There are many different thoughts as to what is the right strategy for hospitals and health systems. Increasingly, a number of these thoughts are untested and put forth by professors and consultants. These strategies often resonate less and less well with what is successful practice.
Currently, the strategy first and foremost that we see working is quite simple — build a dominant market presence, and keep getting better. Here, a system needs to be so dominant in its market that payers can't go around it. Further, it needs critical mass to pay and retain the best people and be the most attractive to patients and payers. Dominance is becoming more and more about high quality physician networks as it is about having the best buildings and locations. Further, the system must keep getting better in so many ways. For example, it must improve customer experience, invest in precision medicine and better care delivery, invest in more effective cost management and a better IT, physician and core team.
We believe, in short, as follows:
- Market power is key
- Focusing on the total consumer experience is critical
- Constantly improving operations is critical
- Owning practices (a dominant physician network) is critical
- The jury is out on owning an insurance plan
- Bundled payment efforts are growing
- A constant focus on what drives cash flow is very important; and
- Developing and recruiting great people is critical
As we read articles like "The Strategy That Will Fix Healthcare," published in Harvard Business Review by Harvard Business School professor Michael Porter, PhD, and Thomas Lee, MD, CMO of Press Ganey Associates, one grapples with the mix of intelligent and abstract thought all put forth by the same brilliant people.
Notwithstanding the brilliance of Dr. Porter, we are convinced that few of the theorists have the next great answer. More often, if someone can understand who their customer is, where their revenues come from and start by really managing and developing those pieces of information — building upon the core of what works and building a dominant system — they are more likely to succeed. For example, there is no question that inpatient volumes will continue to decline. There is no one great answer to this other than to keep costs in the system rational and to keep becoming dominant in those things where the system is making money and continually grow revenues in those areas.
This article embraces a lot of existing concepts. Here, as the world evolves, we believe that one also needs to return to the basics as a core starting point.
We also believe healthcare systems and their leadership should define clearly their core overriding goals. Ideally, the system can move beyond the first goal and focus on Nos. 2 through 4. These can often be categorized as follows:
- Financial survival
- Greatness in certain specific areas
- Dominant in a market
- Great international brand. This often starts with first meeting goals 1, 2 and 3.
This article breaks down strategy and certain core observations as follows:
- Market Power Wins.
- Know Your Business; Double Down on Cash Cows; Test New Areas.
- No Single Strategy; No Static Solution.
- There Will Still be a lot of Fee-For-Service. Bundled Payments are a Type of Fee-For-Service.
- Owning an Insurance Product Requires a Great Deal of Market Position and Risk Tolerance.
- Most Systems Must Own Practices.
- Consumer-Driven Healthcare.
- Talent Management.
The following nine sections expand on these points.
1. Market Power Wins.
A. Market Power Wins. The party with the greater market power tends to do better. In healthcare, this is abundantly true. Jack Welch, the celebrated longtime CEO of GE, positioned GE such that it only focused on markets where it could be a market leader. I.e. number 1 or 2 in its market.
Being a market leader often comes with pricing power, durability in challenging times, branding and recruiting advantages, purchasing power and other advantages. In healthcare and in business, the top one or two market dominant leaders tend to end up with the lion's share of profits. Consumers do not think there are acceptable substitutes, and/or the health system receives better prices from suppliers. This concept seems to be as true as or truer than ever in healthcare. Further, it has become more important as the top five payers — UnitedHealthcare, Aetna, Humana, Cigna and Anthem/Blue Cross — have become more dominant in most markets; in fact, it is usually one or two of the four that really dominate any specific market.
The power of market dominance plays out in market after market. It is clearly evidenced by Boston-based Partners HealthCare. Launched in 1994, the Partners HealthCare business model was "ahead of its time," according to The Boston Globe, combining the forces of two Harvard teaching hospitals — Brigham and Women's Hospital and Massachusetts General Hospital. Since then, Partners has expanded to become the largest nonprofit network of hospitals and physicians in the commonwealth. Its unequivocal market share gave it the ability to set prices and negotiate favorable reimbursement from private payers, to the disadvantage of its competitors. The Partners brand is also closely associated with cutting-edge medical research. Although the prices of Partners HealthCares' services have been repeatedly criticized by its competitors and some consumers, the massive health system's brand, combined with its dominating presence in Massachusetts, have enabled it to sustain its popularity among patients.
Here, other systems that have built dominant market positions continue to outperform. e.g., Cleveland Clinic, Northwell, Baylor Scott & White and more.
B. The National Size of a System is Less Important than Regional Dominance. The number of hospitals a system has nationally is less important than the number of markets a system has dominance in. The financial performance of the large, for-profit and nonprofit hospital operators are driven by the regions they win in. The regions in which they are dominant tend to deliver the greatest share of their profits.
In contrast, the more they own lots of hospitals but don’t tend to have market dominance in specific or regional markets, the less profitable they are as a whole.
C. A Second Size System Must Work Really Hard and Smart to Survive and Thrive. California is home to several outstanding and competing hospitals systems, the most expansive being Oakland, Calif.-based Kaiser Permanente. Kaiser Permanente is a multi-hospital integrated delivery network that also operates a managed care plan that covers millions of members throughout California, Colorado, Georgia, Hawaii, Oregon, Washington, Virginia, Maryland and Washington, D.C. Sutter Health, based in Sacramento, operates 24 hospitals. It is outstanding but second in market dominance to Kaiser Permanente. Its biggest competition is Kaiser Permanente, though it also faces Stanford (Calif.) Hospitals & Clinics and UCSF, which are best known for their specialized, complex care.
To make it more competitive, in 2013, Sutter launched its own managed care plan, Sutter Health Plus. Sutter's health plan and reach is much smaller than Kaiser's. Sutter Health's latest financial report shows the system has its work cut out for it. Sutter reported a net income of $81 million in fiscal year 2015, down nearly 80 percent from $402 million in 2014. Jeff Sprague, Sutter's CFO, told the San Francisco Business Times that salary and benefit increases and one-time costs of implementing an EMR system in some of its facilities contributed to the rise in expenses last year. The health system has also put $9 billion into new buildings and technology over the last decade, including $898 million last year.
2. Know Your Business; Double Down on Cash Cows; Test New Areas.
A. Know Your Business. A core concept of business management is the discipline to constantly understand and study where one's current business is coming from. What are you great in and who makes up your customer base? A first effort is to constantly reinforce that customer base and those revenues. How do you continue to get those revenues? Are those revenues at risk? Are you allocating resources appropriately?
One of the fascinating refrains of many health systems is the spraying of money and resources in several different directions. In a health system, as in any business, it is critical to understand where revenues are coming from, whether they are high- or low-margin revenues and whether a more targeted effort can be made toward the higher margin and higher revenue businesses. Further, can the system afford to abandon certain low-margin businesses?
As there is so much change, it is more important than ever that hospitals go back to the old Boston Consulting Group paradigm of business management.
First, leadership has to understand their cash cows. Before reallocating to other areas, health systems must maintain and harvest cash in those businesses. Two successful community hospitals excel in orthopedics (a Southern and Midwestern hospital) and another in neurosurgery (a Midwestern hospital). The leadership team knows the exact revenues and margins these specialties and practices mean to the hospitals. Each consistently doubles down to protect those revenues.
Second, leadership must devote a certain percentage of resources, maybe 25 percent, to new initiatives and areas that can become tomorrow's stars. See also the next subsection “Test New Areas.” This may be orientating part of the system to a more focused shared savings payment model, looking at different types of fee-for-service initiatives or creating and maintaining greatness in product lines. Here, while exploring new areas, there needs to be a constantly doubling back to three core questions: What is the system going to be great in, where does it make its money and who is its customer?
Many of the systems that continue to thrive and dominate are leaders in their markets. They can point to the specialties they are the best in, and they continue to double down on areas that work; even when the world around them is changing and moving, they are very cognizant of where their revenues come from and the need to continually invest in and harvest these areas. At the same time, these systems keep track of the world around them.
Cleveland Clinic is one of the most well respected health systems in the world. It has built an international brand based on excellence in clinical quality. The clinic consistently ranks among the top hospitals and health systems in the nation by U.S. News & World Report, this year coming in at No. 1 for the 21st consecutive year. It is among the best for numerous specialties and No. 1 for cardiology and heart surgery. To capitalize on this, the health system created the Cleveland Clinic Affiliate Network, through which it has drastically expanded its reach. It has entered into many agreements with other hospitals and health systems around the nation through the affiliate network, with more than 24 systems signing on to be either cardiovascular, orthopedic and spine network affiliates — the specialties represented in the network to date. Since it began in 1994, the Cleveland Clinic Heart & Vascular has grown to include affiliates in Ohio, Kentucky, Missouri, New Jersey, New York, North Carolina, Pennsylvania and Texas.
At the same time that Cleveland Clinic does this, it also doubles down on its own market leadership.
Baltimore, Md.-based Johns Hopkins is another academic medical center that uses its renowned excellence to channel new sources of revenue. JohnsHopkinsUniversity, the health system's affiliated university and a research powerhouse, received the most funding from the National Institutes of Health with more than $603 million in 2015. The institution capitalizes on its vast intellectual property through its technology ventures. In fiscal year 2015, Johns Hopkins Technology Ventures, which serves researchers and investors as a licensing, patent and technology commercialization center, formed 16 startup companies based on licensed university intellectual property. The venture made $18 in total revenue by the end of the year.
John Hopkins also doubles down on its core business. It also makes a great deal of its profits from overseas.
B. Test New Areas. The best businesses try to constantly improve current operations and also pursue new initiatives. The best businesses are not static. They are constantly working at understanding and improving the core business, and then they devote time and attention to the allocation of talent to new initiatives.
Hospitals have to constantly look at how they maintain a cost and margin structure so they can attack different areas while refocusing on their core areas and patients. Hence, it is an interesting concept used by business consultant Jim Collins to put resources into different areas, but fire bullets as opposed to huge amounts of money. His school of thought is to test new areas but not break the bank.
One of the tensions we see is between geographic expansion versus not too much expansion. Can you do a geographic expansion without investing a ton of resources? In contrast, will a geographic expansion be useful without a huge position in the new market? For example, a constant theme — and a disaster in many situations — is where a health system significantly increases its cost structure at a time of change.
A health system may invest a certain amount for outreach clinics, for example. It then faces a set of questions: Are those outreach clinics really successful, do they really generate revenues, do they really generate referrals back to the main hospital? Further, once a hospital seriously expands into another related market, does it need to have a more substantial presence there to be a more dominant player? For example, while Cleveland Clinic has maintained a dominant position in the greater Cleveland area, a great question is whether some of its national efforts are truly effective. Either way, its dominance in Cleveland allows it to test those other efforts. Some of its expansion efforts are successful and some not.
3. No Single Strategy; No Static Solution.
Some of the best discussions of healthcare strategy recognize the obvious. In essence, there is probably no single great strategy for the future. It all starts with a baseline of services. Then one needs a lot of smart, creative talent constantly looking to improve upon operations. There are countless examples of this and it takes a lot of energy. In one hospital, the hospital is constantly applying for every state grant it can get. In another hospital, leadership supports constant outreach to gain patients in the area with the most patients. In one case, the outreach is at the largest church in the community every Sunday. At another place, the system is trying to work with payers to try new initiatives and new concepts.
Another hospital has a tremendous effort underway around better use of its EMRs and better development of systems to deliver post discharge notes to patients. In other great systems, like Evanston, Ill.-based NorthShore University HealthSystem, a strategy might be constant talent development to grow the next level of leaders. There are no static solutions. In essence, it's often not, "We simply do this and this works for the long run." Rather, a high-performing system requires consistent, smart leadership that is always improving. Hence, one needs to constantly be looking to get better and have lots of talent in place to go after initiatives and make the system more successful. It is the concept of an agitating system constantly trying to get better.
The best businesses have a solid core and then constantly try to improve themselves. They constantly look to apply and test new ideas and concepts, and they do so with discipline and cohesion. With all the discussion of new and great concepts in healthcare, there is no substitute for this. There is not usually one brilliant concept from that will save the day. Rather, there is a constant evolution to get better. It's closer, if anything, to a Jim Collins perspective of constant talent and team development. Essentially, every ability to pursue initiative depends on talented people.
4. There Will Still be a lot of Fee-For-Service. Bundled Payments are a Type of Fee-For-Service.
One of the fascinating things we see is the constant attacking of fee-for-service. In one article, for example, the author derides fee-for-service and sanctifies bundled care. Fee-for-service will likely persist at some significant level.
When someone provides a bundled service, for example, someone within that bundle still receives fee for-service payment to some degree. For procedures and costs of treatment over a certain amount, bundled payment clearly is a concept that is gaining traction quickly now at the federal and the private level. Here, a provider needs to make sure it offers high enough quality and an organized bundle that they can deliver. It also needs to make sure there is a big enough market for their bundle that they can take share from others.
Further, if someone must travel to receive care under your bundle, savings and quality must be substantial enough that people are willing to actually travel for that bundled care. This is an especially pertinent concern for health systems seeking to forge direct contracting agreements with large employers. Cleveland Clinic, rated first in the country for cardiac care by U.S. News & World Report for a decade, was an attractive partner for Mooresville, N.C.-based home improvement giant Lowe's when the two finalized their direct contracting arrangement in 2010. Prior to striking the deal, Lowe's observed variability in outcomes among its employees' heart care, as roughly a quarter of a million Lowe's staff throughout the country visited different physicians and hospitals. Cardiac surgery is a big-ticket procedure, which justifies Lowe's reimbursement for airfare and other travel costs.
Cleveland Clinic has similar agreements in place with Seattle-based Boeing and Bentonville, Ark.- based Wal-Mart Corp. In evaluating these bundles and relationships, Cleveland Clinic does not operate on the notion that every patient needs to travel. Rather, its team looks for services for which travel makes most sense.
Despite the growing popularity around demonizing fee-for-service reimbursement models, even hospitals that have committed to transferring elements of their payment structures to fee-for-value models still largely rely on the traditional reimbursement model. At the Becker's Hospital Review 6th Annual Meeting, Kate Walsh, president and CEO of Boston Medical Center said she is surprised about "how slow the rate of change actually is despite how breathless we all feel. We talk a lot about how pay is reforming, but I don't know a system that is not still on fee-for-service."
Hospitals will need to carefully consider which elements of fee-for-service to preserve — and how. "Certain tertiary and quaternary services may always have fee-for-service elements, and you need to be thoughtful about moving away from fee-for-service in these areas," Michael Moody, senior vice president of partnership integration and development at Walnut Creek, Calif.-based John Muir Health System, told Becker's Hospital Review in December 2015. "The decision is market-specific and influenced by the size of the population you will be taking risk for. Examples of this are transplant, trauma and burn units — essentially things that are more difficult to manage from a population standpoint."
Robin Kilfeather-Mackey, CFO of Lebanon, N.H.-based Dartmouth-HitchcockMedicalCenter, pointed out that fee-for-service is the principle way providers show payers how their money is being spent and what services are actually being administered. There are also health services that promote better population health but don't yield payments to providers, such as preventive care, according to Ms. Mackey.
5. Owning an Insurance Product Requires a Great Deal of Market Position and Risk Tolerance.
The ownership of an insurance product by a health system is periodically viewed as the Holy Grail. The goal is total control of the premium dollar. The perception being that this is a powerful position to be in. Many systems are finding that they are absorbing huge losses as they grow and develop their own insurance plan. The effort, while viewed as a hedge against payer power, also harms relationships with payers. Parties that excel with a plan typically have deep pockets and a great market share. They also view it as a long-term commitment.
By launching their own health plans, health systems hope to control the premium dollar as well as leverage a variety of patient clinical and cost data traditionally owned by insurers. This information can be extremely valuable for supporting population health management and better coordinating care across disparate providers.
However, launching a provider-sponsored health plan comes with risks and questions, one such being possible retaliation from competing health plans. Attempting to maintain contracts with those plans while simultaneously competing with them could increase tension, leading insurers to direct patients elsewhere or leave a competing system out of certain networks, according to Paul Keckley, PhD, managing editor of The Keckley Report. Whether an organization can function without those contracts is the first question providers considering creating their own plan must consider. There is also the question of whether to build or buy and the risk of scale. Unless a health system acquires a plan that already has a substantial membership, it will have to invest capital in such things as claims management and infrastructure.
6. Most Hospitals Must Own Practices to Thrive in the Long Run
There is no question that a health system has to own practices. If you don't own practices, your fee-for-service volume goes elsewhere. Further, if you don't own practices, in the evolving managed care world, you don't have a total delivery system to provide. Part of owning practices is retaining fee-for-service volume. Another part of owning practices is being able to offer integrated packages of services. Finally, part of owning practices is maintaining dominance in an area so payers and patients are unable to go around you.
Increasingly, we perceive that having the dominant physician network, preferably owned, is a core to success.
The real questions become:
- What kind of practices to own?;
- How big a physician network do you need?;
- Where and in what specialties do you need to be great?; and
- How can you manage it efficiently?
In most places, you need the biggest physician network possible, you often want productivity-driven compensation and you want to constantly improve your physician network. One may not need to break even on their physician-owned network, but one needs to be close enough that the losses, are not devastating to the system. Further, one has to be prepared and have contingency plans in place in case physician revenues drop significantly.
7. Consumer-Driven Healthcare.
When we first think of consumer driven healthcare, we think of consumers paying for healthcare and models of patient convenience. More and more we also think of consumer healthcare as related to overall consumer experience. This includes:
- Ease of access to the system electronically;
- Convenient hours and access;
- Early intervention through data and predictable analysis;
- Great human interactions; and
- Transparency in pricing and outcomes.
One core apparent long-term solution for really reducing healthcare costs is the greater use of high deductible and similar health plans. This is a useful strategy for the great majority of day-to-day healthcare costs. On bigger ticket healthcare costs, there will be a need for more care management teams and efforts to bundle, reduce and target costs. Day-to-day, however, consumer-driven plans — such as health savings accounts and high deductible plans — seem to be the best answer out there for the system as a whole to reduce costs.
For a provider that relies day-to-day on ordinary care for a great percentage of its revenues, this is concerning. The ultimate shift of costs to consumers is the best bullet for slowing down the growth in healthcare costs on a substantial percentage of the dollar. Here, this is where systems need to drive patients to their lowest cost provider, allow direction to advanced practitioners versus physicians, and get better at collecting upfront since collecting from patients later is very difficult. Hence, as a basic strategy, health systems need constant internal agitation to move costs to lower points of care and constant efforts to improve billing and collections at the point of service.
8. Talent Management
There is a great friction between keeping okay talent in place versus agitating and constantly changing leadership. There is a pace at which change can be made that doesn't overly disrupt an organization. In contrast, if an organization is in constant change, it results in cultural challenges. A leader needs to offset this concern with the cultural challenge of allowing greatness and not mediocrity to flourish in leadership positions. This is a constant challenge for health systems. There may be a certain gravitational pull toward leaving things in place rather than effecting change. At the same time, organizations get stale, slow and ultimately grind in the wrong direction if they are not constantly agitating toward greatness and constantly developing and grooming leaders for different leadership positions.
In some ways, business today involves a certain amount of surfing. You want to have a great a team in place and focus on core priorities, but also be able to examine new opportunities. It is less and less that any one leader can tell an organization, "This is where things are heading." Rather, the key is starting with a core baseline business and making sure nimble leaders are in place who can adjust as needed.
There are huge differences between managing a large system and a small system. In a small system, one needs a tight executive leadership team, and it can be easier to assure everyone stays on the same page. In an environment where there are 100 to 200 employees, it is a lot easier to do this with a small management team that is on top of its game. I have seen many small health systems and many small chains thrive with a great core management team of four to five "A" players and a terrific larger staff. In a small system, however, it can be harder to develop and afford the next level of talent.
In contrast, if you become a bigger system, there is an institutional concept that becomes more important. Great people must be in the lead of the various different units throughout the system. In general, you never want more leadership positions than you have great leaders. Increasingly, this may mean you have a great leader "double-hatting." We have seen a situation where a great CFO, for example, also serves as president of the medical group. While this isn't ideal, it is far better to have a single great leader with great discipline and drive captain two units instead of two mediocre people leading two different units.