The very forces creating a better, cheaper and more available health care industry also can be used to create monopolies, raise costs and degrade care. Which future strategic model will prevail?
Rapid change is engulfing health care across the United States, but the strategic responses of organizations to these changes are sharply divided. In the shift that has been broadly shorthanded “from volume to value,” many organizations across the country are deeply engaged in moving toward “value” by building new partnerships, affiliations, capacities and economic structures, striving to bring better health and health care to more people for less money.
At the same time, some organizations are using the chaos and fluidity of the moment to double down on the old way, aggressively seeking greater volume reimbursed at higher rates. For now, within their regions, some of these organizations appear to be “winning” at the game, building greater market share and margin and increasing their budgets. But is this in fact the wisest strategy to follow in the long run, not only for their institutions but for the good of their missions and the people they serve?
Moving toward Value
Virtually all serious attempts to answer the question, “Why do we pay so much more for health care in the United States?” have pointed to the competition for reimbursements under a commodified, insurance-supported fee-for-service system. If what you pay for is items off of a list, what you will get is lots of items, especially the more profitable ones. That’s how we end up with a system in which waste (stuff we could simply do without) is pegged by repeated studies at one-third or higher.
So the true measure of the much-touted “volume to value” move is not attitude or pronouncements, but frankly economic: How do you make your money? What proportion of a given organization’s income comes from fee-for-service reimbursement, and what proportion from other revenue streams that in one way or another measure and pay for the value received by the patient? Organizations that have a high proportion of such “value” revenue find themselves making their livelihood by competing to provide that value, rather than by jacking up the volume and cost of profitably reimbursable items.
Given how difficult and complex it is to move health care systems and payment systems into such frankly new territory, it is striking how strongly the movement toward “value-based health care” has emerged in actual structures, agreements, budgets and strategies. As a late 2012 Oliver Wyman report noted, as of that point some 25 to 31 million Americans, roughly 10 percent of the population, were already under the care of some broadly defined ACO or ACO-like organization, and some 45 percent lived in a primary care service area served by at least one ACO.
Not all of these ACOs are “real”; they are certainly not pure ACOs taking risks on the downside as well as the upside throughout all their revenue streams. But even if some of these are just dipping their toes in the water, the numbers still show a strong and early move to the value end of the spectrum.
The numbers of organizations that have signaled their intentions to participate in further rounds of Medicare ACO building are significantly larger, and comprise, on average, much larger systems. And we can add on the value spectrum a wide range of organizations that have moved to bundled payments for a number of major operations or chronic disease management, as well as organizations that are now making a significant amount of their income from such non fee-for-service revenue as prospective payments for patient-centered medical homes.
Private payers across the country have been building more and larger value-based arrangements with providers, such as Blue Cross Blue Shield of Massachusetts’ Alternative Quality Contracts, or Blue Cross Blue Shield of Illinois’ arrangement with Advocate Health Partners in Chicago, Aetna’s private-label ACO with Aurora Health, CIGNA’s with Tenet, or Optum’s many arrangements across the country.
In an excellent column published in the American Hospital Association’s H&HN Daily in September 2012, Ian Morrison described “The Bridge from Volume- to Value-based Payment,” including the difficulties of what some have described as “stepping from one canoe to another in midstream,” and suggested a series of steps and bridges to make this transition manageable. But it is clear that for some the question at this critical moment is still whether to even attempt the transition, or whether instead to compete strongly, old-style, on volume.
Sticking with Volume
Health care is in turmoil, doctors are migrating to sign up with health systems, new systems are emerging, everyone is considering new structures and affiliations. In some markets, some players are using this chaotic environment to restructure their organization to win and win hard — by the old rules. In major reports in The New York Times and other mainstream media, in trade press notes, in my conversations with health care executives across the country, and in casual chatter at the bar at the scores of health care conferences I attend every year, the trend is clear: Many aggressive health care management teams are using increasingly hard-knuckled practices to grow their organizations and survive in these turbulent times.
The details of the drill are familiar: Corral as many docs as possible, buying practices, both primary and specialist. Do whatever it takes, including paying bonuses, to get them to refer to your hospital, your specialists, your labs, your imaging. Do whatever you can to increase admissions, tests, procedures, utilization of all types, while cranking up throughput and holding down length of stay by using quotas, economic feedback to the docs, jawboning and even “de-accessing” docs who don’t get with the program. Squeeze the other guy out of the market as much as possible.
Sounds like a beginner’s guide to survival in the health care world. It’s the way many health care organizations have always competed, but in the last two years the noise of such practices has grown to a crescendo.
Will It Work?
But will they really win? In today’s environment, are these moves strategically wise? These practices are, actually, a bet that the “value” strategy will fizzle, that ACOs and ACO-like structures, as well as bundled payments and other non-fee-for-service revenue sources, will play only a small part in their market. They are especially a bet that customers — individuals, employers, governments, unions, payers — will not find special value in these “value” structures; the “value” structures will fail in the attempt to deliver better health care for less money.
Each of these guesses about the future is probably wrong. The rapid growth, and especially the variety, of such structures and agreements across health care, their wide geographic spread, the economic pressure of the extreme cost growth of health care over the last decades, and what seems to be a near consensus across policymakers, payers and managers of health care that the only way that shows promise in alleviating that cost growth is to somehow get away from the pure fee-for-service system — all these argue that this trend is unlikely to fizzle.
There will be many mid-course corrections, but the “volume to value” trend is not going to go away. The early experience of the arrangements with the longest history (such as Massachusetts’s Alternative Quality Contracts) show that serious care coordination, prevention efforts and attention to quality can deliver services at significantly lower costs, delivering zero premium increases, or even decreases, even while everyone else’s costs continue to rise.
Meanwhile, individual customers are increasingly sensitive to price. It’s a good bet that trend will continue. Especially as the ACA is implemented, it can be expected that a large proportion of those newly insured through their employers or the state exchanges will seek out lower-cost plans with significant deductibles and co-pays, which turns beneficiaries into “shoppers.” Large employers especially are showing a newfound willingness to “shop” for the highest quality/lowest cost providers for such major items as surgeries, transplants and cancer care.
In programs like BCBS of Massachusetts’s “Blue Options” plan, the payer gives the patient plenty of choice: For any given item (a scan, a sleep lab test, a colonoscopy) the payer ranks all providers in the area by quality and cost. Choose a provider ranked low on quality, and you pay the whole fee yourself, as a patient. Choose a high-quality, low-cost provider, and the payer will pay the whole cost, with no co-pay. Choose a high-quality, high-cost provider, and your co-pay will be the entire difference in price. It is easy to see how great the incentive will be for the patient to choose a high-quality, low-cost provider.
Even if the first wave of such arrangements reaches only a minority of the market, that wave as it matures and demonstrates its value will have a hugely disproportionate effect on the rest of the market. It will provide, for the first time, true competition on the basis of cost and quality for the product that customers are actually shopping for — whether that is a particular procedure or test, or more commonly a return to health (“Fix me!”), or maintaining health (“Help me manage my conditions!”). This is the truly “disruptive innovation” in the future of health care.
The competition need not even be in your regional market, as some organizations will find when many of their most profitable cases are drawn off or forcibly directed off by payers or employers to distant providers who have strongly demonstrated their cost/quality value. Companies are increasingly willing to pay employees’ deductibles and co-pays, their air fares and hotel bills, and even kick in an extra bonus, if they are willing to have their operation at some high-quality center that specializes in that operation at a lower cost.
In your home market, it will become increasingly difficult to support any significant price differentials that are not supported by clear, demonstrable value, especially when both payers and employers get active with “shopping options” programs that put some or all of the cost differential on the patient.
As these things happen and the “value” strategies show their value and gain customers, the “volume” strategy will dry up. Late adopters then struggling to shift to the “value” strategy will find it exceedingly difficult. The “value” strategy requires deep organizational learning, staffing, instruction — on all of which the late adopters will be years behind. The strategy also requires new, complex, close affiliations with other providers, as well as payers and customers, many of whom will already have made those affiliations with the competition.
When change roils an industry as complex as health care, there is significant risk to being an enthusiast and early adopter. But there can be even more significant risk to being a late adopter. The early adopters take some chances, sure, but they also enjoy a large first mover advantage in any particular market, snatching up those affiliates, providers, payers and customers who are most ready to move in this new direction. Unless they fail spectacularly, they leave only the harder part of the market to the later adopters.
Is It Right?
There’s another question to ask, though: Suppose for the moment that either strategy would work, at least in the short run. Does our mission tell us anything about which strategy we should employ?
Broadly, across health care, as clinicians and as organizations, we have the charge to provide the best health care possible. I would argue that broadly, across health care, that means providing the best health care possible not just to the people who show up at our door and can pay for it, but to as many people in the regions we serve as possible. And since the high cost of health care is the single most important factor that keeps people from accessing the best health care possible, our charge extends to providing the best health care possible at the lowest cost possible.
As long as health care providers really had no choice in the matter, no way around the fee-for-service system, the question did not arise. But now that there is a way forward, a strategy being demonstrated that seems able to lead us toward better, lower cost health care that is more widely available, I believe that the broad mission of health care makes it incumbent upon us to try.
Hard to Be Hybrid
As difficult as it is to move an organization partially into using “value” revenue streams and participating in value-oriented affiliations and structures, it will prove more difficult to stay that way, in midstream with one foot in one canoe and one foot in another. It is systemically unstable to earn money from revenue streams that interfere with one another.
Revenue streams such as medical home payments, pay for performance bonuses, and shared savings are designed to reduce other revenue streams, especially large ticket revenue streams such as admissions, surgeries and procedures. To the extent that they are successful (and evidence so far is that they are often successful if done correctly), your ability to increase these revenue streams will decrease your fee-for-service revenues.
At the same time, focusing on these new revenue streams requires a serious and thoroughgoing reorientation of the organization toward primary care, prevention, chronic disease management and care coordination. As these revenue streams succeed, the systemic pull will be to move more and more of the business away from fee-for-service as fee-for-service becomes less profitable. Because of their complexity, some parts will always remain fee-for-service, but over time they will become a distinct minority of your revenues and your margins.
Where Is This Heading?
It should be obvious by now that the result of the “volume to value” move will not be bigger empires and more FTEs, but leaner organizations with fewer dollars and fewer FTEs for any given population, not because they are being strangled, but because they are providing smarter, earlier, more efficient and effective care, and have eliminated wasteful care that does not provide real value to the patient. This leanness is not a side effect of this change; it is the point of this change. Working to help your organization have a bigger budget and take in more revenue in caring for the same population is swimming against the tide, and is frankly not helping.
At the same time, this future pictures patients being cared for by more complex organizations, more highly integrated across the continuum of care. The “independence” of any given organization is of little value to the society it serves. Its seamless connectivity with other providers, its ability to coordinate care, is of great value. And the society is getting much better at paying for what it values.
The Difficulty of Mind
This is where the difficulty lies, and it’s a difficulty of mind: These new ways of working often require building super-organisms capable of taking on risk and spreading the labor, the risk and the revenue across multiple providers. These super-organisms must be created by those providers. All those currently independent organizations have to find new ways to cooperate, to surrender some of their autonomy and survivability to the super-organism. And all those current organizations, by definition, are run by people who are very good at the old way, at keeping their current organizations alive.
To make this shift happen requires great imaginal flexibility and boldness from the CEOs of all those independent organizations to see that there is a better way forward, a long-term strategy that will allow their organization to survive at the same time that it better serves the people they purport to serve. This rests most strongly with those CEOs of large medical systems who have the organizational capacity and market strength to lead a whole region in a new direction.
The people who run today’s health care organizations are not the passive sufferers of this process. They are in fact, of all the players involved, the ones who have the most ability to direct the pace and shape of change in their markets. It’s the job that’s been given us, and we need to take it on.
(First published by the American Hospital Association in H&HN Daily 2/14/13