The distinction between the organizations that provide services and the organizations that manage financial risk for a population has typically been quite clear—until recently. There were, of course, exceptions (the Kaiser and Geisinger systems, for example), but for most of the health and human service field, the lines were clear. Provider or insurer. In fact, just a decade or so ago, there were concerns about the “conflict of interest” in crossing that line.
But the Patient Protection and Affordable Care Act (PPACA) ushered in new thinking about holding provider organizations accountable for population health spending in the form of Medicare accountable care organizations and Medicaid health homes (see Medicare ACOs – The Enrollment & The Savings Are Increasing and The Changing Face Of Medicaid Health Homes—The 2017 Update). And, soon thereafter, Medicare announced its plan to move most of its payments to provider organizations to some form of risk-based contracting (see HHS reaches goal of tying 30 percent of Medicare payments to quality ahead of schedule and Better Care. Smarter Spending. Healthier People: Paying Providers for Value, Not Volume).
That was 2010, which seems like a lifetime ago at this point. We now have over 158 Medicare ACOs accepting downside financial risk. (And 75% of ACOs on the commercial insurance side of the equation.) The Medicare bundled payment program attracted 1,000 participating facilities.
Provider organizations are also working with private employers on the same concept. For example, in 2010, the Cleveland Clinic launched their Program for Advanced Medical Care (PAMC) by providing employees of Lowe’s with a bundled rate for heart surgery. In 2015, hospital system Ascension bought an insurance company (see Ascension Health Subsidiary, Together Health Network, To Acquire Michigan-Based Insurer). And going the full distance, Disney Corporation just announced that they will contract directly with Orlando Health and Florida Hospital to offer HMO plans to 70,000 employees (see Disney Contracts Directly With Orlando Health, Florida Hospital For New HMO Plans).
Those developments are happening at the same time that health plans are asking provider organizations to share financial risk through alternate payment models and value-based reimbursement models. About 59% of primary care practices are participating in VBR (see Payment and Delivery in 2016: The Prevalence of Medical Homes, Accountable Care Organizations, and Payment Methods Reported by Physicians). About 36% of hospitals are participating in VBR (see Journey to Value: The State of Value-Based Reimbursement in 2016). And, from our just-released national survey, 33% of specialty provider organizations are participating in VBR (see Value-Based Reimbursement—The Numbers Are In).
While provider organizations are taking on more risk, health plans are developing and acquiring service delivery capacity. The Optum division of United Healthcare is a good example. When you look at the chronology, they have been building a formidable service delivery system:
2015 – Optum Acquires MedExpress
These acquisitions have put Optum in the position of being the largest primary care provider organization in the United States. (For more on the perspectives of Martha Temple, Senior Vice President, Behavioral Health Services, Optum, at The 2017 OPEN MINDS Executive Leadership Retreat, see The Future Is Now).
This forward integration of risk-bearing capabilities in provider organizations and the backward integration of service delivery capabilities into insuring organizations is upsetting the traditional “value chain” in health care. (For more on Michael Porter’s value chain concept, see There Is No Plan B and The Business Model Transition To Value-Based Care.) The traditional roles in the health care delivery ecosystem are changing – and with it market positioning and sustainability. While this has been happening, the “scale” of the transactions is increasing. At the end of last year, strategists were looking at the effect of Kindred’s sale to Humana (Kindred Announces $4.1 Billion Sale To Consortium, Including Humana & Equity ) and the Optum’s purchase of DaVita (Optum To Acquire DaVita Medical Group For $4.9 Billion).
But, I don’t think this is the end of the disruption of the value chain. There are new developments. Pharmacy company CVS is moving ahead with its purchase of Aetna (CVS Health To Buy Aetna For $77 Billion). A consortium of hospitals has announced they are forming their own pharmaceutical manufacturing company (see Fed Up With Drug Companies, Hospitals Decide to Start Their Own). Pharmaceutical companies are moving in to the digital medicine space (see FDA Approves Abilify MyCite® (Aripiprazole Tablets With Sensor), A Pill With Digital Sensor To Track Oral Antipsychotic Ingestion and Novartis, Pear Therapeutics sign development deal for two digital therapeutics). And tech giants Amazon and Apple are now officially in the health care field (see Amazon, Berkshire Hathaway & JPMorgan Chase & Co. To Partner On U.S. Employee Health Care and Apple is creating medical clinics to offer employees healthcare and test products).
Traditional health care provider organizations are, understandably, rethinking their path to sustainability. Not surprisingly, there was this headline this week in The New York Times – Are Hospitals Becoming Obsolete?. And I read with interest the growing interest of hospitals in community-based programming – Hospitals pressured as insurers pursue more vertical integration and Tenet Healthcare Signals Outpatient Acquisitions Ahead Amid Value-Based Care Push.
So what is an executive team to do when the path to long-term success and sustainability seems at best murky? My three words of advice—planning, partnerships, and nimbleness. In these times, executive teams can’t do enough planning to make sure that every investment dollar (in programs, technology, people, and marketing) gets the best possible return. But planning needs to be driven by clear and quantifiable objectives, informed by market intelligence, and constantly updated using real-time performance metrics. Now is not the time to do less planning, but the time to develop an on-going planning (and course correcting) activity. Don’t forget that “if you don’t know where you’re going, any road will get you there.”
Second is partnerships. Partnerships are key to success in a turbulent market by providing immediate increases (if well constructed) in market footprint; financial and human resources; political and thought leader influence; contracts, revenue, and more. But the partnerships (whether mergers, acquisitions, affiliations, joint ventures, etc.) that an organization pursues should be driven by their strategic goals and an analysis of the resources needed for success. There is a great opportunity cost to the time and money spent pursuing the low-yield partnerships.
Finally, nimbleness. A perfectly good plan with perfectly good partners can be made immediately obsolete by some change in the market landscape. Be quick to correct the course. “Fail fast” by recognizing a “sunk cost” and move on.
For more thoughts on strategy in a disruptive market, check out these resources in the OPEN MINDS Industry Library:
- Leadership Lesson #1 – Don’t Be Surprised
- Be Broad? Be Niche? How?
- No System Too Big? No Niche Too Small? Strategy Challenges Ahead
- Can Small Organizations Survive?
- If 1 In 8 Community-Based Organizations Are Insolvent, The Answer Is?
- David Versus Goliath?
- When ‘Being Acquired’ Is The Best Financial Move
- Planning For The Digital Reinvention Of Your Market
- Jumping The ‘Strategy-To-Execution Gap’?
- The Merger Of Retail With Health Plans-Strategy, Please
And for a first-hand look at how one organization is addressing the changing market, I hope you’ll join me on June 5 at The 2018 OPEN MINDS Strategy & Innovation Institute for the keynote address by Michael G. Griffin, Chief Executive Officer of Daughters of Charity, “Sustainability In A Competitive Market: The Daughters Of Charity Services Story.”