I’ve been saying it for years (and in 3D and Technicolor in my new book Healthcare Beyond Reform): The Standard Model of Healthcare (the traditional unmodified fee-for-service, commodified, defined-benefit payment system) is broken and doomed. It’s fascinating to hear that even the CEO of Aetna, Mark Bertolini, said exactly that recently at a major healthcare technology conference — and that Forbes, a bastion of business and the private approach to everything, would publish an article on his remarks.At Health 2.0 last fall, Bertolini said that he no longer thinks of Aetna as an insurance company, but primarily  as an information company. This time, he made these main points:

• The end of medical underwriting in the ACA, combined with other demographic, regulatory, and economic factors, made health insurers’ business model increasingly untenable.
• These changes will not go away, one way or another, no matter what the Supreme Court does, no matter who is elected in November. These changes are directly tied not just to legislation but to underlying demographic and economic realities
• This is not a terrible thing.  “We got pulled through the crucible against our will and have been reshaped because of it,” he said. “For most of what has already been implemented, it has been a pretty good thing.”
• Health insurers are unlikely to disappear. But their primary role in the future will be using new technologies to help accountable health systems serve their customers and drive out costs — and the health systems, not the health insurers, will increasingly be the face, the brand, of that improvement.  “We can use technology to make it easier for the consumer. Convenience is the new word for quality.”

He is right on every count, and that is not news. What is news is who is saying it. When the CEOs of companies like Aetna and Cigna, and the CEOs of the many Blues that I have been working with in recent months, show that they understand the size, shape, and power of the changes we are all surfing together, that to me is one more clear sign that this change is happening. There will be no going back.

 By Joe Flower

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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

One of the most common ideas in the whole healthcare financing discussion is a moral one. Why, people say, should my taxes and my healthcare premiums go to take care of the huge medical problems of people who don’t take care of themselves? As one commenter on TheHealthCareBlog.com put it: “…self inflicted injuries to not be covered at all, ideally. If someone drinks their liver away I don’t think we should all have to buy them a new one. Same for smoking.”

This is a common idea, one that seems logical and right on the surface. But there are four assumptions built into it, all four of which have problems:
1) That the “self-inflicted injuries” that people commonly identify (smoking, drinking, other addictions, obesity) actually are major predictors of cost.
2) That we can clearly differentiate “self-inflicted injuries” from other medical problems
3) That to the extent that they are actually “self-inflicted,” the patient could just stop doing them if they just had enough gumption, or enough something.
4) That if our goal is to cut unnecessary medical costs, refusing medical coverage would cut costs.

But each of these four is problematic.
1) The best predictors of medical costs are not smoking, drinking, or obesity, but depression and stress. (“Association Between Health Risks and Medical Expenditures,” http://www.the-hero.org/Research/Studies.htm) So trying to dis-insure “self-inflicted injuries” might miss the target of lowering healthcare costs.

2) Trying to decide what is “self-inflicted” and what is not presents a major problem. A friend has a lifelong condition that gives him excruciating pain. He has struggled manfully (and successfully) against addiction to booze and painkillers to ameliorate his pain. He has always felt bitter toward his father because his father was addicted to booze and painkillers. He recently realized that his condition is genetic, and guessing from some symptoms he observed, realized that his father was fighting the same excruciating pain. His attitude toward his late father changed instantly.

You can easily see other people with addictions and troubles that you don’t have. What you can’t see is what led them to that situation. You may be the very model of the perfect human, with no addictions of any kind, nothing in your life that you don’t want there, and you have never made any mistakes in your life that could have led you down the wrong path. Maybe. But even if you are, who exactly would you want sitting in judgment about which of your medical difficulties are “self-inflicted,” and which are not? Your individual doctor? Or a committee, say? A “death panel?”

3) The idea that people with “self-inflicted” problems such as smoking, drinking too much, other addictions, or obesity could just stop doing them is blatantly, obviously, provably false. And if it is false, then we have no logical or moral basis for refusing to help people who have those problems. Even if they could have avoided those problems by making better choices in the past, it is very difficult to unmake those choices now. They need a lot of help.

4) If your goal is to spend less on these people, making sure they don’t get coverage won’t do it. People with coverage cost the system less than people without coverage. In fact, they cost the system half as much. (http://today.uci.edu/news/2012/02/nr_insurance_120209.php). No matter the source of their problems, self-inflicted or not, it costs less to give people with lots of problems more, smarter, earlier care rather than less — unless your plan is to just take them out and shoot them when they show up in the ER.

So no part of the idea that we can and should reduce healthcare costs by refusing coverage of people with “self-inflicted injuries” is supportable. In the end, it makes no sense.

 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

A reader writes to ask: What about personal responsibility? “I see no movement afoot to require the public to accept or meet norms of behavior that would reduce the need for medical treatment—smoking, excess drinking, use of drugs, over weight, etc. What ever happened to ‘You reap what you sow’?”

Good question. I answered:

Thanks for writing. This is a common concern. It’s often expressed something like, “Why are we paying for all this healthcare for people who won’t take care of themselves?” This seems, at first blush, an obvious question with an obvious answer. After all, as I constantly point out in what you read, vast amounts of healthcare dollars are spent to correct what we might call “self-inflicted lifestyle damage.” Why should the rest of us pay for that? Where is the responsibility?

On inspection, the question is more complex and the answer is not so obvious. Let me try to parse it out. I can think of four related aspects of the question.

1. Their health affects ours. My wife and I had a lovely dinner at a very nice French restaurant on the waterfront here in Sausalito last night. The staff was all French, with those endearing accents. The busboy who set our table, poured the water, took away dirty plates and all that, was Mexican. I talked with him a bit in Spanish about the nice weather. I have no way of knowing his immigration status. Now, if I had my ‘druthers, just as a customer, would I rather that he have good access to healthcare and healthcare advice, be up on his flu vaccinations, be aware of the importance of washing his hands frequently, or would I rather he be a seething mass of communicable disease, compounded by ignorance?

Similarly, why should I wish the best outcomes for the Yakima Valley Farmworkers Collective? Because I drink beer. Ninety percent of the hops in the U.S. come from the Yakima Valley area. Sick and injured farmworkers do not help make hops cheaply and reliably available. In many ways, private health is a public concern. Wanting everyone to be as healthy as possible is not just a nice, charitable feeling. It is a public health concern, as well as an economic concern.

2: Assumptions about will and information. “You reap what you sow” is a very American thought. We like to think that people are completely responsible for their actions, have the ability to change them, and the knowledge that they need to identify what they are doing that is wrong or stupid, and to identify how to correct those actions. And of course in some sense we are, but that sense may not be as universal as we would like to think it is. My wife, Dr. Jennifer Flower, Ph.D., is a psychoanalyst, and we were discussing this just the other night, in the context of an article in the NY Times about Congressman Anthony Weiner. The article asked the question everyone has been asking, “What was he thinking?” They talked to various experts on neurophysiology, compulsive behavior, addictions, and the like, about the changes in the brain and mental patterns that lead to bizarre and obviously stupid behavior like that. That “Jackass” actor presumably knew that getting blind drunk and driving his car at 140 miles an hour was stupid and dangerous and would get him killed. Yet he did it anyway. Repeatedly, to a predictable end. People like that make being on the highway far more dangerous than we would like it to be.

We can now assume that people who smoke have heard that it is bad for them, but many of them don’t really know how they could stop. You and I might think that they should know, but they don’t. Most people who are obese don’t like being obese, don’t know how they got that way, and don’t really see a realistic path to losing all that weight. Again, we might think that we could tell them what to do, but they don’t actually know what to do (and most of the time, we would be wrong about what would actually work).

Assuming that people with behavioral problems could just correct them is not a realistic or fruitful way to frame the thought.

3: Ability to correct behaviors of others. So what do we do to correct those people’s behaviors? History shows us in multiple ways that simply telling them to shape up doesn’t work. Prohibition doesn’t work. Shame doesn’t work. Even good information by itself doesn’t work. The only thing that works is good information, combined with good attention, conveyed in language and modalities that they can hear it, delivered repeatedly by people whom they trust. What it takes is total engagement.

Short of that, changing those folks’ behavior is a pipe dream. The way you and I think they “should” live is completely irrelevant. Our opinions change nothing. “Requiring the public to accept or meet [our] norms of behavior” is a non-starter.

4: Just let them die? What would be the logical result of taking “you reap what you sow” as the driving dictum of the healthcare system? If you have a problem caused by your behavior, you’re on your own. Just suffer and die. This is, in effect, making stupid behavior a criminal offense. Some obviously is, such as drunk driving. But I’m picturing trials before you get treated at all to determine whether your lung cancer came from your smoking or the effluent of the refinery that you lived near; whether your obesity was willful or not.

If we are not going to just tut-tut disapprovingly and cast people who we think caused their own problems out into the cold, then we end up treating them. What’s the cheapest way to treat them? As early as possible. In fact, the absolute cheapest way to treat them is to prevent the behavior from causing a medical problem in the first place, by getting very engaged with them as early as possible, at the primary care level, and in the schools, in the workplace, and in the community. That’s how they essentially ended risky sexual behaviors among gays in San Francisco and across the nation in the late 80s and 90s. There are scores of other examples in the “Healthy Communities” movement.

So the answer to: “Why do we have to pay so much to take care of people who won’t take care of themselves?” turns out to be: Because we have been in denial about the problem. If we truly want to spend as little as possible taking care of bad-behaving people, we need to build better systems for engaging with them earlier, stronger, in their language.

A “nanny state?” What would the Founders do?

By the way, does this sound like a “nanny state”? No, because engaging with the system is still voluntary at every step. It’s a numbers game. There will always be those who can’t or won’t take up the challenge to change their behavior. But it can be clearly shown that you can change the landscape of bad behavior within a population by offering the right kind of help at the right kind of level.

You ask, “Did our founders ever envision a nation that would use the government in the way it has been re: provision of healthcare?” We actually know what the Founders thought. Healthcare of course was a much more primitive matter then, and far less expensive compared to people’s income. But it was a much greater problem for one part of the population that was poor but economically important. So the very first Congress established a single-payer, individual mandate system for them: sailors got a few dollars taken out of their pay every payday; when injured or sick they could go to the sailor’s hospital in any of the young country’s major ports. They took care of the problem.

What would Jesus do?

We also, by the way, have some sense of how Jesus would deal with people who behave badly. When he encountered the accused prostitute, he told her to change her ways: “Go and sin no more.” But first he invited those in the crowd who had never behaved badly to cast the first stone. Then he knelt and began writing in the dust the sins of the crowd, and they melted away. When we are quick to condemn those who behave badly, and try to withdraw our help from them on that basis, this is a lesson worth contemplating. Few of us are as free of bad behaviors throughout our lives as we would like to imagine. Most of us struggle to live a good life. Some of us have had a lot more of a leg up in doing that than others.

So economics, good systems analysis, and a sense of forgiveness at the core all drive us to the same conclusion: The way to drive down costs for people’s unhealthy behavior is not to withdraw services from them, but to get to them earlier with smarter, stronger engagement.

 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