(From H&HN Weekly, November 24, 2009)

It’s not easy being a futurist, but I will make a bold prediction: no clear victory, no simple end. What we will get, one way or another, is years of turmoil, re-definitions, new rules and shifting markets—an industry under great, immediate and chaotic pressure.

This makes plotting a direction for your institution more difficult than ever. Yet the next few years will demand and reward far more active, even aggressive, tactical and strategic management than ever.

By January 1 we may have some version of a “public option” plan enacted. Maybe we’ll get insurance co-ops, or nationwide insurance exchanges, or some kind of universal coverage through mandates and subsidies. Maybe we’ll get some kind of patchwork chimera shambling mess of “reform.” Even if there is no bill at all, or even if President Obama pulls a giant rabbit out of a very large hat, still we face what the elder Kennedy brother called “a long twilight struggle, year in and year out.” This is not over and will not be over for a long time.

We are engaged in a political melee, with a wide array of interest groups willing to cry havoc and let slip the dogs for any advantage. And our institutions, at the center of all this, can too easily end up as just so much collateral damage. Institutions already reeling from the recession, the flood of uninsured, the hammered budgets, could well find themselves further hampered in their fight to simply stay alive and do their jobs.

Why It Will Not End

If President Obama signs some version of the legislation, it will take years to set up the structures it mandates, whether co-ops or exchanges or the “public option.” Other provisions of the act will come into play on different time scales (as they are already for the health care portions of the ARRA “stimulus bill”). Some provisions that require no new infrastructure, such as adjustments to Medicare rates, are likely come into operation fairly swiftly.

On the other hand, it will take time for federal agencies to interpret the bill, for the administration to appoint and staff the various commissions and agencies created by the bill, and for Congress to pass various subsidiary pieces of enabling legislation. And every piece of this implementation will be ground for massive inside-the-Beltway turf fights—between people who mostly do not have the good of health care institutions in mind.

If there is no bill this year, the fight for reform will come back again next year, but with diminished potential. One could imagine a bill restricted to “non-controversial” aspects, such as helping rural hospitals stay alive, clarifying restrictions on doctor-owned rural hospitals, or better defining how to pay for telemedicine.

But in a hyper-politicized atmosphere in which paying physicians for helping patients and their families understand their choices for dealing with the last stages of life (and to actually pay attention to advanced health care directives) becomes “pulling the plug on Grandma,” it is hard to imagine any provision in any bill that would slip under the radar as “non-controversial.”
In the event of no bill or an extremely “lite” bill, we will see the states return to the fray. The desire for a better system is real and strong, and feelings on the issue differ greatly across the country. State efforts (which we are already seeing pop up again) would be less likely to get caught up in the politics swirling around President Obama, and more likely to be attuned to local sensibilities.

Much of the push, at the state or federal levels, is and will be driven by a desire to keep down costs by keeping down your payments. Yet legislators and regulators have no ability to affect or even understand the costs of your labor, capital, construction, supplies or technology, or usually, crucially, any way to mitigate that key driver of health care costs, utilization—the 60 percent more that they do for patients in Miami and McAllen, Texas, than they do in Minneapolis and Seattle.

Any expansion of Medicaid, subsidies for low-income people to buy insurance, mandates for individuals to buy insurance or employers to offer it, or tax credits for small businesses to offset the cost, will bring millions of new people into the system. In many parts of the system, we frankly don’t have the capacity to handle them.

At the same time, restrictions on Medicare Advantage (for health systems like Kaiser that are direct contractors for it), “productivity improvement” cuts to Medicare rates (estimated by the American Hospital Association to average 1.3 percent per year), cutting any payments for “potentially preventable” re-admits, tying the public option to Medicare rates, and tying Medicare rates to a powerful (nearly un-appealable) rate-setting commission—all these will hit our institutions’ bottom lines, and hence ability to maneuver our way toward survival.

Payer mix will change, in some places swiftly. Cost shifting will largely come to an end. Bundling and new forms of capitation and mini-capitation will shift risks to the hospitals.

Hospitals have not yet become targets of the screaming matches, but almost no one “out there” understands the economics of this industry. Hospitals are believed to be large, rich, overflowing with waste and easily cut back. Those who live with this industry daily know that much of the waste comes from factors that cannot be controlled by simply cutting reimbursements to hospitals.

No Simple Way Out

You can’t wiggle out. You can’t outsource the hospital to India. You can’t decide to give up on this market and go try another one, the way an insurer can. You can’t close this factory and open one in Brazil. You can’t decide to go into trading on futures, the way Enron did. Even going bankrupt is not really an option—you’re there because you’ve got a commitment and probably quite a history. Where you are, people really need you.

And any business strategist worth her salt will tell you that you cannot cost-cut your way to profitability.

So what do you do? If you are trying to lay down your strategic parameters for the next three, five, 10 years, what are the key thoughts that might help you survive and more than survive?

On the industry level, working through the AHA and our state hospital associations, we all have to get used to thinking of major-league political and regulatory lobbying, and even court action where necessary, as an essential part of doing our job over the next three to five years. There are shoals in these dark and swift waters that could tear the bottom out.

Key Strategic Parameters for Institutions

But what is job one for the CEO of an institution? What are the key parameters that define strategic leadership, amidst this chaos?

Partnership innovation.
The highest priority for an institution is to strongly seek partners and allies at the local, regional and state levels, whether employers, business coalitions, community organizations, local governments, or local and state health departments. People who truly rely on your continued viability should know as much as possible about what you are doing, and why, and how they can help. Partnerships can range from simple goodwill and informational outreach, to coordinating action on specific issues, to contractual business arrangements.

If there is one thing this political season has taught us, it is that it is very easy to underestimate the political forces arrayed against the survival of health care institutions, and very easy to overestimate the public’s (and politicians’) understanding of how health care institutions make a living—how they survive from day to day to be there when the community needs them.

Business model innovation.
Another high priority is to investigate and pilot a wide variety of business models and frameworks. Investigate scaling up and down at the same time. Highly defined businesses, such as joint ventures with physicians, can offer specific product lines on an efficient basis, such as orthopedic surgery, urgent care, a “mothers and children” specialty, or a diabetes mini-cap. Larger umbrella organizations can bring the hospital, with its unique vulnerabilities, within the economic embrace of an ecosystem of health-related entities.

This kind of exploration is key not only for efficiency (matching the type of medicine to the type of product, price and business model), but for nimbleness in responding to changing health care economics over time. (See my September 2009 column in H&HN Weekly, “How to Mayo Up.”)

Process innovation.
Digitize all your processes, certainly, but make sure that your data are transparent and transportable. Most data gathered by the most prominent commercial systems are not transportable and cannot be mined. At least half the reason for digitizing health care is to mine the data for performance improvement—which few organizations in health care do as a serious, strategic practice. You can’t improve what you’re doing if you don’t know, in detail, what you’re doing. You must expose yourself to the information.

Getting a grip on your processes is the only way to substantially reduce your cost of doing business, which you simply will have to do. The only way
to reduce system cost is to think systemically and to teach and incentivize every manager to think systemically. Align every job, every incentive, not to excellence on one narrow measure (such as reducing unit cost on materials), but to systemic excellence (such as reducing the costs of whole processes, including materials, labor and resources).

One great recent exemplar of systems thinking is North Carolina’s Novant Health, whose decision to calibrate all costs against Medicare payments is profiled in “A Model of Efficiency,” by Matthew Weinstock, in the August 2009 issue of H&HN magazine.

Properly managed, new technologies can reduce system costs. Non-invasive ventilation units, for instance, can cost $10,000, but they have greatly reduced the number of tracheotomies over the last 15 years. Now new high-flow oxygen units cost less and promote quicker healing by allowing the patient to eat and talk. Yet one hears of hospital systems reacting to the economic downturn by dictating “No new technology.”

Management Improvement Systems

Every executive faces an array of “new management” rubrics, such as the Theory of Constraints (TOC), Total Quality Management (TQM), Six Sigma process improvement, benchmarking and the Toyota Production System. Which one should you use? All of them. Whatever works for your situation. There is no management Swiss Army knife.

•    The Theory of Constraints helps you identify what to pay attention to at any given moment: What good is “pay for performance” if you don’t know which parameter will actually move the dial on cost and quality?

•    Or you’re not even sure what you want the dial to measure? The Toyota Production System mobilizes the people who do the work to discover how to do it better—and then to own their process and their improvement.

•    Six Sigma is appropriate, even necessary, for processes that can and must be done with the greatest possible precision and repeatability, such as patient identification and drug administration.

None of these is “the answer.” They are all paths to the mountain. You will need not only the lower cost that they can bring, but the ability to tell rapidly what is working and what is not, and what needs to change.

Change Is Mandatory

It’s hard to change the culture and thinking and ordinary practices of an institution. And it can seem that in a crisis all you can do is plant your feet and bull forward into the melee. But new culture, new thinking and strong, collaborative leadership is no longer an optional after-market bolt-on, but is precisely what the crisis calls for. It must be done.

Whatever the specific outcome of this bruising political season, for health care institutions to survive and improve, we need new thinking—from the details of how you mop a floor or clean an infusion filter to the organizational form of the whole institution. Management in times of chaos must be swift, nimble and bold.