14 September 2016

ESPN, Health Care Organizations Threatened by New Lower-Cost, More Flexible Alternatives

A recent article in Hospitals & Health Networks pointed out the striking similarities between the disruption of ESPN and the disruption facing health care organizations. ESPN’s dominant leadership position is being threatened by new lower-cost, more flexible entertainment media alternatives, forcing it to re-think its longstanding, wildly profitable business model. The value-based care imperative is causing equally dramatic disruption to the traditional health care delivery model.

ESPN, which styles itself “The Worldwide Leader in Sports,” has long dominated sports media and in 2012 was valued at $40B, making it the world’s most valuable media property. Since then, however, ESPN has been bleeding subscribers, losing four million between the end of fiscal 2013 and the end of fiscal 2015. Streaming media platforms like Amazon Prime Instant Video, Netflix, Hulu and Sling TV have expanded their content, offering more customizable and lower-priced alternatives to cable and satellite TV subscriptions. To remain competitive, cable companies are offering “skinny bundles” that, for the most part, cut out the highest-price premium channels like ESPN (whose per-subscriber fees cost cable operators four times as much as what they pay for other networks). Streaming media and skinny bundles are cutting into ESPN’s revenue stream, and in order to survive this digital disruption the network needs to reinvent its business model and embrace streaming media. As a tentative first step, ESPN cut a deal with Sling TV to be part of its basic $20/month package. But cannibalizing its enormous cable TV subscription revenue with lower-cost streaming offerings is not a profitable long-term strategy, given the high fixed costs of the exclusive content and commentary that makes sports fans willing to pay.

The move to value-based care is creating similar disruption in the health care market. As with cable’s skinny bundles, narrow networks are excluding high-quality providers that can’t cut their costs enough to meet insurers’ and employers’ low pricing demands. Like ESPN, hospitals also have high fixed expenses that are difficult to trim without negatively affecting care. Medicare reimbursements, a major source of revenue, will be at risk under MACRA. In addition to governmental mandates, health care performance is also under scrutiny from 20 major U.S. corporations including American Express, Coca-Cola and IBM, that formed the Health Transformation Alliance, whose collective data analysis of providers’ cost/quality of care value proposition could also put providers’ revenue at risk. As with entertainment media, new lower-cost, more convenient options are entering the market, such as CVS Minute Clinics, virtual visits and urgent care chains. And telehealth is gaining traction, promising further disruption to long-standing health care business models.

Hospitals and other legacy care organizations need to rethink their long-established business models in order to survive these fundamental disruptions to traditional health care. Like ESPN, they are faced with the fundamental challenge of how to provide higher quality, more convenient services at a lower cost.