Current healthcare dynamics in America present critical challenges for providers. Healthcare costs are growing at an unsustainable rate and represent a major source of future unfunded liabilities in the U.S. Patient demand and market supply will continue to impact service offerings and patient access, while market pressures and reform efforts will lead healthcare organizations to transition from thinking about growth in total assets to maximizing returns on total assets. We won’t be able to cost shift our way to sustainable financial performance. No one can rationally argue with the need to control costs while improving access and quality, yet unproven government reform efforts remain the topic of substantial debate, leaving the U.S. healthcare delivery system, and providers in particular, facing the greatest period of uncertainty in memory.
For many healthcare providers, this is a time of survival, and for others, an opportunity to lead. In either case, the path to a sustainable future involves the pursuit of fundamental changes required regardless of how reform-oriented policy options are resolved. Reform legislation aside, it is our position that providers are best positioned to improve efficiency and quality of care while the government should enable market-based solutions.
In light of these future conditions, health systems must learn to be ambidextrous organizations and will benefit from simultaneously pursuing strategies that exploit the present while exploring the future. [1] For the near term, healthcare delivery will continue to be driven by market-based dynamics. As such, strategic positioning, volume, share position and revenues will remain important drivers of financial health and fiscal stability. Concurrently, and certainly over the long term, reimbursement will shift to even greater emphasis on performance and risk bearing by providers, intensifying provider focus on improving cost, quality and more efficient care delivery models, and reducing unnecessary utilization. Leaders will gain sustainable advantage by managing to several key imperatives.
Imperative #1: Strengthen physician alignment
Historically, many healthcare organizations attempted to increase physician alignment through economic models alone, including employment, professional service arrangements, medical directorships and emergency department call fees. But to create a leading provider organization ready to embrace the ambidextrous business model of selective growth and an increasing focus on cost, quality, and efficient and effective care delivery, physicians and hospitals must be aligned along three dimensions:
Imperative #2: Enhance operating performance—cost and quality
Facing the prospect of declining reimbursements, healthcare provider organizations must become more operationally efficient while continuing to provide high-quality care and exceptional patient service. This will require aggressive control of both labor and non-labor costs while concurrently improving clinical effectiveness and providing an environment where physicians want to practice and patients want to receive their care. This is no small feat and, if managed poorly, providers may see the departure of both physicians and patients. Providers must embrace a value-based strategy and a culture of innovation, efficiency and effectiveness. At the same time, it's essential to integrate clinical and operational advances in a manner that creates more value for patients, insurers and physicians, as shown by the value equation below.
Imperative #3: Optimize your delivery network
We do not believe that joining a system is the penultimate solution for improving healthcare delivery in the U.S., nor do we suggest that complex organizational structures overseen by federal agencies and designed to share savings among a delivery network are the optimal means to achieve longstanding improvement. However, we do believe that only strong partnerships among hospitals, physicians and other providers—whether wholly integrated or with strong clinical and economic alignment—are in better positions to shift the value curve.
As financial pressures intensify, scale will become increasingly important. Consolidation among providers will accelerate, and many independent community hospitals will seek the safety of system membership. Concurrently, many systems will seek to expand their reach in order to gain purchasing power, achieve economies of scale, and expand their referral network to their affiliated subspecialists and their tertiary and quaternary medical centers. In locally concentrated systems, rationalization and consolidation of services will become important considerations as health systems seek to maximize use of their clinical resources and adopt a single standard of care across their delivery network.
As we move to an era of accountable care, even one premised on as simple a concept as shared savings, optimizing a healthcare delivery network will be no simple task. Many healthcare providers are challenged to find the right degree of centralization and standardization of services within a system, but these challenges will be simple compared to the task of achieving clinical alignment and integration across a network of providers with the objective of achieving higher levels of quality, access and more efficient care delivery models. Provider organizations that can navigate these dynamics will be far ahead in their ability to achieve long-term sustainability and strategic advantage.
Imperative #4: Grow intelligently, rationalize selectively
After years of technology-fueled growth in an attempt to serve as many people as possible, many organizations have institutionalized cross-subsidies, leveraging the financial benefit of select clinical services to support myriad programs and services that fare worse in an economic sense, if not along other metrics as well.
But the new healthcare environment will not condone such a diffuse strategy to the extent present today. Provider organizations need to evaluate their clinical portfolio and determine against codified criteria which programs and services are essential, which are strategic and which are expendable. Selective harvesting of underperforming or undercontributing programs and services will be a necessary discipline for providers in the future.
The rational deployment of resources will become essential. Providers must evaluate their clinical service offerings, patient migration patterns, physician availability and capacity to ensure patients are being treated at the right place, location and time, and by the right set of caregivers guided by the principles of optimizing value: costs, quality and patient experience. Regional referral sites with subspecialized services, advanced technology and high infrastructure costs should concentrate their available resources and may not be the best venue to support the provision of basic care that is more appropriately treated in less intensive provider settings. The corollary rule is that health care providers must pursue intelligent growth, discerning market opportunity, patient needs and resource availability with return at or above defined threshold levels of performance in terms of contributions to margin, quality and community benefit.
Imperative #5: Improve clinical effectiveness
Optimizing effectiveness will require innovative models of care that improve clinical effectiveness, operational efficiency and the ability to manage patients across the continuum. Value will no longer be determined solely by what happens within the walls of the hospital, but on the outcomes of care along the continuum: from primary care clinicians and specialists working together pre-hospital, to post-hospital care, which meets the needs of patients in the most cost-effective setting—rehab facilities, skilled nursing facilities or at home.
As important as how care is organized will be that care provided is based on best practices and not always on the latest practices. Providers will likely implement best practices when well educated on the evidence and when they have an opportunity to develop care management protocols and to share in the savings achieved, demonstrating the benefit of rewarding care based on value instead of volume.
Imperative #6: Prepare for population management in the long term
While population health is being widely discussed in the context of reform and is a laudable goal, it will be difficult to achieve without considerable change to funding and behavior management among resident populations and providers. This is an important future issue but will require significant short-term investment and institutional learning to produce a long-term return. Population health management will be particularly important to providers who care for a large number of patients on Medicare and Medicaid, and these will be among the most difficult populations to manage given their typically complex health status. Academic medical centers and children’s hospitals will have a particularly significant challenge ahead.
Because the concept of population health management is ahead of proven funding and reimbursement models, rather than get distracted with the pursuit of population health initiatives for patient populations who lack the personal accountability to change, we submit that providers can prepare for population health management by starting with their own employees. The near-term payoff can be a healthier employee base and less cost to the organization. This is an important future issue, but will require significant short-term investment to produce a long-term return.
But regardless of readiness, the industry is quickly changing, and leading organizations will ensure they are ready to meet those changes in six key areas, positioning themselves for sustainable growth.
Andy Bachrodt and Harvey J. Makadon, MD have more than 30 years of experience working with and advising the leaders of health systems and hospitals in both the academic and community settings. They can be reached at andrew.bachrodt@kurtsalmon.com and harvey.makadon@kurtsalmon.com. Learn more about Kurt Salmon at www.kurtsalmon.com.
Footnotes:
[1] The Ambidextrous Organization, Harvard Business Review, Charles A. O’Reilly III and Michael L. Tushman, 2004.
For many healthcare providers, this is a time of survival, and for others, an opportunity to lead. In either case, the path to a sustainable future involves the pursuit of fundamental changes required regardless of how reform-oriented policy options are resolved. Reform legislation aside, it is our position that providers are best positioned to improve efficiency and quality of care while the government should enable market-based solutions.
In light of these future conditions, health systems must learn to be ambidextrous organizations and will benefit from simultaneously pursuing strategies that exploit the present while exploring the future. [1] For the near term, healthcare delivery will continue to be driven by market-based dynamics. As such, strategic positioning, volume, share position and revenues will remain important drivers of financial health and fiscal stability. Concurrently, and certainly over the long term, reimbursement will shift to even greater emphasis on performance and risk bearing by providers, intensifying provider focus on improving cost, quality and more efficient care delivery models, and reducing unnecessary utilization. Leaders will gain sustainable advantage by managing to several key imperatives.
Imperative #1: Strengthen physician alignment
Historically, many healthcare organizations attempted to increase physician alignment through economic models alone, including employment, professional service arrangements, medical directorships and emergency department call fees. But to create a leading provider organization ready to embrace the ambidextrous business model of selective growth and an increasing focus on cost, quality, and efficient and effective care delivery, physicians and hospitals must be aligned along three dimensions:
- Alignment of purpose: the correlation of vision, values and energies; creating a shared belief in a single vision/mission, a common culture and an active involvement in the organization's future direction.
- Clinical activity alignment: the correlation of the patient care approach, expectations of quality and service, and consolidation of activity in the diagnosis, treatment and rehabilitation of a patient.
- Economic alignment: the correlation of physician and hospital financial returns.
Imperative #2: Enhance operating performance—cost and quality
Facing the prospect of declining reimbursements, healthcare provider organizations must become more operationally efficient while continuing to provide high-quality care and exceptional patient service. This will require aggressive control of both labor and non-labor costs while concurrently improving clinical effectiveness and providing an environment where physicians want to practice and patients want to receive their care. This is no small feat and, if managed poorly, providers may see the departure of both physicians and patients. Providers must embrace a value-based strategy and a culture of innovation, efficiency and effectiveness. At the same time, it's essential to integrate clinical and operational advances in a manner that creates more value for patients, insurers and physicians, as shown by the value equation below.
Imperative #3: Optimize your delivery network
We do not believe that joining a system is the penultimate solution for improving healthcare delivery in the U.S., nor do we suggest that complex organizational structures overseen by federal agencies and designed to share savings among a delivery network are the optimal means to achieve longstanding improvement. However, we do believe that only strong partnerships among hospitals, physicians and other providers—whether wholly integrated or with strong clinical and economic alignment—are in better positions to shift the value curve.
As financial pressures intensify, scale will become increasingly important. Consolidation among providers will accelerate, and many independent community hospitals will seek the safety of system membership. Concurrently, many systems will seek to expand their reach in order to gain purchasing power, achieve economies of scale, and expand their referral network to their affiliated subspecialists and their tertiary and quaternary medical centers. In locally concentrated systems, rationalization and consolidation of services will become important considerations as health systems seek to maximize use of their clinical resources and adopt a single standard of care across their delivery network.
As we move to an era of accountable care, even one premised on as simple a concept as shared savings, optimizing a healthcare delivery network will be no simple task. Many healthcare providers are challenged to find the right degree of centralization and standardization of services within a system, but these challenges will be simple compared to the task of achieving clinical alignment and integration across a network of providers with the objective of achieving higher levels of quality, access and more efficient care delivery models. Provider organizations that can navigate these dynamics will be far ahead in their ability to achieve long-term sustainability and strategic advantage.
Imperative #4: Grow intelligently, rationalize selectively
After years of technology-fueled growth in an attempt to serve as many people as possible, many organizations have institutionalized cross-subsidies, leveraging the financial benefit of select clinical services to support myriad programs and services that fare worse in an economic sense, if not along other metrics as well.
But the new healthcare environment will not condone such a diffuse strategy to the extent present today. Provider organizations need to evaluate their clinical portfolio and determine against codified criteria which programs and services are essential, which are strategic and which are expendable. Selective harvesting of underperforming or undercontributing programs and services will be a necessary discipline for providers in the future.
The rational deployment of resources will become essential. Providers must evaluate their clinical service offerings, patient migration patterns, physician availability and capacity to ensure patients are being treated at the right place, location and time, and by the right set of caregivers guided by the principles of optimizing value: costs, quality and patient experience. Regional referral sites with subspecialized services, advanced technology and high infrastructure costs should concentrate their available resources and may not be the best venue to support the provision of basic care that is more appropriately treated in less intensive provider settings. The corollary rule is that health care providers must pursue intelligent growth, discerning market opportunity, patient needs and resource availability with return at or above defined threshold levels of performance in terms of contributions to margin, quality and community benefit.
Imperative #5: Improve clinical effectiveness
Optimizing effectiveness will require innovative models of care that improve clinical effectiveness, operational efficiency and the ability to manage patients across the continuum. Value will no longer be determined solely by what happens within the walls of the hospital, but on the outcomes of care along the continuum: from primary care clinicians and specialists working together pre-hospital, to post-hospital care, which meets the needs of patients in the most cost-effective setting—rehab facilities, skilled nursing facilities or at home.
As important as how care is organized will be that care provided is based on best practices and not always on the latest practices. Providers will likely implement best practices when well educated on the evidence and when they have an opportunity to develop care management protocols and to share in the savings achieved, demonstrating the benefit of rewarding care based on value instead of volume.
Imperative #6: Prepare for population management in the long term
While population health is being widely discussed in the context of reform and is a laudable goal, it will be difficult to achieve without considerable change to funding and behavior management among resident populations and providers. This is an important future issue but will require significant short-term investment and institutional learning to produce a long-term return. Population health management will be particularly important to providers who care for a large number of patients on Medicare and Medicaid, and these will be among the most difficult populations to manage given their typically complex health status. Academic medical centers and children’s hospitals will have a particularly significant challenge ahead.
Because the concept of population health management is ahead of proven funding and reimbursement models, rather than get distracted with the pursuit of population health initiatives for patient populations who lack the personal accountability to change, we submit that providers can prepare for population health management by starting with their own employees. The near-term payoff can be a healthier employee base and less cost to the organization. This is an important future issue, but will require significant short-term investment to produce a long-term return.
Determining Readiness for Change
Any healthcare provider's need and readiness for change will depend on two factors: local market characteristics and dynamics, and the organization's positioning. Positioning encompasses several key factors: the degree of alignment and integration of the provider network and continuum; the effectiveness of its business operations, cost structure and margin generation; its quality, patient safety and service environment; the strength of its physician alignment and physician leadership; and the degree of health information technology as an enabler of managing the business, managing patient care and as a platform for managing change.But regardless of readiness, the industry is quickly changing, and leading organizations will ensure they are ready to meet those changes in six key areas, positioning themselves for sustainable growth.
Andy Bachrodt and Harvey J. Makadon, MD have more than 30 years of experience working with and advising the leaders of health systems and hospitals in both the academic and community settings. They can be reached at andrew.bachrodt@kurtsalmon.com and harvey.makadon@kurtsalmon.com. Learn more about Kurt Salmon at www.kurtsalmon.com.
Footnotes:
[1] The Ambidextrous Organization, Harvard Business Review, Charles A. O’Reilly III and Michael L. Tushman, 2004.