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Why “half the cost?” How? Most important, what does it mean for hospitals and health systems? Here’s the argument, and some of the implications.

In 1980, health care in the United States took no more of a bite out of the economy than it did in any other developed country. Then we instituted cost controls. By 2000, U.S. health care cost twice as much as everyone else’s. By 2020 or 2025, we may be back to costing the same as any other country — half the current cost in GDP.

Historical charts of the comparative cost of health care in different countries show a startling and obvious pattern. The trend lines of the leading economies form a fairly tight pack, drifting slowly upward from around 5 percent of GDP in 1960 to 8 percent to 10 percent in recent years — except for one. Around 1980, the U.S. trend line sharply breaks from the pack, and quickly establishes itself at half again as much as most other leading economies, then twice as much.

This happened over the very period that Medicare, followed by private health plans, instituted increasingly stringent and widespread unit cost controls.

I draw two conclusions from this: The notion that U.S. health care must cost twice as much as everyone else’s is not exactly the law of gravity. And there is no evidence that unit cost controls actually control system costs. In fact, through a series of complex feedback mechanisms, it may well be that controlling unit costs pushes up system costs, as members of the system find ways to increase their prices and the numbers and acuity of their utilization patterns despite the caps on reimbursements for individual items.

The Current Health Care

The answer to why U.S. health care costs more is hotly debated because it is highly complex, and the higher costs are spread through every level and sector of the system. It’s a mirror house of high costs: You can point anywhere and you’re right. What’s more, if you are clever, you can obscure your sector’s part in the higher costs. One analysis that I saw broke out all the various costs, and how much they contribute to health care inflation, but never mentioned pharmaceuticals. It turned out drug costs were subsumed within physician costs, hospital costs and so on. The survey was, of course, paid for by the pharmaceutical sector.

But you know the drill: U.S. health care prices for individual items are higher. We tend to use more of the more expensive items. We waste vast amounts on unnecessary uses. Our dysfunctional malpractice system pushes doctors into defensive medicine, which means more unnecessary care. The higher prices for, say, an appendectomy ($13,000 on average in the United States, about $5,000 to $6,000 in Canada or Switzerland, $3,000 in France) subsume much higher costs for every element of that service, including the fees or salaries of the surgeons, anesthesiologists, radiologists and everyone down the line; and higher prices for drugs, sutures, imaging machines.

What it’s due to. All of the various causes of the high cost of U.S. health care are due to the structure of the market — paying fee-for-service for individual procedures, most of them chosen by the provider, many for a user who cannot (or feels they cannot) refuse, and who is in any case generally not the payer.

The fact that the cause is structural suggests that no amount of per-unit cost controls is ever going to fundamentally change the situation. Health care paid for this way will always cost too much, and return too little.

What to pay attention to. Because the cause is structural, look to structural changes in the funding of the health care market for the big leverages. Mechanisms like Medicare’s new Independent Payment Advisory Board and more comparative effectiveness research will produce marginal downward pressure on prices and some culling of the more egregious kinds of waste for useless procedures.

But these are not the real show. They will not fundamentally change the relationship between the buyers and sellers of health care. What will: all methods of payment other than fee-for-service. Any mechanism that pays for outcomes, for the health of populations, anything that even partially spreads the financial risk for those outcomes from the payers alone to the users and the providers will fundamentally change the interactions between the buyers and sellers. Shift the financial risk, and you shift everything. So to see the future, follow the risk.

Following the risk. On the provider side, we are seeing bundled products, full Kaiser-like capitation, mini-caps (such as diabetes subscriptions), experiments in value-based purchasing and comprehensive risk-based arrangements like the alternative quality contracts (AQCs) pioneered by Blue Cross/Blue Shield of Massachusetts. Even process warranties and Medicare’s increasing refusal to pay for re-admits shift some risk for outcomes to the provider. And on the users’ and employers’ side we are seeing continued growth in high-deductible consumer-directed health plans, health savings accounts, direct pay primary care and incentivized wellness plans, all of which involve the user in making rational economic consumer-like decisions about their health care.

These large and small shifts in risk are already having their effect on the market. Across the country we are seeing hospitals merge into larger systems that are more capable of bearing financial risk and of bearing the heavier data and management cost of mitigating that risk. Both from changes that are already happening, and in the face of changes to come when the PPACA reforms fully kick in, hospitals and health systems are increasingly expanding their “medical home” primary care operations and “forward-basing” clinics in poorly served communities. Suddenly it seems that they will do better financially if they can keep people out of the hospital.

The tipping point. This is just the beginning. We are approaching a tipping point. The recent substantial drop in health care inflation is not just a cyclical reflection of the recession. It is, at least in part, the leading edge of the effects of the systemic, structural (and therefore permanent and growing) shift in risks across health care. The growing evidence that employers and health plans can drive costs down through such shifts in risk, accompanied by aggressive prevention efforts, incentivized wellness programs, and targeted intensive management of chronic disease, is already percolating through the broad community of payers. Self-funded employers (half of small employers, up to 90 percent of large employers), especially, have both the flexibility and the direct, bottom-line incentive to get much more heavily involved in directing the health care of their employees. Both employers and health plans are increasingly willing and determined to try new ways.

The Next Health Care

When that happens — and I believe we will cross that tipping point fairly soon over the next few years — we will see a rapid and chaotic shift across health care.

The Next Health Care will be fiercely driven by data, analysis and strongly directive management. Health care organizations will compete strongly. The scoreboard of this competition will not be, as it has been, who can provide the most reimbursable services, but who can provide the measurably best health and health care (both) to defined populations that they serve.

The industry that we are imagining here, the health care industry that costs half as much of GDP while returning much better health, is wildly different from the health care industry of today. It is as different as a Toyota Prius from a 1950 Willys truck.

Creative destruction. IBM and its competitors (such as Burroughs, UNIVAC, DEC, NCR, Control Data, Honeywell and Hewlett Packard) must have felt in the early 1980s that they stood astride a vibrant, maturing industry. That almost all of them would be irrelevant, dead, merged, downsized or sold within a decade would have seemed a bizarre fantasy to them, as would today’s smart phones and Internet, or the emergence of organizations like Apple and Google as among the world’s most valuable and powerful corporations.

Because communities are very attached to them, hospitals have somewhat more built-in resilience than computer companies. But only somewhat. The creative destruction in the computer industry in the 1980s and 1990s approximates the scale and depth of change that we can contemplate for this industry over the next decade at least.

The Next Health Care is a tough fit for hospitals as we have traditionally conceived them — loosely organized, focused on the reimbursement for the reimbursable, paid for action rather than results. The strong tendency will be for hospitals to be increasingly cut out of more and more of the market, specifically all parts of the market that can be made to pay under the new risk-bearing regimes — unless they are smart, nimble and aggressive in re-shaping themselves.

We are likely to see entirely new players entering local and regional marketplaces, new risk-bearing structures designed specifically to keep the people they serve out of your EDs, your surgical suites and your hospital beds. Your competitors at Major Memorial will increasingly not be St. Mary’s Health System or HCA Suburban. Your competition will be large multispecialty physician groups with AQC-like contracts; it will be onsite primary care clinic chains plopping themselves down in the major employer’s factories and warehouses; it will be OnlineInstantCare.com on the customer’s smart phones; it will be all manner of new structures, contracts and arrangements that we have not even seen yet.

Dealing with the end of cost-shifting. More and more you will be competing against organizations that do not have the “hospital premium” built into their cost structure. The functional result of working in a health care economy that is mixed between risk-bearing and fee-for-service structures will be that cost-shifting, not only between payers but between departments and product lines, will become much more difficult. The Next Health Care will in effect demand that every product and product line bear its own real costs.

This is dire news, the most difficult dynamic in the Next Health Care for hospitals, particularly hospitals that continue to have a heavy burden of uninsured — usually the same hospitals bearing the heaviest burden for emergency and trauma. As cities and states pare back other services and programs, EDs increasingly become not only the first responders for stroke and AMIs and diabetic shock, but at the same time dumping grounds for the mentally ill, the painkiller addicts, the violent, the drunks, the police problems. Communities desperately need and are deeply attached to competent emergency services, but are not really willing to pay for them. Hospitals have tended to be the passive victims of this dynamic, the chumps in this game, simply absorbing the costs as part of the “hospital premium” charged for every other service. The Next Health Care will make that much more difficult to do.

Stemming the emergency department tide. In response, hospitals and health systems that do not want to simply abandon their communities will be forced to become extremely creative and aggressive at paring back the burden of the populations that surge into the ED. This will include:

• Triage: vigorously, quickly, and accurately triaging non-emergency cases to clinics.
• Behavioral triage: Make psychological triage a normal part of the ED intake process. Mental health plays an astonishingly large role in addictive, traumatic and chronic disease processes — and an astonishingly large number of people find ways to need emergency services simply because that’s the only place where someone will really pay attention to them. Find someone other than a trauma specialist physician to do that. Mental health services are generally far cheaper than the medical and surgical services they can supplant.
• Identify and track problem users, especially those just seeking narcotics. Use biometrics if necessary. Establish regional patient identification registries to deal with “ER shopping.” Give your emergency nurses and physicians the legal and technical backup they need to not waste time and resources playing “What’s My Line” with addicts.
• Identify and track “frequent fliers” with untreated chronic disease. Establish pro-active Camden-style clinician groups to seek out such problem users and help them. If someone is showing up in your ED every three weeks with multiple chronic problems, you will spend far less money if someone goes to their house and helps them vigorously and intensively before they show up again.
• Seek new sources of funding from states and municipalities, such as direct contracts for emergency services, and direct revenue streams from sales taxes and property taxes. Yes, taxes. The current mania for never taxing anything and drowning government in its bathtub will run its course. It will be possible to make the case to municipalities and states that the people need to pay for the services that the people demand.
• Campaign for state and federal legislation to cover the un-coverable. Don’t call such legislation the “Give Free Health Care To All Those People You Don’t Like Act.” Call it the “Hospitals Rescue Act.” Because that’s what coverage for the un-coverable is: helping hospitals survive the onslaught of the cost of caring for them.

Upgrade your cost analysis. The technically most difficult part of managing this transition is simply continually computing your real costs, not per reimbursed procedure but per benefit provided. If you’re in the fee-for-service business of doing back surgeries, your cost analysis question is whether you can keep the average costs of the surgery below the reimbursement level. But if you have a contract for a set amount for every aching back referred from, say, all the warehouse workers at the airport, then you have a different and much more complex analysis to make: What are the average costs of fixing all those aching backs, some of which may need surgery, but most may not? Suppose you have a comprehensive risk contract for all the back care for all the warehouse workers, whether they have aching backs or not? Then you have a further element to your analysis: What can you do to prevent chronic back aches in this population?

Cut waste. It is obvious that hospitals and health systems need to “go lean,” finding much more cost-effective ways to do every process. But in the Next Health Care, it is even more important to stop doing unnecessary procedures. Under a fee-for-service system, waste is not waste, it’s revenue. Put an implanted defibrillator in someone who does not need it, and you get paid. Under a risk-based contract like an AQC, waste is waste. Do something expensive, unnecessary and risky for the patient, and it costs your bottom line.

Move fiercely upstream. When you assume financial risk for the health of a population, everything headed your way is not a revenue stream, it’s a cost. There is no doubt that everything coming your way will be easier and cheaper to deal with if you can get to it sooner. You must become your customer’s friend, using real people (not just robo-nags and websites) and working through naturally trusted pathways in customers’ schools, workplaces, churches, bars, police athletic leagues and local hangouts. At the same time, you will need to become world class in tracking, characterizing and understanding your customers and potential customers. This is miles beyond marketing research. It’s population health management on steroids. The skill set is in its infancy, but it includes tracking on individual and aggregate levels; mining and understanding the now very deep literature on prevention, incentivized wellness and healthy communities; geographic information systems to “geocode” the data onto neighborhoods, workplaces, churches and other community connections; predictive modeling to suggest what interventions will have the best effect; and tracking the return on investment of particular interventions. The skill set will have to include the ability to create targeted, flexible responses, to “mass customize” interventions and resources to individuals and to micro-populations (such as the residents of a particular convalescent home, or employees on a particular site, or all of your customers who have a particular condition). All of this is new, and there will be an extraordinary premium on getting it right.

Campaign for legal reform. There are significant legal barriers that get in the way of hospitals competing effectively in the Next Health Care. These barriers are found especially in the federal Stark laws and anti-kickback legislation (which can be interpreted to prohibit or inhibit many of the kinds of risk-sharing structures that this shift calls for). The varying and inconsistent state “corporate practice of medicine” laws can similarly inhibit new necessary medical corporate structures. State scope of practice laws often, in effect, mandate the inefficient use of health care resources, demanding, for example, that a physician give a subcutaneous vaccination that could just as easily be given by a pharmacist. The efficiencies of the Next Health Care will need all clinicians to be operating at the top of their license and at the full extent of their training.

In the Next Health Care, these laws will tend to disadvantage hospitals and health systems, because the new-style competitors will be more nimble and well situated to find ways around them. Hospitals and health networks will need changes in the laws not only not to be disadvantaged, but to be able to make use of these new entities as allies and partners.

Re-Invent Yourself

The economy of the Next Health Care, emerging over just the coming few years, will re-apportion financial risk for the health outcomes from the payers to the providers and the users, driving the entire industry to a smaller, leaner, more efficient and effective model. Such a shift is an existential threat to hospitals and health systems. To survive and thrive will take insight, unprecedented flexibility and creativity, strong leadership, and courage.

This article first appeared in H&HN Daily, from the American Hospital Association, March 27, 2012

 By Joe Flower

[This article first appeared in H&HN (Hospitals and Health Networks) Daily, January 24, 2012]

2012 and 2013 present a unique and compelling opportunity for health care executives to produce significant change. If we hope to be, as Buckminister Fuller said, “Architects of the future, not its victims,” we have to change the way we think in specific ways.

How do you learn to “Think Different” as Steve Jobs’ famous ads put it?

Let’s think about the structure of thought for a moment. The great experimental psychologist Daniel Kahneman, in his recent book Thinking, Fast and Slow, shows how much of our thinking and decision making is driven by illusions and assumptions, such as the “illusion of validity” (the false belief in the reliability of our own judgment), the “availability bias” (a biased judgment based on memories that are more easily available or more vivid) and the “endowment effect” (the tendency to value something more highly when we own it than when someone else owns it).

This makes sense. Kahneman’s analysis resonates strongly with my experience working with executive health care teams, including providers, health plans and suppliers, and with governments in North America, Europe and China over several decades. Smart, seasoned executives can make seriously poor judgments, especially when the environment changes.

Curiously, these illusions and biases and assumptions are driven by our experiences. So being more experienced does not necessarily exempt us from illusion, unless something in our process constantly and directly tests the results of our judgments (as, say, a robust retail market does on price setting). Even if the judgments are correct, they are based on an environment: in the jungle or the savannah, in a controlled market or a retail market, in a risk-bearing business arrangement or an endowed business arrangement. When our environment shifts, the illusions and biases and assumptions persist, even though they may be dangerously out of date.

We are in a rapidly shifting environment. Over the next several years, all health care leaders will be called on to make numerous strategic decisions and tactical choices that will be fundamentally different from decisions they are used to making. But they will be making those decisions with a mental apparatus formed in the old environment.

A Thought Exercise

How do we rethink our assumptions? How do we approach the unfolding situation with a continually fresh mind?

Here is a basic and enormously useful thought exercise. Take some time to write down a number of basic facts and beliefs about your organization, anything from facts such as “We own XYZ Homecare” to opinions such as “Tom’s a lousy communicator.” Then take one of these “truths” and find several ways to form an opposite of it.

An opposite of “We own XYZ Homecare,” could be “We don’t own XYZ Homecare,” “Our crosstown rivals own XYZ Homecare,” “XYZ Homecare owns us,” or “We keep XYZ Homecare’s assets but farm out the management,” or even “The business we now think of as ‘homecare’ disappears and becomes something else,” for instance.

The opposite of the opinion, “Tom’s a lousy communicator” could be “Tom’s a great communicator,” “I’m a lousy listener to Tom,” or “There’s really no need for Tom to be a great communicator.”

Entertain one or another of these opposite assumptions for a while. Treat it as if it were true. Assume that in some way, it actually is true, or could be true. How does that feel? In what ways might it actually feel true? What would be the consequences if it were true? Explore it; give it room to grow.

This is not a test of your original assumption, but a way to ferret out different assumptions and give them room to play in your judgment. Your original assumption may be correct, or it may be correct for now, or it may be as correct as some of its opposites. Maybe Tom really is a lousy communicator, but you’re also not so good at hearing what Tom is on about, and in Tom’s job it’s not so important that he be a good communicator. In making your assumptions explicit and overturning them, you can find other truths — and in a deeply shifting strategic environment, we will need to find lots of new truths.

Overturn Assumptions

In this year of thinking dangerously, here are some assumptions to entertain that may be counter to the way you are thinking now. Try them on for your organization and your environment. See if the act of taking them, experimentally, as true turns up other thoughts that might add to the power of your judgment in the changing environment.

Assume brevity. Assume that your current product lines, business models, revenue streams and business structures have a short half-life, that they are not permanent but will disappear. Many businesses (such as consumer electronics) have this assumption built into their DNA. In health care, we make the opposite assumption: If we have a cancer program, if we make our margin on the employer side, if the sleep center is a good revenue stream, we assume permanence until proven otherwise. Assume brevity — actively search for, create and incubate alternatives.

Assume common ground. Assume that your business adversaries and rivals can be allies. The health plans, your crosstown rivals, the city government may be making life difficult for you now. But under different business assumptions, for particular product lines, revenue streams or business structures, your strongest rivals may be your natural affiliates.

Assume all form is classical. If you are thinking of some new business direction, something that seems radically new to you, assume that somebody somewhere is already doing things this new way, is doing it well, and has learned something about how to do it. Assume that, rather than start from scratch, you can beg, borrow, pirate, buy or copy their expertise and experience — and then improve on it.

Assume new capacities. Assume that your organization does not have the capacities that it will need in its evolving environment.

Assume new abilities. Assume that your organization has latent abilities to learn, change and create that you have never tapped; that it is possible to tap them; and that you could learn how from other organizations.

Assume heterodoxy. Assume that there is no one right way to do health care, even for you to do health care in your market with your organization, but many partially right ways.

Assume exotic provenance. Assume that the answers are not all in health care. As the business environment changes, we will increasingly find that we can learn things from other industries, that other industries represent a “target rich environment” for new business ideas, revenue streams and risk structures that we can use in our organizations.

Assume the fruitfulness of challenge. Assume that a leader’s most important task is to pose the unanswerable questions, the true challenges, to subordinates. Any question that actually has an answer is a technical question, not a leadership question. Leadership deals with the unanswerable, with where we could be and where we might go. Being the smartest person in the room and having the right answer is the smallest part of the job — and can actually get in the way of finding the best answer and the greatest intelligence the organization can manifest.

Assume curiosity. Curiosity is much more valuable than answers. Questions are far more useful than fixed opinions. Foster curiosity in your subordinates, in your customers, in your allies and potential allies. An organization displays and feeds curiosity by starting pilot programs, fostering new product lines, seeking out new allies and relationships, then seeing what works and pruning the rest.

Assume ruthlessness. Don’t fall in love with what you create. It’s a new environment. You have to try new things — and you have to kill off what does not work.

Assume competition. Assume that in a changing business environment, if an opportunity shows up, someone will take it. It could be you or it could be a competitor. The opportunity could be something not invented yet in your market, or it could be something you already do that someone else finds a way to do better, faster or cheaper.

Assume the bottom of the pyramid. Assume that there are opportunities on the low end, that there are ways to find margin even serving the least well-insured and the least well-employed. The reason is simple: The changes in the health care business environment are likely to increase, rather than decrease, your exposure to the low end of the market, and to decrease the ways that you can offset losses in serving it. You have to find margin, and you will not find it if you assume it is not there.

Assume ignorance. Assume that you do not know enough about your own organization and its environment to make the best decisions: how much particular processes cost you, which of those costs are flexible, which are even unnecessary, where your revenue streams actually come from, who are the true decision makers both in incurring costs and in becoming customers. “Big data,” the ability to drill down into the masses of information your organization produces and come up with answers to such questions, could be your friend.

Assume decision-making from ignorance. Assume that you will never really know enough, and you will have to make big decisions anyway.

Assume that it’s always a decision. Assume that to make no decision, or to delay a decision, is itself a decision.

These are a few examples of the ways we must continually overturn and test our thinking, expose our illusions and bring a fresh mind to our strategic judgments. No matter how smart or how experienced, the mind whose expertise was formed in business models of the past decades is ill-equipped to make judgments in the Next Healthcare as it forms and re-forms over the coming several years. When the mind of the leader learns to change first, then the organization can learn and change.

 By Joe Flower

Ten existential questions will make the difference between stumbling into the future and thriving

The questions have changed. The key strategy questions that the C-suite must be asking—and getting actionable answers to—are different now than they were in the past, even from what they were last year. Most of today’s health care CEOs and C-suite leaders are missing many of the key questions they need to ask to drive strategy now, this year, this budget, in order to survive the next three to seven years. Which ones are you missing?

A New Mind-set

Today and for the next few years the weather of this industry will be dominated by pervasive, discontinuous change. Structures, revenue streams, relationships of every level: All are shifting in fundamental ways. Specifically, the weather will be driven by:

• invention and propagation of new business models;
• shifting risk onto both the provider and the patient, accompanied by building of new risk-based relationships, contracts and alliances;
• smart primary care coming to the fore as the foundation of health care, driving most business models;
• digitization and automation going wall to wall and beyond the walls—accompanied by powerful new info-capacities, from “big data” strategic analysis to new ways of reaching and bonding with customers; and
• a striking new need for efficiency and effectiveness in response to rapidly rising demand as the baby boom ages, the baby boom health care workforce ages and disengages, and the newly insured increase their use of health care facilities.

Most of these factors, except the very last, are not dependent on the health care reform act, and will not change much if the act is altered or set aside.

Here are 10 strategic questions. There are lots of questions you can ask at the strategic level, but these 10 stand out as existential questions, the ones that, unasked or poorly answered, could cripple your organization, narrow your options and threaten your continued viability. So we will call them “the X questions”—X for the Roman numeral 10, for the existential nature of the answers, and for the key “X factor” role they will play in your future. If you are not asking these questions, asking them seriously, not rhetorically, in a venue that searches for answers that result in actions, you and your organization are flying blind into unknown territory.

The X Questions

1. Smart primary care: What would it take to derive the majority of your income and profit from primary care in three to five years? What would that look like? What capacity would you have to buy or build or ally with to do that? What structure would make primary care a profit center instead of just a source of patient flow for the real profit centers? Do you recognize the elements that make a primary care practice “smart,” lean, effective and a true “medical home”?

2. Risk: Are there definable populations in your market whose health costs could be driven down by improving their health status? While there are thousands of examples out there, focus on just this one: In the last 10 years, through basic, conservative preventive measures, Kaiser drove down the incidence of heart attacks in its members by 24 percent; it reduced serious heart attacks requiring hospitalization or surgery by 68 percent. Those are big numbers. Kaiser is financially at risk for the care of its members. You can probably imagine how the return on investment for preventing all that suffering and death looked on Kaiser’s bottom line.

These definable populations could be populations defined by payer (all the Blues members in your area, for instance, or all the members of your own health plan). Or by disease process (all the diabetics), by living situation (everybody in a particular retirement home), by income level (all the lower-income people in a particular part of town), by life stage (all the mothers of young children) or even by occupation (all those dock workers with the bad backs). How could you put your organization at risk—therefore at profit—for those particular health costs? Who might pay you to care for them? In what way might they pay?

3. Hotspotting: Eighty percent of your utilization and costs, typically, come from 20 percent of your patients; half of the utilization and costs come from 5 percent of your patients; and fully 20 percent to 30 percent come from the top 1 percent. Some of those patients just got hit by a bus or contracted a swift-moving cancer. This is their moment to need a lot of attention. But of that highest-spending 1 percent this year, 14 percent will still be in that category next year. Of the top 5 percent, the ones who use half of all the resources, nearly a third will still be in that category next year. Of the top 20 percent, those who use 80 percent of all the resources, more than half will be in that category the next year.

These are typically the long-term chronic patients who are not getting the real care and attention they need to stabilize their condition and keep them out of the ER or the hospital. If you are going to be at risk for some population, do you know who that top 1 percent or top 5 percent of resource spenders are? Do you know how to find out? Do you have a clear idea how you could lower their costs by serving them better?

4. Alliances, customers, partners: Who is going to work with you? Who will share the risk and the benefit of these new risk environments? Are there competitors—such as physician groups, specialty clinics, urgent care clinics or retail clinic chains—that are now potential allies? Are there employers in your area with whom you can work directly, either to be at risk for some aspect of their employees’ care (behavioral health, for instance, or spine care, or all primary care in a workspace clinic)?

5. Teams: What sort of clinical teams will you need to build to take on this kind of risk? What will make those clinical groups into teams, and not mere collections of clinicians with their own agendas? In what ways can the way you pay those clinicians tie them directly into the organization’s goals for each group of patients? How will the business structure, patient flow and workflow have to be different from what you have now?

6. Definition: How will the definition of “care” expand beyond your traditional inpatient and outpatient “sick care” concerns when you take on such risk? For instance, how can you affect outcomes and costs by putting behavioral health professionals into the care flow early and often? Consider this: The two top predictors of an individual’s health care costs are not physical. They are not body mass index, blood pressure or blood sugar level. They are stress and depression. Are you going to put yourself at risk for those health care costs without trying to do anything about those factors?

7. Setting: Where will such care have to be delivered? Through what kind of channels, and in what kind of environments? If your survival depends on managing the health risk and costs of populations, how do you bring the care to them? How do you snuggle up to your customer? What are the technologies that could put your relationship to your customer in her purse, on her desk, in her house?

How will your physical plant and built environment have to change? As you contemplate building, renovating and repurposing in a new risk-based environment, you will have to focus not only on getting closer to your customers, but on building a safer, more efficient and effective environment where your clinicians can work with them. How conversant are you and your executive team with the principles of evidence-based design championed by the Center for Health Design and encapsulated in its certification program? Are your architect and interior designer certified?

8. Benchmarking: Are there organizations of your size and level of complexity, in markets like yours, that have done something like what you are navigating, that you could benchmark? How could you best find them? How could you best work with them?

9. Digitizing: Everyone is gettin’ digital at once, but there is no mantra that makes it all work. It can be done seriously badly, even when working with market-leading companies. You can cripple your organization’s workflows, cut efficiencies and make your clinicians hate you—at the same time that you pay out checks as much as 10 times larger than you need to.

How much do you and your executive team actually know about the changing horizon of information capacities? How seriously have you studied it? Does that knowledge simply pad out your strategy, or does it drive it? How satisfied are you that the strategy and the company you are choosing to lead your digitization drive are the best for you? Or are you and your CIO simply buying the security of the imprimatur of a major company? How aware are you of the new technological capacities arising and being showcased in the Health 2.0 environment, in the open source movement or, in primary care, in the Ideal Medical Practice movement?

In your enterprise-wide digitization, are you using OpenVista and the Resource and Patient Management System (RPMS), the open-source software suites available for free from the Veteran’s Administration, one of the oldest, most tested and largest digital implementations in health care? If you are not, how good are your reasons?

Consider this: A couple of years ago West Virginia University Hospitals spent about $90 million to install commercial health software from a major brand-name vendor in seven hospitals. About the same time the West Virginia Health and Human Resources Department installed OpenVista in eight hospitals. The installation and customization by a private vendor in all eight hospitals cost $9 million. Are we to assume that the university system got 10 times the value? Why would we assume that?

In taking your smart primary care practices and other physician practices electronic, have you considered the free or cheap software-as-subscription packages such as Practice Fusion or Doctations? How strong are your reasons for spending money you don’t have on systems that cost far more?

Kaiser recently rebuilt its entire electronic system (and by all reports quite successfully), to the tune of $4 billion. Top managers involved 160 physicians from all parts of the system in the re-design, not just once, but repeatedly, as a task force. This really helped not only in building a good system that actually works for the clinicians, but in getting the doctors to really use it to advantage once it was implemented. How much have you involved your doctors in designing your system? Or is it just, “Oh, we have a doc on the committee”?

Ask yourself some functional questions from a doctor’s point of view, such as: Are the accounts and records transaction-based or patient-based? When an ED patient is admitted, does that become a new record? Or is all the clinical information on that patient brought forward as part of a continuing, longitudinal patient record? Can it display, for instance, variations in blood albumin level over time as a single graph? Or does the clinician have to burrow through dozens of transactional records to write down the data, then visualize it in her head? Can the system accept data from other hospitals’ systems, or from legacy data sources within your own system? If not, why not, when translational software is available?

If you don’t know the answers to these questions to a close approximation of on-the-ground clinical reality, you need to find them. They could be killing you.

10. Healthy communities: If you are at risk for the health of a population, what could you be doing to help members of that population be healthier? The least expensive way to deal with disease is to prevent it. Many prevention methods range far beyond the medical environment. They have involved everything from a bicycle helmet campaign to better day care centers to traffic lights, community gardens, yoga classes and healthy cooking clubs. Do you know what the key leverage points are in the community you are at risk for? Have you asked them? Have you done the community health risk assessment mandated in the reform law?

The amount of actual funding involved in partnering to build a healthier community can be so low that one CFO described it to me as “lost in the noise” of the budget. In a risk environment, the return on investment can be very high. The experience, the data, the expertise in improving the health of populations is now deep, wide and accessible, not least in the AHA’s Healthy Communities Fellows and its Association for Community Health Improvement with its risk assessment toolkit; and in the comprehensive turnkey software and databases available from the Healthy Communities Institute of Mill Valley, Calif.

Confronting Your Risk

In the environment that is developing right now, with the shift in underlying economics, demographics, technologies and business assumptions, every organization in health care is at risk of slowing its development, crippling itself or even falling by the wayside. At the same time, tremendous new opportunities are opening up, often in directions we have never had the possibility of even thinking about.

This is the time to ask and answer the fundamental strategic and tactical questions, the X questions.

[Originally published in H&HN (Hospitals and Health Networks) Daily]

 By Joe Flower

[From Hospitals & Health Networks Daily, September 20, 2011]

There is fire in the valley and smoke in the mountains. A plague is on the land and danger is afoot.

That may be — maybe — the good news.

Health care is more unstable than it has been at any time in living memory. That’s pretty scary, but that instability may turn out to be its most important asset in this moment, as the whole industry becomes open to profound change.

As long as I can remember, thoughtful analysts have been saying, “We need to do this differently. This is not working.” In this century, the voices became louder and more insistent, and they spread. But health care has been very slow to evolve in any fundamental way. Even health care reform, when it came through extraordinary political pain and maneuver, was more a way to bolster business as usual, a way to shore up revenue streams and patch holes in the fee-for-service business model, than it was any fundamental restructuring.

Now the ground under our feet is liquefying.

The Bad: The Economy

Political rhetoric screaming “Jobs! Jobs! Jobs!” continues to be matched at every level by political action to slash government-dependent jobs, cut funding and limit actions that might actually produce more jobs any time soon. More and more “medically indigent” people are streaming through our doors, and the number and percentage of uninsured still are rising a year after passage of health care reform.

The health care sector of the economy is slowing down. Health care architects and planners are heading to the airport for another trip to Brazil or Dubai or Shanghai, places that are building while capital projects have slowed, suspended and stopped in the United States. The latest job reports show that health care, for the past three years the stable haven of job growth in the troubled economy, has stopped hiring. The looming Medicare cutbacks are troubling executive conference rooms and board meetings across the country.

The worst anxiety is the instability. There is no light yet at the end of this tunnel. No one knows when the economy will turn around, or how much worse it will get before it gets better.

The Ugly: The Politics of the Slowdown

State governments are slashing Medicaid and indigent care budgets, depriving health care institutions of lifelines that help them offset the costs of caring for the poor.

The anti-government and anti-tax mood in the land spills inevitably into health care, which gets so much of its funding through federal, state and local governments.

The ugliest of this is again the instability: It is hard to say when this might get better, whether it might get worse, or how fast, or how bad it might get. It is easy in this atmosphere to write doomsday scenarios.

The Good: A Time to Experiment

Wait, really? Is there something good in this mess? Actually, there is. It is the very instability that is the source of the fear.

Every problem holds the germ of its own solution. We cannot know exactly how health care will change in the coming few years, but we can know that it will change, because it is not possible for it to stay as it is. It is also far more malleable to our attempts to change it for the better than it has ever been.

If we are smart and fast and aggressive and have a clear vision, there is a better chance than ever that we can help it change not chaotically but in ways that will make it better and cheaper for everyone. That’s our job, and this is our chance.

Our Shaky Equilibrium

Systems get stuck. In economic game theory, the technical term for this particular way of getting stuck is a “Nash equilibrium,” named for the mathematician who formulated it, John Nash (portrayed in the 2001 film A Beautiful Mind). Systems consist of a number of different interacting players. In the health care system, for instance, there are hospitals and health systems; doctors and physician groups; and other providers, health plans, employers, government payers, politicians, pharmaceutical companies, various suppliers and manufacturers.

In any system, each player seeks what is best for him-, her- or itself, to survive and grow and do what he, she or it is there to do. But we can’t think about them in isolation, because each player thinks about, and acts on, what he or she thinks the other players’ strategies will be. Each player fights to a position that is the best he or she can do with the information acquired, against the strategies of the other players as they are understood.

Imagine the players in a 3-D landscape, each climbing a peak of fitness, the taller the better. The place that represents “the best they can do” is called their “local optimum,” fitness peaks from which every direction is down. There is no strategy that will take them farther up without first taking them back down into the trough, no way to do better without doing a lot worse for a long time.

But this is not their best possible position. They may well be able to imagine a much better situation for themselves, they may be able to see another peak that is higher, but they have no way to get to it without hurting themselves. So they are doing “good enough” to stay where they are, but they are stuck there. And the players’ local optimum, their stuckness, is locked into the local optima of the other players around them, because each player is watching the others and reacting to their strategies.

So doctors being paid fee-for-service may know that their patients need and deserve more of their time and attention, and the insurance companies less of their time and attention, but if they do this unilaterally, they will make less money and likely be driven out of business. Insurance companies may know that there are less expensive ways to fund health care, but they are paid a percentage of the health care market. If they truly drive their customers to better, cheaper health care, they cost themselves a chunk of their market.

Hospitals are in the same position as doctors: They have to take the “good enough” funding that they can get, and keep begging for more, because to do anything seriously different would so undermine their position that they might have to close their doors, and what good would that do?

This position holds as long as the status quo does, even as it may slowly become less tenable for every player. A Nash equilibrium changes only if something causes the ground under everyone’s feet to shift.

That is what is happening right now.

A Window of Opportunity

For a concatenation of reasons, reasons that neither start nor end with Obamacare, players across health care are feeling the earth move under their feet.

Talk, as I have been talking, to surgeons, hospital executives, health plan administrators, nurses, insurance brokers, employers wrestling with health care costs, health care architects, pharmaceutical companies, device manufacturers, vendors, the people who actually make up this vast rolling chaotic system — and every sector tells the same story: It’s not working for them anymore. They no longer anticipate that the future will resemble the past, or get any better without some big change. Their business models have come loose from their moorings, and the new and safer harbor has not yet been located.

The fact that much of the industry shares this perception is of profound importance. The risk of attempting to stay where they are has come to seem very great, in fact impossibly so: They must change or die. The resistance to change has disappeared — if only they can see what to change to, what course to set that will bring them safely to a new situation.

The health care system is approaching a state of liquefaction. New coalitions of players can form, break and re-form in new relationships, to find better footing for their members. Providers may ally directly with employers, for instance. Broad coalitions of providers may organize ACO-like virtual organizations to offer services to employers or government payers. Health plans may reorganize themselves to directly provide health care services to select covered populations. Disease management organizations may spring up to serve as organizers of services with different incentives.

The resistance to experiment, the defaulting to status quo, is evaporating.

This is temporary. Before too long the system will resolidify in new forms that represent a better solution in one way or another for some or most of its most powerful players. Once it does, it once again will be in a Nash equilibrium, difficult for any player or coalition of players to change.

The time span is short, the speed accelerating. Given the pace of change of a huge, politically embedded system like health care, this is probably a unique opportunity in our professional lives. Once the system re-concretes, it is not likely that we will have another such opportunity any time soon.

We in health care deal in contracts and budgets and programs and percentages, but these numbers and documents represent real life and death, real suffering and poverty. If you hope, in your life, to do good in the world, now’s the time.

 By Joe Flower

 By Joe Flower

Cutting costs does not cut costs. If we hope to steer health care toward a better cheaper future, we have to wrap our minds around this conundrum: Slashing spending does not necessarily improve the bottom line.

Governments in Ireland and the United Kingdom have come up hard against this conundrum. They have both faced soaring deficits due to the economic downturn, because their tax revenues have fallen at the same time that their costs for unemployment and other kinds of social support have risen.

So they both did what might seem like the sensible thing: They attacked the problem by cutting spending, in the professed belief that such a move would also increase the financial markets’ confidence in the future, and thus pump up the economy, reduce unemployment, reduce the interest the government has to pay on its debt, and increase tax revenues.

Result? Their deficits have grown even larger. Why? Because what economist Paul Krugman likes to call “the confidence fairy” never showed up. The austerity measures tanked their economies even further. Firing a lot of people, it turns out, drives unemployment up and tax revenues down. The worsening debt picture increased the cost of borrowing. Many U.S. states are headed down the same path right now, slashing spending in order to slash deficits, and the U.S. Congress is famously and forever wrangling over the same formula.

Aim at Foot. Pull Trigger.

What is to notice here, from our perspective, as people who run health care systems? Two things:

• This conundrum (spending cuts lead to increased spending) happens when an entity cuts spending that is an input to the larger system to which the entity is responsive.
• This is a pattern that repeats in one way or another at all scales in the economy: National governments, states and provinces, health systems, individual businesses

So a government cuts spending drastically, lays off workers, cuts salaries and restricts unemployment benefits. But a cut in spending by the government is a drop in income to the economy as a whole, the very economy on which the government depends for its tax revenues and its borrowing ability. A state finds its austerity spending program helps drive down its tax revenues, and drives up the number of people applying for Medicaid and other support programs. A business faced with a fall in sales lays off workers and cuts back investment in new equipment, inventory and its sales force, and finds that sales decline even further, while it has narrowed its own ability to respond with new products, more efficient and innovative production, or new revenue streams. A health system responds to cuts in reimbursement levels and shifting payer mix with the same tactics, laying off people and cutting back on new investment, and finds that it has actually decreased its efficiency, increased costly mistakes, and cut its ability to respond with new initiatives and revenue streams.

Health Systems: More Complex

But health systems’ cost situation has always been much more complex than other businesses, and has traditionally been drastically different, for one simple reason: Health care providers have been able to decant their excess costs to customers and payers.

Reimbursements are set based on various formulas, and negotiations based on the formulas. These, in turn are based on a number of factors, including such things as a vague idea of how different items generally are priced in a given market, what they cost last year, how much should be allowed for system overhead, and how able the payer is to beat up on the provider. These negotiated reimbursements have not been based on any actual accounting of the incremental cost of producing the service in a given setting. In fact, in the past, most systems have been incapable of producing any such realistic cost accounting. And there has been little real competition of the type that would demonstrate how efficiently a particular product or service could be delivered.

Hospitals and health systems always complain that the reimbursement is far too low; the payers that it is too high. Providers have dealt with the reimbursement squeeze by trying to cut costs in general, through strategic moves to change their payer mix (such as building facilities in growing suburbs and closing facilities in poor areas) and to perform more of well-reimbursed procedures and less of poorly reimbursed ones.

Overall, though, since health systems have continued to survive, we can conclude that the reimbursements have included the cost of their inefficiencies. If they did not, if payers were only paying for what a service would ideally cost in some ideally efficient system, we would all have closed our doors long ago.

No More Cost Decanting

That’s changing. Health care providers can no longer assume that they can decant their costs to the payers. Let’s take a look at how, exactly, that is changing.

There are three ways to cut costs in treating a given patient, and they are quite different in their effect on the provider’s bottom line. These three ways are efficiency, coordination and avoidance.

Efficiency relates to unit costs: How much does it cost to administer a given procedure or test (such as foot amputation for a diabetes patient)? In a fee-for-service system, being more efficient at each service is always a net gain for the provider. Whether the service is not really necessary or helpful to the patient, or even damages the patient, does not show up on the balance sheet. What shows up is whether you can produce the service for less than the average reimbursement for your payer mix.

The more fruitful economic strategy is the one that hospitals have followed for years: Determine which outcomes are already being delivered at a cost substantially below the reimbursement, and do more of those; do less of those that are delivered at a loss. That’s a lot easier than doing the hard work of becoming steadily more efficient at all your processes.

Coordination relates to bundled costs: How much does it cost to produce a particular solution to a problem (such as the entire foot amputation bundle, from intake and diagnosis, through imaging, anesthesia, operation and post-op care, through discharge and maintenance care)? Can we deliver this solution at the right level of acuity? Can we avoid duplicating services?

Avoidance relates to solution costs and system costs. Solution costs answer a different question: How much does it cost to solve the whole problem, including all possible solutions (such as aggressive early treatment of the foot abscesses, to avoid the need for amputation)? System costs answer an even wider question: How much would it cost to prevent the problem in the first place (through aggressive management of the diabetes, including regular foot exams)?

The Cost of Avoiding Costs

Take, for a moment, these few examples: 1) Complex back fusion surgery for simple chronic back pain, which works no better than simple decompression, yet costs up to 10 times as much and kills twice as many people. Or any surgery for simple chronic back pain, which has proven no better than medical management (ibuprofen, yoga, injected steroids) over any time span longer than a few months. Medicare shells out around $2 billion per year for such back surgeries. 2) Heartburn surgeries, shown by a large randomized clinical trial to work no better than over-the-counter drugs like Prilosec and Nexium. 3) Implanted defibrillators, which are literally life savers for most people who receive them. But a major study in the April 7, 2010 issue of the Journal of the American Medical Association found that 22 percent of Americans who get them don’t need them—they don’t fit the “evidence-based” profile of patients who would be helped and not hurt. Implanting the device is a major, invasive operation that involves sticking wires into your heart. It’s expensive, at an average cost of about $40,000, including the device, hospital charges, and the surgeons’ pay. It’s common, at about 100,000 operations per year. If 22 percent are not needed, they represent an unnecessary expense of about $880 million—nearly $1 billion per year for one common, unnecessary operation that, by the way, puts the patients at risk, as any operation does.

So in three quick examples we have identified wasted costs amounting to something like 4 percent of the $100 billion it is commonly thought it would take to pay for the health care of all uninsured Americans.

But traditionally, as a hospital, these are not your wasted costs. In a fee-for-service system, they are decanted to the payer. The only costs that really matter are your costs per reimbursable item: Can you get reimbursed for this? Can you get your costs of production significantly below your reimbursement? If an extra CT scan, or the whole operation, is not strictly necessary, you’re still fine as long as you can get reimbursed for it under the right code.

Cost savings through coordination and avoidance save money for the customers, for the payers and for the system at large, but if you are fee-for-service the money they are saving would have been your money. You could have charged for the inefficiencies, the unnecessary scan, the avoidable surgery. Forming an accountable care organization doesn’t change that. As long as it is fee-for-service, an ACO is just a way to get back a little of that money you didn’t make. You saved costs by driving down your own income.

As we enter a world with more bundled purchasing, value-based purchasing, mini-caps (such as disease management contracts) and full capitation, all of these deviations from a strict fee-for-service model bring the other ways of cutting costs to the fore.

How Do You Make Money by Saving Money?

To make money at coordinating care, or through avoiding solution costs and system costs, you have to be at risk for the cost of that size of solution. To make money at bundled payments, you have to be able to control the costs of all parts of the bundle. To make money through cutting solution and system costs, you have to be at risk for the entire solution. If you help a patient avoid a foot amputation by aggressively treating the foot abscesses, or by avoiding abscesses altogether, in a fee-for-service universe, your bottom line just took a huge hit. In a universe in which you are at risk for the health of that patient, because you have a capitated contract for their diabetes care or for their overall care, your bottom line looks better for every cost you can avoid.

Sometimes this means adding process costs to save the system costs. The Vermont Blueprint is a good example. This project places community health teams in primary care offices. Led by nurses, these teams are charged with tracking chronic patients and offering whatever help they need to manage their situation, as well as coordinating the physicians’ offices with community prevention efforts. The cost, which is borne by the payers, is roughly $350,000 per team per year. Each team can cover about 20,000 people. Do the arithmetic: $17 per patient per year. Result: better health, 22 percent lower cost in inpatient admissions, 36 percent lower cost in emergency visits, 11.6 percent lower costs overall. That’s big.

Or the Special Care Center in Atlantic City, N.J.: This clinic offers special attention, team-based care, and walk-in immediacy to the top 5 percent of health care spenders among the employees of the casinos and of the AtlantiCare Medical System, all for no co-pay, no deductibles, even the drugs free. Result: a 25 percent drop in overall costs for this top-spending 5 percent.

If you are a hospital in a fee-for-service system, those are hits to your bottom line. If you are at risk for those costs, saving them turns into profit.

It’s About to Get Really Complicated

This is about to get really complicated for most of us. If you are Kaiser, or the Veterans Administration, or Group Health of Puget Sound, fully capitated for most of your users, the calculations are complex, but they have a simple basis: How do you deliver the best possible health and health care at the lowest possible cost? Most of us are not in that situation. Most of us are in a fee-for-service universe, and are not going to become another fully capitated Kaiser any time soon. But over the next few years we will find ourselves taking up various types of risk-based contracts, coming to count on pay-for-performance bonuses as a major revenue stream, offering bundled products, and competing for “value based purchasing.” Each of these flips some part of the incentives with some part of our users and some part of our suppliers (including physicians, and other providers with whom we join in bundles or any kind of risk-based contracts).

In the face of this vastly more complex price picture, we realize that we are driving systems whose very complexity makes them relatively inflexible. A car company, for instance, can design a cheap-as-dirt car for the Indian market, say, and a range of products from basic pickups to a line of luxury sedans for the U.S. and world market. No problem. But a health system with some users under risk contracts and others fee-for-service finds those patients intermixed through all their facilities. And the fee-for-service patients from different payers come with different levels and kinds of incentives in their co-pays and deductibles, and different pay-for-performance and value-based purchasing incentives from their plans. It can become very difficult to tell whether any particular avoided cost helps you or hurts you.

Re-designing the system to avoid unnecessary costs is hard enough. Designing it to avoid some costs for some patients and not for others is impossible. Kaiser of Northern California has a medically sound, guideline-based program that helps steer patients with knee problems away from unnecessary and unhelpful MRIs, operations and total knee replacements. This saves Kaiser a lot of money and helps the patients improve their knees. If you put such a program in place, would it save you money or just cost you reimbursements? This can become extremely difficult to tell.

We haven’t been trained for this. Our training and experience is in a different universe. We are just feeling our way forward here.

So What Is a Hospital Executive Team to Do?

Three core strategies:

First, get fierce about efficiency, the first type of cost. Driving down the process cost of everything you do is a good thing no matter how you make your money. And the improvements in quality that come out of such efficiency efforts will help you with pay-for-performance, with ACO kickbacks if you are aiming for them, with all types of value-based purchasing.

Second, clarify your situation strategically, driving toward simplifying your patient flow and major contracts, so that you can easily grasp your cost situation with the various populations you serve.

Finally, judiciously take on risk for costs you can help control. Then vigorously control those costs, using all the tools available to avoid unnecessary operations and procedures, duplicated tests, and treatments at the wrong level of acuity. In becoming at risk for some populations and some parts of your services, you will have to learn to act as if you are at risk for all of it. You will have to drive your whole system toward greater efficiency and effectiveness, at the same time that you are finding various ways to profit from that efficiency and not be driven bankrupt by it.

None of this will be easy, or exactly fun, but it sure will be educational.

(This article first appeared in the American Hospital Association’s H&HN Daily, July 21, 2011)

 By Joe Flower

Lindsey Dunn of Becker’s ASC Review reports on what I had to say to the Ambulatory Surgeons meeting in Chicago the other day:

In a keynote address to attendees at the 9th Annual Orthopedic, Spine and Pain Management-Driven ASC Conference in Chicago on June 10, Joe Flower, a healthcare futurist, discussed trends in healthcare delivery and where he sees the industry moving in the next 10 years.

Mr. Flower said healthcare is currently at a key turning point in its history, and as the industry works to improve quality and lower cost, a number of new healthcare business models will emerge.

Significant changes with or without reform

While the Patient Protection and Affordable Care Act has drawn a great deal of attention to the need of significant changes in the healthcare delivery system to control growing healthcare costs, Mr. Flower said healthcare delivery as we know it will transform even if the PPACA doesn’t survive constitutional challenges.

According to Mr. Flower, the survival of the PPACA will rest in the decision of Supreme Court Justice Anthony Kennedy. Challenges to the PPACA have already reached the Circuit Court of Appeals and if any of the three-judge panels reviewing reform cases overturn the law, the issue would move to the Supreme Court, where Justice Anthony Kennedy, known for being the Court’s moderate Justice, is likely to deliver the swing vote.

With or without an individual mandate, societal changes — most notably the aging of Baby Boomers — will force healthcare payors along with providers to develop new approaches to healthcare delivery to deal with rising costs, said Mr. Flower.

One group particularly driving efforts toward new delivery models are employers. “Across the country, employers have driven down the cost of healthcare by significant percentages by getting involved in the lives of employees,” says Mr. Flower. For example, Boeing has reduced its costs for employees with certain chronic diseases by 20 percent and Safeway reduced its healthcare costs by 14 percent through its CIGNA Choice Fund. Other employers, such as Utah-based Questar have contracted directly with health systems to oversee employee care, said Mr. Flower.

Many states are also working vigorously to lower healthcare costs and this is expected to continue. Massachusetts, for example, beat the federal government in instituting an individual mandate, and Vermont is currently attempting to develop a single-payor program.

The end of fee-for-service

Most new business models introduced by payors, employers and states will move away from the fee-for-service model toward pay-for-performance and bundled or capitated models, all of which redistribute risk among payors, providers and consumers. Consumers and providers will take on more risk, which will lead to different behaviors for both groups and among payors. Some of the new behaviors Mr. Flower expects include:

Consumer behaviors

• Consumer shopping. Healthcare consumers, who will take on more financial responsibilities for care, will shop for providers that provide the best care for the least money.

Consumers will delay expensive surgery. Consumers may do nothing or may choose medical management, which Mr. Flower describes as “ibuprofen and yoga,” over surgery. “[Your] competition does not have to be better, it just has to be cheaper and good enough,” he says.

Doctor’s orders count for less. Mr. Flower believes as patients become more informed consumers, they may view their doctors’ opinions with less reverence than they’ve done in the past.

• Payor behaviors. Increased use of comparative effectiveness research. Mr. Flower said payors, both private and Medicare/Medicaid, will lean on comparative effectiveness research to justify not paying for certain procedures. He noted that comparative effectiveness research funding has increased from $300 million to $1 billion since President Obama has taken office.

Paying for outcomes and quality. Fee-for-service will decrease as payors move to pay-for-performance models. Mr. Flower pointed out this could actually be an advantage for providers that can provide good outcomes.

More aggressive advice. Payors will increasingly talk to consumers about healthcare options before they come to providers for care. Mr. Flower expects the use of health coaches — provided by insurers, employer or even hired by patients directly — to help patients navigate the healthcare space to increase.

• Health system behaviors: Consolidate and diversify. Advanced, integrated health systems will acquire additional providers along the continuum of care, leading to increased consolidation. “Weaker hospitals will not be able to stand this onslaught,” said Mr. Flower.

Accept greater financial risk. Because risk provides greater financial rewards, integrated systems will increasingly enter into bundled and capitated contracts to oversee care from primary care outward.

Focus on systemic cost savings. In order to lower costs and profit more under capitated models, systems will focus on driving out services that create significant costs. To do this, systems will 1) rebuild inefficient processes through Six Sigma, Lean and other techniques 2) better coordinate care to avoid duplicate treatments and ensure right-level treatments, 3) avoid unnecessary treatments, 4) reduce primary care provided in the ER and 5) better control chronic diseases to reduce ER services and admissions related to unmanaged chronic conditions.

What it means for ASCs

Although ASC reimbursements are currently significantly lower than hospitals and a chief bragging point of ASCs, as health systems drive costs out of their systems, they will offer increasingly lower bids to payors in order to win contracts. This means the gap between hospital and ASC rates will narrow.

Where ASC can compete

However, Mr. Flower says several areas exist where ASCs can prosper under new delivery models:

• Bundling. ASCs will be able to compete with hospitals by offering bundled care. These bundles could feature a single price for facility, anesthesia and physician fees and include warranties for guaranteed outcomes and timing.
• Safety. ASCs can compete with hospitals on safety, making the case that surgery centers are safer sites of care for surgical procedures.
• Surgical management. ASCs may also benefit by partnering with hospitals to provide outpatient surgical care efficiently. “[Health systems] are promising to do things they may not be able to deliver,” said Mr. Flower. If hospitals are unable to meet efficiency goals they’ve promised to payors, “[ASCs'] strongest rivals could become their best customers.”

 By Joe Flower

Under the headline, “Medicare Plan for Payments Irks Hospitals,” today’s New York Times details the opposition stirred up by the government’s “value-based purchasing” initiative.  If you’re buying anything (and the US federal government is the largest purchaser of healthcare in the world), on what basis other than value would you want to buy?

The measure at issue is “Medicare spending per beneficiary” during hospitalization, and in the 3 days before and 90 days after. The hospitals and hospital associations that are complaining have, mostly, two beefs: “Our patients are sicker,” and “We can’t be responsible for what happens, and what tests and procedures doctors order, outside our walls.”

The government’s response to the first is that the system will be adjusted for older populations, more acuity, and other variables. The response to the second is more complex, but it amounts to: “Work it out.”

And there is good reason for this. In studies going back two decades, the Dartmouth Group has shown wide disparities in Medicare payments per beneficiary between regions and between hospitals. A recent Institute of Medicine study took the Dartmouth stats and, in response to all the talk from hospitals that “our patients are sicker,” or “but we have to pay for teaching and research,” re-worked them to back out all those confounding factors. The Dartmouth Group’s study showed that the most expensive areas spent three times as much as the least expensive. After the IOM backed out the confounding factors, the data still showed that the more expensive areas spent twice as much.  And the expense does not vary so much with inner-city status or number of illegal aliens as it does with whether health care in a given area is well-organized and coordinated or unorganized and fractured. It’s a really easy pattern to see if you stare at the maps of expense long enough, and know a lot about different healthcare markets.

Lack of care coordination is at the core of the mess healthcare is in, coordination between various parts of the healthcare system locally, on the ground, and coordination between the healthcare providers and the patients’ life. As Atul Gawande put it in his commencement address at Harvard Medical School last week, “It’s like no one’s in charge — because no one is.”

A reasonable response to a hospital or health system that claims, “Our patients are sicker,” is actually, “How did they get that way? What have you attempted to do about it?” That’s reasonable to ask because some organizations of various types, from hospitals to medical groups to employers to unions to state Medicaid administrators, have actually found ways to reduce the burden of sickness, even in very poor populations, for the people who show up in their system, even before they show up — and have saved money, even in cases where they are not getting reimbursed for it.

If an executive for a health system complains, “We don’t have any control over what those doctors do!” it is reasonable to ask, “Why not? What have you tried? What have you not done?” It is reasonable to ask because there are organizations that have been increasingly successful in working tightly with doctors, even doctors who do not work for them. There are many different ways of coordinating care, in hundreds of examples in scores of different contexts around the country, in cities and suburbs, in tribes and in Medicaid populations, for well-employed groups and retired folks on Medicare. No one model for coordinating care works for every market, every physician population, and every patient population, but the models are out there. It’s difficult, sometimes very difficult. It can be expensive, and it’s always time consuming. But other people are doing it, why not you?

Why not you? Let’s be clear: These extra costs do not represent some technical glitch in the reporting system. This is not an accounting argument. These extra costs mean real people with extra sickness, extra suffering, and extra unnecessary deaths. You don’t have to call in your house ethicist on this question. It’s a moral question, but it’s not a hard one. If you are in charge of some piece of the healthcare system, and you are not doing everything you possibly can to coordinate care in order to reduce costs, to reduce suffering and unnecessary death, what’s the moral accounting, for you, personally?

 By Joe Flower

[Note to the reader: Anything that is in italics and square brackets (such as this note) is addressed to you, personally. Yes, you. Try it on, see if it fits.]

Healthcare has, right now, the greatest opportunity we have seen in our lifetimes to make a big change, to rebuild itself in a hundred ways to become better for everyone, and cheaper—to get cheaper by getting better. We’re not talking “bending the cost curve,” cutting a few points off the inflation chart. We’re not talking a little cheaper, a little less per capita, a few percentage points off the cut of GDP that healthcare sucks up. We’re talking way cheaper. Half the cost. You know, like in normal countries.

We’re not talking a little better, skipping a few unnecessary tests, cutting the percentage of surgical infections a few points. No. Don’t even think about it. We’re talking way better. Save the children, help the people who should know better, nobody dies before their time, no unnecessary suffering. Seriously.

I don’t know how high you want to aim, but personally, I think we should aim at least as high as the cutting-edge programs and facilities that are already out there, in the system as it exists today, cutting real healthcare expenses of real people, even “frequent fliers,” by 10, 20, even 30 percent, while making them healthier, much healthier. At least. To me, that’s a wimpy goal, just doing as well as some other people are already doing. Because these programs are just getting off the ground. They’re in the first few iterations. The stretch goal, the goal we can take seriously, is to cut real costs by 50 percent, by making people healthier. There is at least that much potential out there.

All the Ways the System Doesn’t Work

You want a little convincing? Here’s an easy little exercise: You know how the system actually works. [Note: Yes, you do. You’ve been around the block, right?] Pull up an empty notes page on the laptop, iPad, Blackberry, iPhone, whatever, and just start writing a list of all the frustrations you can think of, the thousand and one ways that the system does not drive toward the best health at the least cost for the people it serves—the missed handoffs, the wrong person/wrong drug mistakes, the lack of engagement with the patient’s life, all that. [Note: My guess? You can come up with a better and longer list than I can. Every person I talk to who actually works in health care has buckets of this stuff for me, every time I talk to them.]

Now do a little imagination exercise: Go down that list, stop at each item, and imagine some way in which the system eliminated it. Imagine that there was some systemic change that made it nearly impossible to give the wrong person the wrong drug, some change that meant that everybody got good health coaching, nobody ever got an operation that actually won’t help them, whatever is the inverse of each frustration on the list. Imagine what each of those changes would mean to the effectiveness and cost of healthcare.

Now imagine that somebody, somewhere, has done just that. Somebody is solving that problem, in ways that can be duplicated where you are. Because that is what I am seeing happen all across healthcare, and it’s a breathtaking story.

A Word about Systems

Do you know how many people died in car crashes in the United States in 2010? 32,000. That’s the lowest number since 1949. That’s impressive, but wait: It’s far more impressive than it sounds at first, because people in the United States drove about 10 times as many vehicle miles in 2010 as they did in 1949. In other words, if you drove a car or truck in 2010, you were 10 times more likely to live through each mile you drove than your father or grandfather was 60 years ago.

Why? Are we better drivers? Nah. Seatbelts, airbags, tougher DUI laws, breathalyzers, graduated licensing for teenagers, anti-lock braking systems, better highway designs, crash barriers, rumble strips, median barriers, steel-belted radial tires that don’t blow out, crumple zones, better bumpers…system tweaks that work, that make it 10 times as hard for even a terrible driver to kill himself or you.

It’s the system, not the individuals. We have only started on the thinnest little wedge of that kind of thinking about healthcare. That kind of thinking will take us way beyond “evidence-based medicine” to what is coming to be called “evidence-based health.” Evidence-based medicine does everything necessary to stabilize diabetic shock patients, gets their blood sugar under control, gives them the right prescriptions and sends them home. Evidence-based health goes home with them, if necessary, does whatever it takes to find out why they were in shock in the first place, what it takes to make sure that they fill the prescriptions, eat better, get good advice and don’t end up back in the ER in a month.

The Reform Is Not the Change

The federal healthcare reform law is a catalyst, and enabler, and an accelerator of the change we are going through. It is not the change itself, and is not even the cause of it, because the change is driven by much larger economic and demographic factors, especially by the crushing cost of healthcare. If the reform law were to go away, the change would not go away.

Here’s why the change is actually happening: As all these factors have come together, everybody in the business has come to believe that their usual way of doing business is crumbling under them. Doctors, hospitals, home health agencies, insurers, employers—everyone is desperate to find a new footing. And no one has found a certain footing yet.

Eight Methods for Screwing This Up

So this is, as the sportscasters say, our game to lose. It’s our change to screw up. And we can screw it up, big time. In case you are interested in helping that happen, here are eight ways to go about it:

Pretending it’s not there. Denial. A few tweaks. Business as usual. Same-old. Flavor of the week. Hey, it’s not my problem. I can squeak through to retirement anyway. [Note: Hello.]

Pretending it’s there and we know exactly what it is. We know its address and its measurements, the forms to fill out and the boxes to tick off. It’s all execution. Trust me, I’ve done this before. [Note: Actually, you haven’t. Nobody has.]

Fending off risk. Going for the safe choice. Pulling up the drawbridge. Hunkering down. We can’t afford to extend ourselves in this budget cycle. If we try that, it’ll just piss off the doctors. Better wait until this whole thing settles out. [Note: Let us know how that works out for you. From here, it looks like the waters are rising really fast.]

Grabbing an answer. Downloading a package. Not recognizing the edge of panic in your voice when you say reassuringly, “This is what works. This is the solution.” [Note: When the problem is not simple or static, the solution is not unitary.]

Mistaking it for an opportunity for empire. Building ACOs as regional monopolies to push up our compensation and grab market share. [Note: Consider this. How would your answer change if the question was not “How do we grow the enterprise and make our careers safer?” but instead was truly (truly now—be brutally honest, at least with yourself) “How do we help the people we serve better? How do we ease the suffering? How can we do that for more people? Cheaper? Earlier?”]

Making it a turf war. Grabbing territory. Knocking out the other guy.

Pretending it’s not a turf war, and losing it. Standing by while the other guy eviscerates your hold on the market. [Note: Of course people are going to treat it like a turf war. When everyone’s livelihood is threatened and their value is challenged, that’s what they do. That doesn’t mean you have to. In some games, the only way to win is to not play.]

Gaming the system. Figuring the angles. Making “What’s in it for me? What’s in it for us?” the only questions worth asking. [Note: Here’s the invitation: Play a bigger game. The author Harriet Rubin said a marvelous thing. She said, “Freedom is a bigger game than power. Power is about what you can control. Freedom is about what you can unleash.”]

Consider This

“Since death alone is certain, and the time of death is uncertain, what shall I do?” Yes, I’m quoting somebody. Never mind who. No, don’t write it down. Don’t Facebook it, Tweet it, stick it in Evernote, e-mail it to someone. In fact, don’t even think about it. Don’t think it through, generate options, prioritize. Stop. Just sit with it, just for this one moment: “Since death alone is certain, and the time of death is uncertain, what shall I do?”

Whoever you are, however you have defined yourself so far, you have your hands on some portion of this great rambling chaotic sacred Grand Guignol parade we call healthcare. You have some influence. You can nudge it, poke and prod it, re-shape it, help it grow, make new connections, try new skills. Healthcare is where we bring our suffering, and our tricks to defeat suffering.

We can do this. It is as if the sky has opened up, a break in the pattern; there is an urgency, a swiftness to events, a tide, a moment, a momentum. Let’s roll.

First published in the May 19, 2011 Hospitals and Health Networks Daily, from the American Hospital Association.

Let’s create systems that will take on real risk and that will compete for customers based on real results and real prices.

[This article first appeared in the March 15 edition of the American Hospital Association's H&HN Daily]

The current reorganization of health care could make it better and cheaper for everyone, harnessing real creative and competitive energies to build the “next health care”—or it could lead to local monopolies, higher prices and less real competition where it matters. The many and various moves toward accountability, competition and transparency could defeat themselves. 

The theme of the reorganization is clear: new types of cooperation between physicians, hospitals and other providers that cut down on duplication and unnecessary procedures and tests; that make the system accountable both for processes and outcomes; and that share economic risk among the providers. This new and strange cooperation comes in many types, typically labeled “accountable care organizations” (ACOs), “bundling,” “patient-centered medical homes” (PCMHs) and “co-management.”

All these concepts require new structures: complex organizational, contractual, reporting, liability and payment structures that in one way or another stretch across specialties and providers throughout whole regions. What could these new structures (particularly ACOs) look like if they were to turn evil? They could look like monopolies, like regional health care cartels, capable of forcing other providers into disadvantaged relationships and jacking up prices to health plans and employers.

Legal Hurdles

These new structures are absolutely necessary for the new era. They are key to making the system work. No better alternative has been proposed or seems likely. Yet many of them also seem to be illegal unless laws are reexamined. One Medicare/Medicaid law severely penalizes any institution that knowingly gives a physician any compensation “as an inducement to reduce or limit services.” The law makes no allowance for the possibility that you might be paying a physician a bonus to reduce duplicative, unnecessary or even inappropriate services. Doing anything to limit even inappropriate services could get you bumped from the program and denied any compensation from Medicare or Medicaid.

Other laws make it a crime to pay physicians any inducement to refer their patients to any particular institution. Any kind of “gain-sharing” bonus obviously depends on their referring patients to your institution (you’re not sharing somebody else’s gains), so it’s illegal. The thicket of Stark laws and the prohibitions in California and some other states against the “corporate practice of medicine” can make it tortuously difficult to bring physician practices and other services under the same roof. Similarly, health systems attempting to create comprehensive regional organizations find themselves continually running up against anti-trust laws and in need of waivers from the Department of Justice.

These laws were designed to protect the public from corporate predation and monopoly, but they represent an outmoded concept of how health care should be organized—a view of health care as a cottage industry built out of small, unrelated entities. For the new era to work, these laws and regulations must be changed.

At the same time, those laws and regulations had a purpose: to restrain health care organizations from enriching themselves at the expense of the public. Without them, we are left with only our good intentions and high moral stature.

Not for Comfort

We are all homo economicus—you, me, the guy down the block and all the organizations we work for, whether they are for-profit or nonprofit. Nonprofit status does not keep us from competing for what we perceive as best for us personally, or for the organizations we serve. This is only what is best for our customers if we are forced to it, if truly serving our customers is the most efficient path to making ourselves comfortable.

Yes, we all care about the health of the people we serve. We are all in this together, serving the public. Let’s all hold hands and sing one more chorus around the campfire. Then let’s get back to work to create organizations that are not just “not-for-profit,” but “not-for-comfort,” organizations willing and able to take on real risk, to actually compete for customers on the basis of real results and real prices.

Do we need another set of laws to restrain us and make us do the right thing? Mostly, the answer is no. What we need, and what we are getting, is far more vigorous and demanding customers, and something approaching real transparency. If we don’t create a competitive, risk-accepting provider market ourselves, our customers will find ways to create it for us.

Redesigning Markets

We don’t need to just build ACOs and PCMHs and OWAs (“other weird arrangements”). We need to redesign regional health care markets to create real point-of-care competition for particular types of care.

ACOs, bundling, PCMHs and co-management are not just the different types of new organizations that are on offer. They also map out the nature of “taking on risk.” It is appropriate for hospitals and health systems to take on a larger share of the provider risk simply because they are usually bigger than the physician organizations they work with. Individual physicians can take on risk appropriate to the size of their business model in the form of performance incentives and per-patient-per-month payments.

The goal: real competition within each region for measurable price and quality goals at the level at which buyers make choices. Let’s unpack this:

Competition. Real competition exists in a given market when the buyers:

• have the ability to make choices (they are not locked in by law, contract or some other constraint);
• have suppliers of comparable goods and services they can choose among; and
• have real information about the costs and benefits of the choices.

Buyers. Buyers are those who choose a product and pay for it. The “buyers” in health care are health plans, employers and government, as well as patients and their families who (together with doctors) drive individual utilization decisions. In a more transparent, “consumer-directed” world, we can expect the health plans and employers, especially, to get very aggressive in shopping for the best health care at the lowest cost.

Region. The definition of “region” (or “buyer catchment area”) varies with the nature of the service. People will travel for laser eye services or hip replacements if there is a much better provider elsewhere. Birthing? You’d better be able to get there after the contractions start.

Measurement. There is no competition if you can’t tell the buyers how much it will actually cost them, and show them how good it is.

Level of choice. For the most part, people are not trying to buy “health care.” They are trying to buy solutions to their health problems. Despite all your efforts at branding, patients usually do not make choices about what is the best system. They ask, “What’s the best place to deal with my particular problem?” In a “consumer-directed” system, an aching back, a diabetes diagnosis, a metabolic syndrome or a pregnancy become conditions that require care. The consumer asks, “What’s the best solution?” Employers and health plans will increasingly be asking that question forcefully as proxies for their employees and members.

If you don’t have each of these elements, you don’t have a truly competitive market. But don’t be surprised when the employers and health plans in your area manage to create competition for you, when you least expect it, against your most profitable service lines.

Beyond “Aligning Incentives”

Finally, in order to create a truly competitive regional market, you must involve the physicians in strategic decision making, simply because you need their support, and people support what they create. Their involvement must go way beyond aligning incentives. This is true whether they work for you or not, or work for some larger entity that you helped create. You can effectively create more doctors by lifting non-medical burdens from them, burdens such as IT, measurement, liability and insurance, either by taking them on directly (if they are on your payroll) or by helping them streamline their practices.

This is what we are seeing take shape across the country: a wholesale reshaping of health care markets, prodded and encouraged by the reform act, but pushed by far more powerful forces in the private, “consumer-directed” and increasingly employer-directed private market. These forces engage us in real change at a much deeper level than legislation ever could. It’s time to get clear on the goal and head there.

 By Joe Flower