The “shop local” movement has been a mainstay in the U.S. healthcare marketplace for ages. Patients travel fewer than 30 miles for the majority of their care, which means that healthcare is consumed in local markets, each with unique characteristics, almost like small provinces. Providers are increasingly acknowledging this trend, as evidenced by the recent M&A activity of provider systems across the country. Given the pace of change, it seems that this topic warrants a closer look.
Local Healthcare Markets Defined
Due to patients’ travel patterns when seeking care, healthcare markets naturally are centered around major population hubs. Patients’ travel is dependent, however, on the type of medical care that they’re seeking, as illustrated in the chart below. On one extreme, patients stay local for routine, emergency care such as the setting of a fractured arm. On the other extreme, patients may travel quite far for specialized and non-emergent care such as chronic treatment for a very rare disease. Meanwhile, in the middle of the spectrum, patients exhibit mixed travel patterns that frequently depend on their preferences. Highly specialized emergency care might warrant travel to a specialist if appropriate local resources are unavailable (for example, medivac), but non-emergent routine care is primarily consumed locally—with the exception of high cost-to-patient procedures that encourage price shopping and medical tourism.
Large regional and local provider systems are aware of these dynamics, and organize their partnerships—that is, their clinically integrated networks, community provider referral arrangements and so on—and their M&A strategy to maximize their influence within their existing footprint and to increase market share. In contrast, national hospital chains have begun to divest hospitals in markets where they haven’t garnered enough market share, which enables them to focus on partnerships and M&A in their most important local markets.
Across the U.S., providers are going local and working to increase their treatment influence and market share in an effort to improve their negotiating position with payers, improve reimbursement rates, achieve population health outcomes and other ACO-like metrics, and manage risk more effectively. As a result, the U.S. healthcare system is becoming increasingly organized into local healthcare markets—a term that we find so fitting that we’re prone to using its acronym, LHM. Local healthcare markets are demarcated by where a preponderance of patients travel to seek care. These LHMs include all of the stakeholders—payers, providers, employers, etc.—who influence care within these geographic boundaries.
Conceptually, the definition of an LHM is very intuitive: Where do patients consume healthcare, and where are providers executing local M&A strategies? In practice, however, determining where patients consume healthcare requires a detailed analysis of multiple medical claims data sets. My colleagues and I examined claims data, which detail how doctors share patients. Using clustering algorithms to link systems that share patients and separate systems that do not, we identified approximately 104 self-contained LHMs in the U.S. In the process, we also learned a few additional facts about these LHMs:
- 97% of Medicare spending and 95% of patients are contained in these 104 LHMs.
- 80% of patients in the U.S. receive all of their care within the boundaries of a single local healthcare market.
- The majority of provider M&A is executed within, rather than across, these local markets.
- 75% of provider systems are self-contained within any single local healthcare market.
We were surprised at the consistency that we found in local healthcare markets. Thinking through it more closely, it made a lot of sense: In order to create outcomes required by CMS, providers must develop and execute a local population health strategy, meaning that they’re organizing themselves to control care from diagnosis to discharge.
Does This Mean That Pharmaceutical Companies’ Deployments Are Broken?
The map of approximately 104 LHMs combined with the associated ZIP code file resulting from our analysis has proven to be a valuable diagnostic tool, which we’ve used to examine pharmaceutical organizations’ performance across the U.S. We’ve found that, in many cases, customer engagement teams aren’t aligned to these LHMs but often are aligned across LHMs. This means that these teams are required to navigate within different healthcare environments, serving different organized providers with limited ability to strategically and holistically understand and address everything from customer needs to contract status. The result is a less effective commercial and medical organization, and below average customer engagement.
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Meanwhile, if customer engagement teams were aligned to LHMs, reps and account managers could, for example, communicate the importance of an IDN’s treatment policies such as their prescribing guidelines and associated physician report cards on the product selection of an affiliated, clinically integrated network. Increased coordination would make these engagement teams better able to influence the key opinion leaders, pharmacists and hospital administrators who are responsible for these policies.
Furthermore, pharmaceutical manufacturers will need to be better attuned to local healthcare markets as the LHMs continue to develop their response to the ACO-led increased focus on patient outcomes. Customers will be enacting local population health strategies, and to secure premier status, manufacturers will need to show the value of their product within the context of these local strategies.
Aligning customer engagement teams to local healthcare markets is especially important as pharmaceutical companies increase their B-to-B engagement strategies. Detailed understanding of these LHMs, including local market strategies, provider affiliations, parent-child relationships, patient referral networks and payer-provider dynamics, will be essential to the success of a manufacturer’s account management program.
As the U.S. healthcare market continues to undergo change, providers are expected to continue vying for share of patients within these local healthcare markets. This leaves many manufactures wondering where to begin. At the very least, current sales and medical field teams should be aligned with the LHMs where their most important customers are designing their own public health strategies. Doing so will help pharmaceutical companies begin a longer journey, allowing field teams to generate richer customer insights that enable manufactures to better deliver value and to improve their customer experience.