The transition of the healthcare market from the volume-based payment of the past half-century (where we always got paid to do more: more testing, more surgeries, more visits) to the value-based reimbursement of the future (where we will be measured on improving health status at the lowest possible price) is well underway. The impact of the Affordable Care Act, coupled with the 2007-2008 recession, has already disrupted the market, driving down the use rates for hospital inpatient and outpatient services, and eroding the margins of many providers.
These trends are likely to be permanent as employers and commercial insurers have moved out ahead of government reform with the goal of reducing utilization and bringing premium increases closer to the rate of the GDP inflation.
The aging of the baby boomers, and the addition of newly insured patients from health insurance exchanges, may create some increase of demand, but this uptick will be offset by broad cost control initiatives launched by CMS, employers, and insurers.1
“Crossing the Crevasse” between today’s volume-based payments to tomorrow’s value-based payments means developing a plan of how to compete and be profitable in a market where organizations will see more and more Medicare and Medicaid patients, but fewer and fewer commercial patients. Since the transition to value-based payments will be gradual, most organizations will need to develop a bridge strategy to “straddle” the crevasse until they can fully cross it. Maintaining good fee-for-service rates, while simultaneously building the capabilities to manage the total cost of care is the central requirement for success during the market evolution.
There are 5 critical market forces that boards need to understand as we move through this period:
The 5 Critical Market Forces Boards Should Understand
Critical Market Force 1: Market Boundaries are Blurring
Disruptive change is blurring the boundary lines between payer and provider markets.
In the past two years, several large commercial payers, including Humana, UnitedHealthcare, WellPoint, and DaVita Healthcare Partners, have acquired large multi-specialty medical groups to build market share and new care management skills — clear moves into traditional physician and health system market territory.
Highmark Blue Cross Blue Shield acquired the West Penn Allegheny Health System in Pittsburgh. Rebranded as the Allegheny Health Network, the five-hospital provider unit will form the groundwork for an integrated delivery network.
Health systems, including Partners in Boston, Adventist in California, and the national investor owned UHS, have gone so far as to secure insurance licenses and are entering the market directly. Providers have also more than matched insurance company acquisitions of physician practices, with approximately 50% of primary care practitioners in the nation now employed by hospitals or health systems.
Critical Market Force 2: A Clinically Integrated Network of Physicians Emerging as a Requirement for System Success
The clinically integrated network (or CIN) is a mechanism that allows both employed and private practice physicians to engage in contracts that include incentives for improving quality and efficiency. Approximately 500 CINs have been organized since the passage of the ACA. The CIN facilitates health system efforts in shared savings programs, allows systems to reduce their own healthcare cost through the better management of system beneficiaries, and prepares systems to take on more management of the total cost of care.
Organizations that have not begun to organize CINs will need to play catch up if they expect to manage population health instead of selling it by the encounter.
Critical Market Force 3: The Pace of Consolidation (Horizontal and Vertical) Keeps Increasing
“Consolidation? We’ll see more of that by 2019 than we’ve seen in the last three decades. The pressure to get your costs at or below where Medicare is today have become enormous.” Peter Fine, CEO of Phoenix-based Banner Health Network.
Both national and regional health systems are acquiring partners to gain greater economies of scale, new care management capabilities, and the ability to manage the total cost of care. Examples already abound: Continuum Health Partners, a five hospital healthcare system in New York City, and the Mount Sinai Medical Center, created the Mount Sinai Health System, the largest voluntary system in New York State.
Trinity Health merged with Catholic Health East to secure its position as the nation’s second largest religiously sponsored system.
In Texas, Baylor Health Care System merged with Scott & White Healthcare to create a mega integrated system to manage the two organizations’ strategy to move towards population health management.
Critical Market Force 4: Scale: Organizations are Seeking Out Mergers, Affiliations, and Partnerships
There are a variety of new business partnerships emerging in the market including those ranging from business alliances between for-profit and non-profit providers, to “virtual integration” partnerships between payers and providers to offer private label Medicare Advantage plans, or to bring new narrow network products to the market for the public and private health insurance exchanges in 2014.
The Cleveland Clinic, for example, has forged an alliance with the investor owned hospital operator Community Health Systems Inc. to leverage their brand and expand into nearby local markets. The new alliance doesn’t involve any change in ownership stakes, but goes beyond the affiliations the Clinic has long formed with local hospitals’ cardiovascular programs. The alliance recently entered into negotiations for its first acquisition of the Akron (Ohio) General Health System and is currently discussing a “strategic equity partnership” with nearby Metro Health Corporation in Wyoming, Michigan.
In a similar deal, Duke University Health System has formed a partnership with publicly traded LifePoint Hospitals—Duke LifePoint Healthcare—to pursue acquisitions and shared ownership and governance of community hospitals who are looking for a stable home in the new reform market.
Critical Market Force 5: Increasingly, Healthcare is Becoming a Consumer Purchase (not a benefit)
The introduction of new products for the public and private health insurance exchanges, and the continued expansion of Medicare Advantage, means that consumers will have a greater range of choice in selecting their source of care. The experience of other industries, such as retail or media, is that when consumers are offered more convenient or cheaper delivery options that don’t compromise quality, they will change buying habits quickly.
What this Means for the Hospital and Health System Board
The transition of the volume-based business model to a business model organized around incentives for quality and shared savings will require developing new capabilities and perspectives in the executive suite, the board of trustees, and the physicians. This may include consideration of new partnership alternatives and approaches, acquiring or outsourcing capabilities to meet market demands in a timely way, and developing new models of care that are team-based rather than individually focused.
Boards should be examining their own capabilities to work through these changes and those of the organization.
Here are some key competencies for the crossing of the crevasse from our old fee-for-service world to the world of population health, total cost of care, and value-based payment.
Acceptance of Cultural Change. A few larger organizations such as Partners HealthCare in Boston and Intermountain Healthcare in Utah have decided to aggressively pursue global payments and population health management.
Health system boards, physician leadership, and executive leadership must develop consensus around the rate of change occurring in their markets and the speed with which the transition will occur and then execute plans to match that pacing.
Alignment of Resources Across the Continuum of Care. In their 2013 Signature Leadership Series report, the Health Research and Educational Trust, in cooperation with the AHA, ranked aligning hospitals, physicians, and other clinical providers across the continuum of care as the number one improvement priority for the nation’s healthcare providers. They defined successful alignment to include the availability and integration of acute and non-acute services, as well as serving as health manager for chronic disease, behavioral health, and long-term care.
A Collaborative Skill Set. The insurance industry has moved decisively to adopt accountable partnerships as their preferred business model within many regional markets and effective contracting in the future will be focused more on sharing frontline innovations and technology to manage care, reducing unwanted variation, and participating in product design to grow share and replace utilization lost through market consolidations.
Ability to Capitalize On, and Effectively Use, Big Data. Intelligently used data from enterprise applications can speed the revenue cycle, reduce service breakdowns, and better manage the efficiency of operations to increase margins. Big data can help maximize the effectiveness of the fee-for-service business model while simultaneously providing the tools needed to move towards the future state delivery models on the other side of the crevasse. Realizing the potential of data driven improvements will require new information technology competencies in the executive suite as well as the board and an evolving recognition that organizational models of the future will be more customer and service focused, supported by strong analytic underpinnings.
Enhanced Patient Engagement and Communication. Changing patient behavior will require relevant, concise, and actionable content in the hands of the clinician and patient at the moment they are delivering or contemplating care and facilitating provider / patient coordination.3 Recent studies indicate patient engagement via e-health technology may be the undervalued tool for improving patient engagement and activation to reduce unmet medical needs.4
Conclusion: Questions for Consideration
As boards and executives deliberate their position for the future, three major questions could help guide their considerations:
1. What are our organizational strengths and how can we best leverage them in our respective markets? Developing a consensus around a transition model for crossing the crevasse — as well as identifying where you can best serve the community and deliver high value care in the future — is job one. Since only 10% to 15% of most provider revenue today is from value-based payments, identifying how to take advantage of existing strengths and augment deficiencies will be key differentiators going forward. Deciding your organization’s place on the continuum and where you’ll need to be positioned is the first strategic issue to be addressed.
2. What is the rate of change in our market and how quickly must we move towards a value-based delivery model? Developing a broad consensus on the rate of change and the speed with which your organization will need to adapt is a requirement for setting realistic, implementable goals. Failing to prepare for the fiscal cliff may be fatal, but failing to build consensus on the need for, and speed of change, may make implementing a sustainable business strategy impossible.
3. Who are our preferred partners and how will we position ourselves for success?Identifying the spectrum of choices and preferences for participating in population management and the full continuum of care will take systematic deliberations and discussions among the organization’s major constituencies. Deciding cultural, financial, and organizational compatibilities will be an ongoing and iterative process over the next few years. As the markets mature towards value-based care, the criteria for partnering will change from forming alliances that primarily focus on competitive advantage to partnerships which focus primarily on the creation of customer value.
Healthcare delivery is never simple. That said, this current phase of evolution will be more dramatic than any in the past and will stretch the creativity and flexibility of boards and executives across the spectrum.
The very notion of “who are we” will need to evolve as boards consider mergers and partnerships over standing solo, turn over more power and control to physicians, and move up the premium chain toward looking more like (or even becoming) a health insurer.
Whereas the typical board has needed to be conservative and hold fast to the past, this new era will require boards to be innovative and to make difficult decisions so that the healthcare communities will be optimized for the future. Increasingly, boards will need to focus on truly improving the health of the community while lowering the costs to that community and less on the preservation of the status quo.
1 A recent study of inpatient use rates for the total population from 2011-2021 by Milliman, the respected actuarial firm, projected that despite population gains, inpatient admissions would decline approximately 15% from 2011 to 2021 in all markets regardless of whether care was “loosely,” “moderately,” or “well” managed. Milliman Projections for Inpatient Use Rates for Total Population 2011-2021, Kaufman & Hall Associates Inc., private study 2013, with data from Kaiser State Health Facts, AHA.
2 SK&A, private study for BDC Advisors, 2013
3 Reisman, Lonny, MD, “Redesigning the Health Care System,” AETNA, March 2013
4 Ricciardi, Lygeia, et al, “A National Plan to Support Consumer Engagement via E-Health,” Health Affairs, Aug 2013 376-384
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