• Monday, December 02, 2024
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Yemi Johnson: How to Build a Healthcare Business in Nigeria

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Over the last couple of years, I’ve been deeply involved in the healthcare sector, focusing on consumer health insurance. During this period, I built a consumer health insurance business, went through an acquisition, and served as the Senior Vice President of Consumer Business at Reliance Health. This experience provided unique insights into how the largest players in healthcare make money and where entrepreneurs can find profitable opportunities.

In this essay, I’ll explain how established healthcare sectors generate revenue, and how new businesses can leverage structural insights to create value. Let’s begin with a foundational concept from Professor Clayton Christensen: the Law of Conservation of Attractive Profits.

Professor Christensen’s Law of Conservation of Attractive Profits explains that industries often go through cycles of commoditization (driving down profits) and differentiation (creating new profitable areas). When one part of a value chain is commoditized—meaning competition drives its profits to near zero—opportunities for profitable, proprietary innovation usually arise in an adjacent area.

Two key terms used throughout this essay are modularity and commoditization:

Modularity: When a component is modular, it’s created by a third party rather than the company itself. This allows high-quality, specialized components to be easily integrated, enabling businesses to innovate without reinventing each part of the value chain. For example, most smartphone companies buy their screens from suppliers instead of making them in-house.

Commoditization: This occurs when the profits in a component of the value chain fall to zero due to competition and innovation. Companies often choose to commoditize certain areas to unlock value elsewhere. For instance, telecom giant MTN initially sold SIM cards at high prices but commoditized them, drastically reducing their cost to drive customer acquisition. The company then generated revenue through the actual usage of SIM cards (calls and data), where margins were higher.
The Law of Conservation of Attractive Profits tells us that a new business can drive profits out of one layer in the value chain by commoditizing it, and then capture those profits in a different layer by offering integrated services. Consider how this plays out with online travel agencies (OTAs) versus hotel chains.

When you book through an online travel agency like Booking.com, the brand of the hotel becomes less critical because you trust the travel agency’s information—pictures, reviews, and descriptions—about the property. By commoditizing the hotel brand, travel agencies reduce the profit hotels earn based solely on brand value, while they profit from commissions on bookings. You can apply the same value chain disruption to the airline industry as well.

In healthcare, this concept can be applied to the relationships between consumers, providers, and insurers. Traditionally, hospitals provide “trusted care” through their facilities, which consumers select based on reputation and quality. Billing and payments are often managed by third-party insurance companies, which means that hospitals don’t always have a direct financial relationship with the patient.

Hospitals make a profit by combining care with the facility. This bundling is why healthcare prices differ by hospital, as trust drives consumer choice more than price does. Although some hospitals experiment with integrated billing (such as membership plans), lack of scale often makes this unfeasible.

Health insurance providers approach the value chain differently, integrating payment with trusted care. In this model, the healthcare facility itself becomes a “commodity” in the chain; the insurance company is primarily focused on trusted care and billing. By offering consumers access to trusted care through approved facilities, the insurer doesn’t depend on individual facility profits, freeing them to control costs across the network.

Insurance companies aim to work with providers that deliver high-quality care to reduce fraud, retain customers, and minimize repeat visits due to poor initial care. By bundling payment and care, they can offer additional services, such as financing for treatments not covered by insurance plans.

One of the most complex aspects of healthcare business models is cost management. Unlike online travel agencies, where Booking.com pays minimal transaction fees, healthcare insurers bear the cost every time a patient uses the service. This creates a “variable cost” tied to each service use, requiring insurers to invest heavily in managing these costs. To bend the cost curve, healthcare businesses often increase capital expenditures (CAPEX). For example, by investing in telemedicine, insurers can reduce reliance on physical consultations, lowering variable costs.

Another approach is vertical integration—building or acquiring facilities to control costs directly rather than relying on third-party providers. This mirrors Amazon’s approach to logistics: by owning its delivery network, Amazon reduced its reliance on third-party shipping, turning shipping into a proprietary, cost-effective part of its business model.

Jim Barksdale, the former CEO of Netscape, once said, “There are only two ways to make money in business: bundling and unbundling.” This philosophy reveals another opportunity for disruption in healthcare. While traditional providers bundle services—offering a range of care options under one roof—new entrants can succeed by unbundling and specializing.

For instance, many fintech companies unbundle banking services (loans, savings, payments) and offer specialized, often superior, versions. Healthcare could follow a similar path: by breaking down services into focused niches, providers can differentiate and innovate more effectively.

A healthcare business focused solely on diabetes could provide drugs, appointments, and ongoing support, creating a dedicated value chain for diabetes management. Owning the demand side (consumer engagement and acquisition) makes it more cost-effective to grow and retain customers as the business scales.

New models could also monetize through alternative revenue streams, such as partnerships with pharmacies or telehealth providers. A diabetes-focused business, for example, could integrate specialized care, drugs, and payment processing, enabling consumers to pay for only the care they need while accessing personalized support.

There are extensive opportunities for innovation in healthcare by rethinking value chains and identifying where profits can be driven down or recaptured. For entrepreneurs, this means identifying modular components that can be commoditized and areas where bundling or unbundling services can create a unique value proposition. Focusing on specific consumer needs, especially in chronic care management, can build trust and loyalty while managing costs in scalable ways.

By strategically applying these principles, new healthcare ventures can carve out profitable niches within a complex and essential industry.

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