Strategically Positioning Health Systems in a Dynamic Environment

The healthcare industry is undergoing large and fundamental changes with implications that are not fully visible. The Patient Protection Accountable Care Act, which was an important catalyst for the industry upheaval, turned three years old in March and yet many of its provisions are still waiting to be defined and enacted, causing continued uncertainty in the industry. And, while health insurance premiums continue to grow, it is not translating to better margins for health systems as elective healthcare volumes continue to decline and demographics continue to shift the patient base to older and sicker populations who require more healthcare services.

Both systems and independent organizations have increased acquisition and merger activity as organizations seek the perceived security size brings in the face of an uncertain future.4 Even though finding partners is a natural response for hospitals and health systems in an uncertain world, it will be years before many of these systems recognize any significant benefits from coming together.5 Moreover, size will not guarantee success or future security during the industry transition from fee-for-service reimbursement model to the risk-sharing models of population health. Without the right strategic advice and positioning in the market, large and small health systems are at risk of becoming commodities and losing their position as leaders in the U.S. healthcare industry.

In these times of industry uncertainty, health systems must be actively working on four major strategies to be positioned for the future. These groupings of strategies include: Growth, Effectiveness, Relevance and Capabilities. While Growth and Effectiveness strategies have been a staple of every health system strategic plan over the past two decades (e.g., grow x, y, and z service line, improve service, deliver worldclass quality, etc.), the massive industry upheaval brings into increasing importance strategies related to Relevance and Capability. It is no longer enough to simply drive growth and effectiveness, most must fully reinvent their capabilities to remain relevant in light of the industry shifts.

Growth strategies Definition: strategies to affect expansion

Growth strategies are focused on the efforts by the organization to expand their services and ultimately, their revenue and mission. In a market where the future direction and competitive rules of the industry are generally clear, those that grow the fastest win. Until recently, growth has been the primary focus for healthcare organizations. Growth strategies take on a number of forms including: volume, payor mix, new markets, additional geographies, reputation, size and scale and span of services, specific populations, etc.

Growth is a high-impact, aggressive strategy and is often seen as a sign of strength and success in the American social fabric. Organizations looking to increase margin have two major options: savings through cutting costs and increasing revenues with growth. Many organizations consider growth and cost savings two aspects of the same process; however, this is not the case as savings can put the relationships with patients in jeopardy and thus often leads to a decrease in margin6 while growth enhances these relationships and leads to sustained increases.7 Further, while cutting costs may appear to be an entirely internal operation, inevitably customer satisfaction will be affected8 perhaps through reduced patient services, longer wait times or discontinuing/ limiting a product or service. These implications hardly encourage consumer loyalty, which can stunt business growth by 50 percent or more9.

Increasing revenues with growth has a different effect entirely. Focusing on growth has shown better results than cost savings or even a combination of the two, including a higher return on investment. Growth will often increase the availability of new services and access to existing services, which leads to a loyal and growing customer base. This preference for growth across industries is further evidenced by the stock market reaction. While surprise announcements of each strategy adds some immediate market value, investors react more strongly to sustainable and persistent growth revenue changes over the change in expense that cost savings represent. 10 The differential in investor reaction is even more pronounced in growth stocks versus value stocks.

The importance of Growth strategies is and will remain strong. Health systems continue to have many opportunities for growing top line revenue that must be aggressively undertaken. Some of these include:

• Enhancing service lines within existing programs
• Adding new service lines entirely (e.g., ambulatory)
• Expanding the market footprint through alignment, partnership or acquisition
• Expanding channels and avenues to deliver care, such as urgent care or retail care
• Deploying technology particularly to grow access with online/smartphone health and telemedicine options

Moreover, organizations can approach growth strategies tactfully focusing on areas that are likely to benefit from the industry trends (ambulatory, primary care, technology-enabled solutions) rather than riding the same specialty inpatient service line growth plan too long.

Effectiveness strategies Definition: strategies that improve an organization’s ability to produce a decided, decisive or desired outcome

Effectiveness strategies focus on gaining higher value from the organization and delivery of services. Effectiveness has gained increased focus of many healthcare organizations in the last several years as reimbursement and financial pressures have mounted and market volume growth has stagnated or shrunk. Often, however, this effectiveness focus has been incremental, and not fully integrated into the organization’s strategic DNA.

A focus on effectiveness strategies is often found in mature industries that have moved past the growth phase. In the manufacturing industry, various waves of effectiveness strategies have come in the form of assembly line manufacturing techniques, interchangeable parts and lean manufacturing. An example of this is the automobile industry, which has moved from hand building every car, to Henry Ford’s assembly lines, to today’s semi-automated robotic assembly facilities.

The importance of effectiveness strategies is increasing in healthcare. As market volumes stagnate, competition will shift to price. Price competition will likely come in three forms:

• Local competition for ambulatory services at rates 35-50 percent lower than hospitalbased provider rates.
• National competition with providers like the Cleveland Clinic that offer high-quality bundles of heart care for lower costs than local providers to large employers.13
• International competition for medical tourism to high-quality hospitals across the globe. It is already happening in places like Thailand, where services offered at Bumrungrad hospital are performed at the same level as Western care for 30 percent of the price.

More effective alternatives will become increasingly attractive to consumers as dollars are squeezed out of the healthcare industry, whether that be patients footing higher levels of their healthcare bills, physicians who have taken on risk-sharing arrangements for a certain population, or employers and insurers.

Key methods toward improving effectiveness according to the Commonwealth Fund’s “Achieving Efficiency: Lessons from Four Top-Performing Hospitals” 15 include:

• Standardize processes and supplies
• Improve the coordination of care between handoffs across departments and elements of the continuum
• Use technology to complete standardized tasks
• Reinforce goals by addressing organizational culture

Approaching effectiveness strategies with an eye toward areas of highest impact now and in the future will cause health systems to look at processes both within the hospitals and outside the hospital walls.

Relevance strategies Definition: strategies that improve the ability to provide services that satisfies the needs of the user

The relevance of health systems is threatened as non-traditional providers are rapidly moving into the provider business. For example, insurers are outright purchasing large physician organizations, portions of the care delivery model, and using risk-sharing contracts to directly align with physicians. The anticipated result is cost of care reductions. To date, much of the cost reduction has come at the expense of traditional hospital businesses. In fact, through the narrowing of networks to preferred physician groups, commercial insurers are predicting the ability to reduce costs by as much as 20 percent compared to traditional plans. Employers are taking a larger role in providing insurance, with large-size private-sector employers driving a trend toward more “selfinsured” health plans.19 In 2011, 58.5 percent of workers with health coverage were in selfinsured plans, up from 40.9 percent in 1998. Employers are also providing new incentives to their employees to use “preferred providers,” narrowing provider networks. Eleven percent of large employers use direct contracting for surgical centers, hospitals and patient centered medical homes with an additional 20 percent contemplating such provider agreements.

Large retailers and equity investors are also creating new substitute delivery models. Consider that Walgreens has some 2 million retail clinic visits across the country and still has more than 7,500 additional stores in place today that could serve as future clinic sites. In other cases, private equity investors are able to move into a market and dramatically outspend traditional non-profit healthcare systems. Examples include Blackstone Group investing in Vanguard Health Systems, Oak Hill Capital joining forces with Ascension Health, and Cerberus Capital Management financing Steward Health Care System.

To remain relevant, health systems must rapidly reinvent themselves. This reinvention is particularly the case where consumer demands have shifted, technology has created viable substitutes and reimbursement changes the way value is monetized. Some of the strategies will include:

• Trusted relationships with populations for the coordination of health and care
• Building primary care and infrastructure to manage the systems of health rather than only the systems of care
• Customer service strategies such as movement from scheduled (traditional primary care clinic) to on-demand (urgent care, retail clinic) health solutions
• Delivery channel management and the movement from inpatient to outpatient • Leverage of technology to improve access, convenience and costs such as use of online or smartphone apps to deliver primary care diagnosis and treatment • Partnerships with non-traditional providers

Living in the changing world requires health systems to better articulate their relevance (or differentiation) to their customers, whether patients, providers or payors. Relevance tends to focus on influence and knowledge of the customer and ensuring they receive services or care that satisfies their needs better than current and emerging substitutes.

Capabilities strategies Definition: strategies that create organizational potential and ability

Capability strategies focus on developing the abilities and talent needed to coordinate and manage both systems of care and systems of health. In the changing environment of healthcare today, adaptability and innovation need to be top of mind for organizations. As Charles Darwin said, “It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.” Those who understand and embrace this concept will be the ones who excel, because they will focus their energy on creating new capabilities and options for the future.

Examples of companies that lacked the ability to change can be found across all industries and often fall into the three categories summarized by Vijay Govindarajan, a professor at Dartmouth’s Tuck School of Business

• Physical: Investment in old systems and equipment leave industries cash strapped and unable to move on to newer, more relevant ideas.

Borders, for example, was the pioneer of big box retailers and began to falter in the mid 1990s at the same time technology took off. During this time, Borders failed to recognize this monumental shift, investing money instead in expansion and renovation of physical space, while outsourcing their online platform to Amazon in 2001. By 2008, Borders had restructured twice and was $350 million in debt. As digital technology began to takeover, they were in a poor financial position to effectively move as a result of long-term leases and large amounts of debt.

• Psychological: An intense focus on what was successful the past without regard for innovations which may be replacing them.

Kodak exemplifies a business that continued to focus on strategies, which initially made it successful. Once the leader in the film industry, it did try to adapt to digital technology but continued to hold onto the old business model of consumers printing photos, not realizing that digital was replacing printed photos.

• Strategic: Organizational focus specifically on the current market realities and inability to anticipate future market trends.

Humana is in the process of reinventing itself and its role in the future. They are moving from pure insurance company to a company invested in the well-being and health of the population. This is not without pain. Layoffs in 2010 have led to growth in 2012-2013 with new acquisitions in primary care and wellness services (not just insurance products). This organization seems focused to take the populations on a new path in improving their well-being (not just providing sick care).

Some examples of capability strategies that health systems might pursue include:

• Develop data analysis and population segmentation models to predict disease and health needs
• Create care teams to effectively communicate and manage chronic disease through outreach and active care prevention and education
• Coordinate community outreach and economic development activities to increase the overall health of the population and decrease cost of care
• Create clinically integrated networks with physician and non-physician providers

Success for health systems over the next decade will depend on their ability to balance strategies in the four groupings of Growth, Effectiveness, Relevance and Capabilities. The market is in a period of dramatic upheaval. Ensuring an organization has well thought out strategies in each area requires thinking that is difficult to complete with the operational pressures facing health systems today. Health System Advisors was founded out of the desire of its people to dedicate their professional energies to advising leaders, advancing organizations and transforming the healthcare industry. Contact us to be a part of this effort.

Footnotes: 1 Graham, J. “Health Spending Slows, While Premium Growth Accelerates.” National Center for Policy Analysis. Filed under New Health Care Law on February 1, 2012 2 Lee, J. “Dawdling Rebound: Analysts blame economy for elective surgery slump.” Modern Healthcare. Posted: January 28, 2012 - 12:01 am ET 3 “Aging and the Healthcare Workforce.” Population Reference Bureau. Today’s Research on Aging | N o . 1 8 | December 2009 4 In 2012, merger and acquisition activity for hospitals totaled $1.9 billion dollars not including sponsorship transfers and other non-asset transfer mergers. This is down from the high of $8.4 billion in 2011, although the number of deals increased. Irving Lewin Associates. The Healthcare M&A Report, January 2013. 5 http://www.fiercehealthfinance.com/story/ hospital-mergers-dont-guarantee-financial-benefits/ 2012-10-23 6 “You Can’t Cut Your Way to Growth”. Stark and Stewart. Inc.com. February 2012 7 “Getting Return on Quality: Revenue Expansion, Cost Reduction, or Both?”. Rust, Moorman, and Dickson. The American Marketing Association. 2002 8 IBID. 9 “The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value.” Frederick Reicheld. 2001 10 “Differential Market Reactions to Revenue and Expense Surprises”. Ertimur, Livnat, and Martikainen. Review of Accounting Studies. 2003 11 IBID. 12 2012 Health System Advisors’ study of ambulatory imaging center rates in a major metro area 13 http://my.clevelandclinic.org/media_relations/ library/2012/2012-10-11-cleveland-clinic-addswalmart- to-bundled-payment-program-for-employees. aspx 14 “Medical Tourism: Consumers in Search of Value”. Keckley, Underwood. Deloitte. 2010 15 “Achieving Efficiency: Lessons from Four Top- Performing Hospitals”. Edwards, Silow-Carroll, Lashbrook. The Commonwealth Fund Synthesis Report. July 2011 16 https://www.beckershospitalreview.com/hospitalphysician- relationships/unitedhealth-group-buys- 2300-physicians-in-california.html 17 Humana now owns Concentra, the largest urgent care provider in the US with reported plans to grow the sites by 10% this year 18 Burns, J. “Narrow Networks Found To Yield Substantial Savings.” Managed Care February, 2012. 19 Moore. R. “Large Firms Drive Self-Insured Plan Growth.” PlanSponsor.com. Posted on November 28, 2012 20 Ibid. 21 Santilli, J. “Employer Direct Contracting.” Knowledge Source. Posted on August 2012. 22 http://money.usnews.com/money/blogs/ flowchart/2010/08/19/10-great-companies-thatlost- their-edge 23 http://business.time.com/2011/07/19/5-reasonsborders- went-out-of-business-and-what-will-takeits- place/ 24 http://www.cbsnews.com/8301-505143_162- 57363629/why-kodak-failed-and-how-to-avoid-thesame- fate/ 25 http://ihealthtran.com/pdf/Mike%20McCallister% 20Keynote%20Presentation.pdf

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