Integrated Health System CEO’s Perspectives on Market Share Strategy in The Market Place Ahead: Strategic Application of The Integrated Health System Model
(Pictured: Frauenshuh Healthcare Real Estate Solutions, developed a new 120,000 square feet ambulatory care center in partnership with the Franciscan Health System in Tacoma, Washington. The new ambulatory care center fundamentally changes how care is provided by organizing physician practices into whole floor centers of excellence that support collaborative care and population health management. Segregated patient-only hallways, self-rooming, and expedited registration and check-out procedures enhance and streamline the patient experience. Frauenshuh fully financed the project and provided the hospital with a 50 percent ownership interest in the facility though the contribution of land and equity grant with limited impact on the hospital's balance sheet.)
My conversations with several CEOs of large, regional, integrated health systems have focused on the question, “What is your strategy for acquisition of productive market share given the likely dynamics of a reforming U.S. healthcare marketplace?” Or rather, “How do you expect to acquire the markets you want, leaving what you don’t want to your competitors?”
First, it’s important to define
integrated health system
means: a.) a large, multi-site, regional provider system that employees virtually all clinicians required to meet mission, clinical programming and strategic needs and/or, b.) a provider system, as described, that also owns its own health plan.
The recipe for market strategy did not vary much between and among those consulted. Those that owned a health plan felt they had an advantage for some portion of their target markets, especially Medicare markets.
The ingredients that composed the “recipe” were consistent, clear and concise across many of the executives interviewed.
1. Move up the financial risk ladder
Get as close to the premium dollar as possible (including owning the premium dollar flow if possible). The strategy here is to pursue contracts where financial risk is transferred to the provider system at
revenue realization rates that permit sufficient margins as the health system reduces
and total cost of care rates to full best-practice potential.
The theory of this strategy is that, even though health insurers are under pressures to moderate premium inflation rates, real rates will remain on a positive, but reduced, inflationary slope for the foreseeable future. While health insurers—especially those operating in consolidated provider markets—typically have reasonable visibility on case costs and unit price paid, only the most sophisticated insurers have a handle on total costs of care supplied by integrated health systems for specific disease and health event categories.
Consequently, if the more competitive and attractive integrated systems are able to negotiate revenue realization rates on a positive inflationary slope and, at the same time, succeed with reducing total costs of care, actual and aggregate health system profitability may be sufficient or even superior to historic fee-for-service performance.
2. Get control over total costs of care for high-risk populations
Especially those with chronic conditions:
These health systems understand which clinical cohorts are the high consumers of care, including end-of-life care. Upwards of 75% of all US healthcare costs are attributable to those with chronic diseases/conditions.
These systems seem to have a reasonable handle on where clinical care inefficiencies exist within high risk clinical cohorts and have the ability, through system design and available resources, to intervene and curb inefficient and ineffective utilization behaviors at the individual provider level.
3. Leverage providers through interprofessional team care
Research by my colleagues and me demonstrate that even when health systems employ licensed physician extenders across clinical specialties, few effectively leverage physician potential, meaning, in many instances, there is an excessive and inefficient overlap of work between and among the providers.
Stated simply, physicians are doing work that licensed and trained extenders could do, in many instances. The more sophisticated and mature IHS’ have recognized this potential. They are aggressively re-designing the composition and clinical models of interprofessional teams to exploit the potential, including the re-design of provider compensation plans.
4. Fully develop ambulatory facility and clinical programming models
As cited previously in this blog, integrated health services delivery is largely an outpatient business. It is my opinion that many, if not most, U.S. health systems are behind the curve in their investments in ambulatory facility assets and programming.
Successful strategies typically emphasize fewer, larger, multi-specialty ambulatory centers including urgent care, and for many, full emergency care delivered at some distance from owned hospitals.
The demand for such ambulatory facilities in the U.S. is spring-loaded. I expect a precipitous and pronounced acceleration of investments in advanced, ambulatory destination strategies for U.S. health systems. Those interviewed agree. (See photo)
5. Brand Promise as Strategy
Every successful business in the history of U.S. industry made a brand promise to customers and delivered on it. Healthcare is no different, including pharmaceuticals and healthcare devices.
Leaders of integrated health systems recognize and embrace the value of “the brand”. Effective brand management in healthcare
sends important messages to markets:
- we are comprehensive;
- we are top-quality and we can prove it;
- we are convenient and responsive to your needs;
- we deliver value;
- we will personalize your care;
- if we don’t have what you need we will get you to those who do;
- we are in any insurance plan you choose;
- we are innovators;
- the “triple aim” is our strategy; and
- price and value are transparent
Brand value and brand promise should not be under-estimated as a principal strategic tool. Effective execution on a brand promise leads to brand loyalty and brand “stickiness”.
6. Many Open Doors
Integrated health systems create and exploit multiple “open doors” meaning; they deliver on the promise of multiple, reliable and convenient points of access to the health system. Examples include:
- primary care
- urgent care
- emergency care
- direct access to specific clinical specialties (e.g. orthopaedics)
- cyber access; i.e., on-line access (or telephone access) to diagnosis and treatment that does not require a visit to a practitioner. (see HealthPartners, Twin Cities, progress with “Virtuwell”)
Successful integrated health systems create many open doors to their systems of care. These doors are principally responsive to the users; not necessarily the providers.
The Mastery of Health Informatics
Not I.T. systems, but supported by I.T. systems.
is defined by CEOs as the ability of organizations to ask and answer important questions from the data resident internal to their information systems: billing systems, accounting systems, electronic health records and patient information systems. Effectiveness in this regard requires systems and staff that have not, historically, been available in health systems.
Effective informatics feeds organizational balance scorecards and provides for required ad-hoc inquiries useful for practical decision making.
The art of the scorecard is knowing what outcomes and related metrics should be observed, evaluated and managed; i.e., the most important questions in need of reliable answers to improve the value of decisions made.
apital Asset Leverage
In an article I published with Jay Sterns, head of public finance for Barclays, we examined the question of capital efficiency in integrated health systems.
The working hypothesis was the well-integrated delivery systems should be more capital asset efficient; that is to say given their ability to better control the availability of supply of provider production potential and scheduling and flow of patients through the system, the ability to produce more revenue per unit of fixed asset (i.e., ability to better manage fixed asset turnover rates) should be superior to the traditional community health system design where most physicians are independent and therefore more are likely to compete for “prime-time” procedure room slots and are more likely to compete with their hospital (and other physicians) for profitable ancillary diagnostic and procedural services.
The results of this study showed that for what were categorized as the more mature IHS’ (i.e., those with more time and experience as an IHS) capital efficiency performance was better than that of the less-integrated or less mature IHS’.
Why do leaders of IHS’ see this asset efficiency as important and a strategic advantage?
a) Compressed depreciation curves; i.e., expensive clinical and information technologies, especially, have practical useful lives that will prove to be less than assigned depreciation schedules, due to accelerating innovation and related obsolescence.
a growing need to access less traditional, alternative capital financings at overall costs rates higher than traditional tax-exempt financing rates causes a need for improved fixed asset turnover performance
strategies demanding the deployment of expensive fixed assets to multiple strategic sites for convenience of patients and providers and more effective responsiveness to patients’ expectations and demands, and
d) the need to mitigate the financial risks of high-investment clinical programming; i.e. more capital-intensive clinical services and programs.
9. Leading the Physician Enterprise to its Full Potential
Those experienced in leading integrated health systems recognize the value of a well-structured, well-led organized physician enterprise. I have referred to the physician enterprise within the IHS as the “economic flywheel” and argued that the IHS is a closed economy; the economic productivity of the physician enterprise dictates the aggregate economic productivity and financial performance of the IHS.
High-functioning IHS’ are not collections of independent medical practices. IHS mission, strategy and operations is a team sport.
Leaders of the higher-functioning IHS’ characterize the future potential of IHS performance in a reforming US healthcare marketplace to be encouraged or challenged by:
the ability to get provider compensation plans right; i.e. advancing model design to higher levels of internal incentives alignment (better alignment of provide compensation incentives with those driving IHS economic and financial performance);
harnessing the potential for teamwork, team care and the effective and efficient application of the potential for highly skilled professionals;
c) effective balance of the entire provider enterprise; clinical specialty balance, geographic supply balance and productivity balance as a closed economy The effective balance of supply with demand and access across the continuum of care is more challenging than with the historic and traditional community hospital/independent physician designs;
effective application of total cost of care strategies; team care strategies that effectively manage care across time for challenging clinical populations;
meeting the changing personal and professional life-style expectations of the younger generation of care providers “coming up”; and
developing clinicians as leaders.
Strategic, economic, financial success of an IHS pivots on the successful leadership of the medical provider enterprise.
10. Consolidation of Strategy and Strategic Assets
Under Jack Welch, GE’s strategy required it to be #1 or #2 in market share in any business it was in. As U.S. health systems have grown by mergers and acquisitions, many of the larger find themselves with revenue structures composed of multiple operating units spread over wide geographies occupying less than dominate positions in markets served.
Said otherwise a $5 billion health system with assets spread over ten states holds a strategic and market share potential that differs from a $5 billion dollar health system with assets located within a fifty mile radius of the home office.
There is evidence that larger U.S. health systems are re-shuffling their operating asset portfolios. Catholic Health Initiatives (CHI) comes to mind. Over the last several years CHI has sold assets and left certain markets to re-deploy liquidity gained in new ventures with, presumably, better prospects for improved market position and longer term strategic and financial performance.
Leaders of healthcare financial advising houses indicate more M & A activity on the horizon directed to greater market strength positioning potential.
CEO’s of IHS’ recognize that the integrated model provides performance potential that can produce strategic (and market share) results that are superior to less integrated models and thereby, advantages in the health market place ahead. But, THEY DON’T RUN THEMSELVES; meaning the integrated model is a tool. Performance is dependent upon the operator.
(a) MHA Executive Interview;
(b) Zismer, D.K.; “Brand Loyalty in a Reforming US Healthcare Marketplace-Applications of the Science and Lessons Learned from Other Industries”, PEJ, May/June 2012.
(c) Zismer, D.K., Sterns, J.B., Claus, “Capital Efficiency and the Integrated health System Design: Does the Business Model Design Predict Capital Efficiency Performance in Community Health Systems?”; HFM, July 2011, Healthcare Financial Management Association
(d) Zismer, D.K., Fox, J., Torgenson, P.; “financing strategic healthcare facilities, the growing attraction of alternative capital”; hfm, May 2013, hfm.org