Looking Back to Move Ahead: Leading Hospitals Through Fast-Paced Change
"Over the past 6-12 months, changes induced by healthcare reform have added to an already packed CEO agenda," says Russ Richmond, MD, CEO of the McKinsey Hospital Institute, part of the global McKinsey Healthcare practice, which serves seven of the 10 largest healthcare systems in the country, among other clients. "For some CEOs these additional pressures are new territory, requiring new skills and behaviors."
Throughout the numerous conversations this publication has held with healthcare executives, a certain phrase seems to pop up frequently: the pace of change. Many leaders speak to how it has accelerated in the past year and a half, influencing hospitals' strategy and executives' personal leadership style. Here, we analyze the greatest sources of pressure facing today's CEOs and examine how history can help leaders find their footing.
Effects on hospitals' strategy
The healthcare industry is only in the early innings of the game since PPACA provisions will be implemented throughout 2015. Currently, 50 of healthcare reform's 92 provisions are in effect, of the greatest sources of pressure on the hospital CEO is not directly related to any one provision. Rapid consolidation in the industry is leaving many CEOs with some difficult choices: remain independent, partner with another provider or pursue an accountable care organization, in addition to a few other options.
During the second quarter of 2011, the healthcare sector posted 243 merger and acquisition deals worth a combined $73.7 billion — a six percent increase in volume of deals over the first quarter of 2011 and a three percent increase over the same quarter a year ago, according to Irving Levin Associates. Even if hospitals didn't foresee an affiliation in their strategic plan, they may find themselves on the defense to protect market share.
"All of a sudden, with a significant amount of anxiety and intensity, CEOs have to think through different partnership scenarios or grapple with the decision of remaining independent. We have not seen this level of deal velocity — especially with community and regional hospitals — in the last 10 to 15 years," says Dr. Richmond. Mergers and acquisitions are now approached from a proactive rather than reactive angle, as CEOs work to ensure they have a seat at the table when it comes to deals with both ambulatory care and acute care providers in their local market. As hospitals consolidate, the highest-level CEOs find themselves overseeing larger and more complex organization than in the past, and in many cases they are responsible for many sites of care beyond acute-care facilities.
There are significant pressures exerted from the hospital's internal operations as well. The combination of PPACA-mandated payment reductions, additional likely cuts to Medicare and the rise of risk-based reimbursement stresses the need for operational efficiency and cost reductions in the day-to-day. "In order to maintain some type of margin, hospital efficiency is becoming even more critical than it has ever been," says Dr. Richmond.
As a result of these operational pressures, CEOs are delving deeper into initiatives that they may have traditionally delegated. CEOs have always been familiar with cost-side programs, but they are now becoming involved in greater detail. "We are seeing CEOs engage directly in detailed cost-driven decision making. For instance, we are seeing a stronger CEO voice in labor and supplier expense management, as well as physician practice variation," says Dr. Richmond.
Relying on experience and history lessons
A handful of hospital leaders have completed prestigious training or other formal education before arriving at their current position. Still, when it comes to providing the necessary leadership under healthcare reform, nothing is more valuable than hands-on experience and a solid grasp of history. Craig Garner, JD, an attorney and adjunct professor of law at Pepperdine University in Malibu, Calif., as well as a former hospital CEO, believes there are very few programs designed to train healthcare management in today’s current climate of reform.
"Even the programs presently in existence, such as the American College of Healthcare Executives, have yet to develop a formal or comprehensive discipline on healthcare reform. Instead, healthcare leaders must reply upon past experience, practical acumen, and a little bit of history in responding to these swift and sweeping changes," says Mr. Garner.
Indeed, an executive's understanding of healthcare history can play a vital role in how well he or she approaches change. Many of the provisions within healthcare had some form of direct or indirect implementation previously, and a firm understanding of this history can help leaders with modern day implementation. For instance, bundled payments are not new to healthcare. The Department of Health and Human Services announced a new bundled payment initiative in late August, but the model's roots go back as early as 1984 when a heart hospital in Texas began charging flat fees for cardiovascular surgeries.
"No matter how 'up-to-speed' a healthcare CEO may be on the present-day regulations and changes, nothing replaces the benefits of a solid understanding of historical, critical foundational changes in healthcare," says Mr. Garner. Other initiatives that played out in healthcare history before also required a significant amount of change, such as the creation of diagnosis-related groups in 1982 and the Emergency Medical Treatment and Active Labor Act, or EMTALA, in 1986.
DRGs and EMTALA are just two initiatives that had major repercussions on hospitals' operations, finances and physicians. They can also be linked to contemporary themes in PPACA, such as new payment methods or expanded coverage. "DRGs created a whole new way to pay. Does that sound familiar?" says Mr. Garner. "How familiar today’s healthcare leaders are with historical tenets in health care reform will be an enormous asset as they formulate appropriate plans of action to keep up with the changes."
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