Strategist Explains Key Trends in Healthcare’s Transformation

Hospitals, physicians, and health insurers rapidly changing how they do business

CEO SUMMARY: Four trends are disrupting the nation’s healthcare system in ways that no one would have predicted just a few decades ago. Ted Schwab, a healthcare strategist, described these trends during his keynote presentation at the 24th Annual Executive War College in May. His insights and predictions will help clinical laboratory directors and pathologists develop effective strategies in response to these trends. The steep rise in healthcare costs is one of the four trends and a primary reason why many community hospitals are struggling to remain open and avoid bankruptcy.

First of Two Parts

MOST PATHOLOGISTS AND CLINICAL LAB ADMINISTRATORS know that healthcare in the United States is transforming at a pace unseen since the birth of Medicare in 1965.

This unprecedented speed of change raises the stakes for every clinical lab and pathology group. Hospitals, physicians, patients, and payers are interacting in new and different ways. That makes it essential for clinical labs and pathologists to have appropriate strategies in place that enable them to serve the new—and often very different needs—providers have for diagnosing patients, selecting therapies, and monitoring progress.

One individual who has significant insight into the transformation of the US healthcare system is Ted Schwab, a healthcare strategist and entrepreneur. In his career, Schwab has worked with Alegent Health, the Oliver Wyman Group, the Strategy& division of PwC, and the Huron Consulting Group. Most recently, he has worked with Babylon Health, a company that promotes remote consultations for patients with physicians and other caregivers.

At the 24th Annual Executive War College in New Orleans in May, Schwab addressed a record crowd of almost 900 clinical laboratory professionals and pathologists on the current and future state of healthcare in the United States and abroad. It was the third time Schwab addressed THE DARK REPORT’s premier conference for innovative lab executives and pathologists, previously speaking in 2014 and 2016. Since then, much has changed in healthcare and those changes have validated many of his insights from those earlier presentations.

“Things are happening in healthcare in the United States today that none of us would have predicted when I started in this business in the mid-1980s,”commented Schwab during his keynote  presentation. “Healthcare’s transformation is in response to four significant trends. These trends involve how clinical care is organized, how that care is delivered, and how providers are being reimbursed.”

The four trends are:

  1. The rising cost of healthcare and whether the current rate of increase is sustainable.
  2. The rapid increase in spending for prescription drugs—particularly specialty drugs—as a main driver of increased healthcare spending.
  3. The struggle of community hospitals to remain open, as many have closed in recent years and more may close in the coming years.
  4. The shortage of primary care physicians (PCPs) and changes in how patients enter the healthcare system. This shortage creates an opening for retail health clinics and artificial intelligence.

“The first trend is the rising cost of healthcare,” Schwab said. “The question raised by this trend is whether those costs are rising so fast that the rate of increase has become—or soon will become—unsustainable. The idea that rising healthcare costs are unsustainable has been heard many times over the past 20 to 30 years. Yet this prediction has not yet come true.

“That said, the numbers show that this time, predictions about how the current rate of increase is unsustainable may actually come true,” he commented. “Less than 20 years ago, the income for the average family of four in the United States was roughly $60,000. Out of that $60,000, the family spent about $6,500 on healthcare, or about 11% of the gross income. That was the year 2000.

“Then, in 2008, came the greatest recession,” stated Schwab. “By 2018, inflation-adjusted income for that same family of four was still about $60,000, yet that family now spends about 35% of its gross income on healthcare expenses.

Unstainable Rate of Increase

“If this rate of increase continues, by the year 2046, a family of four will spend 100% of its income on healthcare,” Schwab predicted. “Obviously, this rate of increase in healthcare spending is not sustainable.”

The second trend is the fast-growing rise in prescription drug spending. “Currently, the main driver of the increased cost of healthcare is our consumption of prescription drugs, especially specialty drugs,” he said. “A friend of mine runs one of the largest pharmacy benefit management companies in the United States. His biggest worry is that within five years, 50% of what we spend on healthcare will be for prescription medicines.

“Today, about 20% of every dollar spent on healthcare in the United States goes for prescription drugs and spending on these drugs is rising by 13% annually,” Schwab explained. “But it is not widely recognized that 44% of the year-over-year increase in prescription drug costs comes from spending on specialty drugs.”

Schwab gave two examples of high-cost specialty drugs but did not name the medications. “Just one course of treatment for one specialty medication costs $475,000,” commented Schwab. “Another drug costs $375,000, and, again, that’s for just one course of treatment,” he explained. “These are bioengineered prescription medications, each of which is much more effective than other drugs. But bioengineering comes at a high cost.”

“Consumers, health insurers, or taxpayers have to pay for both of those specialty medications—and that’s before you add in the cost of the physicians who prescribe those drugs, the pharmacy that fills the prescriptions, and any hospital bills for those patients,” commented Schwab.

‘Zombie Hospitals’

“The third trend—community hospitals struggling to stay open—is important for pathologists and clinical laboratories to consider because these hospitals are like the walking dead. To call them zombie hospitals is not far off the mark,” Schwab noted. “If it hadn’t been for the rise in stock market valuations over the last 10 to 12 years which made their stock portfolios worth much more money, a third of all community hospitals in the United States would be closed today.

“Here’s why I say that: Last year, 39% of all hospitals in the United States had a negative operating margin,” he said.

“Hospitals are one of the core pillars of the healthcare value chain, and yet four out of 10 community hospitals were underwater last year. The only thing that propped them up was their investment income from a rising stock market.

“If you exclude all of HCA’s hospitals and all academic medical centers, the average net operating margin for the hospital industry is minus 3%. So, the next time the stock market has a severe and sustained downturn, we could lose somewhere between 20% and 25% of our community hospitals,” he predicted.

Shortage in Primary Care

“The fourth trend changing healthcare involves the shortage of primary care physicians and how patients can access primary care services,” commented Schwab.

“Primary care physicians as we’ve known them—such as Marcus Welby, MD, of TV fame—are no longer part of the landscape,” he stated.

“When I was growing up, Dr. Reed was our neighborhood physician and a pillar in the community,” Schwab continued. “He delivered all the babies in the neighborhood, gave us our vaccinations, and set our broken bones. In 1971 he even performed an experimental surgery on my mother’s ear and restored her hearing.

“The primary care doctors of that era were business folks and entrepreneurs. They also were individual practitioners,” he noted. “Today’s primary care physicians don’t deliver that kind of care anymore.

“Primary care has changed and will continue to change well into the future,” Schwab predicted. “One of the first ways we can tell that primary care has changed is that hospitals employ about 42% of all primary care physicians (PCPs) today.

“Hospitals that employ PCPs pay them an average annual salary of about $250,000. That is completely unsustainable,” he noted. “As employed physicians, they are no longer required to keep the hours that Dr. Reed or Dr. Welby kept in the days when they worked what seemed like 24 hours a day, seven days a week.

“Another important way to view how primary care has changed is to consider that in the 1980s, almost 90% of PCPs were sole practitioners or worked in groups of three or fewer physicians,” stated Schwab.

“By last year, those numbers were almost completely flipped. Now, 80% of primary care physicians work in groups of 20 physicians or more,” he said.

In addition to the fact that hospitals employ so many physicians today, Schwab saw two more signs that primary care is changing. One is that the Optum subsidiary of UnitedHealthcare has a division called the OptumCare Medical Group that employs 47,000 physicians. The fact that a division of the nation’s largest health insurer employs so many physicians is an important sign that shows how insurers are changing the delivery of primary care. The other sign showing how primary care is changing is that an ever-greater number of pharmacies have opened retail health clinics to deliver primary care, Schwab said.

Expect an Explosion in How Artificial Intelligence Becomes Involved in Patient Healthcare Services

MANY ORGANIZATIONS ARE WORKING TO INCORPORATE ARTIFICIAL INTELLIGENCE in how they deliver healthcare services, explained Ted Schwab, a health strategist and entrepreneur. He made this comment during his presentation at the Executive War College in May.

“You can expect artificial intelligence (AI) to have a growing role in healthcare,” he predicted. “As technology takes on a larger role in healthcare, hospitals and other provider organizations are testing how AI can aid physicians.

“Today I spend most of my time with companies attempting to get artificial intelligence (AI) to solve healthcare problems,” commented Schwab. “That simply means that machines are learning and doing what humans currently do.

“In AI, there are three trends to watch,” he explained. “The first major AI trend will affect clinical laboratories and pathologists. This trend involves how diagnosis will be done on the Internet and via telehealth.

“The second AI trend is care delivery, such as we’ve seen with Amazon’s Alexa,” continued Schwab. “You should know that Amazon’s business strategy is to disrupt healthcare. One way Amazon will do so is by announcing that Alexa will deliver behavioral health this year. I have no idea how that will work, but I’m fascinated by the process.

“The third AI trend to watch involves biological engineering,” Schwab said. “Look at what’s happening with T-cells and how AI supports much of what’s happening with bioengineering. T-cell therapy is five times as effective as the chemically-induced therapy used today.

Concept of Singularity

“In AI, there’s a concept called singularity, which is when machines have the ability to think as humans,” he explained. “Experts predict that singularity may be achieved somewhere between 2050 and 2075, when machines will be on par with humans.

“Already today, machines do amazing things in healthcare,” added Schwab. “But within five years, 90% of every invasive surgical procedure in the United States, except dermatology, will either be robotic or computer-assisted.”

Retail or Office Care?

“If we think about the components that go into offering a medical service in a retail setting versus a typical healthcare offering, we see that those two settings are very different,” he commented. “Despite those differences, the goal of delivering care in both settings is to provide a medical service that is more tightly integrated. This will continue as more companies open clinics in pharmacies and other retail stores.

“Here are some facts about this trend,” he said. “There are 9,560 Walgreens stores in the United States, and there are 9,800 CVS stores, 6,363 Walmarts, 597 Sam’s Clubs, and 2,277 Albertsons. What do each one of those stores and those companies have in common? Each one is developing strategies to put primary care offerings into its retail stores.

“Some of the most interesting ideas about this trend come from California and the Pacific Northwest,” he commented.

Providence Health and Services in Renton, Wash., says that within five years they will offer free care to any of their members, constituents, and beneficiaries who have any of the 75 most common primary care diagnoses.

“For those patients Providence Health will offer prescriptions and everything else needed for their care for free,” added Schwab. “Here’s how their math works: Right now Providence subsidizes primary care physicians at about $250,000 per practice per year. Therefore, it’s a win for Providence to give away care for free because they will do it in two ways.

“First, they will do it through their retail offerings in their drug stores and grocery stores in the Pacific Northwest. Second, they’ll do it through their digital or telehealth offerings,” he said.

Virtual Patient Visits

Another example comes from Safeway, a grocery chain in Arizona. “In Arizona— and particularly in the Phoenix area— Safeway has opened health clinics in its stores this year,” Schwab said. “What’s interesting about these clinics is that they are typically staffed with just a medical assistant. Otherwise, it’s a completely augmented reality.

“The care a patient would get in one of these clinics would be a self-determined primary care visit with a virtual visit on the back end,” he commented. “Such virtual visits via telehealth are increasing in frequency, particularly in rural areas where there are fewer PCPs.

“In addition, we now see a more interesting alternative to telehealth and retail offerings pop up over and over in healthcare,” explained Schwab, who often consults on how patients use artificial intelligence for symptom checking.

Online Symptom Checkers

“If you use Google in the United States to check symptoms, you’ll get five-million to 11-million hits,” commented Schwab. “Clearly, there’s plenty of talk about symptom checkers, and if you go online now, you’ll find 350 different electronic applications that will give you medical advice—meaning you’ll get a diagnosis over the internet. These applications are winding their way somewhere through the regulatory process.

“Recently, researchers in the UK ran an international symptom checker against a physician taking a medical board exam,” he said. “The researchers found that a primary care physician makes an accurate diagnosis about 79% of the time, while the most advanced artificial intelligence machines in the world make an accurate diagnosis about 81% of the time.

“The FDA just released a report saying it plans to regulate internet doctors, not telehealth doctors and not virtual doctors,” he explained. “Instead, they’re going to regulate machines.

“This news is significant because, today, within an hour of receiving emergency care, 45% of Americans have googled their condition, so the cat is out of the bag as it pertains to us going online for our medical care,” declared Schwab.

“Right now in China, health systems use robots as healthcare providers for in-home services,” he explained. “In Japan, over 50% of home care is provided through computers and robots. South Korea is experimenting with nurse robots in hospitals.”

Pathologists and clinical laboratory directors should be asking: How do we provide clinical lab testing or anatomic pathology services when more patients are diagnosed through telehealth or by AI via an online symptom checker? When new technology replaces patient visits to physicians, how will clinical labs and anatomic pathologists respond?

“My advice in these times of change is to do something,” suggested Schwab. “What we know today is that providers—including clinical laboratories and pathology groups—who do nothing will get trampled. However, those providers that do something proactively will most likely be the winners as healthcare continues to transform.”

Why ‘Medicare-for-All’ Could Gain Enough Support for Congress to Pass Enabling Legislation

IF HEALTHCARE COSTS HAVE RISEN AT UNSUSTAINABLE RATES, it will soon be necessary to make a broad, systemic change to get such spending under control, predicted entrepreneur and strategist Ted Schwab. One possibility is the introduction of Medicare-for-All, he said.

“I’m not a proponent of this idea, but folks in the millennial generation are likely to see Medicare-for-All,” he said. “There’s no question about that whatsoever.

“Here are some reasons why Medicare-for-All is coming: First, the federal government is already the biggest payer for healthcare services in the United States—by far,” he said. “In California, which has about 40 million people, Medicaid covers 33% of the population, Medicare covers 11%, the Veterans Administration 5%, and the Department of Defense and TriCare 2%. The Bureau of Indian Affairs also covers 2% and random other programs cover 2%. Adding up those numbers, shows that the government covers more than half—about 55%—of California residents.

“In West Virginia, one of the smallest states, Medicaid covers 30% of the population, Medicare 15%, the Veterans Administration 7%, the Department of Defense 2%, and other government programs 2%,” he said. “Again, it’s more than half of the population, or 56% in this case.

“So, we’ve gone beyond the tipping point of the federal government providing the majority of healthcare coverage in the United States,” Schwab comments. “But it’s even more important to think about the next generation.

“About two months ago, the Economist magazine devoted an entire issue to millennials and what they think about socialism,” he added. “What I took away from that article is that health insurance coverage is an important topic for millennials for three reasons.

“Number one, they believe government debt is no longer relevant, which is the opposite of what those of us in the baby boom generation believe about debt,” he said. “Number two is that millennials believe that healthcare is a human right. Number three is that millennials believe they will never get sick.

“In just a few years, millennials will comprise a majority of the workforce and voters,” continued Schwab. “If these current beliefs and attitudes hold constant, the millennial generation may be the one that supports implementation of Medicare-for-All.”

Contact Ted Schwab at 402-618-8154 or


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