In this Q&A, adapted from a video conversation recorded this summer, Harvard Business School Professor Regina Herzlinger talks with MIT Sloan Management Review contributing editor Steven DeMaio about how companies in the health care industry are teaming up with unlikely collaborators to reduce costs, increase efficiency, and better understand and solve customers’ problems — a topic of interest to innovators in any sector. Herzlinger focuses specifically on partnerships between health retailers and insurers, such as the CVS-Aetna merger and the Walmart-Humana merger that’s in the works (details about these partnerships are evolving rapidly, particularly on the regulatory front). She also explains why hospitals and other providers must raise their game to compete.
MIT Sloan Management Review: Regi, to start, can you give our readers some basic background to explain why retailers like CVS and Walmart are interested in joining forces with large health insurers like Aetna and Humana?
Herzlinger: It’s spelled “Amazon.” Amazon scares the you-know-what out of everybody who might compete with them. And for a long time Amazon was like a shy bride — on again, off again, are they going to enter the pharmaceutical space? They finally did. They bought a company that does mail-order pharmaceuticals. So why is CVS concerned? Well, its pharmaceutical division is highly profitable. And Walmart is also in competition with Amazon, not only in pharmaceuticals, but in many merchandise categories.
So CVS and Walmart thought that by joining with health insurers, they could sell health insurance products in their stores — and they could expand their stores to provide more convenient, higher-quality, lower-cost access to people for health care services. Clearly, you won’t get your brain surgery done at Walmart, but if you have diabetes and you have very challenging daily needs, it could be helpful to go to Walmart, which has 4,800 stores conveniently located. You could go to CVS, which has 10,000 stores conveniently located.
MIT SMR: What’s the advantage for the insurer in merging with a retailer? In particular, I’m thinking of merging with CVS, which is both a pharmacy benefit manager and a health care service provider that offers vaccines and strep tests and other services. Why do insurers want to do this?
Herzlinger: Well, they’re pretty threatened themselves.