A primer for tactical decision-making in times of deep change.

The problem at the core of the “volume to value” movement, the shoals it is running aground on, is this: How do you make it work economically? How does your organization make a living at it?

To put a finer point on it: How do you know that you can make it work? How can you guide your strategy with the maximum safety and opportunity for your organization?

Let’s explore that question.

You know how you made a living under the code-driven fee-for-service “volume” regime. Strategy was complicated, but the underlying question was simple: How do we do more of the specific items that we can get paid for? On that basis you could evaluate building a new bed tower, expanding a line of business like stents or births, or moving into a new business like retail care.

How you make a living under a “value” regime is a much more complex question, requiring a much more robust, extensive and continual analysis of which strategies will work best for you, in what order, with what investment. The questions are not general; they are specific. Because it is complex and will require continual discussion and re-shaping, you need a way for you and your strategy team to see that analysis, handle it, add to it and change it as the situation changes. You need a situation room.

The analysis required is not something all that new and strange, but it seems to be new to many of us in health care because it wasn’t necessary when things were more stable and expectable. What we need is an enhanced version of a revenue-based strategy analysis common in other industries. Let’s call it the 4-Dimensional Strategy Template.

Dimension One: Revenues

Step one: Get some big white boards. Yes, there are software dashboards that help you track the whole enterprise. But every dashboard is an expression of hundreds of assumptions about what data is important and what they mean. At the level of strategy, that is worse than useless; it is misleading. The whole point here is to get behind and beyond our usual assumptions.

starlings-looking-in-different-directions-on-wire-500x184When you are meeting with your strategy team, the brains of everyone in the room do not work precisely the same, at precisely the same speed at every level. Thinking fast is not always a virtue, as the fastest thinkers often get their speed by taking heuristic shortcuts that contain multiple assumptions. Turning the discussion into a visual discussion object that takes time to create gets the assumptions out in the clear and opens the discussion to everyone in the room.

The virtue of white boards is precisely in their limitation: They are only so big, so you can’t infinitely ramify everything. If you are running out of space, you can get a bigger board, you could write smaller, but eventually you have to chunk your thinking better so you can get it all on the board. This means you have to make choices, you have to clarify what you are thinking and examine your logical organization to get the chunking right.

Start by making a list of all your current revenue streams. A revenue stream is anything that you can separate out as a business. For instance, “in-patient room charges” is not a revenue stream, since it lumps together people in beds recovering from surgery, women recovering from giving birth, and people into the cancer center for tests. Rather, the cancer center, the surgical suites, the birthing center are separate revenue streams, because you could expand or contract them independently, separate them out as independent businesses, or even stop doing them.

Now go through the list, and assign a percentage to each revenue stream: What percentage of your business are you getting from that one stream? This will be inexact. In fact, a lot of this process will be inexact. It is the nature of the process to iterate through it to try to get all of it more precise and balanced over time.

Dimension Two: Sources

Now make a big grid. List your revenue streams down the left side. Across the top, list where you get the customers to fill that revenue stream. Do they come in through the emergency department? Are they brought in by local specialists? Did they come to you through a medical tourism program? Did they choose your birthing center because of your ads? Or because you are covered in a particular network? Again, you are looking for independent variables.

Once you have put up all the sources, put percentages under each one: In the boxes that correspond to the revenue stream “birthing center,” take a shot at what percentage show up there because of your ads, because of the network or through local OB/GYNS.

What we are scanning for here are high percentages, because they represent strategic vulnerabilities. If you are getting 80 percent of your income through one payer, you work for that payer. If for whatever reason it designates you a “Tier 2” institution, or muscles your reimbursements down, or anything else happens to disadvantage that revenue stream, you’re road carrion. Time to get a little trailer in Baja and eke out that 401(k) with whatever fish you can catch.

Similarly, if 80 percent of your customer sources come through the biggest employer in town, or any other one source, you are at the mercy of that source.

In stable times, that was not a problem, really. In rapidly changing times, it’s a huge problem, and the solution is to diversify your revenue streams and your sources of customers. For that we need the third dimension: Time.

(Before we move on: Take a picture of the board as a visual note, in case the janitor comes in and erases it overnight.)

Dimension Three: Time man-facing-clock-paris-349030_640

What you have up on the board now represents your present state. Start over with a new set of white boards. Duplicate the basic grid, but add possible future revenue streams, such as taking on a risk-based contract for an employer, opening onsite clinics, joining a captive accountable care organization, taking a risk-based Medicaid role, or beginning a medical tourism program.

Imagine a possible future state in which all of these revenue streams have reached their potential and are bringing in revenue and customers. Don’t put a time frame on this for the moment; just imagine that it’s all working. Assign to each revenue stream what percentage of your income might come from that one, then go across and assign a percentage to each box that represents where your customers are coming from.

At the same time, look at each of your present revenue streams and ask yourself whether you can broaden the sources of their customers. Maybe your spine and pain organization can establish a risk contract for the employees at the distribution center being built near the interstate, and that could bring in 30 percent of its revenue.

Work back through the numbers so that all your revenue streams add up to 100 percent. If spine and pain is bringing in more revenue, maybe it jumps from 10 to 15 percent of the whole, so adjust the other numbers to be less. If spine and pain is servicing the risk contract by being more efficient, effective and preventive, could that efficiency cause a drop in what otherwise would come through the emergency department?

We have entered the stage of “thoughtful fiddling with the numbers” — thoughtful, broad bandwidth working through the streams of data, assumptions and decisions. Make it real, make it real.

Now we are beginning to get a look at how the whole thing might work with a diversified set of revenue streams bringing in customers from an array of sources. But it’s obviously not a full picture, as so far we have been using the most easily available data and just plain guesses, and we have not looked at when these things might happen. Yes, it seems reasonable that if you offered priced, bundled products through your eye clinic and advertised them throughout the region, you might get X number of customers at a margin of Y per customer. But can we get more exact about that? And when can we expect that new revenue to arrive? For that we need the fourth dimension: Effort.

Dimension Four: Effort

This dimension will not fit on the white boards, because we need a whole discussion about each possible future revenue or customer source. For each one, we are going to ask: How much time, capital, human resources, executive attention and luck is needed to effect the change? How likely is it that we can garner all of that? How long will it take? So, how likely is it that the change can happen, and in what time frame? These questions require serious study and data gathering.

This is also where the cost and waste side appears. Traditionally we don’t give serious thought to the waste part, because even if a procedure is medically unnecessary and unproductive, we can still get paid to do it. In risk situations, this reverses: An unnecessary MRI that does not contribute to better outcomes is pure cost.

The cost part similarly alters the picture: If we can reasonably do medicine more efficiently, according to lean principles, with less waste, waiting, do-overs and so on, then the profit picture for each item changes considerably.

Work back and forth from the discussions of each item to the numbers on the boards, digging out your assumptions. Maybe you don’t need to build a stand-alone building for urgent care; maybe you’d be better off taking a lease at the mall. Maybe you could fund it operationally instead of mounting a capital campaign of some sort. Or maybe you could find a private developer to do a public-private partnership. How would that affect the cost, the margin, the patient stream?

Go back to the other three dimensions and adjust your expectations and estimates. Include factors you may have not thought of, and notice where you may have allocated some resources in two different places.

Is this a lot of work? It’s a lot of work. But all of it is necessary.

Look at the interactions between various parts. If you get really successful at an urgent care line of business, how much will that drive down the numbers of your emergency department? Which way might that affect your margin? How long will it take to get it up and running? Will we see the shift in revenues in the first quarter, the third quarter or two years from now?

Use these discussions to reshape the numbers in the time dimension. Eventually you will be able to build 90-day and annual calendars, laying out your expectations for when each initiative will be building, when it will need resources and when its revenue contribution will come on line.

Finally, study all your assumptions, seeking the points of greatest vulnerability. Looking at any one initiative, ask yourself: What change in the environment would make this unworkable? For instance, what if Medicaid expansion in your state is overturned? Or imagine that you are investing in a particular technology that costs millions. Could it lose favor medically, in regulation or in reimbursement (which has happened to other technologies and practices over recent decades)?

Iterate Iteratively

You will come out of this exercise with some obvious candidates for strategies you should start on (or enhance) immediately, others that will take some time, others that might be possible in the future if the market changes in the right way. At each stage of implementing new strategies, you will learn a lot about the real costs, the real difficulties and the real market response. At the same time, the environment will be changing. Bring that information back to the situation room and hash out how the vision shifts.

Doing this continually will get you as close as you can come to a real-time adaptable vision of where you are going, why, and what you need to do today to execute on it.

 

First published in the American Hospital Association’s Hospitals and Health Networks Daily, January 19, 2016.

{ 0 comments }

C. Little looking up“See? Obamacare is failing!” according to industry expert C. Little, citing Wolf Report 712A just filed by Boy W. Cried.

What is the hue and cry about this time? United Healthcare is saying it has lost large bales and wads of money on Obamacare exchange plans, and just may give up on them entirely. Anthem and Aetna allow that they are not making very much either. Some new not-for-profit market entrants have gone belly up, and the others are having a hard time. So various industry pundits are pronouncing Obamacare a failed experiment, obviously doomed, done, toast.

Before we perform the Last Rites over Obamacare, perhaps we should think for a moment about the hit ratio of the first 711 Wolf Reports from Boy W. Cried and ask a few questions.

Trust the numbers?

First: Do we trust implicitly the numbers that the health plans are giving out in press releases, citing unacceptably high medical loss ratios? Medical loss ratios (MLRs) are self-reported. Yes, there is a certain amount of accountability. The numbers have to square with expenses given on their corporate tax forms and so on, but there is wiggle room in just what is reported and how. It is a reasonable supposition that if you wanted to look for the professionals with the greatest skill in juggling numbers, you would find them working for insurance companies, especially health plans, because the stakes are so high. These numbers people at the top of their game have huge incentives to report a high MLR, so if there is wiggle room, I am sure they will find it.

Beyond that, MLR is reported by state, by market segment (large group, small group, individual), against what portion of a premium is “earned” within that reporting period, and by calendar year rather than any company’s financial year. To say, “Our MLR is X” is to claim that X is the correct aggregate number across their entire multi-state system, from all their subsidiaries, appropriately weighted for the size of each region. We don’t have access to those numbers, just to what they are telling us. There are plenty of reasons for them to want to report the highest MLR they can get away with, plenty of reasons to be skeptical of the numbers they are giving out, and plenty of reasons not to base drastic policy changes on such pronouncements.

Obamacare fail or poor business judgment?

But let’s get down to business here. So they lost money (or barely made it) in 2014 and 2015, and they are projecting cartoon-chick-with-glasses-191254307the same in 2016? Doesn’t this mean that they misjudged the cost of healthcare, so they need to raise premiums? And they didn’t realize this soon enough to raise them appropriately for the 2016 year?

Sounds like somebody (or a pile of somebodies) made faulty business judgments. This is not too surprising, given that these are new business models in new markets. Pricing, risk analysis, and utilization projections are hard enough in established markets, doubly difficult in emerging ones, and exponentially more difficult for a new company scrambling to grab any market share at all, like the failed cooperatives.

Well, waah. Welcome to competition, market capitalism, all that stuff. None of this is in the least surprising.

But does it mean that “Obamacare has failed”? Does it even mean that these companies have failed in Obamacare markets? No, it means what it is: These companies have failed to make the profits that they hoped for in the opening three years of Obamacare. And they are telling us all about their pain so that the government (through regulation) or the body politic (by repealing Obamacare) will make it easier for them to churn a profit.

So what’s the real problem here? In any kind of economy, you need to price your products so that (in aggregate, over time) your total cost of ownership is less than what you sell your products for. There’s your margin, the oxygen of your business. These folks are claiming that the aggregate total cost of ownership of what they are selling (access to healthcare) is close to what they are selling it for. Hmmm. That’s a problem. It has two paths out: Lower the total cost of ownership (get the actual costs of healthcare down) or raise the premium.

Get aggressive on real costs?

How about getting aggressive about the real cost of healthcare? Two problems with that part of the equation: 1) It’s really hard and takes years. 2) It does not benefit just them. It will benefit the whole market. So it’s not a path to greater profitability.

A health plan’s profit (margin) is some percentage of the total cost of care for the people they cover. So they have an incentive on the one hand to cover a lot of people (that is, increase their market share). They have an incentive to keep their premiums competitive not in absolute terms but relative to other payers in each regional market. On the other hand, they have no incentive to get aggressive about actually lowering the underlying real costs of healthcare for the whole market. That would not give them a competitive advantage.

What’s the business concern with raising their premiums appropriately? The concern is that these lower-cost narrow network exchange plans are price inelastic. If they raise their premiums, they will lose market share. But wait, if the cause really is the underlying high costs of healthcare, won’t everyone’s premiums have to go up the same amount? cartoon-chick-with-glasses-bending-250This complaint sounds more like an assumption that others can provision the market more efficiently, keep their premiums more competitive, and gobble up market share.

Again, is this a failure of the Obamacare model? Or is it actually proof of concept? To say that the Obamacare exchanges are failing because some companies might give up on them is to imagine that the purpose of Obamacare, the metric on which it should be measured, is to make health plans comfortable and profitable. Wrong.

The core idea of the Obamacare exchanges has been that health plans should compete on a level playing field to see who could offer the best service and the best access to healthcare at the lowest price. That’s what markets are for. The assumption built into this logic is that some organizations will do it better than others, some will not be good at it, and the market will shake out. If nobody ever failed in the Obamacare exchanges, then we would have to say that they failed to establish anything resembling a true market.

{ 2 comments }

“Winning” by Defeating the Triple Aim

by joeflower on November 16, 2015

angry-female-patient-in-gown-125016971Successful strategies will be the ones that thrive despite high variance, multiple energy inputs and multiple strategic options.

You follow movies? That is, not just watching them but thinking about how they are built, looking at the structure? In classic movie structure there is a moment near the end of the first act. We’ve established the situation, met our hero, witnessed some good action where he or she can display amazing talents but also what may be a fatal weakness.

Then comes the moment: Some grizzled veteran or stern authority brings the hero up short.

Think of Casino Royale, that scene where Daniel Craig’s Bond (after those brutal opening scenes) is back in London and is confronted by Judy Dench’s M. Or Obi Wan Kenobi challenging Luke: “You must learn to use the Force.” Or that moment in the classic Westerns when the tired, angry old sheriff rips off his badge and throws it on the desk, leaving the whole problem to the young upstart deputy. But before he stomps out the door he turns and says to the young upstart, “You know what your problem is, kid?”

And then he tells him what the problem is: not just the kid’s problem, but the problem at the core of the whole movie. He just lays it out, plain as day.

In health care, this is that moment. We are near the end of the first act of whatever you want to call out this vast change we are going through.

[click to continue…]

{ 0 comments }

Does prevention save money? __ Yes __ No

August 6, 2015

Or…it’s complicated. The New York Times today published a story titled, “No, Giving More People Health Insurance Doesn’t Save Money.” A piece of the argument is, as the author Margo Sanger-Katz puts it, “Almost all preventive health care costs more than it saves.” What do you think? What’s the evidence? Leave aside, for the moment, the “big […]

Read the full article →

What Company Will You Keep — Strategy In the New Era

July 14, 2015

In an era of complex change in healthcare, how do you plan? Obviously, you have to. Obviously, you can’t. Let’s step through it: the shape of the complexity we are dealing with, how the process must change to deal with it, and what kind of mind we need for this new thinking.

Read the full article →

What Company Will You Keep — Strategy In The New Era

July 14, 2015
Thumbnail image for What Company Will You Keep — Strategy In The New Era

In an era of complex adaptive change in healthcare, how do you plan? Obviously, you have to. Obviously, you can’t. Let’s step through it: the shape of the complexity we are dealing with, how the process must change to deal with it, and what kind of mind we need for this new thinking.

Read the full article →

How We Build Healthy Cities: Talking with Dr. Len Duhl, Pioneer of Population Health Management

June 18, 2015
Thumbnail image for How We Build Healthy Cities: Talking with Dr. Len Duhl, Pioneer of Population Health Management

The Change-Master Series: Deep Dives Into the Essence of Change-Making and Leadership by Joe Flower Twenty years ago we talked in his cramped, book-lined, ex-carport study with the laden plum tree bowing its fruit over the garden gate outside. What Dr. Len Duhl had to say then is, if anything, more true today than it […]

Read the full article →

Obamacare Rates Set To Spike? Um…

June 11, 2015
Thumbnail image for Obamacare Rates Set To Spike? Um…

So it’s all over the news space and the shrieking blogosphere, with headlines like, “Obamacare Rates To Spike Up To 51%,” “Obamacare Hell…” and “Obamacare Inflationary Deluge…” And online friends are commenting about “Obamacare premiums set to rise next year as much as 51% in some states…” Hey, hey, hey. No need to panic. “Set […]

Read the full article →

Productivity? In Healthcare?

June 3, 2015

Obamacare is built on the assumption that healthcare can be more productive, that we can squeeze more health per dollar out to the system that is built to give it to us. Practically everything I write is based on the same idea — big time. I believe we could do healthcare better for half the […]

Read the full article →

GOP has The Fear: King v. Burwell

May 26, 2015

Republicans have raged against Obamacare for six years now. But do they really want to see it crash? We are rapidly approaching the day when the Supreme Court announces its decision in King v. Burwell. The case found a four-word phrase in the 900-page law that says that the tax subsidies are available to people […]

Read the full article →