In our work over the years advising health systems on M&A, we’ve been struck by how often “social issues” cause deals that are otherwise strategically sound to go off the rails.
Of course, it’s an old chestnut that “culture eats strategy for breakfast”, but what’s been notable, especially recently, is how early in the process hot-button governance and leadership issues enter the discussions.
Where is the headquarters going to be? Who’s going to be the CEO of the combined entity? And most vexingly, how many board seats is each organization going to get? That last issue is particularly troublesome, as it’s often where negotiations get bogged down. But as one health system board member recently pointed out to us, getting hung up on whether board seats are split 7-6 or 8-5 is just silly—in her words, “If you’re in a position where board decisions turn on that close of a margin, you’ve got much bigger strategic problems.”
It’s an excellent point. While boards shouldn’t just rubber stamp decisions made by management, it’s incumbent on the CEO and senior leaders to enfranchise and collaborate with the board in setting strategy, and critical decisions should rarely, if ever, come down to razor-thin vote tallies.
If a merger makes sense on its merits, and the strategic vision for the combined organization is clear, quibbling over how many seats each legacy system “gets” seems foolish. No board should go into a merger anticipating a future in which small majorities determine the outcome of big decisions.
A complete financial recovery for many organizations is still far away, findings from Kaufman Hall indicate.
For the past three years, Kaufman Hall has released annual healthcare performance reports illustrating how hospitals and health systems are managing, both financially and operationally.
This year, however, with the pandemic altering the industry so broadly, the report took a different approach: to see how COVID-19 impacted hospitals and health systems across the country. The report’s findings deal with finances, patient volumes and recovery.
The report includes survey answers from respondents almost entirely (96%) from hospitals or health systems. Most of the respondents were in executive leadership (55%) or financial roles (39%). Survey responses were collected in August 2020.
Findings from the report indicate that a complete financial recovery for many organizations is still far away. Almost three-quarters of the respondents said they were either moderately or extremely concerned about their organization’s financial viability in 2021 without an effective vaccine or treatment.
Looking back on the operating margins for the second quarter of the year, 33% of respondents saw their operating margins decline by more than 100% compared to the same time last year.
Revenue cycles have taken a hit from COVID-19, according to the report. Survey respondents said they are seeing increases in bad debt and uncompensated care (48%), higher percentages of uninsured or self-pay patients (44%), more Medicaid patients (41%) and lower percentages of commercially insured patients (38%).
Organizations also noted that increases in expenses, especially for personal protective equipment and labor, have impacted their finances. For 22% of respondents, their expenses increased by more than 50%.
IMPACT ON PATIENT VOLUMES
Although volumes did increase over the summer, most of the improvement occurred in areas where it is difficult to delay care, such as oncology and cardiology. For example, oncology was the only field where more than half of respondents (60%) saw their volumes recover to more than 90% of pre-pandemic levels.
More than 40% of respondents said that cardiology volumes are operating at more than 90% of pre-pandemic levels. Only 37% of respondents can say the same for orthopedics, neurology and radiology, and 22% for pediatrics.
Emergency department usage is also down as a result of the pandemic, according to the report. The respondents expect that this trend will persist beyond COVID-19 and that systems may need to reshape their business model to account for a drop in emergency department utilization.
Most respondents also said they expect to see overall volumes remain low through the summer of 2021, with some planning for suppressed volumes for the next three years.
Hospitals and health systems have taken a number of approaches to reduce costs and mitigate future revenue declines. The most common practices implemented are supply reprocessing, furloughs and salary reductions, according to the report.
Executives are considering other tactics such as restructuring physician contracts, making permanent labor reductions, changing employee health plan benefits and retirement plan contributions, or merging with another health system as additional cost reduction measures.
THE LARGER TREND
Kaufman Hall has been documenting the impact of COVID-19 hospitals since the beginning of the pandemic. In its July report, hospital operating margins were down 96% since the start of the year.
As a result of these losses, hospitals, health systems and advocacy groups continue to push Congress to deliver another round of relief measures.
Earlier this month, the House passed a $2.2 trillion stimulus bill called the HEROES Act, 2.0. The bill has yet to pass the Senate, and the chances of that happening are slim, with Republicans in favor of a much smaller, $500 billion package. Nothing is expected to happen prior to the presidential election.
As Warren Buffett turns 90, the story of one of America’s most influential and wealthy business leaders is a study in the logic and discipline of understanding future value.
Patience, caution, and consistency. In volatile times such as these, it may be difficult for executives to keep those attributes in mind when making decisions. But there are immense advantages to doing so. For proof, just look at the steady genius of now-nonagenarian Warren Buffett. The legendary investor and Berkshire Hathaway founder and CEO has earned millions of dollars for investors over several decades (exhibit). But very few of Buffett’s investment decisions have been reactionary; instead, his choices and communications have been—and remain—grounded in logic and value.
Buffett learned his craft from “the father of value investing,” Columbia University professor and British economist Benjamin Graham. Perhaps as a result, Buffett typically doesn’t invest in opportunities in which he can’t reasonably estimate future value—there are no social-media companies, for instance, or cryptocurrency ventures in his portfolio. Instead, he banks on businesses that have steady cash flows and will generate high returns and low risk. And he lets those businesses stick to their knitting. Ever since Buffett bought See’s Candy Shops in 1972, for instance, the company has generated an ROI of more than 160 percent per year —and not because of significant changes to operations, target customer base, or product mix. The company didn’t stop doing what it did well just so it could grow faster. Instead, it sends excess cash flows back to the parent company for reinvestment—which points to a lesson for many listed companies: it’s OK to grow in line with your product markets if you aren’t confident that you can redeploy the cash flows you’re generating any better than your investor can.
As Peter Kunhardt, director of the HBO documentary Becoming Warren Buffett, said in a 2017 interview, Buffett understands that “you don’t have to trade things all the time; you can sit on things, too. You don’t have to make many decisions in life to make a lot of money.” And Buffett’s theory (roughly paraphrased) that the quality of a company’s senior leadership can signal whether the business would be a good investment or not has been proved time and time again. “See how [managers] treat themselves versus how they treat the shareholders .…The poor managers also turn out to be the ones that really don’t think that much about the shareholders. The two often go hand in hand,” Buffett explains.
Every few years or so, critics will poke holes in Buffett’s approach to investing. It’s outdated, they say, not proactive enough in a world in which digital business and economic uncertainty reign. For instance, during the 2008 credit crisis, pundits suggested that his portfolio moves were mistimed, he held on to some assets for far too long, and he released others too early, not getting enough in return. And it’s true that Buffett has made some mistakes; his decision making is not infallible. His approach to technology investments works for him, but that doesn’t mean other investors shouldn’t seize opportunities to back digital tools, platforms, and start-ups—particularly now that the COVID-19 pandemic has accelerated global companies’ digital transformations.
Still, many of Buffett’s theories continue to win the day. A good number of the so-called inadvisable deals he pursued in the wake of the 2008 downturn ended paying off in the longer term. And press reports suggest that Berkshire Hathaway’s profits are rebounding in the midst of the current economic downturn prompted by the global pandemic.
At age 90, Buffett is still waging campaigns—for instance, speaking out against eliminating the estate tax and against the release of quarterly earnings guidance. Of the latter, he has said that it promotes an unhealthy focus on short-term profitsat the expense of long-term performance.
“Clear communication of a company’s strategic goals—along with metrics that can be evaluated over time—will always be critical to shareholders. But this information … should be provided on a timeline deemed appropriate for the needs of each specific company and its investors, whether annual or otherwise,” he and Jamie Dimon wrote in the Wall Street Journal.
Yes, volatile times call for quick responses and fast action. But as Warren Buffett has shown, there are also significant advantages to keeping the long term in mind, as well. Specifically, there is value in consistency, caution, and patience and in simply trusting the math—in good times and bad.
IN THE New York Times, Stephen I. Sadove, chairman and chief executive of Saks Inc., explains that it is culture that drives results:
It starts with leadership at the top, which drives a culture. Culture drives innovation and whatever else you’re trying to drive within a company — innovation, execution, whatever it’s going to be. And that then drives results.
When I talk to Wall Street, people really want to know your results, what are your strategies, what are the issues, what it is that you’re doing to drive your business. They’re focused on the bottom line. Never do you get people asking about the culture, about leadership, about the people in the organization. Yet, it’s the reverse, because it’s the people, the leadership, the culture and the ideas that are ultimately driving the numbers and the results.
While we know that our most important resource is our people, it’s not so easy to get people “all in”—convincing people to “truly buy into their ideas and the strategy they’ve put forward, to give that extra push that leads to outstanding results.”
All In by Adrian Gostick and Chester Elton explains why some managers are able to get their employees to commit wholeheartedly to their culture and give that extra push that leads to outstanding results and how managers at any level, can build and sustain a profitable, vibrant work-group culture of their own. All In takes the principles found in their previous books—The Orange Revolution and The Carrot Principle—and expands on them and places them in a wider context.
They begin by explaining that it all rests on the “belief factor.” People want to believe, but given the fact that “failure could cost them their future security why shouldn’t they be at least a little dubious about your initiatives?” But belief is key. “As leaders we must first allow people on our teams to feel like valuable individuals, respecting their views and opening up to their ideas and inputs, even while sharing a better way forward. It’s a balancing act that requires some wisdom.”
To have a culture of belief employees must feel not only engaged, but enabled and energized. What’s more, “each element of E+E+E can be held hostage by an imbalance in the other two.”
The authors have created a 7 step guide to develop a culture where people buy-in:
Define your burning platform. “Your ability to identify and define the key “burning” issue you face and separate it from the routine challenges of the day is the first step in galvanizing your employees to believe in you and in your vision and strategy.”
Create a customer focus. “Your organization must evolve into one that not only rewards employees who spot customer trends or problems, but one that finds such challenges invigorating, one that empowers people at all levels to respond with alacrity and creativity.”
Develop agility. “Employees are more insistent than ever that their managers see into the future and do a decent job of addressing the coming challenges and capitalizing on new opportunities.”
Share everything. “When we aren’t sure what’s happening around us, we become distrustful….In a dark work environment, where information is withheld or not communicated properly, employees tend to suspect the worst and rumors take the place of facts. It is openness that drives out the gray and helps employees regain trust in culture.”
Partner with your talent. “Your people have more energy and creativity to give. There are employees now in your organization walking around with brilliant ideas in their pocket. Some will never share them because they don’t have the platform to launch those ideas on their own. Most, however, will never reveal them because they don’t feel like a partner in the organization.”
Root for each other. “Our research shows incontrovertible evidence that employees respond best when they are recognized for things they are good at and for those actions where they had to stretch. It is this reinforcement that makes people want to grow to their full shape and stature.”
Establish clear accountability. “To grow a great culture, you need to cultivate a place where people have to do more than show up and fog a mirror; they have to fulfill promises—not only collectively but individually.” And this has to be a positive idea.
Gostick and Elton explain that the “modern leader provides the why, keeps an ear close to those they serve, is agile and open, treats their people with deference, and creates a place where every step forward is noted and applauded.”
The authors skillfully examine high-performing cultures and present the elements that produce them. A leader at any level can implement these ideas to drive results. A great learning tool.
Provider executives already know America’s hospitals and health systems are seeing rapidly deteriorating finances as a result of the coronavirus pandemic. They’re just not yet sure of the extent of the damage.
By the end of June, COVID-19 will have delivered an estimated $200 billion blow to these institutions with the bulk of losses stemming from cancelled elective and nonelective surgeries, according to the American Hospital Association.
A recent Healthcare Financial Management Association (HFMA)/Guidehouse COVID-19 survey suggests these patient volumes will be slow to return, with half of provider executive respondents anticipating it will take through the end of the year or longer to return to pre-COVID levels. Moreover, one-in-three provider executives expect to close the year with revenues at 15 percent or more below pre-pandemic levels. One-in-five of them believe those decreases will soar to 30 percent or beyond.
Available cash is also in short supply. A Guidehouse analysis of 350 hospitals nationwide found that cash on hand is projected to drop by 50 days on average by the end of the year — a 26% plunge — assuming that hospitals must repay accelerated and/or advanced Medicare payments.
While the government is providing much needed aid, just 11% of the COVID survey respondents expect emergency funding to cover their COVID-related costs.
The figures illustrate how the virus has hurled American medicine into unparalleled volatility. No one knows how long patients will continue to avoid getting elective care, or how state restrictions and climbing unemployment will affect their decision making once they have the option.
All of which leaves one thing for certain: Healthcare’s delivery, operations, and competitive dynamics are poised to undergo a fundamental and likely sustained transformation.
Here are six changes coming sooner rather than later.
1. Payer-provider complexity on the rise; patients will struggle.
The pandemic has been a painful reminder that margins are driven by elective services. While insurers show strong earnings — with some offering rebates due to lower reimbursements — the same cannot be said for patients. As businesses struggle, insured patients will labor under higher deductibles, leaving them reluctant to embrace elective procedures. Such reluctance will be further exacerbated by the resurgence of case prevalence, government responses, reopening rollbacks, and inconsistencies in how the newly uninsured receive coverage.
Furthermore, the upholding of the hospital price transparency ruling will add additional scrutiny and significance for how services are priced and where providers are able to make positive margins. The end result: The payer-provider relationship is about to get even more complicated.
2. Best-in-class technology will be a necessity, not a luxury.
COVID has been a boon for telehealth and digital health usage and investments. Two-thirds of survey respondents anticipate using telehealth five times more than they did pre-pandemic. Yet, only one-third believe their organizations are fully equipped to handle the hike.
If healthcare is to meet the shift from in-person appointments to video, it will require rapid investment in things like speech recognition software, patient information pop-up screens, increased automation, and infrastructure to smooth workflows.
Historically, digital technology was viewed as a disruption that increased costs but didn’t always make life easier for providers. Now, caregiver technologies are focused on just that.
The new necessities of the digital world will require investments that are patient-centered and improve access and ease of use, all the while giving providers the platform to better engage, manage, and deliver quality care.
After all, the competition at the door already holds a distinct technological advantage.
3. The tech giants are coming.
Some of America’s biggest companies are indicating they believe they can offer more convenient, more affordable care than traditional payers and providers.
Begin with Amazon, which has launched clinics for its Seattle employees, created the PillPack online pharmacy, and is entering the insurance market with Haven Healthcare, a partnership that includes Berkshire Hathaway and JPMorgan Chase. Walmart, which already operates pharmacies and retail clinics, is now opening Walmart Health Centers, and just recently announced it is getting into the Medicare Advantage business.
Meanwhile, Walgreens has announced it is partnering with VillageMD to provide primary care within its stores.
The intent of these organizations clear: Large employees see real business opportunities, which represents new competition to the traditional provider models.
It isn’t just the magnitude of these companies that poses a threat. They also have much more experience in providing integrated, digitally advanced services.
4. Work locations changes mean construction cost reductions.
If there’s one thing COVID has taught American industry – and healthcare in particular – it’s the importance of being nimble.
Many back-office corporate functions have moved to a virtual environment as a result of the pandemic, leaving executives wondering whether they need as much real estate. According to the survey, just one-in-five executives expect to return to the same onsite work arrangements they had before the pandemic.
Not surprisingly, capital expenditures, including new and existing construction, leads the list of targets for cost reductions.
Such savings will be critical now that investment income can no longer be relied upon to sustain organizations — or even buy a little time. Though previous disruptions spawned only marginal change, the unprecedented nature of COVID will lead to some uncomfortable decisions, including the need for a quicker return on investments.
5. Consolidation is coming.
Consolidation can be interpreted as a negative concept, particularly as healthcare is mostly delivered at a local level. But the pandemic has only magnified the differences between the “resilients” and the “non-resilients.”
All will be focused on rebuilding patient volume, reducing expenses, and addressing new payment models within a tumultuous economy. Yet with near-term cash pressures and liquidity concerns varying by system, the winners and losers will quickly emerge. Those with at least a 6% to 8% operating margin to innovate with delivery and reimagine healthcare post-COVID will be the strongest. Those who face an eroding financial position and market share will struggle to stay independent..
6. Policy will get more thoughtful and data-driven.
The initial coronavirus outbreak and ensuing responses by both the private and public sectors created negative economic repercussions in an accelerated timeframe. A major component of that response was the mandated suspension of elective procedures.
While essential, the impact on states’ economies, people’s health, and the employment market have been severe. For example, many states are currently facing inverse financial pressures with the combination of reductions in tax revenue and the expansion of Medicaid due to increases in unemployment. What’s more, providers will be subject to the ongoing reckonings of outbreak volatility, underscoring the importance of agile policy that engages stakeholders at all levels.
As states have implemented reopening plans, public leaders agree that alternative responses must be developed. Policymakers are in search of more thoughtful, data-driven approaches, which will likely require coordination with health system leaders to develop flexible preparation plans that facilitate scalable responses. The coordination will be difficult, yet necessary to implement resource and operational responses that keeps healthcare open and functioning while managing various levels of COVID outbreaks, as well as future pandemics.
Healthcare has largely been insulated from previous economic disruptions, with capital spending more acutely affected than operations. But the COVID-19 pandemic will very likely be different. Through the pandemic, providers are facing a long-term decrease in commercial payment, coupled with a need to boost caregiver- and consumer-facing engagement, all during a significant economic downturn.
While situations may differ by market, it’s clear that the pre-pandemic status quo won’t work for most hospitals or health systems.
[Readers’ Note: This is the first of two articles on the Future of Hospitals in Post-COVID America. This article
examines how market forces are consolidating, rationalizing and redistributing acute care assets within the
broader industry movement to value-based care delivery. The second article, which will publish next month,
examines gaps in care delivery and the related public policy challenges of providing appropriate, accessible
and affordable healthcare services in medically-underserved communities.]
In her insightful 2016 book, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore,
Michelle Wucker coins the term “Gray Rhinos” and contrasts them with “Black Swans.” That distinction is
highly relevant to the future of American hospitals.
Black Swans are high impact events that are highly improbable and difficult to predict. By contrast, Gray Rhinos are foreseeable, high-impact events that we choose to ignore because they’re complex, inconvenient and/or fortified by perverse incentives that encourage the status quo. Climate change is a powerful example
of a charging Gray Rhino.
In U.S. healthcare, we are now seeing what happens when a Gray Rhino and a Black Swan collide.
Arguably, the nation’s public health defenses should anticipate global pandemics and apply resources
systematically to limit disease spread. This did not happen with the coronavirus pandemic.
Instead, COVID-19 hit the public healthcare infrastructure suddenly and hard. This forced hospitals and health systems to dramatically reduce elective surgeries, lay off thousands and significantly change care delivery with the adoption of new practices and services like telemedicine.
In comparison, many see the current American hospital business model as a Gray Rhino that has been charging toward unsustainability for years with ever-building momentum.
Even with massive and increasing revenue flows, hospitals have long struggled with razor-thin margins, stagnant payment rates and costly technology adoptions. Changing utilization patterns, new and disruptive competitors, pro-market regulatory rules and consumerism make their traditional business models increasingly vulnerable and, perhaps, unsustainable.
Despite this intensifying pressure, many hospitals and health systems maintain business-as-usual practices because transformation is so difficult and costly. COVID-19 has made the imperative of change harder to ignore or delay addressing.
For a decade, the transition to value-based care has dominated debate within U.S. healthcare and absorbed massive strategic, operational and financial resources with little progress toward improved care outcomes, lower costs and better customer service. The hospital-based delivery system remains largely oriented around Fee-for-Service reimbursement.
Hospitals’ collective response to COVID-19, driven by practical necessity and financial survival, may accelerate the shift to value-based care delivery. Time will tell.
This series explores the repositioning of hospitals during the next five years as the industry rationalizes an excess supply of acute care capacity and adapts to greater societal demands for more appropriate, accessible and affordable healthcare services.
It starts by exploring the role of the marketplace in driving hospital consolidation and the compelling need to transition to value-based care delivery and payment models.
COVID’s DUAL SHOCKS TO PATIENT VOLUME
Many American hospitals faced severe financial and operational challenges before COVID-19. The sector has struggled to manage ballooning costs, declining margins and waves of policy changes. A record 18 rural hospitals closed in 2019. Overall, hospitals saw a 21% decline in operating margins in 2018-2019.
COVID intensified those challenges by administering two shocks to the system that decreased the volume of hospital-based activities and decimated operating margins.
The first shock was immediate. To prepare for potential surges in COVID care, hospitals emptied beds and cancelled most clinic visits, outpatient treatments and elective surgeries. Simultaneously, they incurred heavy costs for COVID-related equipment (e.g. ventilators,PPE) and staffing. Overall, the sector experienced over $200 billion in financial losses between March and June 20204.
The second, extended shock has been a decrease in needed but not necessary care. Initially, many patients delayed seeking necessary care because of perceived infection risk. For example, Emergency Department visits declined 42% during the early phase of the pandemic.
Increasingly, patients are also delaying care because of affordability concerns and/or the loss of health insurance. Already, 5.4 million people have lost their employer-sponsored health insurance. This will reduce incremental revenues associated with higher-paying commercial insurance claims across the industry. Additionally, avoided care reduces patient volumes and hospital revenues today even as it increases the risk and cost of future acute illness.
The infusion of emergency funding through the CARES Act helped offset some operating losses but it’s unclear when and even whether utilization patterns and revenues will return to normal pre-COVID levels. Shifts in consumer behavior, reductions in insurance coverage, and the emergence of new competitors ranging from Walmart to enhanced primary care providers will likely challenge the sector for years to come.
The disruption of COVID-19 will serve as a forcing function, driving meaningful changes to traditional hospital business models and the competitive landscape. Frankly, this is long past due. Since 1965, Fee-for-Service (FFS) payment has dominated U.S. healthcare and created pervasive economic incentives that can serve to discourage provider responsiveness in transitioning to value-based care delivery, even when aligned to market demand.
Telemedicine typifies this phenomenon. Before COVID, CMS and most health insurers paid very low rates for virtual care visits or did not cover them at all. This discouraged adoption of an efficient, high-value care modality until COVID.
Unable to conduct in-person clinical visits, providers embraced virtual care visits and accelerated its mass adoption. CMS and
commercial health insurers did their part by paying for virtual care visits at rates equivalent to in-person clinic visits. Accelerated innovation in care delivery resulted.
THE COMPLICATED TRANSITION TO VALUE
Broadly speaking, health systems and physician groups that rely almost exclusively on activity-based payment revenues have struggled the most during this pandemic. Vertically integrated providers that offer health insurance and those receiving capitated payments in risk-based contracts have better withstood volume losses.
Modern Healthcare notes that while provider data is not yet available, organizations such as Virginia Care Partners, an integrated network and commercial ACO; Optum Health (with two-thirds of its revenue risk-based); and MediSys Health Network, a New Yorkbased NFP system with 148,000 capitated and 15,000 shared risk patients, are among those navigating the turbulence successfully. As the article observes,
…providers paid for value have had an easier time weathering the storm…. helped by a steady source of
income amid the chaos. Investments they made previously in care management, technology and social
determinants programs equipped them to pivot to new ways of providing care.
They were able to flip the switch on telehealth, use data and analytics to pinpoint patients at risk for
COVID-19 infection, and deploy care managers to meet the medical and nonclinical needs of patients even
when access to an office visit was limited.
Supporting this post-COVID push for value-based care delivery, six former leaders from CMS wrote to Congress in
June 2020 calling for providers, commercial insurers and states to expand their use of value-based payment models to
encourage stability and flexibility in care delivery.
If value-based payment models are the answer, however, adoption to date has been slow, limited and difficult. Ten
years after the Affordable Care Act, Fee-for-Service payment still dominates the payer landscape. The percentage of overall provider revenue in risk-based capitated contracts has not exceeded 20%
Despite improvements in care quality and reductions in utilization rates, cost savings have been modest or negligible. Accountable Care Organizations have only managed at best to save a “few percent of Medicare spending, [but] the
amount varies by program design.”
While most health systems accept some forms of risk-based payments, only 5% of providers expect to have a majority (over 80%) of their patients in risk-based arrangements within 5 years.
The shift to value is challenging for numerous reasons. Commercial payers often have limited appetite or capacity for
risk-based contracting with providers. Concurrently, providers often have difficulty accessing the claims data they need
from payers to manage the care for targeted populations.
The current allocation of cost-savings between buyers (including government, employers and consumers), payers
(health insurance companies) and providers discourages the shift to value-based care delivery. Providers would
advance value-based models if they could capture a larger percentage of the savings generated from more effective
care management and delivery. Those financial benefits today flow disproportionately to buyers and payers.
This disconnection of payment from value creation slows industry transformation. Ultimately, U.S. healthcare will not
change the way it delivers care until it changes the way it pays for care. Fortunately, payment models are evolving to
incentivize value-based care delivery.
As payment reform unfolds, however, operational challenges pose significant challenges to hospitals and health
systems. They must adopt value-oriented new business models even as they continue to receive FFS payments. New
and old models of care delivery clash.
COVID makes this transition even more formidable as many health systems now lack the operating stamina and balance sheet strength to make the financial, operational and cultural investments necessary to deliver better outcomes, lower costs and enhanced customer service.
MARKET-DRIVEN CONSOLIDATION AND TRANSFORMATION
Full-risk payment models, such as bundled payments for episodic care and capitation for population health, are the
catalyst to value-based care delivery. Transition to value-based care occurs more easily in competitive markets with many attributable lives, numerous provider options and the right mix of willing payers.
As increasing numbers of hospitals struggle financially, the larger and more profitable health systems are expanding their networks, capabilities and service lines through acquisitions. This will increase their leverage with commercial payers and give them more time to adapt to risk-based contracting and value-based care delivery.
COVID also will accelerate acquisition of physician practices. According to an April 2020 MGMA report, 97% of
physician practices have experienced a 55% decrease in revenue, forcing furloughs and layoffs15. It’s estimated the
sector could collectively lose as much as $15.1 billion in income by the end of September 2020.
Struggling health systems and physician groups that read the writing on the wall will pro-actively seek capital or strategic partners that offer greater scale and operating stability. Aggregators can be selective in their acquisitions,
seeking providers that fuel growth, expand contiguous market positions and don’t dilute balance sheets.
Adding to the sector’s operating pressure, private equity, venture investors and payers are pouring record levels of
funding into asset-light and virtual delivery companies that are eager to take on risk, lower prices by routing procedures
and capture volume from traditional providers. With the right incentives, market-driven reforms will reallocate resources to efficient companies that generate compelling value.
As this disruption continues to unfold, rural and marginal urban communities that lack robust market forces will experience more facility and practice closures. Without government support to mitigate this trend, access and care gaps that already riddle American healthcare will unfortunately increase.
WINNING AT VALUE
The average hospital generates around $11,000 per patient discharge. With ancillary services that can often add up to
more than $15,000 per average discharge. Success in a value-based system is predicated on reducing those discharges and associated costs by managing acute care utilization more effectively for distinct populations (i.e. attributed lives).
This changes the orientation of healthcare delivery toward appropriate and lower cost settings. It also places greater
emphasis on preventive, chronic and outpatient care as well as better patient engagement and care coordination.
Such a realignment of care delivery requires the following:
A tight primary care network (either owned or affiliated) to feed referrals and reduce overall costs through
better preventive care.
A gatekeeper or navigator function (increasingly technology-based) to manage / direct patients to the most
appropriate care settings and improve coordination, adherence and engagement.
A carefully designed post-acute care network (including nursing homes, rehab centers, home care
services and behavioral health services, either owned or sufficiently controlled) to manage the 70% of
total episode-of-care costs that can occur outside the hospital setting.
An IT infrastructure that can facilitate care coordination across all providers and settings.
Quality data and digital tools that enhance care, performance, payment and engagement.
Experience with managing risk-based contracts.
A flexible approach to care delivery that includes digital and telemedicine platforms as well as nontraditional sites of care.
Aligned or incentivized physicians.
Payer partners willing to share data and offload risk through upside and downside risk contracts.
Engaged consumers who act on their preferences and best interests.
While none of these strategies is new or controversial, assembling them into cohesive and scalable business models is something few health systems have accomplished. It requires appropriate market conditions, deep financial resources,
sophisticated business acumen, operational agility, broad stakeholder alignment, compelling vision, and robust
Providers that fail to embrace value-based care for their “attributed lives” risk losing market relevance. In their relentless pursuit of increasing treatment volumes and associated revenues, they will lose market share to organizations that
deliver consistent and high-value care outcomes.
CONCLUSION: THE CHARGING GRAY RHINO
America needs its hospitals to operate optimally in normal times, flex to manage surge capacity, sustain themselves
when demand falls, create adequate access and enhance overall quality while lowering total costs. That is a tall order requiring realignment, evolution, and a balance between market and policy reform measures.
The status quo likely wasn’t sustainable before COVID. The nation has invested heavily for many decades in acute and
specialty care services while underinvesting, on a relative basis, in primary and chronic care services. It has excess
capacity in some markets, and insufficient access in others.
COVID has exposed deep flaws in the activity-based payment as well as the nation’s underinvestment in public health.
Disadvantaged communities have suffered disproportionately. Meanwhile, the costs for delivering healthcare services
consume an ever-larger share of national GDP.
Transformational change is hard for incumbent organizations. Every industry, from computer and auto manufacturing to
retailing and airline transportation, confronts gray rhino challenges. Many companies fail to adapt despite clear signals
that long-term viability is under threat. Often, new, nimble competitors emerge and thrive because they avoid the inherent contradictions and service gaps embedded within legacy business models.
The healthcare industry has been actively engaged in value-driven care transformation for over ten years with little to
show for the reform effort. It is becoming clear that many hospitals and health systems lack the capacity to operate profitably in competitive, risk-based market environments.
This dismal reality is driving hospital market valuations and closures. In contrast, customers and capital are flowing to
new, alternative care providers, such as OneMedical, Oak Street Health and Village MD. Each of these upstart
companies now have valuations in the $ billions. The market rewards innovation that delivers value.
Unfortunately, pure market-driven reforms often neglect a significant and growing portion of America’s people. This gap has been more apparent as COVID exacts a disproportionate toll on communities challenged by higher population
density, higher unemployment, and fewer medical care options (including inferior primary and preventive care infrastructure).
Absent fundamental change in our hospitals and health systems, and investment in more efficient care delivery and
payment models, the nation’s post-COVID healthcare infrastructure is likely to deteriorate in many American communities, making them more vulnerable to chronic disease, pandemics and the vicissitudes of life.
Article 2 in our “Future of Hospitals” series will explore the public policy challenges of providing appropriate, affordable and accessible healthcare to all American communities.