There is a way to avoid a collapse of healthcare in this country.

(This article originally appeared in Hospitals and Health Networks Daily, January 24, 2011)

It’s getting scary.

We are facing, before the end of this decade, a bifurcated future. The way things are going now—with the economy wheezing, doctors bailing, chronic disease rising fast, boomers sliding out of the Viagra years into the Depends years, reimbursements getting squeezed ever tighter, Medicaid sputtering on fumes, and 30 million or more new people soon swarming our doors with insurance cards—if we don’t pull a rabbit out of a hat real soon now, we’re in serious trouble.

If we just muddle along, the best we can hope that “trouble” will look like is horrifying gridlock, no options, no exit. That would be the good outcome. The bad outcome would be the destruction by strangulation of all these great institutions, the utter collapse of our ability to serve this society with real medicine, real healing, real help.

The good news? There is a hat, and it has a rabbit in it.

Here at Imagine What If, we survey healthcare and its environment all the time: talking to, brain-picking and consulting with major employers, healthcare vendors, hospital systems, entrepreneurs, creative start-ups, doctors, big health plans. In this survey we have picked up an encouraging pattern, one that grows increasingly solid with passing months—so encouraging that we have posted a detailed special report on it here.

Here’s what I am seeing: There are things popping up across healthcare, here and there, particular programs, business models, experiments, that lead me to believe there is a way out. The way out leads not just to survival, but actually to better healthcare for everyone. It leads not just to a drop in inflation, a “bending of the cost curve,” but to a substantial drop in the cost of healthcare.

The path out of our dilemma is not simple or fast. It is complex and difficult and will take years to build, yet it is absolutely workable. It is already being done.

There are five parts to the strategic toolkit necessary to get on this path. You need all five, and you need only these five. They are both necessary and sufficient to the task. They are interdependent: Each of these five strategic tools needs the support of the other four.

Five Strategic Tools

1. Explode the business model. The great majority of healthcare is delivered under one business model: the insurance-supported, fee-for-service model. As I explored in my last column, “The Problem with Free Market Healthcare,” this model makes it hard for the seller to deliver value to the buyer, and for the buyer to find value.

New business models are popping up month by month: retail care, urgent care, free clinics (yes, that’s a business model with a positive ROI), online medicine, “concierge” medicine, onsite primary-care clinics for employees, fee-based disease management and specialty clinics with bundled products, all of which, in one way or another, route around the dominant model.

Most hospitals over the decades have been far too insistent on avoiding any business-model adventurism, any experiments to see what might actually make them some money beyond just begging for higher reimbursements and trying to get more patients in one door and out the other. This single-focused strategy has helped lead the industry to the financial straits it is in today, making it strongly dependent on a few large payers.

It is possible, and usually necessary, to mix multiple business models in one institution. It is neither necessary nor usually possible for everything in the institution to get out of the insurance-based fee-for-service system. Rather, a balance of different revenue streams helps shape the institution to better serve multiple types of customers.

2. Integrate. One way or another, hospitals and doctors need to work together more tightly—clinically, administratively and financially. They need to be on the same team.

There are multiple ways to get the docs on the team. We don’t all have to be Mayo, Kaiser, Virginia Mason, Group Health of Puget Sound or Geisinger. Anything that seriously does not fit the culture of at least some good portion of the physicians in your area will not work. You can integrate more closely with docs through joint ventures in specific areas like backs, cardio or urgent care; through a properly conceived and run physician-hospital organization (PHO); by helping physicians digitize their practices; by putting nurses in their practices to track chronic patients; or by hiring specific specialists in key areas and buying specific primary care practices.

It is not necessary nor necessarily helpful to get all the docs to work in one big team in the same way. It depends on the business model—and we need multiple disparate business models.

3. Share risk. Risk and rewards drive behavior. If players in a system are not doing what you think they should be doing to make the system work well, chances are they are not getting rewarded, or put at knowing risk, in a way that matches their effect on the system.

A patient who over-uses the system has no financial risk. Patients’ costs don’t change whether they use it or not. Patients who under-use the system do not see how they are hurting themselves. A healthcare system that does its best to drive maximum use of the system, getting the most bodies into scanners and beds and surgical suites, is not at risk for the health of those patients, and is given incentives only for doing stuff to them. Balancing risk appropriately across the system allows the system to drive itself toward value.

Ways of sharing risk more appropriately across healthcare are cropping up swiftly. Intelligently designed high-deductible health plans matched with health savings accounts and the right set of incentives are proving to be a workable way for the consumer to accept some financial risk. A fully capitated system like Kaiser, of course, transfers most of the financial risk to the system (though even Kaiser has introduced deductibles and co-pays on most plans).

But there are many other ways to take on appropriate risk. Bundling, with published prices, is a way to take on risk. The system is saying, “We are willing to take the risk that we can deliver, say, an uncomplicated birth as one package for this price.” Warranties are another way. The system is saying, “We are willing to take the risk that we can deliver quality on demand.” “Mini-caps,” such as diabetes care subscriptions, transfer risk. The system is saying, “We are willing to take the risk that we can deliver all the services you need for a set price—because if we do it right, we can actually drive down the cost of those services.”

There is no need, and it may not even be helpful, for fully capitated risk to become the single model for healthcare. Such monolithic models tend to transfer all the risk to the providers, or to the government, and they have no traction with which to drive toward value. Taking on some risk, in ways and in areas in which that risk can be intelligently managed, exposes providers to the discipline of the market.

4. Build from primary care upward. Every healthcare system worldwide that delivers healthcare better and cheaper than the U.S. system has a stronger primary care sector. This is by design. Specifics in the policies of other governments support the primary physician.

Our primary physicians have been left to languish. Here are some numbers. The difference in income between primary care physicians (PCPs) and specialists is huge: The average PCP earns 55 percent of what the average specialist earns, and a mere 30 percent of what (for instance) an orthopedic sur¬geon does. Only 27 percent of PCPs describe their practice as “robust” and satisfactory. PCPs are flocking to sign on with hospitals, and hospital employment is rapidly becoming the norm, with 40 percent of active PCPs estimated to be on hospital payrolls by 2012.

Every year medical schools produce fewer doctors who elect to go into primary care, at the very time when demographic shifts and the reform act mean we are fac¬ing a massive shortage of primary care docs. But the money, relatively poor as it is, is not actually the main thing burning docs out of primary care. It’s the burden of the work.

The key rubric for supporting primary care is the “medical home,” but the medical home can come in many forms, funded many different ways. The key questions are, Can we find ways to pay doctors to do what we most want them to do? Do they use registries aggressively to track their patients? Are they operating in a team environment, with everyone doing most of their work “at the top of their license”? Are they evidence-based, measurable without the “measurability overhead” burden?

5. Rebuild the production system constantly. Healthcare is a production system, a massive one with high demands and expectations, huge and exacting transfers of information and material, meticulous manufacturing and processing needs—and until recently almost no introspection about processes.

In most healthcare even now we do things the way we do them because that’s the way we’ve always done them, or that’s the way it’s convenient for this or that doctor, or for thousands of other reasons that have little or nothing to do with “that’s the most efficient, effective way to get this done. We know because we have tried other ways and measured the result—and we’re still looking for better ways.” Healthcare, in its core processes, is enormously wasteful, simply because most of its processes in most of its environments have never really been studied and improved.

Lean management, the theory of constraints, benchmarking, six-sigma process quality, checklists, continuous performance improvement—a whole array of tools have been tested and refined in other industries, and are beginning to gain a foothold in healthcare. Their successes, when applied diligently and enthusiastically over time, have been remarkable and measurable.

The Payoff

The core problem in healthcare is pretty neatly expressed by the fact that while I can say to the customer, “If you did these five things, you would be in better health,” I cannot say to them, “If you did these five things, you would get better healthcare for less.” In most of healthcare, the customers can’t find value, don’t know how to, and don’t get rewarded in any way if they do find it. There are no real “products” to compare, no real prices that relate to how good the product is and no real useful measurement. To a great extent, this applies just as well to the customer’s representatives in shopping for value (the employers, the health plans and the government).

These five strategic tools (and the similar toolkits I am laying out for health plans, physicians and physician groups, and employers) are all about how we in healthcare create real value (cost per benefit), prove the value through real measurement, present it to the customer in packages from which they can pick and choose, take our lumps in the marketplace, and constantly improve through competition?

People say, “But what about those darn (patients, health plans, employers, pick your villain)?” What about them? Healthcare is a complex adaptive system with all players at static local optima in a “Nash equilibrium.” Translated, that means 1) All players feel helpless to change anything about their situation without being punished and feel it’s everyone else’s fault, and 2) any player who changes, changes the incentives and forces acting on every other player. If the providers shift their strategies, they change the rules of the game, and suddenly everyone is looking for a new way to get this thing done. Now’s the time.

By Joe Flower