Week 4: Vitality

Week 4: Vitality

“Vitality”
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Summaries

  • Coursework > Week 4: Vitality > Video: Vitality
  • Coursework > Week 4: Vitality > Video: Vitality 2
  • Coursework > Week 4: Vitality > Video: Vitality 3
  • Coursework > Week 4: Vitality > Video: Vitality 4
  • Coursework > Week 4: Vitality > Video: Vitality 5
  • Coursework > Week 4: Vitality > Video: Vitality 6
  • Coursework > Week 4: Vitality > Video: Vitality 7
  • Coursework > Week 4: OdontoPrev > Video: Odontoprev
  • Coursework > Week 4: OdontoPrev > Video: Odontoprev 2
  • Coursework > Week 4: OdontoPrev > Video: Odontoprev 3
  • Coursework > Week 4: OdontoPrev > Video: Odontoprev 4
  • Coursework > Week 4: OdontoPrev > Video: Odontoprev 5

Coursework > Week 4: Vitality > Video: Vitality

  • You wouldn’t think that somebody would say, wonderful and health insurance in the same sentence, but the product is phenomenal.
  • It’s called Vitality, and here’s what it does.
  • If you are enrolled in Vitality, you fill out information about your health habits.
  • If you’re sick and you adhere to the things that you need to do to keep yourself healthy, you get paid a lot of money.
  • It’s particularly cost effective with people who are very sick.
  • For societal purposes, it’s really great for people who are sick.
  • Vitality, to its credit, has done studies which are described in the case, that show that people who participate in Vitality versus those who do not, the people who participate are in much better health and they spend less.
  • We’re going to look at innovations outside the United States, not only with Vitality, but also with another one of our case studies which is set in Brazil.
  • Vitality is the first case study that we’re doing that focuses on an established company trying to innovate itself.
  • We’ve looked at Vitalia in Spain, and Kathy Hoffman’s start-up, to help people who have some sort of Mild Cognitive disorders.
  • Vitality is an established company, but it is innovating.
  • You may be working within an established firm that needs to change itself and innovate.
  • So we’re starting this voyage about a how-to innovate within existing firms with the study of Vitality.
  • We’ll see Adrian, and we’ll have a chance to hear his point of view at the end of the study.
  • So Adrian has decided he’d like to bring Vitality to the United States.
  • We need some ways of helping people to help themselves, to get fitter, to get thinner, to adhere to the daunting self-care regimens that people who have chronic diseases have to adhere to.
  • So does he sell Vitality, This product they incense people to manage their care directly to employers? Or does he take Vitality, package it with a health insurance product, and sell it through health insurers? So how do we analyze this decision? Well we’re going to go back to our framework and we’re going to use it to try to analyze, does he go to the employer route or does he goes the insurer route? First thing we should do is look at the six factors, and their impact on whether he goes employer or insurer.

Coursework > Week 4: Vitality > Video: Vitality 2

  • REGINA HERZLINGER: So let’s look at the financing factor.
  • Financing is always important because if the financing factor is not aligned with a venture, you may as well forget about it.
  • Vitality, if they package it with their existing health insurance, going to raise the costs of health insurance and they’ll have to raise their prices.
  • Is there sufficient evidence that the market wants this kind of product? And are they really convinced it’s cost effective? Cost effectiveness is something that falls under the accountability factor.
  • Have they shown that it does what it’s supposed to do and that it does it in a cost effective fashion? In other words, that the savings outstrip the costs of this product.
  • Even though Vitality has adjusted for the socioeconomic factors of those who participate.
  • Those who don’t participate, they cannot adjust for the factor of motivation.
  • So they have accountability and the evidence is very strong that the people who participate have much better health status and save money than those who don’t participate.
  • So financing factor to employers and insurers, I’d say it’s a question mark.
  • Accountability factor, much stronger than what we looked at in, let’s say, Weight Watchers or Jenny Craig in my judgment.
  • If you’re one of these people, why shouldn’t you get paid for it? And that’s what Vitality is going to do.
  • So it’s OK. What about technology? Well, discovery is a very well managed firm, in my opinion, and they have great technology.
  • Well, there’s one thing we haven’t thought about, and that is, what about the insurers versus the employers when it comes to these six factors? And where it is most important, this factor that is most important in distinguishing about whether they should go with employers or go with insurers is what? Why don’t you have a group discussion and think about it? “.

Coursework > Week 4: Vitality > Video: Vitality 3

  • Do consumers really want people to know how healthy they are- people outside their immediate friends and family? Most people- no.
  • Remember, Vitality Age Vitality measures how healthy you are and assigns you your real age versus your chronological age.
  • Whereas if they go to employers and sell it as a standalone product, only Vitality will know how healthy they are.
  • I believe it is so critical that my analysis of the six factors absolutely focuses me on the decision that they have to sell it as a standalone product to employers and assure the consumers that the employers will never know- they will not pierce the veil of Vitality to know their employees health status.
  • How do you go to employers? Do you knock on the door of the head of General Electric and say, I’ve got a great product for you? That’s, of course, totally impossible.
  • They sell all kinds of insurance and financial products to human resources.
  • They’ll go to the employers, and they’ll sell it.

Coursework > Week 4: Vitality > Video: Vitality 4

  • The exhibit shows that to sell 100,000 of these Vitality policies costs $3 million.
  • Plus they have the characteristics that make them good salespeople.
  • So they put themselves at risk for selling these products.
  • You don’t pay them the fee, unlike the salespeople who are on salary.
  • The way the brokers work is they’re totally on commission.
  • If you’ve ever bought a house, you’ve worked with a broker.
  • Or if you’ve bought a mortgage through a broker, those people are called mortgage brokers.
  • Typically brokers earn around- what do you think? 6% typically.
  • Are the brokers going to sell this product? They’re going to get 6% of the price of the product.
  • What is the price of the product? Once you tell us what the price is, we’re going to give you feedback on your answer.

Coursework > Week 4: Vitality > Video: Vitality 5

  • SPEAKER 1: The answer should be $60 per person, per year.
  • So 6% of $60 per person, per year, for broker is $3.60, for selling an entirely new product to a corporation.
  • So you’ll have to hire your own sales force and payment.
  • Is this viable? And the points under the viability is, how much does it take to break even? How many customers do need so that your revenues are exactly equal to your costs? So can we answer this question for Vitality? Well, we know that the price per person is $60. We know that they have to pay sales people $3 million in order to get 100,000 in sales.

Coursework > Week 4: Vitality > Video: Vitality 6

  • REGINA E. HERZLINGER: So here’s the Vitality break-even analysis.
  • So how many people will make those expenses equal to the revenues? Simple algebraic formula, and the formula shows us that the break-even point for Vitality is 400,000 people.
  • So there are over 900 firms in the United States with more than 10,000 employees.
  • If they sell Vitality to 40 of those firms with 10,000 employees, they’re going to have 400,000 employees.
  • How long does it take to make a sale? Probably half a year.
  • So I think Vitality, with its own sales force, can hit break-even, but it’s going to take some time- two to four years.
  • So we’ve discovered a pretty good avenue for Vitality go sell to the business community.
  • We think they should hire their own sales force, and after a couple of years, they will break even.
  • Course couple of years means they will have invested $12 million a year, $24 million in two years.
  • So what about the other elements of the business model? How do they look as far as Vitality goes? Why don’t you have a group discussion and focus on those? So the things we haven’t discussed as yet is the competitive strategy, how sustainable what they’re doing is, the financial valuation of this business, and- always the most important thing- do they do good as well as doing well? Please, talk about it amongst yourselves.

Coursework > Week 4: Vitality > Video: Vitality 7

  • First mover, fast follower- somebody who learns from the mistakes of the first mover and executes better- and legal barriers Vitality is clearly a first mover.
  • It’s got a lot of stickiness because once you’re out on the Vitality model and your earn those points for doing the right thing, you’re not likely to say, I don’t want to do this anymore.
  • Because Vitality has been done in South Africa for such a long period of time, it works very well.
  • So this is a good business? I think it’s a fabulous business.
  • If you value that at a multiple of 10- and remember the multiple is a value that the stock market assigns to every dollar of earnings.
  • So for every dollar of earnings, that stock is valued at $16. If we’re conservative and we value Vitality at 10, multiple of 10, got $12 million of earnings.
  • Multiple of 10, $120 million business for investments of about 24 million for the first two years.
  • Is the management sustainable? Well, back in South Africa those people have been with Vitality since its inceptions.
  • If you’re in this line of business, selling a wellness product that makes people healthier and rewards them for all the effort they go through, lots of people would love to work for that kind of business.
  • I’m convinced that they can break even pretty soon and it will be a profitable business.
  • Does this look like a winner or loser? But the very first question is what kind of business is this? And this is an important question.
  • As we saw with Doctor Ornish, if the business is not clearly one thing or the other, it has difficulty in reaching its market potential.
  • Or is it technology firm? I believe it is an integrator myself and that Vitality has the skills of the an integrator firm.
  • It is guided by people who understand finance and they understand how to drive down costs.
  • He thinks it’s a consumer-driven business and he believes that because it’s consumer-driven and because he himself is so consumer-driven that he has a sustainable competitive advantage that competitors like insurance companies, which are not so consumer-driven, cannot attain.
  • Once you look at the tape- and he is a fascinating, very successful, and admirable guy.
  • See what you think about what kind of firm it is and how he himself adds value to this really amazing, amazing firm that he’s created.

Coursework > Week 4: OdontoPrev > Video: Odontoprev

  • So we’re going to discuss another case study in your voyage in learning how to innovate health care.
  • So in this case, Odontaprev- it’s an entrepreneurial company like virtually all the cases that we’ve looked at- actually, all the cases that we’ve looked at- there was an entrepreneur someplace way back in their history, or in our first case studies, right now, they’re start-ups.
  • What would be a good next step, a sensible next step, a viable next step? So in this case, the question is, do they go to different regions in Brazil? Brazil’s a huge country, not relatively so many people, but a great, big country.
  • Another is to continue in their present line of business, and go to new countries.
  • They’re thinking specifically about Mexico, and Chile, and Argentina, but really thinking about Mexico.
  • So how do you answer a question like this? Do I stay where I am and go deeper into the country that I’m in? Or do I go to a totally new country? Well, here’s what we’re going to do.
  • While we’ll look at the Argentina and Chile, I think it’s pretty clear in the case that their heart is really in Mexico.
  • Then whatever we decide, we’ll look at the business model, and see whether it fits well with that decision, or if not, whether the lack of fit is a deal breaker.

Coursework > Week 4: OdontoPrev > Video: Odontoprev 2

  • REGINA HERZLINGER: So let’s look at Brazil, and let’s look at the six factors in Brazil.
  • So what does it mean when you have a lot of dentists? It means that your prices are going to be cost controlled, because there is a lot of competition among the dentists.
  • There are a lot of small dental practices that aren’t consolidated.
  • It’s a titan of a company, and has a sideline in dental insurance.
  • Bought them for about $6 billion, and it bought them to penetrate the Brazilian market.
  • You know, if I’m OdontoPrev, I would get a really serious migraine headache if I had read about the purchase of a rival by this deep pocketed American company that wants to get deeper in Brazil.
  • Because I would think that sooner or later they’re going to get very, very serious about competing in the dental business.
  • So another plus about the structure in Brazil is they’re really not in the small medium enterprise market.
  • So the structure is a plus, and the structure is a minus.
  • There is a lot of supply, there’s a lot of under penetrated demand, you’ve got a partner with great sales channels.
  • The negative is this scary company that’s just gotten acquired by a even scarier deep pocketed US company that may become very aggressive in the dental insurance market.
  • You probably are too young to remember all of this, but Brazil was one of these countries with hyperinflation.
  • The government of Brazil finally got its hyperinflation under control, and Brazil, filled with brilliant, energetic, wonderful people, started growing.
  • The GDP growth has started to sputter, and Brazil does have this history of violent ups and down.
  • Plus, the dental market for whatever reason has slowed down.
  • If they want to expand to the individual market, they’re going to face a lot more price regulation than they currently do.
  • Brazil doesn’t have a safety net for dentistry in its universal coverage.
  • In part, they are profitable because they’re very well managed and they have low administrative expensive.
  • In part they’re profitable because they don’t pay out that much of every dollar for dental benefits.
  • An activist government, a populist government, the kind of government that Brazil has may focus on them and say, you know what? You’re making too much money.
  • You’re paying out too little in dental expenses.
  • Why is that important? Well, earlier we said in the structure there are a lot of little dental practices around.
  • Good and bad. Public policy, good and bad. What about the other of the six factors in Brazil? So let’s turn, for example, to consumers.
  • They have beautiful teeth, and they’ve got a lot of dentists.
  • A problem that may face them is that they have related businesses that are owned by OdontoPrev, and they sell those services to the dentist.
  • That here is my purveyor of goods and services, and he’s buying from the parent company all other types of goods and services.
  • What about the technology part of it? Well, if you’re going to manage a dental practice or manage dental insurance, you need a lot of data.
  • Where the problem is in technology is when you’re pricing an insurance policy, you need a lot of information about your potential customers.
  • If they’re thinking about going into the individual or the SME market, they’ve got some very serious shortcomings because they don’t have the data that they could use to price the insurance policies accurately.
  • So the last one that’s left in Brazil is are they accountable? I think they have very good accountability mechanisms.
  • It’s a three year policy, and they will invest a lot in the beginning to prevent dental disease.
  • The reason it’s a three year policy is they hope that by preventing dental disease in year one, they have lower costs in year two or three.
  • They have a lot of instruments of accountability in Brazil.
  • So where are we on the six factors in Brazil? Well, on the structure side, there is a lot of opportunity for expansion, but Amil.
  • On the financing side, it could integrate a lot of small firms, but the economy is jumping around.
  • What makes them nervous is that Brazil, which had a history of disastrous bouncing around, is starting to bounce around again as an economy.
  • A worrisome thing is if they’re going to go into new markets, Individuals, small medium enterprises, they don’t have the data.
  • Lots of unsatisfied demand, and lots of supply of dentists you could use to satisfy it.
  • Amil is waiting in the wings, and may just spring as massive competitors, especially given the profitability of OdontoPrev.

Coursework > Week 4: OdontoPrev > Video: Odontoprev 3

  • REGINA E. HERZLINGER: Let’s look at the first of the six factors, and that is it’s a very large market.
  • It’s very close to the US, of course borders the US. And medical tourism, which is where people go to other countries or other states within the US to get their medical care, it is conceivable to me that a number of people on the border between the United States and Mexico would go to Mexico for their dental care if they were assured of pretty good quality and a reasonable price.
  • Carlos Slim, who is the richest man in the world, Carlos Slim is a Mexican, and he has opened a chain of hospitals solely to promote medical tourism to Mexico from other countries- obviously primarily the United States.
  • On the other hand, Mexico is very similar to Brazil on these transparency and corruption scores.
  • So OdontoPrev knows how to function in the Brazilian market with that kind of transparency and corruption, could probably do the same in Mexico.
  • They have very good IT. The dentists in Mexico, like the dentists in Brazil, have very poor connectivity and very poor installation of IT. It’s a positive.
  • What do you think? Should they go to Brazil with new markets to the individual or small or medium enterprises? Or should they go to Mexico? Once you talk about it as a group, let’s come back and discuss it.

Coursework > Week 4: OdontoPrev > Video: Odontoprev 4

  • So the gold rush in California happened when gold was discovered there.
  • That’s what it’s like now in Mexico in the dental insurance market.
  • I think in addition to the Mexican market, there’s a huge potential US market from the states that border Mexico.
  • People Mexico are used to paying out of pocket for their health care.
  • We have to see if the business model is such that if they go to another country, that business model which has been very strong in Brazil will be successful in this other country.
  • Why don’t you, as a group, discuss whether or not the business model that has served OdontoPrev so well in Brazil would also work well in Mexico? And if not, why not? “.

Coursework > Week 4: OdontoPrev > Video: Odontoprev 5

  • REGINA HERZLINGER: So let’s look at the business model.
  • Second question is what kind of venture is this? Because if we’re going to analyze the business model, we have to understand what it is we’re trying to do.
  • OdontoPrev, it grew by acquiring and rolling up and understanding dental practices, and it said we’re going to give you the best value for the money.
  • So let’s look at the next set of questions which is is it financially viable, and how much would it be worth? So is it financially viable? I love this model.
  • They don’t own the dentist, they just integrate the dentists with technology advice and they sell health insurance featuring those dentists.
  • Just love them as a business, this is a business judgment.
  • What does this mean, negative working capital? It means that their suppliers are financing the business, that the people who sell things that OdontoPrev uses to provide its services, probably they’re kind of slow in billing them so that they provide financing for the business.
  • They’ve got a diversified customer base and on a break even risk analysis, they look pretty good.
  • The one negative in Mexico is there aren’t that many dentists and they may not be able to keep their payments to the dentists as relatively low as they are in Brazil.
  • So on the financial viability valuation score and with the consideration of the sustainability of revenues and costs, I think it’s a very good market.
  • As a competitive strategy, first mover that has a three year insurance policy, I think, financially, they’re great and especially coupled with their competitive strategy.
  • We’ve looked at the sustainability of the revenues and the costs.
  • The head of OdontoPrev and the founder of OdontoPrev- I don’t know about you, I think he’s a terrific CEO.
  • So I think that management and the managerial systems he has built, first of all, they are very appropriate to an integrator kind of firm.
  • Secondly, because he has so many systems, you know it’s not a personality driven business, not a charisma driven business- it’s a systems driven business.
  • He has people who consult to dentists and very clear protocols for consulting to the dentists to help them become better at what they do.
  • These are all systematic things and you can pick them up and move them from Brazil to Mexico.
  • So initially when I looked at this case and they told me they were thinking of moving out of Brazil, I thought, what? Huge country, growing country, under penetrated market, lots of dentists.
  • As you see from my analysis of what kind of firm it is, its alignment with the six factors- which is kind of worrisome in Brazil- and the strength of its business model, and its ability to be portable to move from Brazil to Mexico, Mexican strategy makes a lot of sense to me.
  • So I hope with this case that you’ve seen that the power of these frameworks in helping us to analyze yet another kind of business decision that innovators in health care face.

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