Are Hospitals’ Economic Moats Drying Up?

Economic moats are a great analogy, coined and popularized by Warren Buffet. They refer to the ability of any business to maintain a competitive advantage, protecting its long-term profits and market share. (If you would like to read a quick description, I recommend this article on Investopedia.) Identifying healthcare’s economic moats allows us to understand why certain industry changes have been – or will become – imperative. Below are a few “economic moat trends” for hospitals and health systems across the country:

Specialized Providers and Campuses

While modern hospitals and their extensive facilities are known for their broad range of services, they are not known for simplicity or ease of use (e.g., confusing billing and insurance procedures, hard to navigate physical locations, etc.). In short, the breadth of services has bred complexity.

In response to this, many specialized competitors have sprung up over the years, offering niche services and simpler operations. This model streamlines and optimizes care delivery, and can be characterized by leaner processes, more deeply trained staff, and a focus on patient experience. A few examples include:

  • Dialysis centers – Some of these centers have been open since the 1970s, taking one of the most regular treatments in healthcare and providing an easier-to-access option. The big three examples of this massive industry are: Davita, Fresenius, and DCI. These centers have become known for customer service, comfort and ease of use.
  • Birthing centers – A trend that seems to be taking off because of factors in the ACA, these specialized centers provide everything from luxury birthing suites to classes – and sometimes offer every pregnancy-related appointment. One example is Baby+Co which now has five locations everywhere from Colorado to North Carolina.
  • Ambulatory surgical centers (ASC) – As outpatient surgeries become more prevalent, so do standalone surgery centers. This trend, with its convenience and efficiency, has moved many procedures outside of the traditional hospital walls. The majority of ASCs are independently managed, with the exception of organizations like USPI and the recently merged Envision Healthcare/AMSURG.

How do health systems compete with these specialized facilities? They often create centers and clinics that duplicate the specialization of other providers and extend their offerings beyond the traditional hospital ecosystem. Additionally, they form traditional partnerships including everything from clinical collaboration to part ownership in new ventures or extensions for a local market.

Location, Location, Location, but…

Location has traditionally been the biggest moat for local hospitals and health systems in larger markets. Some people are not willing or able to travel significant distances to receive care. However, complex payment models are changing consumer behavior, and payers are willing to exchange convenient locations for other factors, like savings and quality improvements. If the hospital of yesterday was the go to option for 100% of healthcare services, today the top, middle and bottom of the funnel are being siphoned off to the competition, listed above and in many more places.

With the cost of healthcare rapidly on the rise, travel costs are becoming relatively insignificant. As a result, consumers are interested in a wider range of care options – to find their preferred balance of quality, cost, and location. There are a number of trends to watch, and some early indicators that smart hospitals will jump out in front and manage. Some examples include:

  • Self-insured employers – We have all heard about the partnership between Cleveland Clinic and Lowe’s. This has impacted local hospitals across the country, since now any heart surgery for a Lowe’s employee will cost them nothing at one of the top heart centers in the country. This type of relationship redirects individuals from local markets in an attempt to both improve quality and reduce cost. While this is a single example, there are 1,000 variations of this strategy that a smart hospital could deploy.
  • Self-pay medical tourism – This can range from driving across the border to flying around the world. When individuals are paying for their own medical care, their “inconvenience threshold” can increase significantly. Traveling can provide waitlist-free access to everything from weight loss surgeries in Tijuana to liver transplants in Hong Kong. We fully acknowledge that this trend is a tiny share of overall healthcare spending but it is one to watch.
  • Medical transportation insurance – Individuals can also obtain medical transportation insurance which allows them to be transported to the facility of their choice for moments of medical need. This allows wealthier individuals (often health systems’ most valuable targets) to choose their treatment location, sometimes even in emergency situations.

The modern world’s connectedness has allowed individuals around the world to find better care. If we connect the specialized care developments with the trend of traveling for treatment, it presents the opportunity for a sizable shift away from the traditional geographic moats.

Virtual Health

A final, big leap is virtual medicine and its ongoing impact on hospital operations, enhancing services and pulling individuals out of the top of the traditional hospital funnel. Many virtual health services are directly fueled by the direct search and health information market, a market that has learned to become more local-focused but may shift to due to the increased demand for virtual services.

Additionally as the use of virtual health tools inside practices and health systems accelerates, the demand for different types of access could lead to significant changes in a health system’s moat of established specialists.

  • On-demand consumer-purchased – As individuals seek care for everyday maladies online, the traditional, local market now competes against search results. Virtual health companies can provide a convenient, on-demand visit – with or without a local health system partnership.
  • Ongoing support services – For long-term counseling and emotional support services, virtual health has a distinct advantage: 24/7 access with no incremental facility costs. These support plans allow individuals to access one-on-one sessions or on-demand texting support from counselors, all from the comfort of their phone.
  • Virtual consults – Even inside the doctor’s office, virtual health can make an impact. If a primary care provider can request an immediate consult during a patient’s visit, the need for a referral could be eliminated, saving that patient considerable inconvenience and cost.

Individual primary care practices, relying on apps and algorithms, can now have a broader presence without a health system serving as gatekeeper. While these apps can be a huge boon for health systems, they also provides consumers and doctors with access to a broad range of specialists while (potentially) not going through a health system. And health systems can use this strategy to address their complexity, widen access and improve efficiency for their employee and physician groups.



What’s a marketer to do?

So, what can you do to help your hospital or health system navigate these pivotal trends? Here are a few key takeaways:

  • Listen to the industry and what is happening in other markets – There will continue to be new disruptors in healthcare that will begin impacting patient volume, before even showing up in your local market. Research and collect industry insights – these serve as great conversation fodder with leadership and prepare you to take a proactive stance. Additionally, they prepare us as marketers to talk holistically about how to use the four P’s of marketing and begin adding responsibilities beyond promotion.
  • Identify & monitor new local market entrants – Use tools like search monitoring to identify new local competitors and facilities on an ongoing basis. As new competitors enter the local market or industry, start a personal analysis of how they could impact your patients, physicians, and entire organization. Additionally, set aside a few hours every month or two to monitor their activity. What can you learn from their marketing strategy? Keep an open dialogue with your peers in strategic planning and/or business development about what is happening and thank them whenever they pass on new intel.
  • Present what you find – Use your research internally with the marketing team and externally with service line leaders who might be impacted. Your clinical colleagues have a huge responsibility to keep up-to-date with current medical knowledge. Help them keep track of the market by providing your take. This will help position your department as a valuable partner and help you be seen as someone who can better represent the voice of the patient, understand market forces and ultimately the reality (and implications) that creates for your organization.



Navigating large, systemic change is never an easy process and the next decade will likely be a trying one for almost every healthcare entity. The disruptions and trends listed above will continue to affect economic moats that have been core to the business of hospitals and health systems; however, they simultaneously represent opportunities as well.

It is my personal belief that now is the time for healthcare marketers to step forward and become the strategists and activators of the “market”, based on a deep understanding of the industry, consumers, competitors and their own organization. This is no easy task, but I see no other discipline which is as adequately-equipped to find a balance for what consumers and patients want and need with the goals of the organization. Ultimately, the organization that finds that balance amidst these changes will be a champion.

October 30, 2017
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