How Healthcare Can Achieve A Fundamentally Different Future: Q&A With the Authors of "Healthcare at a Turning Point"

Few within the healthcare industry reject the idea that significant, fundamental changes are ahead for healthcare. However, the net result of this fundamental change is less clear. Rita E. Numerof, PhD, president, and Michael N. Abrams, MA, managing partner, Numerof & Associates, explore the future of healthcare in their new book "Healthcare at a Turning Point: A Roadmap for Change" (CRC Press, 2013). Here they discuss the book, their predictions for the future of healthcare and how change will be achieved.  

Question: Your book compares the "turning point" healthcare is currently experiencing to similar "turning points" in other industries. Based on these previous examples, what differentiates an organization that deals with this disruption successfully and one that fails?

Michael Abrams: The most common form of industry-wide disruption has been technology based. The entry of the PC suddenly made mainframes largely obsolete; Amazon and its imitators have been displacing retailers of books, music and other goods. For IBM — the case we describe as a just-in-time recovery — the key was leadership, focus and the willingness to break with precedent. That transformation didn't come easily; in fact, it was a near-death experience.

Complacent in its worldwide dominance of the mainframe market, IBM was, by the late 1980s, a bloated organization of over 400,000 employees characterized by redundant processes and functions. Despite extraordinary technological accomplishments, its markets were being eroded by lower cost, more nimble players. Between 1991 and 1993, the company posted net losses of nearly $16 billion, including the largest single-year corporate loss in U.S. history. Hundreds of thousands of employees lost their jobs, including CEO John Akers.

IBM then did something it had not done since 1914 — it hired an outsider, Lou Gerstner, Jr., to run the company. Gerstner brought a fresh, customer-oriented perspective and a bias to action that had been missing in the old IBM. He sharpened the strategic focus of the business, selling off business lines of marginal profitability or relevance, cut the workforce nearly in half and rebuilt product development around the company's core strengths of product and service integration.

The problem for healthcare organizations is similar in some ways, but different in others. More nimble competitors are indeed chipping away at traditional healthcare markets. Physician-owned ambulatory surgery centers have capitalized on new technology that allows many inpatient procedures to be performed at lower cost on an outpatient basis. Enterprising retailers and others are setting up clinics in retail spaces, siphoning off outpatient and urgent care business; regional hospital systems are inking deals with employers to provide carve-out service line care like cardiology, cancer and transplants to their national work forces; and physician-entrepreneurs from India and Asia are building specialized inpatient facilities just offshore, hoping to bring medical tourism closer to home.

But the most profound disruptive force is public finance and payors. Unlike IBM, healthcare doesn't really answer to the marketplace, but rather to payors, and the biggest by far — CMS — is looking at its own financial cliff. The rate of healthcare inflation over the past decade is unsustainable, and CMS shows every indication that it will take defensive action to ensure its own financial integrity, leaving it to providers to figure out how to make do with less. Estimates of reductions in overhead that will be needed by providers to adjust to lower reimbursement range from 20 to 40 percent. It will be up to delivery organizations to find operational solutions, but marginal adjustments won’t be the answer.

Strong leadership that is able to "think outside the box" about new ways to deliver value to stakeholders — payors, employers, and patients — is the primary requirement for success in the turbulent times ahead. Community hospitals in many parts of the country are run by executives and overseen by boards of directors who do not bring the strategic sophistication or discipline that was brought to bear at IBM. In fact, a history of over 30 relatively placid years in which the current business model has sufficed makes it difficult for many in a leadership role to grasp the idea that something so fundamental needs to change.  It is likely to be a trying time for many organizations, and there will likely be many who wait too long to initiate change. Where market demand justifies it, these assets will be taken over by leadership that is better prepared to deal with the changes being imposed on the industry.

Q: The book opens by announcing that healthcare needs a "fundamentally different future." If you had to describe what that future will look like in a few sentences, what would you say?

Rita Numerof:
This future will be characterized by innovative, nimble organizations that have evolved processes and values that enable them to flourish in a competitive and dynamic environment. They will be organizations that make an understanding of consumers a primary consideration in shaping all aspects of the patient interface, in which management and staff are held accountable for making decisions consistent with patient and the business' interests. Financial incentives that distort decision making in ways that raise costs and disadvantage patients will be minimized, and quality will constantly be in focus because it will be, along with cost, transparent to all buyers. One of the key accountabilities of leadership will be to build and improve on the organization's economic and clinical value story for its key service lines, and to develop new clinical and administrative protocols that it can brand as its own that deliver better outcomes at lower cost. Through ownership or contractual arrangements, hospitals will manage treatment seamlessly across the care continuum, with an emphasis on prevention that is not in evidence today. Much of the treatment that is provided will involve predictable costs paired with quality guarantees. Competition will be intense in many areas, and providers will rely on data-based metrics to justify the prices they charge.

Q: Part of reaching the vision you outline for healthcare's future is achieved through comparative effectiveness research and then putting its findings into action. Why is this research so critical and what can be done to more rapidly spread using this research in the day-to-day treatment of patients?

In order to be approved for use in the marketplace by the FDA, a drug or device needs to meet two criteria: (1) it does what it claims to do, and (2) it is safe when used within prescribed limits. FDA approval implies nothing about the clinical benefits provided by the product relative to its cost, or its relative value compared to other treatments for the same condition. Manufacturers have no obligation to do head-to-head effectiveness studies, and generally don't do them because the results — whatever they are — must be made available and could be damaging to the marketing of their product. So, efforts to evaluate the efficacy-to-cost ratio for most medical products and treatment protocols are left to a small community of underfunded researchers, leading to a body of knowledge that is fragmented and incomplete. Comparative effectiveness research driven by the federal government is intended to remedy this situation. Ideally, policymakers would like to reduce costs without impacting the quality of healthcare, and CER is seen as one way to get there. By replacing ineffective treatments and standards of clinical care with effective ones, or by replacing more expensive treatments with equally effective but less expensive ones, the cost of care can be brought down.  

Because the whole area is so new, the issue of dissemination of CER findings has received comparatively little attention. In general, changes in medical practice — even those that are justified by research — are notoriously slow to be adopted by the medical community. One way to accelerate this process would be to make sure that this research is available to consumers/patients, along with transparency in costs and outcomes. Consumers who take the trouble to educate themselves about the clinical options they have to choose from, and those who just focus on the cost and outcomes of the providers available to them will drive adoption of CER findings through these market-based incentives. Consumers in the market for a new television or automobile or even insurance — important and expensive purchases — ask lots of questions about product features and benefits, comparison shop for the best value for our money and negotiate payment terms to get the best deal. It is certainly plausible that more transparency, coupled with credible and accessible information can help consumers make more educated decisions and drive dissemination of CER findings in the process.

The slow pace of dissemination of medical innovation is in part attributable to the fact that as independent practitioners, the physicians' prerogative is to treat the patient as they see best, subject only to professional guidelines, liability and existing reimbursement constraints. Note that cost effectiveness doesn't appear in this list, and in fact, most physicians are only generally aware of the cost implications of the treatment choices that they make.

However, these circumstances are changing quickly. Intimidated by the growing demands of independent practice, physicians are seeking employment by hospitals in growing numbers. The number of physicians employed by hospitals has grown by 32 percent between 2000 and 2012. Estimates are that, by 2013, 25 percent of physicians on hospitals' active staffs will be employed. With hospitals increasingly bearing the financial risk of excessive treatment, incentives will grow to ensure that CER guidance on the most cost-effective treatments weigh heavily in clinical decision making. Indeed, insistence by payors that such guidelines become the default to qualify for reimbursement may be the most effective way to accelerate adoption (if not consensus) of CER findings across the medical community.

Q: You argue that accountable care is needed but ACOs are not. Why the distinction?

Accountable care means that real consequences for individuals and organizations attach to their performance in improving quality and lowering costs. Accountable care organizations have been suggested as a way of reorganizing providers in a way that will accomplish this. The premise is that if providers across the care continuum are subordinate to an umbrella organization that does the billing and distributes the revenues, and cost savings are shared between the ACO and the payor, then these organizations will do a better job of coordinating care and the result will be better quality at lower cost. Unfortunately, the premise is flawed. First, because the politics of creating and governing such an organization more than make up for any efficiencies, and second because savings (if they actually occur) only are shared once — after that, the bar is raised. The "efficiency bonus" to be shared (assuming there is one) gets smaller over time, until it is likely too small to matter. In theory, the ACO program "promotes accountability for a patient population and coordinates items and services… and encourages investment in infrastructure and redesigned care processes for high quality and efficient service delivery," as written in the PPACA.  However, the likely result will be a concentration of power not in the most efficient and highest quality healthcare organizations, but in the largest — simply because they control large segments of the market share.  

Q: How will the changes you describe for healthcare delivery impact pharma and medical device manufacturers? What will the impact on their businesses be?

The issues for pharmaceutical and medical device manufacturers are twofold. First, they need to fundamentally reconfigure their product development and commercialization processes in response to growing demands by payors and providers for evidence of economic and clinical value relative to the current gold standard. This represents a very different and more demanding requirement for market access than ever before, and it calls for substantial structural and cultural change.  

The second issue for these manufacturers is that even those products that pass the bar for economic and clinical value may capture a larger share of a shrinking pie. High volume, high cost procedures and treatments for chronic diseases (for example joint replacements, CABG, expensive cancer treatments) will be under scrutiny by paoers and providers alike. Guidelines may be issued that specify lower cost first- and even second-line treatments before expensive drugs or devices will be reimbursed. Providers will increasingly be consolidating vendors and limiting formulary access,  so price sensitivity will hit new highs. The bottom line is that the volume growth assumed in that last three-year plan may not materialize, and margins will be squeezed.

The net impact will be to the bottom line, and the allocations to marketing and R&D that would have otherwise been made. Difficult choices lie ahead. Manufacturers may need to diversify into adjacent market spaces to find sources of revenue that are more attractive than their core business, and R&D plans may need to be scaled back.

Q: In the final chapter of your book you provide a basic roadmap for change. Can you share some of the steps along this roadmap? What other advice do you have for healthcare providers as they position themselves to embrace the coming changes in healthcare?

As much as we'd all like to believe otherwise, we're not done with the challenge of healthcare reform. Recent legislation mostly regulated insurance companies and gave them an incentive to work with providers to slow the growth in the cost of care. ACOs and bundled payment pilots authorized by the legislation are just that — experiments. I expect that bundled pricing will yield results and will foster a more market-oriented environment, which is the missing dynamic in the industry today.

It looks like impending bankruptcy of Medicare will drive CMS to push the provider sector for a new level of efficiency. Penalties for 30-day readmissions have already begun and have proven the power of financial consequences to stimulate change. The prospect of shrinking reimbursement will force providers to get serious about cost, and if we follow through with transparency and meaningful, standardized metrics, we will be creating the foundation for a market based-approach with the potential to drive continuing change.

Providers would be well advised to consider the lessons learned from IBM, to think "out of the box," and to re-focus on value to the payor, employer, and most of all, the patient. If the changes mandated to date and the ones to come empower and incentivize consumers to make better choices, the healthcare sector will find a way to deliver more value. Twenty-first-century solutions to healthcare will reflect collaboration and innovation in the business models of each industry sector.  Most importantly, it will require a level of integration and coordination among disparate, previously siloed players in the industry: manufacturers, payors and healthcare delivery providers working in concert with savvy consumers.  

Healthcare providers must become more efficient, more transparent and more consumer-centered. They must also demonstrate the economic and clinical value of what they offer compared to alternatives and answer the question: Why should anyone come to their institution? This is the future of healthcare, and healthcare systems, and independent physicians need to get ready for it. 

More Articles Feauring Rita Numerof & Michael Abrams:

6 Hurdles to Bundled Pricing
Bundled Pricing: Getting Physician Buy-In
What Service Lines Are Really Supposed to Do

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