5 Tips for Developing Your Ambulatory Enterprise

Health systems should consider five key lessons in order to develop a strong ambulatory network.

Virtually every health system is accelerating its ambulatory development efforts. Driven by softening volumes, risk-based reimbursement models favoring lower cost substitutes, consumerism and high-deductible health plans, health systems are working to respond to increased consumer and payer price and service sensitivity. The health systems that cannot develop a strong ambulatory network will be increasingly cut out of a larger and larger portion of care delivery. As a result, systems should consider five key lessons from regional health care systems' ambulatory enterprise experience.

1. The time is now. For decades, there has been a shift from inpatient to ambulatory delivery.  However, this shift has been held back by healthcare systems wanting to capitalize on the higher hospital-based reimbursement models. As a result, a major section of the industry with capital and expertise has not had much incentive to build large ambulatory networks. Today, this barrier is rapidly falling. The growth of risk-sharing reimbursement models is mitigating the effect of service pricing, and local competitive pressures are forcing prices down in most markets. If health systems embrace risk-sharing reimbursement models, we will see dramatic growth in health system ambulatory investments. If your system isn't building its ambulatory network, your competitor health system will grab the best locations and relationships.

2. New operational capabilities must be developed. Ambulatory is a game operating with different rules and different organizational capabilities. Too often health systems fall into the trap of thinking about ambulatory assets rather than capabilities. Because ambulatory is a service game, success is less about the infrastructure than it is about the service provided. In this case partnership models can be highly successful. In the traditional partnership models, the goal is trying to capture referral streams by economically aligning physician partners with the ambulatory development. However, for health systems to develop the scale of ambulatory enterprise required, more is needed than one-off physician joint ventures. Health systems might do well to look at partnering with established ambulatory operators as they work to build their own ambulatory service/operations capabilities. 

3. The right financial metrics are critical. Hospital systems often look at EBITDA. Obsession with EBITDA causes health systems to favor activities that effectively deploy capital over capabilities. This makes sense when the organization is trying to maximize the use of an already capitalized fixed asset and rightly focuses the organization on cash flow proxies. Ambulatory programs' success, however, is more about service deployment than capital deployment. As a result, success metrics for ambulatory should not simply compare EBITDA returns with capital-intensive inpatient rates. To win with ambulatory services, health systems must focus on measuring the success of deploying unique capabilities that do not depend on the same levels of capital. For ambulatory projects, total sustainable margin is a better metric. 

4. Competitive pricing is required. Health systems have worried about cannibalizing their hospital-based reimbursement models while they resist the market's demands for access, convenience and low-cost ambulatory services.  While it is important to maximize price for the supplier of the service, the industry appears to be reaching a tipping point where health systems must cut prices to compete. For example, in Denver, the price paid for an outpatient MRI in a regional referral center is as much as 3 times the price at an investor-owned outpatient center for the same procedure. With commodity services and pricing transparency increasing, health systems are rapidly losing their ability to command increased hospital-based rates for many ambulatory services. Moreover, there is increasing evidence quality is not the differentiator. Rather, service, convenience and costs rule the value proposition. As the market forces prices down, health systems must have a well-developed, convenient ambulatory network to compete for the rapid increase of 60 to 75 percent or more in volume needed to make up the margin lost to price cuts.  

Our experience with even the most successful health systems has highlighted the challenges involved in developing the new capabilities needed for an ambulatory enterprise. This leads to a fifth finding that is perhaps the hardest for health systems to solve.

5. Traditional leadership and structure must change. Senior-level ambulatory enterprise leaders do not exist in most systems. While there are strong ambulatory leaders, typically these are director or VP-level leaders without the seniority to have a place at senior leadership meetings. Moreover, ambulatory often reports up through the hospital operations rather than to the system CEO directly. This poses immediate conflicts for building an ambulatory system of care if there is any aspect of substitution for hospital-based services. To resolve this conflict, the most innovative systems work hard to ensure the ambulatory enterprise is not subservient to the inpatient enterprise and is allowed to innovate and implement care substitutes for inefficient care processes that do not clinically require inpatient services.  Standing the ambulatory enterprise on its own requires a top-down commitment to change the corporate structure of health systems and pull the ambulatory enterprise out from underneath the inpatient enterprise, placing it on par with its inpatient counterpart in the organizational structure.

Health systems developing their ambulatory enterprise can learn lessons from studying the successes and challenges of others in different stages of market change. Those that learn the fastest, adapt the best and create comprehensive ambulatory networks are positioning themselves for success in the future value-based reimbursement environment. Those that fail are destined to become commodities in a declining market.

Kate Lovrien and Luke C. Peterson are principals at Health System Advisors. They can be contacted at Kate.Lovrien@HealthSystemAdvisors.com or Luke.Peterson@HealthSystemAdvisors.com. Health System Advisors is a strategy consulting firm with a mission to advise leaders, advance organizations, and transform the healthcare industry. For more information contact HSA at 877.776.3639 or www.HealthSystemAdvisors.com.

More Articles on Strategic Planning:
The Role of Ambulatory Networks in Hospitals' Population Health Efforts
Employer-Sponsored Health Clinics: What Hospitals Risk if They Don't Get Involved
6 Phases of Strategic Plan Execution

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