North America Leads Healthcare ITO Adoption, But Other Regions Are Rising | Market Insights™
June 27, 2014
While North America remains the principal geography for healthcare ITO deals, other regions show a steady rise
While North America remains the principal geography for healthcare ITO deals, other regions show a steady rise
Demand for infrastructure outsourcing in healthcare IT will rise in the coming years, as that for application outsourcing and systems integration/consulting will fall
The healthcare IT outsourcing (ITO) market will see healthy growth over the next several years driven by reform mandates, payer-provider convergence, consumerization, evolving reimbursement models, and value-chain digitization
A movement is underway in the state of New York that, if successful, could result in a seismic shake-up in the U.S. healthcare industry. In a contract now under bid for developing a new program for processing Medicaid claims, New York will shift to paying for Medicaid on a managed-care basis rather than the current system of paying by procedure. The risks are high for both the state and its selected service provider, but so are the opportunities for the first movers to capture a large market throughout the country.
Why the change in pricing structure?
Basically New York wants to pay by service. They want to pay healthcare providers (doctors and hospitals) to treat a patient for an ailment but don’t want to pay for all the different procedures that go into that. The state’s goal in changing the structure is to give providers incentives to work with their patients efficiently against the goal of curing them, rather than maximizing their revenue by doing more procedures.
It’s a lofty goal that shows great promise. We can all agree that incentives matter and curing more people at a lower price is a wonderful thing. But there are consequences that accompany this goal.
The consequences are big
The backbone of the Medicaid system is a transactional billing process and platforms for paying by procedure. Achieving New York’s goal will require changing Medicaid’s underlying computer systems and operations of Medicaid. It’s well worth doing, but it’s a big issue.
The stakes are high
New York is one of the first to come to market for changing the payment structure, and the stakes are very high. As we saw with the Affordable Care Act (Obamacare), big rewrites of healthcare platforms are risky, expensive and painful. New York’s plan is no less risky, expensive and painful in that it deals with a substantial part of the U.S. economy and the services cover the poorest of the poor — an important set of stakeholders that we don’t want to disenfranchise.
The risks are also high for the service providers that win the contract to work with the state to develop the new structure. Hopefully New York learned from the lessons of implementing the Affordable Care Act and will spend adequate time defining the requirements and selecting the appropriate service providers and will also create flexibility for the providers as they move down the journey of discovery to build these new platforms. The requirements will emerge as they start working on the problem, making the traditional waterfall process of government contracting difficult.
The stakes are also high for the healthcare providers, who don’t wish to be in the cross-hairs of public scrutiny as the early adopters of the exchanges in the Affordable Care Act.
The benefits are substantial
Despite the high risks, the benefits are equally high. A restructured payment system promises better patient outcomes, greater efficiency for the state, and an improved healthcare industry. And the first mover that successfully builds this platform will be well positioned to capture a very large market and resell it to the other 49 states.
It’s a risky, high-stakes game. But they have all to play for.
Novartis on April 22, 2014, announced a succession of deals in a sweeping restructuring. It agreed to buy GlaxoSmithKline’s (GSK) oncology products unit for US$14.5 billion, plus another US$1.5 billion subject to certain milestones. In turn, it divested its vaccines business to GSK for US$7.1 billion, plus royalties. The two companies also announced the creation of a new consumer healthcare business through a joint venture, in effect combining Novartis’ OTC drug business with GSK’s consumer business, with nearly US$10 billion in annual sales. In a separate deal, it hived off its animal health business to Eli Lilly for US$5.4 billion.
The deals – given their scale and impact – principally reshape Novartis, which has been evaluating its businesses since last year. The move reflects a strategic imperative to focus on higher margin products, such as cancer drugs, and let go of low margin ones, which rely on scale and volume. This signals a momentous shift for the firm, which under its previous chief executive transformed into an expansive healthcare behemoth, fueled primarily by M&As. The deals have substantial implications for GSK as well, reorienting its business across respiratory, HIV, vaccines, and consumer health products – together accounting for nearly roughly 70 percent of its sales. It also consolidates its position as the leading global vaccine player.
These changes reflect an important inflection point for the pharmaceutical industry. The industry is coming to terms with multi-faceted challenges arising out of patent cliff implications, middling R&D productivity, and rising consolidation, leading to a rethink of business models.
Life sciences M&A bandwagon
Bigger is not always better
Consolidation has been a standard practice adopted by Big Pharma to tide over industry challenges, maintain growth momentum, diversify into emerging geographical and product markets, beef up R&D efforts, and boost sagging drug pipelines.
However, with middling R&D productivity, patent cliff losses, and expansion into newer product/service lines, pharma companies are reconsidering the conventional paradigm to factor in these multi-pronged challenges. Incessant consolidation has had a detrimental impact on many companies with decreasing post-merger productivity, culture mismatch, integration challenges, and declining agility.
That has resulted in firms such as Novartis refocusing their priorities to focus on core competencies instead of having its fingers in too many pies. These restructuring efforts call for a carefully thought-out technology strategy that encompasses organization-specific challenges and hurdles. The roadmap for pharmaceutical firms must be evaluated on a profitability-productivity matrix to test for efficacy. The imperatives brought by wholesale value chain digitization in the pharmaceutical industry entail a re-examination of the organizational structure and resource allocation/rationalization required for driving top line and bottom line growth. Technology will serve as a key enabler to free up resources and ensure optimal utilization levels.
The profitability-productivity matrix of pharmaceutical firms
Big Pharma will continue to take the acquisitions route as new drug development becomes more expensive and exhibits declining productivity. But companies need to take a more balanced and individualized approach as they assess their unique value proposition and go-to-market strategies in order to thrive in the new world order.
Application Outsourcing adoption by buyer industry: Key trends and ranks among top adopting industries – BFSI, healthcare, and public sector lead AO activity
Considering the nature of regulations and the sensitivity of personal information, one would assume that IT security is a top priority in the healthcare space. However, an estimated 29 million+ patient health records have been compromised, (classified as HIPAA data breaches,) since 2009. The number of health records breached in 2013 jumped a whopping 138% over 2012. Serious security flaws have even been detected in Obamacare’s much-touted flagship health insurance exchange website, HealthCare.gov, including severe lapses spanning JSON injection, unsanitized URL redirection, user profile disclosures, cookie theft, and unprotected APIs.
An Afterthought
The pace at which IT is changing the healthcare landscape makes it a prime target for malicious activity. Industry headwinds such as big data, payer-provider convergence, BYOD, HIX, EHR/EMR, and the Internet of Things (IoT) are adding to the healthcare information security conundrum. Patient records have become increasingly common in the fraud marketplace. When combined with other data sources such as insurance and medical data, the problem assumes more alarming proportions.
And it’s not a case of absence of punitive measures. Under the new HIPAA Omnibus Rule (effective from September 2013), firms face fines of up to US$1.5 million in the event of a violation (“willful neglect that was not timely corrected”). Europe has enacted several data security measures. Even before the latest regulatory rulings, insurer WellPoint was fined US$1.7 million after its online application database exposed information concerning more than 600,000 patients.
Feeding the problem
Although CIOs often list security as a priority imperative, it just doesn’t translate into actual spending. This discrepancy can be attributed to a confluence of reasons. The problem originates in a lax culture regarding IT security. The majority of information security breaches are highly avoidable, and most lapses can be traced back to sloppy system administrator password practices, careless sharing of sensitive information, failure to change default login credentials, among others. Healthcare information security is still not a top execution priority for most personnel, and most security programs are hampered by lack of relevant expertise and attention. Regulatory inconsistencies compounds the issue, i.e., multiple agencies are involved (FTC, FDA, FCC, to name a few), and their often divergent mandates contribute to the travails of healthcare IT security stakeholders.
Healthcare IT security roadmap
Stakeholders – both buyers’ internal IT teams and third-party service partners –face an increasingly complex technology conundrum. Any mitigation strategy should incorporate leading practices utilized in similar initiatives:
Ultimately, any healthcare IT security policy has to encapsulate the individual needs and challenges of various stakeholders – patients, providers, payers, and third parties – to ensure equitable access and health information exchange for coordinated care. The unenviable task of securing healthcare information in the onslaught of exploding devices and touch points calls for a carefully thought-out and implemented approach. But first, healthcare IT security must make a monumental shift from being an afterthought to being a primary strategic imperative in any plan design.
Applications services renewals concentrated in four industries: BFSI, travel & transport, manufacturing, healthcare
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