Tipping point: Hospital resilience in a perfect storm

1Tipping point: Hospital resilience in a perfect storm Briefing paper

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TIPPING POINT: HOSPITAL RESILIENCE IN A PERFECT STORMBriefing paper

Key points• The leading challenge facing U.S. hospitals is negotiating the implications of the

shift from fee-for-service to value-based payments.• This shift will require a complete change of business model, from one that focuses on

individual health interventions to one that provides integrated care.• Hospital executives recognize that current business models must change in the near

future for their organizations to survive.• The experiences of health systems that have adopted integrated care suggest that

the transition will be a long and difficult process and will involve important cultural as well as operational changes.


Reinvent or disappear: The shift to value-based payments

“Everybody understands that the health system cannot continue the way it is,” says Pat Fry, recently retired President and CEO of Sutter Health, one of the U.S.’s largest non-profit hospital systems.

The diversity and depth of the issues facing U.S. hospitals are daunting. In a survey of 300 senior healthcare executives conducted for this research program, a majority of respondents identified a large number of these issues—including talent, data and regulatory changes—as “very” or “extremely challenging” for their own organizations (see chart).

One challenge, however, is more widespread than any other, say survey respondents from every region, type and size of hospital: negotiating the implications of the shift from fee-for-service-based to value-based payments.

The experiences of a small number of organizations (see sidebar, next page) may foretell an end to episodic, reactive medical interventions, typically in response to a pressing need—the characteristic result of fee-for-service medicine. In its place a more holistic approach might emerge: integrated, population-based care. For every individual within the population, such care seeks to conduct the most cost-effective interventions to prevent and treat disease, as well as to promote wellness, based on that person’s specific medical characteristics, e.g., medical history, known risks and any current conditions.1

1 For clarity—except in quotations—this study uses “value-based” as an adjective describing payment and incentive strategies and “integrated, population-based” to describe a healthcare strategy. In practice, value-based is sometimes used to describe the latter as well.

Critical challenges at respondents’ hospitals(% of respondents)

Shifting from fee-based to value-based payments

Rising healthcare costs

Lower Medicare and Medicaid payments

Changing patient demands around service levels, personalisation of care

Planning for new regulations

Leveraging Big Data to inform patient outcomes, payments, business model changes

Managing against more limited operating margins

Managing against key service talent shortages

Capital requirements for technology-related expenses (EHRs, upgrades)

0 10 20 30 40 50 60 70 80

Extremely critical Very critical

Source: The Economist Intelligence Unit survey, 2016


The implications of what is happening are not lost on hospital executives: 61% of survey respondents say the need to move to value-based care has exacerbated pressures on hospitals’ core value proposition. Only 12% disagree.

What would integrated, population-based care look like?

The transition to integrated care has already taken place at a small number of private companies. Clayton Christensen, Kim B. Clark Professor of Business Administration, Harvard Business School, cites InterMountain Healthcare (IHC), a Utah-based health system that encourages members to pay an annual fee and requires them to pledge to engage in certain healthy behaviors in return for complete medical care. He says, “When IHC takes the full financial risk on their own shoulders, if they can help their members stay healthy, they make money. If they can keep members in the system—because they are delighted with their membership—they make money. They ended up transforming their system by this one change.”

At present, no health system has the data and analytics in place to provide completely individualized care. Nonetheless, cost-saving interventions based on known risks are reshaping care. In integrated care systems, prevention and wellness programs are the norm.

The use of multi-clinician care teams is increasingly common as well. Sutter Health’s Advance Illness Management (AIM) system, for example, uses a primary care physician-led virtual team to provide individualized, coordinated medical care—and even contact with social services—for patients with serious chronic conditions who do not yet require hospice care.

Data-driven innovation is also central to successful integrated care. Steven Safyer, President of the Bronx-based Montefiore Health System, says that after exploring how best to improve the care of those with late-stage congestive heart failure, the hospital found that the most effective interventions target behavior among those with an earlier stage of the condition. Accordingly, Montefiore now has more extensive programs aimed at those with a less-advanced form of congestive heart failure.

The use of data does not end with identification of strategies. For example, since its launch, Sutter’s AIM program has been closely monitored to measure a range of outcomes. In that sense, innovative interventions for integrated care providers have parallels with the repeated, small-scale experiments made famous by agile technology companies.

Just as important, says Dr. Safyer, is that integrated care facilities look beyond the confines of a clinic—a particularly important consideration


“The dominant business model is going from fee-for-service to one that is more risk-based.”Kip Webb, North American Healthcare Provider Portfolio Lead, Accenture

for Montefiore, the largest health system in the poorest urban county in the U.S.. For example, because it has found that homeless patients have a much higher rate of hospitalization, Montefiore has opened a small housing office that helps patients with chronic conditions get off the streets. “By having a single premium,” Dr. Safyer says, “I am incentivized to do things that are not billable in a fee-for-service model but have a huge impact on a person’s health. We get people housing; we are in schools; we get people food; we make sure people’s air conditioners don’t have Legionnaires. We provide social services that have an impact but may not be readily available.”

Integrated care can bring substantially better health outcomes. Professor Christensen notes, “If you ask anybody today who provides the best care, most systems on the list are integrated providers: Kaiser Permanente, the Mayo Clinic, the Cleveland Clinic—all have become integrated.” The gains are also financial, says Pat Fry, recently retired President and CEO of Sutter Health: “Here, saving money and higher quality are synonymous.”

Even at a program level, these benefits can be substantial. Sutter’s AIM initiative has cut hospital admissions for those enrolled by over 55% and saved more than $64 million in costs for Medicare since it started up in 2012. Montefiore, meanwhile, saved Medicare $13 million in 2014 even while various metrics related to health in the area improved.

Over the longer term, the gains add up. Lloyd Dean, CEO of Dignity Health, notes that his company’s development of what is now an integrated approach to care began in the 1990s, when it was looking to maintain the quality of care while ending its $1 million per day in losses. Now Dignity Health is one of the US’s largest non-profit health systems. “We had to do a comprehensive analysis of what we were doing and what the value of it was,” says Mr. Dean. “Fast-forward to today, and these are the same issues colleagues are articulating about cost, where you deliver, metrics and access.”

The success of some health systems, however, should not obscure the fact that this is a long, often difficult transition. Nevertheless, “Value-based care is coming,” says Dr. Kip Webb, North American Healthcare Provider Portfolio Lead at Accenture. “The dominant business model clearly is going from fee-for-service to one that is more risk-based.”


Economic context of business model change: Higher costs, constrained payments and new competitors

Rising costs are a long-standing problem and show no sign of letting up. Over the last six years, the Center for Medicare and Medicaid’s (CMS) Hospital Inputs Price Index shows that the cost of operating a hospital has run ahead of general inflation.

Meanwhile, hospitals have been constrained in what they can charge. “Everyone is focused on managing costs,” says Lloyd Dean, CEO at Dignity Health. “Consumers are demanding it; payers are demanding it.” The rise in what hospitals charge for their services since 2008 has been lower than that of the inflation they face, largely due to very low Medicare—and nearly non-existent Medicaid—increases (see chart).

Indices of changes in hospital input prices and hospital prices charged to payers

2008 2009 2010 2011 2012 2013 2014 2015

Medicare prices paid Medicaid prices paid Private/other prices paid Overall prices paid Hospital inputs price index

Source: Center for Medicare and Medicaid Services, Bureau of Labor Statistics

90

95

100

105

110

115

120

125

130

135

Worse still, according to the U.S. government’s Medical Patients Advisory Service, the operating margin for hospitals as a whole from treating Medicare patients amounts to a loss of 5.4%.2 These are worrisome figures for an industry where the typical operating margin is currently between 2% and 4%.

Meanwhile, hospitals are also facing new types of competition for outpatient services. Says Dr. Kip Webb, North American Healthcare Provider Portfolio Lead at Accenture: “In a world of choices, people are increasingly asking, ‘Do I need to go to a hospital for, say, an MRI or can I go to a more convenient center at a price that is OK?’ People want what they want when and where they want it.” An effect of such patient demand: 61% of survey respondents agree that new types of market entrants are now important competitors in outpatient services.

2 “Health Care Spending and the Medicare Program,” 2015.

“Everyone is focused on managing costs; consumers are demanding it; payers are demanding it.”Lloyd Dean, CEO, Dignity Health


Professor Christensen sees the trend as a good example of disruptive innovation. This occurs when firms with new business models begin by providing a small number of high-quality, relatively simple services at competitive prices, then expand their offerings over time and end up as competitors to established players.

Professor Christensen cites Minute Clinic, a walk-in clinic owned by CVS, a pharmacy chain: “If you compare what they were offering ten years ago to now, it is night and day. They do more sophisticated things every year.” While the clinic began by offering care for six, usually minor, acute conditions as well as pregnancy, it now provides diagnosis and treatment for a range of minor conditions and injuries, vaccinations and monitoring of certain chronic conditions.

The traditional business model must go

Unsurprisingly, a lack of confidence is visible among hospital executives. Only half of respondents—and just 44% of those at the corporate level—say their organization is very prepared to address the critical issues facing their hospitals. The problem is particularly acute for small and rural organizations, two groups with substantial overlap. Fifty-eight percent of respondents see current market and regulatory conditions driving the demise of small independent hospitals. Between 2010 and January 2016, 66 rural hospitals—over 3% of the total—closed.3 The National Rural Hospital Association estimates that more than 270 are at risk for the same fate.

Our business model will need to change substantially in the near term for our institution to survive �nancially(% of respondents)

Our business model over the next three years will be:(% of respondents)

Agree

Neither

Disagree

Largely transformed

Somewhat transformed

Fundamentally the same


5832

10

36

45

19

3 “66 Rural Hospital Closures: January 2010–Present,” University of North Carolina University Rural Health Research Program, http://www.shepscenter.unc.edu/programs-projects/rural-health/rural-hospital-closures/ (accessed 28 January 2016).


The clearest sign of the mood of the industry is a widespread conviction of the need to abandon existing business models. A striking 58% of respondents say their hospitals’ business model must change substantially in the near term in order to survive financially. Equally worrying, a mere one in ten is confident that this is not the case.

Executives consider the problems too urgent to wait. Thirty-six percent say that, over the next three years, their business model will be largely transformed and a further 45% believe it will be somewhat transformed. Only 19% expect it to remain fundamentally the same.

Professor Christensen notes, “Hospital executives understand that dramatic business model changes have to be made—both by creating new profit models that reward providers for maximizing consumer health as well as by creating processes that enable them to do that cost-efficiently. In the past, there has always been somebody to bail them out when difficulties arose. Insurance, for example, had the burden of risk in healthcare, then passed that on to employers. Now the latter are getting out of that business, and the system is in real trouble.”

Business model change industry-wide: A lot of action but no clear direction

Survey respondents were asked about nine changes to target markets, service delivery or relationships with other providers—all possibly important elements of a broader reshaping of business models. Respondents say that every one of their hospitals expects to conduct at least one of these over the next three years. On average, each is projected to engage in between two and three changes. Yet, while every hospital

Which of the following will your hospital do in the next three years? (% of respondents)

Increase focus on niche areas of healthcare expertise (e.g. geriatrics, specific chronic diseases)

Increase use of e-health, m-health or other non-traditional methods of service delivery for patients

Use technology to outsource services (e.g. radiology, tele-health consultations with experts at other facilities)

Increase capacity of preventative healthcare services

Increase non-hospital services (e.g. create or expand a provider- owned health plan or pharmacy associated with hospital)

Increase capacity of community-based clinics associated with hospital

Expand alliances with other local healthcare providers

Reduce acute care beds

Engage in M&A/joint ventures with other hospitals, insurers or physician groups

0 10 20 30 40 50


Only 19% of survey respondents expect their business model to remain the same over the next three years.


may be moving somewhere, the industry as a whole lacks clear direction. No single change is being undertaken by a majority of hospitals and most will be pursued by less than one-third.

In the longer term, the situation is much the same. When asked which of eight different broad categories of patient care were likely to see more or less focus at their hospitals in the next ten years, again there is a lot of movement. Every respondent replied that at least one type of care would see a change in emphasis. On average the number was 4.6. At the industry level, though, the numbers looking to increase activity in every field, with slight exceptions, largely cancel out those expecting to decrease it (see chart).

This lack of convergence does not surprise Dr. Webb. He notes that “hospitals right now are in multiple businesses from, for example, taking care of the sickest of the sick to performing elective cosmetic surgery on relatively healthy patients. The first business needs to know how to save lives; the second is more about outcomes and providing a satisfying experience.” As different competitors circle around different business lines, it is hard to decide what to defend and what to let go.

Lack of consensus will work out over time as winners and losers in the current business environment emerge. Of greater concern is that the changes receiving the least attention are those most likely to be needed for hospitals to thrive in an environment shaped by value-based payments.

The leading options respondents selected around business model change are an increasing focus on niche areas and greater use of technology—both for innovative service channels and to enable greater outsourcing. These can certainly be beneficial when taking place within a broader shift toward more integrated, population-based care.

More Same Less

Over the next ten years, will your organisation focus more, the same or less on the following? (% of respondents)

Acute care

Long-term care

Chronic care

General medical and surgical

Palliative/End-of-life care

Behavioural/Mental health

Prevention

Rehabilitation

0 20 40 60 80 100



The data, however, indicate that few seem to be headed in this direction. Just 23% of respondents say their hospitals are looking to increase their non-hospital services; 18% to expand alliances with other healthcare providers; and only 12% to engage in joint ventures, or even mergers and acquisitions, with physician groups, insurers or other hospitals.

Similarly, slightly more hospitals are planning to reduce than to increase their focus on two key integrated care priorities: prevention and rehabilitation (26% to 23% and 30% to 23%, respectively). Finally, only 21% expect to invest in analytics that will improve individual patient diagnosis and associated care plans. Rather than reinventing themselves around integrated, patient-centered care, for the next few years most hospitals are planning to improve components of what they already do.

Underestimating the difficulty of real transformation?

This less-than-dramatic change is consistent with a likely underestimation of how difficult business model change is. In general, notes Professor Christensen, “The worst place in the world you can try to create a new business model is inside of your old business model.” Legacy attitudes, processes, structures, even job roles—among other long-established parts of company culture and practice—individually and collectively inhibit such change. Ostensible efforts at transformation tend, in reality, to be tinkering at the edges.

Business model innovation in healthcare, specifically, is known to be difficult. The reasons are too numerous to recite here4 but the effect is obvious. Thirty-eight percent of hospital executives believe their organizations will be largely transformed in three years. However, the experiences of executives interviewed for this report is that the shift from a fee-for-service to integrated, population-based care takes about a decade.

More recently, even those who appear well suited for the transition have been finding rapid change unexpectedly difficult. Since 2012, half of the 32 original Pioneer Accountable Care Organizations (ACOs)—a program that offered advanced sharing of healthcare savings between CMS and hospitals that realize substantial cost reductions under value-based contracts—have dropped out. Most have migrated to other Medicare shared savings programs that are more appropriate for ACOs making slower progress.

Hospital executives, like all business leaders, says Professor Christensen, “can’t simply will things to happen. Their ability to effect change is directly tied to their understanding of the processes and forces within a company or industry that, when correctly harnessed, cause change to happen.” The experience of those who have been among the early adopters of integrated care can help provide some of that understanding.

4 For a useful discussion of these barriers, see Clayton Christensen, Jason Hwang, and Jerome Grossman, The Innovator’s Prescription: A Disruptive Solution for Health Care, 2008.

“The worst place in the world you can try to create a new business model is inside of your old business model.” Clayton Christensen, Professor of Business Administration, Harvard Business School


Lessons from the pioneers

According to Dignity Health’s Mr. Dean, part of the difficulty for those looking to move toward integrated care is that “there isn’t a perfect model out there. That has made this a slow process.” There are, however, critical lessons to be learned from organizations that have made substantial progress toward integrated, population-based care.

Commitment: Integrated care does not happen by accident or organically. Mr. Fry says, “You have to make a decision. Will you go to population management or not?” Dr. Safyer agrees: “This won’t work if you just have your toes in the water.”

Making that choice might be easier in the difficult conditions facing the sector today. Both Sutter Health and Dignity Health began the process that led toward integrated care amid the difficult financial environment for California hospitals in the 1990s. Montefiore acted in part because local primary care in the Bronx had largely ceased to function. “One of the values of a burning platform,” says Mr. Dean, “is that you focus on the essentials.”

Scale and scope: Integrated, population-based care needs to be comprehensive. This is likely to require health systems to grow in size in order to provide the range of care interventions needed and to develop a sufficiently large population for these to be cost-effective. “You have to have a system,” says Mr. Fry. “You can’t do this if you are independent. Even most accountable care organizations today are not large enough.”

This does not mean everything must be provided in-house. But the need for partners in the care continuum requires a readiness to develop new, complex relationships. “We recognized early on that we could not do it all. We had to discover how to get systems and partnerships in the community,” says Mr. Dean. This is also part of what makes the shift to integrated care difficult: “It is not like something Dignity Health can put its arms around and say, ‘We’re going to do this.’ It involves actors that we do not have control of. It forces sometimes strange bedfellows to work together.”

Culture: The shift toward integrated, population-based care is, foremost, a cultural change. This can elicit substantial opposition. Survey respondents identified resistance from clinical and surgical staff as the leading barrier to business model innovation, while resistance from general and administrative staff came fourth (see chart).

Working with clinicians, however, is crucial, says Mr. Fry: “Anybody who thinks a hospital can run doctors needs to rethink strategy. We have 3,000 doctors in our system and they are not run by any hospital. If you want to make change in a significant way, let them be real partners.”

It may take time for such partnerships to bear fruit. When Montefiore began its transition, recalls Dr. Safyer, it seemed strange to different types of clinical specialists to work together in ways that looked holistically at

“One of the values of a burning platform is that you focus on the essentials.” Lloyd Dean, Dignity Health


the whole patient rather than specific medical problems. It was alien to their previous experience. Working with non-medical staff, such as social workers, was even more so. “We had to win hearts and minds. That didn’t happen overnight. Cultural change lags,” he says. In Montefiore’s case, it took a decade of perseverance, but by 2005, “When in a planning meeting the neurosurgery chief and orthopedist were saying, ‘How can we do less unnecessary surgery?’ you could see there was no turning back.”

Experiment: Because ongoing examination of data is essential to effective integrated care, hospitals need to look for new interventions and track results to see what works best. Dr. Safyer recalls that Montefiore lost money in the first years of its transition because “we didn’t have the expertise.” This was developed slowly through experience, trial and error.

Long-term and ongoing: The organizational shift from fee-for-service to value-based payments and integrated care takes time. Montefiore, Sutter Health and Dignity Health all began the shift in the 1990s. Dr. Safyer estimates that it took until the middle to later part of the following decade before it had been irreversibly embedded in the organization.

Even now pioneers in the shift to value-based care are far from having reached their goals. In 2014, just 15% of Dignity Health’s income came from value-based payments, although the system is much further along in providing integrated care than that figure suggests. By 2020, it intends to receive 75% of income from value-based contracts. At Montefiore—where the payment shift has been quicker because the large majority of its patients are Medicare and Medicaid recipients—value-based payments currently account for 85% of receipts.

The precise configuration of integrated care will continue to evolve. As data accumulate and analytics improve, further cost-effective interventions will be found for health system populations as a whole, particular subsets of patients and, eventually, every individual. As with any experimental field, there is no final template, just an enduring culture of continuing improvement.

What are the leading barriers to effective business model change for your organisation? (% of respondents)

Resistance from clinical/surgical staff

Complexity of existing financial structure

Regulatory impediments/complexity

Resistance from general management/administration

Lack of funding/access to capital

Resistance from community

Lack of talent to create or execute new model

Lack of leadership and strategic vision

0 5 10 15 20 25 30 35 40


“We had to win hearts and minds. That didn’t happen overnight. Cultural change lags.” Steven Safyer, President, Montefiore Health System


Conclusion

“For the most part,” says Dr. Webb, “we still live in a fee-for-service world. Right now, overall, value-based incentives and penalties are rounding errors at the back end. In four to five years, though, there is likely to be wholesale value-based payment, where providers may be taking responsibility for the healthcare of whole populations.”

The challenges facing the hospital sector in the twilight of fee for service are vast: lower income, higher costs, new competitors, coming to terms with regulation and data issues. Looming over them all, though, are the demands of a new type of payment system, which requires a new business model.

So far, integrated, population-based care is the best solution to the challenge of value-based payments. It can also do much to address the cost issues hospitals face by targeting the most cost-effective interventions for individuals across the continuum of care. Finally, because, from the patient’s viewpoint, such interventions are covered by a single, annual premium, he or she is more likely to have all their medical needs addressed within a health system, thereby protecting the system from market disruption.

The transition will be more difficult perhaps than many executives believe. The result, however, is likely to be worth it. Looking at the market from the perspective of an organization that already has extensive experience in the new way of doing things, Mr. Fry reports that, unlike some hospitals “we are not in a survival mode,” because, with integrated, population-based care, “we can deliver what others can’t.”

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This briefing paper was written by The Economist Intelligence Unit and sponsored by Prudential. For more information call Prudential Retirement at 1-800-353-2847 or visit www.Healthcare.PrudentialRetirement.com.

Tipping point: Hospital resilience in a perfect storm

Healthcare

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