollar per test in the near-patient market.
41
4.2.6 T2 Biosystems Self Assessment
T2 Biosystems identifies itself as an innovator of disruptive technologies. Disruptive
technologies have five defining characteristics. First, these technologies instigate a systematic
social change through their scaling and replication. Second, these products serve a currently
unmet need in the market or are over-met by the complexity of market offerings. Third, the
products are simpler, less costly, and can potentially be modified to enter the low cost market
while providing slightly less quality than the competitors. Fourth, these products are initially
unattractive to competitors because of the large amounts of intellectual capital or manpower
required in the early stages of development and implementation. Lastly, the innovators of these
products are either ignored by their industry competitors or patronized by them (Christensen,
2006).
T2's products fit the profile of disruptive technology as they are likely to create systematic
social change by bringing diagnostic testing to the consumer at a cost less than or equal to the
competitor in less time than the competitor. Furthermore, T2's products are simpler and
therefore testing on T2's diagnostic machines does not need to be performed by a laboratory
technician.
4.3 Eli Lilly and Zyprexa
In 1996, Eli Lilly introduced the drug Zyprexa for the treatment of schizophrenia and bipolar
disorder. Eli Lilly is the twelfth largest pharmaceutical development company in the world
whose 2007 sales totaled $18.63 billion. Zyprexa's main competitors are Seroquel made by
AstraZeneca and Riperdal made by Johnson & Johnson. Zyprexa was the first of a new
generation of atypical antipsychotic drugs used to treat schizophrenia and bipolar disorder and
accounts for 25% of the drug maker's sales today.
4.3.1 The Problem of Patient Compliance
Zyprexa represented one-third of Eli Lilly's total sales the year it was launched. Despite the
drug's strong launch, it was only being prescribed to one-third of the eligible patient base. The
remaining two-thirds were passed over by prescribers due to excessive weight gain, a common
side effect of Zyprexa. Doctors aware of this side effect avoided prescribing Zyprexa to
individuals at risk for obesity, and patients who feared obesity opted not to take the drug.
Furthermore, only one-third of the patents to whom Zyprexa was prescribed were compliant to
their prescribed treatment course six months later.
4.3.2 Eli Lilly's Solution to Patient Compliance
Eli Lilly defines the prescription making decisions as an alignment of all the stakeholders in
order to achieve successful treatment. The alignment on this decision is to meet the therapeutic
needs of the patient. The successful satisfaction of these needs improves the patient's health
which are the doctor's and the patients main goal. If the patient improves their health through
treatment this will also decrease the system cost for the insurer and therefore the insurer supports
the need to improve patient health. The manufacturer's incentives to improve patient health are
evident in the retention of sales from the patient for treatment and the physician who will
prescribe the specific treatment to more patients because of its successful results.
Eli Lilly recognized that a lack of patient compliance and prescription preference for
Zyprexa represented mis-alignment among stakeholders in the prescription decision. To
overcome this, Eli Lilly needed to eliminate the trend of treatment discontinuation because of
unmet therapeutic needs and directly related non-therapeutic needs. The primary non-therapeutic
need was defined as patients' forgetfulness in taking their medicine daily. The primary unmet
therapeutic need identified was as the inability to offset weight gain accompanied by the use of
Zyprexa. Eli Lilly viewed these issues as a core supply chain management problem.
According to Ken Thomas, Eli Lilly defines supply chain management as the flow of
product, information, services, and cash from the raw material partners to the consumer. The
44
goal of Eli Lilly's supply chain management was not solely to increase operational efficiency
among these flows, but using the flows to drive sales. Zyprexa's shortfalls illustrated an
opportunity to further drive sales through the flow of information and services.
Eli Lilly then partnered with Healthanswers@, a company specializing in the creation of
customized patient programs to accompany pharmaceutical treatment. Healthaswers@ created an
individualized web-based interactive program based on each patients preferences. This program
reminded patients to take their medicine and recommended strategies to combat excessive weight
gain while taking the medication. These anti-obesity strategies included recipes, suggested
meals, and suggestive exercises based on the patients preferences for food and activity.
The cost of this program per-patient was roughly five percent the of per-patient revenue
of Zyprexa. Eli Lilly considered this a small price to pay considering the average pharmaceutical
markup is eighty to ninety percent. The program increased patient compliance from one-third of
all patients prescribed to one-half. The increase in prescription rates rose less by percent.
5 Synthesis: Challenges and Strategies for Stakeholders
The three companies studied are gaining momentum in the home healthcare market and
point to a future where home healthcare will be the heart of this healthcare market. Specifically,
the successful experimentation with Zyprexa by Eli Lilly exemplified the positive benefits of
using home healthcare services to augment treatment; T2 Biosystems has provided a road map of
the future with their vision to bring POCT into the home; and ABC Dialysis illustrated the
successful miniaturization of medical treatment devices and the pressure of a geographically
fragmented supply chain. The key question is how can they sustain their momentum?
The aforementioned case studies have also highlighted some of the major challenges facing
home health care today. To sustain their momentum, these companies need to overcome the
challenges of patient compliance, differentiation, technological acceptance, demand
fragmentation, supply capacity, and operation under a price-capped system.
Home health care exists on the premise that it can create value for at least one of the
stakeholders involved in the activity, and that value is equal to or greater than the value of its
main competitor, namely in-center healthcare treatment. As we have argued, in-home healthcare
value creation falls under three categories of value creation: affordability, availability and
acceptability. Affordability, availability, and acceptability are interdependent value creation
categories with acceptability being the heart of all value creation. Without a product being
acceptable by the prescriber, patient, and insurer it cannot become affordable or available. Once
the product is considered acceptable, innovation is accelerated by the feedback from patients and
prescribers. Innovation in turn increases the relative affordability of the product and availability
through increasing adoption. All home healthcare stakeholders within the value chain directly
and indirectly contribute to the acceptability, availability, and affordability of home healthcare.
Table I categorizes the value proposition of each stakeholder to the system using this
framework.
Table 1: Stakeholder Value Proposition
Stakeholder
Manufacturer
Physician/
Prescriber
Patient
Insurer
Value Creating Activity
Creating operational efficiency through
production
Using strict quality control standards in
production to ensure the minimal amount of
defects
Using scale economies to service
geographically fragmented demand
Miniaturizing current medical technologies and
combining simple user interfaces
Development products that can be customized
on a per patient bases
Communication of benefits to patient
Value Proposition
Category
Affordability
Acceptability
Availability
Affordability
Acceptability
Acceptability
Acceptability
Acceptability
Sharing of knowledge among other prescribers
Availability
Patient follow-up care
Acceptability
Compliance with prescriber
Acceptability
Clarity of reimbursement structure
Affordability
Definition of price
Affordability
5.1 The Dynamics of Home-based Health Care
Value propositions of different stakeholders are interrelated. The actions of each stakeholderi
can possibly affect the value created by other stakeholders. It is important to understand these
dynamics to formulate strategies for growth and sustainability.
5.1.1 Prescriber Acceptance
In order to grow the home healthcare market, prescribers must accept home healthcare
treatments. The patient, manufacturer, insurer, and other prescribers influence prescriber
acceptance in many ways. To better illustrate the interdependence among stakeholders, which
affects acceptability, a systems dynamics framework was used.
These dynamics, illustrated in Figure 14, stress the interrelations between the patient, the
home-based firm, and the insurer on prescriber acceptance. Prescriber acceptance is a critical
element in the majority of the value propositions of the rest of the stakeholders in-home-based
healthcare.
Prescriber
'-
Spend
Q~fflkrnmatlves
A(
Slpending
speneang,
Source:
Modified fom Homet,J B,(1983' A dynamic model for analyig the emergence of new medzcal technologies
Unpublished PhD, MIT, Boston
Figure 14: Prescriber Acceptance Causal Loop Diagram
The model begins with a population of non-prescribers. The non-prescribers
metamorphose to home healthcare prescribers at the rate of adoption. The rate of adoption is
affected by two variables: attractiveness and prescriber awareness.
Awareness is increased through word of mouth recommendations of prescribers. As
prescribers begin to adopt home-based healthcare they share this with not only their patients, but
their industry colleagues as well. Another factor that increases awareness is the amount of
marketing spend towards prescribers by home healthcare agencies. These agencies are able to
increase their marketing and promotional efforts as adoption rate rises and their product demand
grows in scale.
The final main input to the adoption rate is attractiveness. This is the most complex variable
because it is influenced by many factors including patient compliance, insurer acceptance,
innovation, and the benefit to harm ratio of the home healthcare product versus the alternative.
First, innovation influences prescriber adoption in two ways, namely through the increase of
quality and the reduction of the defect rate. The amplitude of the defect rate directly influences
the number of defects. As the defect rate is higher, the cumulative number of defects increases
more rapidly. The number of defects has a similar relationship with the patient base, as the
patient base increases so does the number of defects. As defects increase, the perceived quality
of the product decreases thus fueling innovation. As innovation increases, the defect rate
decreases and quality increases. These scenarios would lead to a reduction in the perceived
benefit to harm ratio. There is a limit to innovation, namely the slowing of innovation as the
quality improves. Eventually the quality and functionality have improved so much that there is
little to no "low hanging fruit" and the opportunity to innovate is slim. Innovation is a slow
process requiring feedback from patients, physicians and the discovery of defects. There is a
significant time delay to gather information from these sources and hence innovation is not
immediate.
The perceived benefit to harm ratio of the home-based product or service reflects the
perception of the medical community with regards to the ability of the product to create benefit
for the patient rather than harm. The greater the benefit in comparison to the harm caused by the
product, the more attractive it is to prescribers, especially if the ratio is higher for in-home
products than the alternative of in-center products.
Insurer acceptance is an exogenous variable in the current model that affects
attractiveness and its influence will be explained later in the analysis. Nonetheless, insurer
acceptance allows providers to prescribe home healthcare to patients with confidence that the
patients can afford the care. The final input to attractiveness is patient compliance, a similar
exogenous variable that will also be explained in more detail in the next section. As patient
compliance improves physicians are more likely to use home healthcare treatments, as illustrated
in the example of Zyprexa.
The delayed rate of innovation of home healthcare services and products leads to the
increased functionality and quality of such products. Innovation is increased by research and
development spending by home healthcare firms, feedback from prescribers, and feedback from
the patient base. These inputs to innovation have delayed effects due to the time needed for
information and funding to pass from other stakeholders to the manufacturer and revenues to
translate into increased research and development spending.
5.1.2 Patient Acceptance
Eli Lilly's solution to increase patient compliance through the use of home healthcare
services to augment Zyprexa illustrated the role of the patient's influence over recommended
treatment plans. Patient compliance not only affects prescriber adoption, but also insurer
adoption.
Much like prescriber adoption, patient adoption is affected by attractiveness, insurer
acceptance, and awareness. In addition, patient adoption is increased by provider adoption. The
previous model illustrated that as the number of home healthcare prescribers increases so does
the patient base. Attractiveness to patients has similar inputs to attractiveness to prescribers,
since the benefit to harm ratio of home healthcare products is still influenced by defects.
A new variable is introduced in the patient acceptance model, namely patient compliance.
Patient compliance is a function of the ability to meet therapeutic and non-therapeutic needs. At
its core, the home healthcare product or service is designed to meet therapeutic needs; the
product's ability to meet theraputic needs is furthered by innovation. Nonetheless, the product
also needs to address non-therapeutic needs that typically arise from treatment side effects or the
amount effort required by the patient. In the case of Zyprexa non-therapeutic needs included the
apprehension of weight gain and ability to remember to take the medicine daily. The ability to
meet non-therapeutic needs is influenced positively by innovation through patient feedback. In
contrast the ability to meet non-theraputic needs becomes more difficult as the number of unique
non-theraputic needs recognized increases.
Word of Mouth
Insmrer
BenefitfHann R
of Aternativ
ue
tic Needs
Defcts
Defects
.Theraputic
Abihtyto Meet I
Needs
+
+
-'
Source: Modified fomHomer, J.B (1983) A dynamic model for analg
ingthe emergence of new medical technologies. Unpublished PhD., MIT, Boston
Figure 15: Patient Acceptability Causal Loop Diagram
5.1.3 Insurer Acceptance
As mentioned in the previous models, insurer acceptance affects patient and prescriber
adoption. There are four variables that influence insurer adoption: current home healthcare
insurers, regulation relaxation, cost attractiveness, and treatment attractiveness.
The variables of defects, patient compliance, perceived benefit to harm ratio for
alternatives and home healthcare products influence treatment attractiveness in the same fashion
as the aforementioned models. This model introduces a new variable, cost attractiveness, which
can be manipulated by the manufacturer. Cost attractiveness is a function of patient compliance,
innovation, product standardization, and demand fragmentation. Innovation is affected by
regulatory relaxation, which could allow the use of less costly input, production methods or user
interfaces. In addition, innovation is heightened as the patient base increases, which increases as
patients and providers accept home healthcare. The acceptance of patients and providers is
increased by the acceptance of insurers.
The use of scale economies also influences cost attractiveness. These scale economies
encompass experience, innovation, production and transportation. Scale economies are
influenced by the standardization of the product and the fragmentation of demand. Product
demand becomes more fragmented on a product and geographical basis, the ability to standardize
the product and delivery of the product becomes more difficult thus reducing scale economies
available. Patient compliance increases cost attractiveness on the assumption that high patient
compliance results in fewer patient visits, increased patient health and thus lower system costs.
Figure 16 illustrates the dynamics discussed that affect insurer acceptance.
Benefit/Harm Ration
ofAlternatives
Defects
Source: Modified from Homer, J. . (19P3). A dynamic model for analyzig the emergence of new
medical technologies. Unpublished PhD., MIT, Boston
Figure 16: Insurer Acceptance Causal Loop Diagram
5.1.4 Manufacturing for Acceptability, Availability and Affordability
The manufacturer of home healthcare products or services influences all stakeholders
through innovation, quality and cost. Quality affects the acceptance of home healthcare by all
stakeholders. The more insurers, patients and prescribers who accept home healthcare the more
available home healthcare is in turn. As home healthcare becomes more widely accepted, the
opportunity to create economies of scale geographically and through production increases
thus
decreasing the potential cost of home healthcare and making it more affordable. The question
facing many home healthcare providers is how to achieve reduced cost, increased quality, and a
sustained rate of innovation.
5.2 Evaluation of Current Infrastructure
The previous discussion highlighted the activities and interrelation of stakeholders within
the healthcare system that can affect the success of home healthcare on the basis of affordability,
acceptability and availability. Affordability, acceptability, and availability can be considered as
balancing forces that lead to the optimal value creation for a healthcare firm. This framework
can be used to evaluate ABC Dialysis, T2 Biosystesm, Eli Lilly's Zyprexa and the in-center
alternative.
5.2.1 Evaluation of the Alternative: In-Center Care
This research supports the home healthcare alternative, but in order to propose an
alternative the current method must be evaluated. The perceived benefit to harm ratio of incenter care includes the acceptability, availability, and affordability of in-center care. The Table
2 depicts influential factors affecting the availability, affordability, and acceptability of in-center
care.
Table 2: In-Center Care Rating of Availability, Acceptability, and Affordability
Value CreationI
Affordability
Factor
System Cost
IRanking
Low
Availability
Capacity Shortage
Availability
Acceptability
Acceptability
Acceptability
Proliferation
High
Stakeholder Acceptance
High
Ability to Meet Non-Therapeutic Needs Low
Proven Quality
High
Low
In-center care is widely accepted as the treatment norm due to its market proliferation and
proven quality. Nonetheless, in-center care fails to be convenient for the patient. As consumers,
patients are becoming more demanding in their needs. One of their demands is for convenience
of care. As convenience becomes an expected attribute of treatment quality, it can be defined as
a non-therapeutic need. The centralized hospital infrastructure is no longer the most convenient
option with the advent of employer on-site care, MinuteClinics®, and home healthcare options.
Secondly, the overall system cost of in-center care is significantly higher than the home
healthcare alternative. In-center care is more labor intensive, requires more follow-up visits, and
requires more overhead. The average price of in-center care is also rising as illustrated in Figure
17. The gap between the price of home healthcare and the price of hospital care is widening thus
decreasing the affordability of in-center care.
Price Index Comparison:
Home Care vs. Hospital Care
160
120
40
0
2001
2002
2003
-
Home Care
-
Hopital Care
2004
2005
2006
c(w Rearc Ltd 207)
Figure 17: Price Index Comparison: Hospital Care vs. Home healthcare
Lastly, the proliferation of hospitals and in-center treatment facilities is widespread and
highly available. Nonetheless there are declining numbers of hospital beds, nurses and
technicians thus creating limited capacity. Expected capacity limitations hinder the long-term
availability of in-center care.
Figure 18 plots the in-center alternative alongside the firms studied in this research. The
research suggests that the availability and affordability of in-center care will decrease.
Availability will decrease as capacity is limited by over crowded hospitals and a shortage of
labor. The shortage of labor will potentially lead to an increase in labor spending as hospitals
attempt to maintain service standards, thus increasing the already rising cost of in-center care.
As affordability and availability of in-center care decrease over time there will be a shift from the
acceptability of in-center care towards alternate means for non-acute patients to offset the
capacity and cost burdens.
5.2.2 Evaluation of Case Studies
ABC Dialysis, T2 Biosystems and Eli Lilly can also be plotted and analyzed using the
same map of alignment on the basis of affordability, acceptability, and availability. Figure 18
maps these firms alongside in-center care on the basis of affordability, acceptability, and
availability. Each of the points of the triad exhibits a gravitational force upon alignment of the
treatment option as value proposition of affordability, acceptability, and availability. The green
star in the center signifies the optimal value for a healthcare firm.
Acceptability
Affordability
*
Availability
Figure 18: Plot of Firms on Acceptability, Availability, and Availability
ABC Dialysis' products are acceptable and affordable, however not yet widely available.
Thus its position in Figure 18 is skewed away from availability. T2 Biosystems product is
targeting the affordable cost of $1 per test, nonetheless the product is not widely accepted in the
POCT market and it is not yet available. Therefore, T2 Biosystem's position is skewed towards
availability and away from availability. Eli Lilly's use of home healthcare services to augment
the sales of Zyprexa is the most closely aligned to all three factors, thus its position is mapped
near the center. The home services offered by Eli Lilly were at a minimal cost for the firm and
the overall system through the increase of patient compliance.
5.3 Strategies to Achieve Optimal Interrelation
In manufacturing, cost and quality are inherently disproportionate. Balancing the trade-off
between cost and quality is a delicate process that requires flexibility and innovation. Any
strategy adopted by home healthcare firms should be focused on optimizing this trade-off
through the successful strategic fit of the aforementioned dynamics and activities. Initially home
healthcare firms will need to penetrate the market with a quality product at a lower cost than the
in-center alternative.
Porter describes three generic competitive strategies: cost leadership, differentiation, and
fit (Porter, 1980). Cost leadership grants the leading firm high returns and protection from
60
entrants, buyers, suppliers, and other competitors. However, in order to achieve low cost
leadership a firm must have high market share and scale economies.
Differentiation strategies rest in the creation of something that is unique industry wide
(Porter, 1980). This uniqueness could be derived from a brand, product, image, features,
technology, or customer service. Cost is a secondary objective to differentiation in this strategy
as it creates brand loyalty and insulates the firm from entrants, buyers, suppliers, and other
competitors while allowing the firm to reap higher than average returns.
Westbrook likens such strategies to the Mills and Snow description of defenders.
Defenders are classified by their achievement of low costs, high capacity utilization, high
quality, brand recognition, and lack product diversity (Westbrook, 1997). Defenders,
differentiators, and cost leaders have a difficult time responding to major environmental changes
in their industries due to the high capital investment needed to achieve economies of scale.
However, their strong market position allows them to weather industry turbulence well.
Porter's third competitive strategy is that of focus. A focus strategy implies the firm
segments products, customers, markets, technology, or other features and then creates a niche.
Focus strategies only appeal to a particular segment of the market and can lead to differentiatiori
or cost leadership based on the area of focus. Westbrook likens the Mills and Snow
classification of prospectors to Porter's focus strategy. Prospectors are usually first to market.
They have the ability to serve several markets, but remain focused on a single characteristic that
is shared in those markets. Prospectors develop close relationships with their buyers and
suppliers and tend to share metrics across the channel to measure performance. Prospectors are
able to weather industry changes well but struggle with industry turbulence.
Currently, home healthcare firms are highly fragmented with minimal scale economies
and lack a market share leader. In the home healthcare industry, no one firm is considered
unique on any aspect. Home healthcare firms exemplify prospectors by having close
relationships with buyers (prescribers) by their ability to be first to market with their innovations,
and by their focus on a particular market segment. For instance, ABC Dialysis targets one-fourth
of the total ESRD market for their product. Prospectors and strategically focused firms tend to
evolve into cost leaders or differentiators.
In order to create stronger market positions that incubate and sustain growth, home
healthcare firms must evolve into defenders focused on cost leadership or differentiation. There
is little room to decrease costs due to the slim margins inflicted in the current fragmented home
healthcare industry by a capitated reimbursement structure imposed by Medicare. The price
ceiling driven by Medicare also leaves little room for innovation due to a lack of cash flow.
Without fueling innovation, home healthcare firms jeopardize the long term acceptability of their
product. Westbrook illustrates this predicament in the matrix displayed as Figure 19. Due to
regulation, home healthcare firms must produce at the minimum quality level and at a maximum
cost signified by the red sunburst. Quality is measured by the ability to meet therapeutic needs
and non-therapeutic needs successfully. The healthcare industry must sustain a minimal level of
quality because the highest cost of a stock-out is death. Therefore the only position that home
healthcare firms can take due to regulation is that of medium to high quality with a cost less than
or equal to the Medicare capitated reimbursement rate.
Qualty
S Good
Mix
Quality
Bad
t
4,
i
ii
4,
k__ -_
Quality/Cost
Equilibrium
i
--
~-
--
Cost
Figure 19: Cost Quality Matrix
Because firms have little room to improve on cost or innovation, a trend of consolidation
is expected to evolve to overcome these challenges. Consolidation will allow home healthcare
firms to achieve economies of scale geographically and in production. Manufacturing and
distribution savings achieved through scale economies will allow firms to invest more in
innovation thus making the product more attractive. By increasing cost attractiveness and
innovation, home healthcare firms can proceed more fluidly to creating acceptability,
affordability, and availability among their market offering. Consolidation with competing firms
that offer in-center care or other home healthcare firms will benefit home healthcare firms
through the sharing of best practices, relationships and soothing of geographical demand
fragmentation by leveraging the in-center firm's current transportation network.
Once consolidation occurs strategies of differentiation are expected to occur rather than
cost leadership. The research indicates that cost leadership is not a sustainable competitive
advantage in the home health industry because all firms must operate in a fixed price system with
relatively high minimal quality standards. Differentiation strategies are expected to target key
dynamics within the stakeholder relationships to facilitate market leadership. Suggested
differentiation traits are high benefit to harm ratios, innovation through patient and prescriber
feedback, quality and functionality, or the holistic treatment of the patient to support compliance.
Nonetheless, the level of differentiation will be constrained by cost as home health firms are
required to sustain a minimal level of quality. For instance, T2 Biosystems targets a per test of
$1 to meet their competition, in-center laboratories. They stress the quality benefits of their
product, which includes the reduction of the total time elapsed for the testing process from
sample collection to results interpretation and the convenience of near-patient testing.
Table 3: Barriers and Strategies
Strategies/Attributes to
Unique Barriers within the
Optimize
Healthcare System
Value
Proposition
Acceptability
-
Quality
Compliance
Simplicity
-
Minimum complexity of regulation
Limitations of innovation due to
the price ceiling
-
Number of unique non-
therapeutic needs
Affordability
-
Volume
-
Fragmentation of demand
-
Reimbursement
Efficiency
Costs
Consolidated Leverage
Prescriber/patient
-
Fragmentation of firms
Limitations to scale
-
Perception of lesser quality
knowledge
Availability
-
Market scale
Table 3 depicts the various attributes that home based healthcare firms can use to
differentiate themselves. The figure also includes the current barriers facing these firms that will
limit their differentiation. For instance, strategies to improve acceptability hinge upon a product
or service of good quality that is relatively simple to encourage patient compliance.
Acceptability strategies are hindered by regulatory complexity required, slim margins due to the
Medicare inflicted price ceiling, and the increasing number of unique non-therapeutic needs. As
argued earlier, a home healthcare product's quality, ability to meet non-therapeutic needs, and
simple user interface increase product attractiveness thus making it more acceptable.
Affordability based strategies focus on increasing economies of scale, reimbursement efficiency,
or creating consolidated market power. In order to increase affordability, firms must first tackle
the exponential fragmentation of demand, current fragmentation of firms in the market, and the
limitation these factors pose to achieving economies of scale. Lastly, strategies to improve
availability focus on increasing adoption, awareness, and market scale. Availability strategies
rely on achieving scale, thus availability strategies are aligned with increasing acceptability and
availability.
6 Conclusion
This study examined the relationships among stakeholders of home healthcare and how
these stakeholders can create value for each other. Healthcare costs are rising and demand for
chronic care is increasing as the baby boomers age. This study argues that home healthcare is a
sustainable healthcare delivery option. Home healthcare will be a significant part of the U.S.
healthcare systems because of the value it creates on the basis of affordability, acceptability and
availability. Once home healthcare achieves widespread acceptance, availability and
affordability they can begin to displace their competitor, in-center care, by shifting focus away
from reductions in manufacturing cost to reduction in the overall system cost.
An extensive literature review was performed and three case studies were completed to
define home healthcare, the relationships among stakeholders in home healthcare, the dynamics
of those relationships, and the current strategies used within the industry segment. Strategic
classifications were used to categorize the current predominant strategies among home health
firms and suggest future strategies.
This research exemplifies that home healthcare stakeholders are deeply interrelated and
thus can create significant value for the home healthcare market by leveraging their
interdependence. This will lead to the innovation and acceptance of home healthcare products
66
and services to achieve adoption by prescribers, patients, and insurers as well as the development
of affordable products. Furthermore, the wide scale adoption of home healthcare and the
affordability that will follow creates a need for home healthcare firms to re-evaluate their
strategy to differentiate on availability and further on affordability. Home healthcare alternatives
will have a significant advantage in the market when overall system cost savings are realized,
and thus will be able to raise the acceptable price of their product. The main competitive
advantage that home healthcare firms have is their lack of sunk costs in facilities and capital
equipment and/or the lack of labor required for home healthcare, in the case of automated home
healthcare.
A framework for home healthcare's strategic evolution is proposed based on these
conclusions. At the heart of the development of home healthcare is innovation and acceptance
driven by affordability and availability. The framework seeks to maximize acceptance by
minimizing cost and shaping availability. The framework suggests that home healthcare firms
will consolidate and create partnerships with other firms and stakeholders to achieve lower costs
and concentrated market power. Following this movement of consolidation, firms will
differentiate based on quality, convenience, product, or customer. The cost pressure of the price
ceiling imposed by Medicare' s reimbursement structure will limit initial differentiation and
require stakeholder alignment to achieve successful differentiation. Once the system cost
savings from home healthcare are realized cost pressures will relax and displace the in-center
alternative.
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