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Castling Partners

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Attn: Elliot Zismer

Minneapolis, MN 55402

612-888-1160

80 South 8th Street
Minneapolis, MN, 55402
United States

(612) 888-1160

Global Healthcare Perspectives

Might health care consolidation be slowing and if so, why and what might it mean? A perspective on where we are, how we got here and what is next.

Daniel Zismer, Ph.D.

Trillion dollar industries that consume significant proportions of the U.S. economy inevitably pursue increasing levels of efficiency requiring ongoing restructuring, known as supply-side consolidation. Eventually, fewer, larger, more efficient producers dominate markets until innovations or major intra-industry “breakthroughs” disrupt the relative equilibrium of products, services, markets and business models, and a new cycle begins.

Health care in the United States is no different. Its need to seek higher levels of economic and market efficiencies was noticeable and observable long before legislated health reform. The drivers are evident:

  • care inflation rates that have out-stripped those of most other goods and services;
  • prices for same or similar services may vary widely within and across geographic markets;
  • a fragmented and inefficient competitive landscape;
  • historically low levels of out-of-pocket financial exposure to those insured; and
  • few constraints on health systems’ abilities to shift costs of negative-margin business to commercial payers.

On the supply-side of the equation (the provider side):

  • it is well accepted that supply stimulates demand; i.e. when health care supply exists, it will usually be converted to demand by the provider-side;
  • historically, policy, payment and consumer-driven incentives have been insufficient to drive the provider side (physicians and hospitals) to higher levels of health services manufacturing and management efficiencies; and
  • despite significant public subsidies of medical education and training, independent physicians have enjoyed relative freedoms to apply their professional interests and capacities to self-directed practice models and productivity profiles.

So, aside from these cursory lessons in health care policy, economics and market behaviors, what’s the point? It’s obvious that the provider and payer sides of the U.S. healthcare system will continue to consolidate at an accelerating rate—hospitals joining together to form and expand systems of care, physicians joining systems of care to form integrated delivery systems and larger, physician-only practices seeking alternatives to “independence” as a driving strategy. This is not new market behavior. 

The difference between then and now is telltale signs that suggest larger health systems’ capacity to integrate additional hospitals or large physician group may be slowing or, perhaps, be nearing an end (at least for some).

Evidence

Consolidation isn’t free, and many large health systems are finding that the next hospital or medical practice integration is weighing heavily on balance liquidity (

[1]

), as well as the organization’s ability to produce sufficient levels of free cash flow going forward. (

[2]

)

There is also emerging evidence, such as in the article, “What doctor shortage? Some experts say changes in delivery will erase need for more physicians” (Modern Healthcare, Nov. 21, 2013), challenging the long-held view that there is a shortage of physicians in the U.S., which may be best addressed with new models of interprofessional team care and modified models of total cost of care management. New models of team care may slow the efforts of U.S. health systems to “buy more doctors”.

As U.S. health systems take on more financial risk through modified approaches to payer contracting (i.e. moving away from fee-for-service contracting models and methods) the incentives to aggressively add new capacity “at any price” may wane.

To participate in payer markets (commercial insurers and/or governmental payers) that are re-structured to shift financial risk to providers requires high levels of health services delivery platform sophistication, including costly information technologies and significant sums of resources dedicated to new managerial competencies; i.e. new core competencies that have their histories more in the realm of public health practice. (

[3]

)

So, is it too late for those who haven’t jumped on the integration bandwagon? Perhaps not, but there may not be an unlimited amount of time to participate effectively in a market consolidation cycle. A risk of waiting too long is market irrelevance.

Physicians will sometimes react to such an assertion with “I have a valuable patient base.” The related question is, who (if anyone) owns patients in the markets ahead? Or, physicians may say, “The hospital CEO said I can sell my practice to the hospital at any time.” “Any time” is too long to wait when faced with a business cycle marked by rapid consolidation. 

Many physicians have also asked, “Are you telling me I have to sell and become an employee of some health system?” Again, the answer is no. However, it is important that physicians understand there may be a price to pay for adherence to a business model that is vulnerable in consolidating markets.

Remember, Lightning Strikes

“Lightning strikes” are good descriptions for market risks for physicians and health systems. A lightning strike is an unexpected, swift and precipitous negative market or policy event—one that threatens the ongoing viability of health services business models.

For example, cardiologists in private practice experienced a lightning strike when those dependent upon the financial margins derived from office-based imaging services experienced swift and steep declines in reimbursements. Other specialties should expect the same. As with Wall Street, no one rings a bell signaling the bottom or top of any market; physicians shouldn’t expect a memo informing them of “time left on the path of private practice.”

Change Management as a Vital Competency

Another observation is the imminent risks derived from a profession that has demonstrated a reluctance to accept, adopt and adapt known clinical (and managerial) best practices, including those available from the successful application of interprofessional team care.

My colleagues and I at the University of Minnesota have demonstrated through several studies undertaken on behalf of MedPAC, that applied care models and methods across clinical specialties are largely idiosyncratic, meaning; “How we do it here is how it’s done.” Care models and methods, including the use of non-physician licensed advance practice clinicians, appear to be driven more by physicians’ individual choices and preferences, interacting with internal practice economics and compensation plans, than by models that seek to apply total physician capacity to its highest and best clinical use within a practice.

A health economist colleague characterized this observation as the “trade guild” phenomenon; physicians learn their craft from observation, training and mentoring by other physicians, apply what’s learned and repeat until faced with overwhelming pressure to change. Such behavior is rational. But unlike the manufacturing of precision medical devices, for example, the practice of medicine holds high tolerances for variations in methods of manufacturing.

More than one medical device company with solid technology and good prospects for success failed due to the risks associated with getting physicians to change their practice patterns and product preferences despite compelling evidence to the contrary.

Conclusion

The goal here is not to challenge independent physicians’ choice of business model or judgment in pursuing their preferred professional path. It is to provide a cogent argument to properly consider the environmental risks to help make informed choices. At the end of the day, one’s professional satisfaction may outweigh the financial risks associated with any turbulent market cycles. Under no circumstances must a professional change if he or she can afford the price that comes with self-determined consistency of purpose and pursuit; meaning “the risks may be worth taking”. However, it must be noted that supply-side consolidation of the U.S. health service delivery industry will not move at a pace that provides for comfortable transitions of all physicians and health systems.  

[1]

Zismer, D.K.; “How Might a Reforming U.S. Marketplace Threaten Balance Sheet Liquidity for Community Health Systems?”; Integrated Health Systems,

Journal of Healthcare Management,

pp. 168-172, Vol. 58, Number 3, May/June 2013

[2]

Zismer, D.K., Beith, C; “Free Cash Flow Productivity and its Connections to US Health System Financial Performance and Strategy in Current and Future Markets-A Macro View of a Potentially Systemic Problem”, Governance Institute, Boardroom Press, Feb. 2014

[3]

Zismer, D.K.; “An Argument for the Integration of Healthcare Management With Public Health Practice”; Integrated Health Systems,

Journal of Healthcare Management

, pp. 253-257, Vol. 58, Number 4, July/Aug. 2013