McKinsey & Company hosted an event in Washington, DC on March 26 in partnership with the Duke-Margolis Center for Health Policy, “Why consumers are crucial for building a sustainable healthcare system.”

1. Why consumers are critical for
building a sustainable
healthcare system

2. CONFIDENTIAL AND PROPRIETARY
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Welcome
Shubham Singhal
Global Leader, Healthcare Practice
McKinsey and Company

3. The healthcare consumer today
SOURCE: CBO projections (Jan and Sept. 2017), KFF 2017 Employer Health Benefits Survey; NHE Fact Sheet 2016. Kaiser The Financial Burden of Health Care Spending
1 For individuals 19-64, with or without an HSA/FSA/HRA; HDHP defined as $1300 or above
2 For single coverage, across firms, for in-network services
3 For non-Medicare households. The figure for Medicare households is 14%
72-112 Million
Who will buy their on
health plan in 2020
59 Million
Who are in HDHPs1 in
2017, up from 54M in
2016
28%
Consumer share of
national healthcare
expenditure (2016)
9%
CAGR in average annual
health plan deductible2 (2006-2017)

4. Consumerism: now and in the future
Today
Segmentation and
pricing of choice
Consumer cost sharing

5. Indexedutilization
100
1 Impact of changes in actuarial value on utilization of medical services holding all else equal (e.g., age, risk)
SOURCE: McKinsey Analysis based on Truven claims data
Cost sharing impacts consumer behavior
Actuarial value
100%
Utilization as actuarial value declines
90% 80% 70% 60%
85
80
76 74
Utilization of services as a percent of utilization with a 100% AV plan1

6. For a specific cohort1, difference between individuals with varying deductibles
Higher cost sharing materially alters utilization
Average utilization
PMPM, $
Members who bought
for financial security
Members who bought
with intent to use care
$115
$295
$82
$190
$2,500
Deductible
$5,000
Deductible
-29%
1 Specific cohort examined is low-risk females, ages 50-59
SOURCE: McKinsey Analysis based on Truven claims data
-36%

7. Consumers are making trade-offs between price and access
47%
More than half of exchange
networks offered in 2017 were
narrowed…
Broad
21%
Ultra-narrow
28%
Narrow
4%
Tiered
SOURCE: McKinsey & Company, Hospital networks: Perspective from four years of the individual market exchanges

8. Consumers are making trade-offs between price and access
…and consumers appear to be willing to accept narrowed networks in
exchange for premium savings
In the silver tier, plans with narrowed
networks were priced ~18%
lower than broad network plans in
2017
Among consumers who purchased a new
plan in 2016, 45% selected a
narrowed network,
up from 34% in 2015
SOURCE: McKinsey & Company, Hospital networks: Perspective from four years of the individual market exchanges

9. Consumerism: now and in the future
Today
Segmentation and
pricing of choice
Future
Consumer cost sharing
Digital consumerPatient-centric care
delivery
Next-gen product
design

10. Looking ahead, next generation product design should align demand
and supply-side levers to improve overall value and affordability
Align level of insurance coverage to
drive value conscious consumption
Guiding Principles
Design provider payment models
to ensure value based care
delivery
Unleash the power of consumer
markets in the health care delivery
services market
SOURCE: McKinsey & Company, “The Next Imperatives for U.S. Healthcare”

11. Severity
Medical risk serves as a framework for thinking about
alignment of incentives
Frequency
Level of consumer
discretion
Temporal dependency
1. Routine
2. Preventive
3. Chronic care
4. Catastrophic: chronic
5. Discretionary
6. Purely elective
7. Catastrophic: not chronic
8. End of life
…leading to 8 medical
risk categories
Four factors define the
nature of medical risk…
SOURCE: McKinsey & Company, “The Next Imperatives for U.S. Healthcare”

12. SOURCE: McKinsey & Company, “The Next Imperatives for U.S. Healthcare”
Low Medium
High
Consumer
discretion
Consumer ability to
absorb risk /expenseRisk category
Chronic care
Catastrophic: Chronic
Routine
Preventive
Discretionary
Purely elective
Catastrophic: Not chronic
End of Life
Potential reimbursement
approach
Nested episodes within
population health models
Fee-for-service
Fee-for-service
Episodes
Episodes
Episodes
Episodes
Out of pocket
Free; usually included in
insurance coverage
Out of pocket
Out of pocket
Insurance
Potential financing
approach
Insurance, with incentives for
proper management: risk-
impaired annuity
Depends on chosen treatment
Each category requires specific incentives

13. LASIK2,3
Breast augmentation3
-5
1 Prices adjusted to 2014 dollars according to US CPI 2 LASIK costs reflect price for one eye 3 Prices are national average surgeon’s fee. Not included are fees for hospital service, anesthetist, pathology or radiological investigations
4 NHEA price proxy for Physician and Clinical Services (composite index: PPI, offices of physicians and PPI, medical and diagnostic laboratories)
A consumer market for services is quite powerful
Eyelid lift3
Tummy tuck3
Physician price index4
-12
-15
-8
-8
Liposuction3
13
Price change of elective, non-reimbursable services
2006-141, %
SOURCE: McKinsey & Company, “The Next Imperatives for U.S. Healthcare”

14. Aligning health insurance with medical risk categories could
lower premiums and improve affordability
Example redefinition of essential health benefits (EHBs) , $, PMPM
SOURCE: McKinsey & Company, “The Next Imperatives for U.S. Healthcare”
120
Routine
and
elective
care2
Incentives
for chronic
condition
management
Episode
based
payments
Current
base of
insured
expenses1
Insurable
expenses3
(basis for new
100% AV product)
Narrow
networks
New
claims,
PMPM
(70% AV)
New
insurable
expenses
391
322-361
325-252
17 14
21-38
-24%
-8-18%
Note: PMPM – Per Member Per Month
1 Based on 2014 exchange premiums and actuarial value.
2 Based on breakdown of 2014 Truven commercial claims data. Expenditures evaluated based on four major criteria: Severity, frequency, level of consumer discretion, and temporal dependency.
3 Includes chronic, catastrophic, and preventive care (excludes routine and discretionary services).
511

15. Virtual
Wellness
Post Acute
Hospital
Sub-acute
Diagnostic
& Ancillary
• Free standing ED
• Dialysis
• Infusion
• Urgent care
• Ambulatory
surgery
• Retail clinic
• Free standing imaging
• Free standing lab
• LTAC
• Home health
• SNF
• Telehealt
h
• Video visit
• eConsult
• Acupuncture
• Employer wellness
• Massage
• Weight loss
• Chiropractic
We have a hospital-centric ecosystem in healthcare delivery today
Patient

16. SOURCE: 2015 McKinsey Consumer Health Insights survey
However, consumers are demanding convenient options
Consumers want choice in settings of care…
50
Virtual or remote care
for non-emergency
treatment
71
Variety of setting
options for routine
care
Top 3 reasons for using a health clinic in a retail store
…and prioritize convenience and access
46.1% 30%32.5%
1 2 3
Convenient
location
Didn’t need
an appointment
Convenient
hours

17. And growth is significant in more convenient sites
Locations
Retail
clinics
29
SOURCE: IBIS World; Merchant Medicine
12%
Urgent
care
Ambulatory
surgery
Growth, # locations CAGR 2015 Revenue, $B CAGR, (2010-2015)
8%
6%
17
19%
4%
6%
1,183
1,866
8,549
10,434
5,400
7,300
2010 2015

18. Alternative sites for common conditions and
diagnostics are generally lower priced
Savings for common conditions by site of care
% difference in cost per episode, $
Physician office Retail
Ear infection
Pharyngitis
Urinary tract
infection
-40%
-28%
-32%
107
157
152
109
189
114
Relative price of hospital-based
and national labs
Indexed to 100
SOURCE: Mehrotra et al (2009). The Costs and Quality of Care for Three Common Illnesses at Retail Clinics as Compared to Other Medical Settings.
Annals of Internal Medicine, 151(15): 321-328 . https://healthcare.mckinsey.com/distributed-sites-care-tipping-point
National
labs
Hospital-based
labs
50
100

19. 38 minutes
saved by performing
a procedure at an
ASC versus a
hospital outpatient
department
These lower prices are often driven by labor and capital efficiencies
Value creation of ambulatory surgery centers (ASC)
Smaller capital
footprint
• Higher asset and
labor productivity
• Lower consumer
prices
• ~20% EBITDA
margins to providers
+ =
SOURCE: Health Affairs, 2014; Blue Health Intelligence, 2016; Expert interviews; McKinsey analysis

20. Minor
procedures
Physicals
Vaccines
51% of visits to retail clinics are for vaccines
74% of those that haven’t visited a retail clinic
are willing to go for vaccine
What will go retail?
Lab
Convenient, affordable blood testing
LabCorp partnership with Walgreens
Minor Procedures
More than 80% of Urgent Care
Centers offer fracture care
Specialist Consults
69% of eConsult referrals in one 2-yr
pilot were resolved without a need for
face-to-face interaction
Vaccinations
Minor
emergencies
Inpatient
admission ICU
Laboratory
Imaging
Specialist Trauma
Specialist
consults Major surgery
SOURCE: Company websites; McKinsey Consumer Health Insights 2015; Press search

21. We are headed towards a more consumer centric delivery model
Virtual
Post Acute
Hospital
Sub-acute
Diagnostic
& Ancillary
Wellness
Patient

22. Telemedicine creates new opportunities for patient engagement
and may further disrupt traditional sites of care
Among healthcare consumers surveyed
SOURCE: McKinsey’s 2017 Consumer Health Insights survey; Capital IQ
1% Members
Surveyed had a telemedicine
visit in 2015
7% Members
Members surveyed had a
telemedicine visit in 2017
66% Members
have not had a telemedicine visit
in 2017 but would be willing to in
the future
2012 2013 2014 2015
Number of M&A and PE deals
in telemedicine and remote
monitoring in the US
3
6
7
11

23. A convergence of technologies promises to reshape healthcare
delivery around the consumer
Cognitive implanted/
ingested devices
Very high speed
wireless and mobile
connectivity
Wearable sensors
Digital & mobile
interfaces
Machine
learning / AI

24. These technologies could create eco-systems that enable
continuous, personalized, enablement of care
Virtual or remote care
for non-emergency
treatment
Variety of setting
options for routine
care
The Future of
Healthcare
Continuous
Tracking
Automated
‘Intelligent
Triage’
Broader
Platform
Inclusion
Intelligent
Personalization
Using Machine
Learning

25. Further research available at
http://healthcare.mckinsey.com