Be Ready for the Reorganized Healthcare Landscape

Running a health system recently has proven to be a very hard job. Mounting losses in the face of higher operating expenses, softer than expected volumes, deferred capex, and strained C-suite succession planning are just a few of the immediate issues with which CEOs and boards must deal.


But frankly, none of those are the biggest strategic issue facing health systems. The biggest
strategic issue
is the reorganization of the American healthcare landscape into an ambulatory care
business that emphasizes competing for covered lives at scale in lower cost and convenient settings
of care. This shift in business model has significant ramifications, if you own and operate acute care
hospitals.


Village MD and Optum are two of the organizations driving the business model shift. They are
owned by large publicly traded companies (Walgreens and UnitedHealth Group, respectively). Both
Optum and Village MD have had a string of announced major patient care acquisitions over the past
few years, none of which is in the acute care space.


The future of American healthcare will likely be dominated by large well-organized and well-run
multi-specialty physician groups with a very strong primary care component. These physician
service companies will be payer agnostic and focused on value-based care, though will still be
prepared to operate in markets where fee-for-service dominates. They will deliver highly
coordinated care in lower cost settings than hospital outpatient departments. And these companies
will be armed with tools and analytics that permit them to manage the care for populations of
patients, in order to deliver both better health outcomes and lower costs.


At the same time this is happening, we are experiencing steady growth in Medicare Advantage.
And along with it, a stream of primary care groups who operate purpose-built clinics to take full risk
on Medicare Advantage populations. These companies include ChenMed, Cano Health and Oak
Street, among others. These organizations use strong culture, training, and analytics to better
manage care, significantly reduce utilization, and produce better health outcomes and lower costs.


Public and private equity capital are pouring into the non-acute care sectors, fueling this growth. As
of the start of 2022, nearly three quarters of all physicians in the US were employed by either
corporate entities
(such as private equity, insurance companies, and pharmacy companies), or
employed by health systems. And this employment trend has accelerated since the start of the
pandemic. The corporate entities, rather than health systems, are driving this increasing trend.
Corporate purchases of physician practices increased by 86% from 2019 to 2021.


What can health systems do? To succeed in the future, you must be the nexus of care for the
covered lives in your community. But that does not mean the health system must own all the
healthcare assets or employ all of the physicians. The health system can be the platform to convene these assets and services in the community. In some respects, it is similar to an Apple iPhone. They are the platform that convenes the apps. Some of those apps are developed and owned by Apple. But many more apps are developed by people outside of Apple, and the iPhone is simply the platform to provide access.


Creating this platform requires a change in mindset. And it requires capital. There are many opportunities for health systems to partner with outside capital providers, such as private equity, to position for the future – from both a capital and a mindset point of view.


The change in mindset, and the access to flexible capital, is necessary as the future becomes more and more about reorganizing into an ambulatory care business that emphasizes competing for covered lives at scale in lower cost and convenient settings of care.

The Other Machiavelli: Finding lessons for leaders in a lesser-known work by the Florentine political philosopher

However cynical it may seem, Machiavelli’s The Prince has long been recognized as a source of insights for anyone trying run a business or gain power in one. A ferocious little treatise of under 100 pages, The Prince was aimed at Lorenzo de’ Medici, the iron-handed Florentine ruler, by an author hoping to regain the proximity to power that he formerly enjoyed.

But modern corporations aren’t principalities ruled by autocrats. They are, in fact, more like republics, their leaders dependent on the support of directors, employees, customers, investors, and one another. That is why, in turning to Machiavelli for management wisdom, we would be well served to leave aside The Prince in favor of another of his works, one that is less known but perhaps more to the point. Don’t be fooled by the academic-sounding title; Discourses on Livy has a great deal to teach us about leadership in any organization resembling a republic. Chances are, that includes your business.

Published posthumously in 1531, Discourses draws on the ancient Roman historian (among others) to analyze the nature of power in public life. Like The Prince, this is not a handbook for saints. But the author was a brilliant student of human nature, and not one to underestimate the potential of a determined individual. In Discourses, he firmly asserts the importance of an individual founder in establishing or renovating a republic—and by extension, for our purposes, a business. A prudent founder, he writes, “must strive to assume sole authority.”

Yet a single person cannot sustain an enterprise in the long run. That is only possible if the founder’s vision and talents result in an institution supported by stakeholders who can carry the venture into the future. “Kingdoms which depend only upon the exceptional ability of a single man are not long enduring,” Machiavelli writes, “because such talent disappears with the life of the man, and rarely does it happen to be restored in his successor.”

Besides, princes have no monopoly on wisdom. Despite the notorious unpredictability of the mob, the author acknowledged the wisdom of crowds when he asserted that “the multitude is wiser and more constant than a prince.” Machiavelli was also insightful about succession: “After an excellent prince, a weak prince can maintain himself,” he observed with admirable economy in one chapter’s epigraph, “but after a weak prince, no kingdom can be maintained with another weak one.”

Many of the epigraphs are bull’s-eyes of this kind. Take this one, for example: “Whoever wishes to reform a long-established state in a free city should retain at least the appearance of its ancient ways.” This is worth doing even if you make massive changes, because, Machiavelli notes, “men in general live as much by appearances as by realities; indeed, they are often moved more by things as they appear than by things as they really are.”

Honesty may be the best policy, but that is not a maxim ever attributed to Machiavelli. In keeping with the notion that people attend largely to appearances, he says leaders compelled to do something by necessity should consider pretending their course of action was undertaken out of generosity. In another chapter, he argues, “Cunning and deceit will serve a man better than force to rise from a base condition to great fortune.”

Machiavelli, of course, took a hard-headed view of humanity, believing that people act largely out of self-interest, whether to gratify their egos or sate their desire for material wealth, and that, for better or worse, actions tend to be judged by their consequences. Indeed, he was very much what philosophers call a consequentialist, arguing that, in some contexts, bad things must be done to achieve good ends achievable in no other way. This is not to say that law-breaking or other unethical acts are justified—even some of Machiavelli’s contemporaries considered such advice controversial—but every business leader knows that hard decisions must be made, be it the closing of a venerable division or taking a company in a risky new direction, for the long-term good of the enterprise.

Even when advocating something like mercy, Machiavelli did so with consequences in mind. He argued, for example, that failure should not be harshly punished, especially if it arises from ignorance rather than malice. Roman generals, he notes, had difficult and dangerous jobs, and Rome understood that if military leaders had to worry about “examples of Roman commanders who had been crucified or otherwise put to death when they had lost a day’s battles, it would be impossible for that commander, beset by so many suspicions, to make courageous decisions.”

If punishment should not be meted out lightly, neither should rewards be delayed. If you don’t cultivate loyalty and support from others in good times through open-handedness, Machiavelli says, those people certainly won’t have your back when things get rough. Doling out rewards only in the face of tough competition or harsh circumstances will lead subordinates to believe “that they gained this favour not from you but from your adversaries, and since they must fear that after the danger has passed you will take back from them what you have been forced to give them, they will feel no obligation to you whatsoever.”

Republics, in his view, have no choice but to grow, for “it is impossible for a republic to succeed in standing still.” Companies are the same. But acquisitions—whether in battle or by purchase—must be carried out with care, for “conquests made by republics which are not well organized, and which do not proceed according to Roman standards of excellence, bring about their ruin rather than their glorification.”

Finally, Machiavelli was well aware of the risks of advice-giving, so much so that he gave one chapter the title “Of the danger of being prominent in counselling any enterprise, and how that danger increases with the importance of such enterprise.” Consultants, take note. Just don’t let the clients catch you reading Machiavelli.

Hospitals need ‘transformational changes’ to stem margin erosion

https://www.healthcaredive.com/news/Fitch-ratings-nonprofit-hospital-changes/627662/

Dive Brief:

  • Nonprofit hospitals are reporting thinner margins this year, stretched by rising labor, supply and capital costs, and will be pressed to make big changes to their business models or risk negative rating actions, Fitch Ratings said in a report out Tuesday.
  • Warning that it could take years for provider margins to recover to pre-pandemic levels, Fitch outlined a series of steps necessary to manage the inflationary pressures. Those moves include steeper rate increases in the short term and “relentless, ongoing cost-cutting and productivity improvements” over the medium term, the ratings agency said.
  • Further out on the horizon, “improvement in operating margins from reduced levels will require hospitals to make transformational changes to the business model,” Fitch cautioned.

Dive Insight:

It has been a rough year so far for U.S. hospitals, which are navigating labor shortages, rising operating costs and a rebound in healthcare utilization that has followed the suppressed demand of the early pandemic. 

The strain on operations has resulted in five straight months of negative margins for health systems, according to Kaufman Hall’s latest hospital performance report.

Fitch said the majority of the hospitals it follows have strong balance sheets that will provide a cushion for a period of time. But with cost inflation at levels not seen since the late 1970s and early 1980s, and the potential for additional coronavirus surges this fall and winter, more substantial changes to hospitals’ business models could be necessary to avoid negative rating actions, the agency said.

Providers will look to secure much higher rate increases from commercial payers. However, insurers are under similar pressures as hospitals and will push back, using leverage gained through the sector’s consolidation, the report said.

As a result, commercial insurers’ rate increases are likely to exceed those of recent years, but remain below the rate of inflation in the short term, Fitch said. Further, federal budget deficits make Medicare or Medicaid rate adjustments to offset inflation unlikely.

An early look at state regulatory filings this summer suggests insurers who offer plans on the Affordable Care Act exchanges will seek substantial premium hikes in 2023, according to an analysis from the Kaiser Family Foundation. The median rate increase requested by 72 ACA insurers was 10% in the KFF study.

Inflation is pushing more providers to consider mergers and acquisitions to create economies of scale, Fitch said. But regulators are scrutinizing deals more strenuously due to concerns that consolidation will push prices even higher. With increased capital costs, rising interest rates and ongoing supply chain disruptions, hospitals’ plans for expansion or renovations will cost more or may be postponed, the report said.

Acknowledging the losses that come with a new strategy

https://mailchi.mp/30feb0b31ba0/the-weekly-gist-july-15-2022?e=d1e747d2d8

Embarking on a new strategy requires myriad organizational changes—which will inevitably come with losses. Some parts of the business, people, roles, processes, and traditions will inevitably be deemphasized, or even eliminated from the organization. A recent article in the Harvard Business Review identifies how leaders launching new strategies typically spend a significant amount of time trying to plan for the unpredictable future, while overlooking one of the most predictable parts of any change in strategy: what will be lost when something else is gained.

The Gist: It is critical to identify, acknowledge, and plan for these losses in adopting any new strategy, as the unexpressed fear of loss is a key driver of organizational inertia and resistance to change.

With health systems deep in strategy development for the post-COVID marketleaders must take into account the wide range of challenges their organizations will face when it comes to reconfiguring investment, growth, competencies, and people, in addition to focusing on new areas of opportunity revealed by the pandemic. 

Failing to confront these tradeoffs head-on may sacrifice any strategic gains resulting from new initiatives.