iProtean—Health System Strategies and Niche Disruptors

The blog this week is from John Harris, DGA Partners.

 

As health providers adapt to health reform and an increasingly competitive marketplace, strategic responses are starting to come into focus. Some say there will be one successful model, but we are seeing diverse strategies, and the threat of disruption from niche players.

 

Health system leaders must be clear about their strategy and how their competitors may affect them. Here, we explore provider strategies and their implications for health system financing and strategic positioning.

 

Key Provider Strategies

Provider organizations are quickly staking claim to their core strategies to win the local market. Health system strategies with a high degree of physician integration appear on the right half of Figure 1.  Locally, health systems (and independent hospitals) are choosing between a new focus on population health or a more traditional volume focus.

  • Accountable Care: One set of health systems is focusing on developing the capabilities to manage population health, looking to new payment models that reward quality improvement and lower population health costs. Many of these health systems have significant employed or aligned physician networks. Since these models often drive down the use of hospital services, it is critical to gain market share to offset these potential volume decreases.

 

  • Big Fish, Small Pond: Another group is holding to a more conventional volume-focused strategy, investing in physician alignment to secure the health system revenue stream. These health systems often seek to use their local market strength to get reasonable payment rates from health plans.

 

Both of these strategies can be successful, depending on the local market, the organization, and the payer environment.

 

Disruptors and Defenses

Health systems will need to keep an eye on potentially disruptive niche players:

  • Doctor’s Orders: Physician groups can leverage their patient relationships and be rewarded for managing population health.  Patient-Centered Medical Homes, physician-sponsored ACOs and risk deals provide primary care physicians with the opportunity to keep population health savings for themselves, and treat hospitals as cost centers.

 

These physician groups have the potential to compete successfully with hospital systems pursuing an accountable care strategy. While many such physician groups may be small, they could be scrappy competitors, driving down hospital utilization, and shifting referrals to lower cost or more cooperative hospitals.

 

The Defense: Health systems focused on accountable care can defend against these physician initiatives in three ways:

  1. Take steps to expand and strengthen their base of integrated primary care physicians
  2. Move quickly to get their accountable care programs established with physicians in the local market.
  3. Cooperate with and support physician efforts with the goal of gaining market share.

 

  • Focus, Focus, Focus: Focused niche players may be a competitive threat to “Big Fish” health systems because of their ability to offer significantly lower costs than traditional hospitals. These niche players can include specialty hospitals, for-profit hospital chains, free-standing surgi-centers and urgent care centers, among others.

 

As insurers seek to reduce premium for products on insurance exchanges, they are taking steps to make consumers more cost conscious, including deductibles or tiered networks that steer patients to low cost providers. These initiatives may benefit these highly focused niche players, potentially shifting market share in highly profitable services, harming health system financial performance.

 

The Defense: Close alignment with physicians is a core strategy in defending against focused niche competitors. Health systems can continue to influence patient flow through physicians, whether through direct employment or other forms of affiliation and partnership. Integrated electronic health records that increase patient convenience and quality of care can also deliver value and help keep services within your system.

 

An alternative strategy is to partner with the niche players (e.g., urgent care centers or surgi-centers) and bring them into the health system’s offerings. This strategy may be helpful if the health system risks losing other market share if it cannot demonstrate a level of cost effectiveness.

 

Figure 1: Health System Strategies and Disruptors

 

provider-focus

 

 

John Harris is a principal at DGA Partners, a healthcare consulting firm that provides services in strategic, business, financial and facilities planning. Dan Grauman, President and CEO of DGA Partners, appears in many iProtean courses including Value-Based Purchasing & Accountable Care Organizations, Transforming Your Organization into an Integrated Delivery System, Financing Considerations for Integrated Delivery Systems, Affiliation & Consolidation Strategies Part One and Two, and the upcoming course, Employing Physicians. Look for it in your course library in the next few weeks.

 

 

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For a complete list of iProtean courses, click here. www.iprotean.com/index.php/iprotean/onlineCourses/Available_courses

 

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED).  For more information, click here. www.iprotean.com/index.php/conference/conferences

 

For more information about iProtean, click here. www.iprotean.com/index.php/iprotean/demo

 

 

 

iProtean—Mergers: The Reality is Complex

“Excessive market concentration” may be one of the best-known causes of high healthcare costs, reported the New York Times last week (“Health Care’s Overlooked Cost Factor,” New York Times, June 11, 2013). Hospital consolidations have contributed to highly concentrated hospital markets, and consolidations continue today. The article notes there have been more than 1,000 hospital system mergers since the mid-1990s, “often involving dozens of hospitals.”

 

The results of consolidation on these markets are stunning, according to the article’s author.  For example, various studies show that:

  • Hospital prices rise by about 40 percent after the merger of nearby rivals
  • Hospital mergers increase the number of uninsured in the vicinity
  • Market concentration may hurt the quality of care

 

Even though healthcare spending has slowed over the last two to three years, it still “outpaces inflation by a significant margin,” the article said. The author cited a recent report by the Health Care Cost Institute that the increase of healthcare spending of Americans under 65 in the last two years has been driven entirely by rising prices, not by more use.

 

The Affordable Care Act could help reduce prices. Health plans in the health insurance exchanges will be forced to compete on price, causing them to pressure medical providers to limit costs. However, accountable care organizations “may prove anticompetitive,” the author noted, referencing a jump in merger activity in anticipation of the law’s coming fully into effect.

 

So how does this information square with what we reported in last week’s blog? If you recall, we reviewed a new report from the American Hospital Association and the Center for Healthcare Economics and Policy that concluded that mergers “are pro-competitive and fully support the twin goals of higher quality and more affordable health care.”

 

We checked with iProtean expert Marian Jennings (Marian Jennings Consulting) about these apparently contradictory reports. She had this to offer:

 

“I remember to this day the adage of my high school English teacher, that ‘truth is a halfway house between extremes.’  I have found this often to be so—especially in the complex environment in which we work. It may be easier to make it an either-or proposition, but there are kernels of truth in both camps.

 

“Those who tout mergers as a panacea leading inexorably to great efficiencies and quality are at one end. Those who say it is all about market clout are the on other. (P.S., no one has market clout with Medicare, the largest payer by far for most hospitals, and I still don’t know of any systems that get paid anywhere near full cost for Medicaid.)

 

“Hospitals, historically a highly fragment industry with little consolidation, have operated under a oligopsony  (yes, this is a real word = a concentration of buyers) for decades, where Blue Cross plus Medicare plus Medicaid covered more than75 percent of the population in most markets (sometimes are high as 90 percent).  It is amazing that the hospital sector has lasted in as fragmented a state for as long as it has.

 

“Payers are right to scream about all of the cost shifting. And perhaps larger systems are more successful at this than individual hospitals. But the underlying problem is not only system formation, but the ridiculous payment system we have in place, the willingness of private insurers to accept cost shifting for as long as they have, and the inability of most hospitals to at least breakeven on Medicare, their largest payer.

 

“So, the reality is complex.”

 

iProtean subscribers, for more information on mergers and acquisitions, please note the two advanced courses: Affiliation & Consolidation Strategies, Part One and Part Two in your course library. These courses feature Marian Jennings, Lisa Goldstein, Dan Grauman and Monte Dube. In addition to information on the independence dashboard, these experts discuss the continuum of options available to hospitals when considering formal partnerships/consolidations with another organization, emerging models for consolidation and how consolidation affects credit ratings.

 

 

 

For a complete list of iProtean courses, click here.

 

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED).  For more information, click here.

 

For more information about iProtean, click here.

 

iProtean—Mergers and Competition

Although many hospitals/systems currently may be evaluating whether to acquire or merge with another organization, a recent report notes that only about 10 percent of community hospitals (approximately 551 hospitals) have been a part of a merger or acquisition transaction from 2007 and 2012. (“AHA Report Says Hospital Mergers Don’t Harm Competition,” Health Lawyers Weekly, June 07, 2013 Vol. XI Issue 22)

 

But rather than stifle competition in the market, it appears that the overwhelming majority of mergers and acquisitions “are pro-competitive and fully support the twin goals of higher quality and more affordable health care,” according to the report recently released by the American Hospital Association and the Center for Healthcare Economics and Policy. (“How Hospital Mergers and Acquisitions Benefit Communities: A New Report from the Center for Healthcare Economics and Policy,” AHA, April 2013.)

 

The Center for Healthcare Economics and Policy reviewed merger and acquisition data transactions and measured the impact of the transactions by Metropolitan Statistical Area (MSA)—a geographic region with relatively high population density and its core and close economic ties throughout the area. It determined that most transactions have been “modest,” averaging one to two hospitals acquired per transaction.

 

It further noted that of those hospitals involved in a merger and acquisition transaction, all but 20 have occurred in areas where there were more than five independent hospitals. The report authors concluded that “there were plenty of hospitals left following the transaction to maintain a competitive marketplace.”

 

So the question is: what about the effect on competition and service delivery in the markets within which the 20 transactions occurred? Did the merger/acquisition benefit the community, or did it cause the loss of needed services? The authors of the report noted that there is a story behind each of these 20 hospitals—each story compellingly illustrated how the merger/acquisition actually benefitted the community. For example:

  • Nearly half of these hospitals had 50 or fewer beds and may have been struggling to secure essential capital or specialized expertise.
  • Other small or critical access hospitals received a financial commitment from the acquiring hospital/system to either improve cash flow, develop new services, purchase new information systems or, in one case, to construct a replacement hospital with expanded services.
  • Larger hospitals that were acquired or merged with an even larger facility also received similar commitments from the acquiring organization.

 

The report’s authors concluded “The numbers of and the stories behind the transactions demonstrate that mergers and acquisitions are supporting the changing landscape of health in a positive way.”

 

Independence Dashboard

Of particular use to hospitals that may be considering consolidation is an independence dashboard, described by Dan Grauman (DGA Partners) in the iProtean course Affiliation & Consolidation Strategies, Part One:

 

“The dashboard should be customized and tailored around the needs of every specific organization, and it serves as a way for the board to get key assessments and pieces of information from management, on a regular basis—quarterly or semi-annually—about the ability of the hospital to remain independent and to be viable.

 

“The dashboard ought to be organized by the major organizational attributes of a hospital.  The attributes include:

  1. How the organization is doing in its marketplace, and how its patient volume are trending
  2. The stability of its relationship with its physicians and the degree of physician alignment at the hospital
  3. The organization’s financial situation—cash, profitability now and over the next year or two and overall debt and capitalization structure
  4. The readiness level of the organization to deal with the new and emerging payment models—is the entity evolving, transitioning to be able to be ready to handle a population health accountability and management approach?
  5. Each hospital owes it to itself to really take a look in the mirror and judge the effectiveness of leadership, both management and the board.

 

“Metrics and measures that relate to those five organizational attributes ought to be agreed upon, looked at, analyzed and assessed on a regular basis.  If you see deterioration in one or more of those key attributes, it’s probably time to start thinking about affiliating in some way or some form to ensure the long-term viability of the hospital.”

 

iProtean subscribers, for more information on mergers and acquisitions, please note the two advanced courses: Affiliation & Consolidation Strategies, Part One and Part Two in your course library. These courses feature Marian Jennings, Lisa Goldstein, Dan Grauman and Monte Dube. In addition to information on the independence dashboard, these experts discuss the continuum of options available to hospitals when considering formal partnerships/consolidations with another organization, emerging models for consolidation and how consolidation affects credit ratings.

 

 

 

For a complete list of iProtean courses, click here.

 

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED).  For more information, click here.

 

For more information about iProtean, click here.

 

iProtean—Strategic Agility

The shift to value-based purchasing and away from reimbursement based on volume requires hospitals and health systems to transform their processes and capitalize on opportunities in the changing competitive landscape.  The Healthcare Financial Management Association (HFMA) calls this “strategic agility” and recently released an educational report that identifies characteristics of strategic agility. (Heeding the Call for Strategic Agility, Report 1, HFMA, May 2013).

 

Irrespective of market position, reputation, resources and mission, strategically agile hospitals/systems share several foundational characteristics:  creative strategic partnerships, sound investments in system capabilities, progressive asset management, innovative management of the care network and nimble governance.

 

Creative strategic partnerships. Mergers, alliances, and other forms of collaboration between systems are central determinants of future strategy and structure, helping the organization achieve economies of scale. For example, Winona Health in Minnesota has crafted an arrangement with its electronic medical record provider to oversee its entire IT operations and management of the revenue cycle, thus allowing Winona to reap the benefits of sophisticated IT without merging with a larger system.

 

Sound investments in system capabilities. Shifting from volume to value requires a new look at system capabilities.  For example, Memorial Hermann in Houston has efforts well underway to integrate care delivery, physician alignment and its payer strategy. It will accomplish this through its clinical information system.

 

HFMA notes that Memorial Hermann made other early investments to ready itself for population management including installing quality management tools and a clinical quality platform across its physician network, so it could mine important practice-based information. “Like other industry leaders, Memorial Hermann is evolving its focus from systems that monitor operations to applications of technology that drive improved quality and efficiency of care.”

 

Progressive asset management. Capital planning will require new levels of collaboration among clinical, financial and operational leadership. Diverse expertise ensures that decisions about capital take into account the impact on financial performance as well as patient experience. Also, should capital needs, market competition or cash flow rapidly change, the organization must have structures in place that allow it to rapidly adjust. Finally, capital planning efforts should “reflect shifts in strategic prioritization . . . Even the large-scale capital project to-do list of just a few years ago isn’t necessarily the same these days.”

 

Innovative management of the care network.  Hospitals and health systems should apply new levels of rigor to service line review, identifying care delivery deficits and repetitions both within the organization and the community at large. “As hospitals across the country reassess their service mix, many organizations also are exploring ways to transfer, integrate, or co-manage certain aspects of their services with other providers.” Working with other community providers to ensure patients receive needed services enables the hospital/system to maintain or enhance those services related to its core mission.

 

Nimble governance. Boards and executives should be alert to “key missteps” such as underestimating patient care needs under global payments and capitation, overinvesting in vertical integration and failing to effectively manage divergent payment structures simultaneously.

 

The HFMA report characterizes strong governance in a value-driven environment as follows:

  • Ensuring that executives/managers elevate the importance of preparedness
  • Having the right checks and balances in place to respond quickly to competitive threats and opportunities
  • Board member experience and expertise in addition to traditional skills in finance, law and banking to encompass backgrounds in real estate, M & A, industrial engineering and utility management

 

 

To read the full report from HFMA, click here.

 

 

iProtean subscribers, for more information on strategic agility including innovative changes to the care network, please note two upcoming advanced courses: Making Difficult Decisions about Programs and Services, Part One and Part Two. These courses feature Marian Jennings, Lisa Goldstein and Nate Kaufman and will be published in your course library this summer.

 

 

For a complete list of iProtean courses, click here.

 

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED).  For more information, click here.

 

For more information about iProtean, click here.