Phillip L. Polakoff, M.D.Senior Managing Director Chief Medical ExecutiveHealth SolutionsFTI Consulting

Strategies and tactics to succeed in the turbulent U.S. healthcare market

September 2013

Rx forTransformation

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As a result, both insurers and pro-viders have been under pressure to reverse that trend and move from volume-based to value-based busi-ness models. The 2010 passage of the Patient Protection and Affordable Care Act (PPACA) has added a new sense of urgency, particularly for insurers that now must issue policies regardless of pre-existing conditions and that no longer can enforce annual or lifetime coverage caps.

Coping with these challenges will take time, resources, commitment and leadership, but sticking with the status quo is not a realistic option. The U.S. health industry is in the midst of a full-scale transformation from fee-for-ser-vices medicine to consumer-centered, value-based accountable care. The future of the healthcare market belongs to those payers and providers that can make the strategic changes necessary to position themselves for success.

Healthcare costs in the United States have been rising at an unsustainable pace for years and eating up a growing share of the nation’s

gross domestic product (GDP).

E X E CU T I V E S U M M A RY

OLDER, SICKERAND MORE EXPENSIVE

costs for a growing cohort of elderly dependents.

Healthcare costs continue to be out of control. According to the Centers for Medicare & Medicaid Services (CMS), total U.S. healthcare costs are projected to reach nearly $4.8 trillion by 2021, by which time they will account for nearly 20 percent of GDP (up from less than $3 trillion and under 18 percent of GDP in 2013).

Many more people will be insured. According to the Congressional Budget Office and the Joint Committee on Taxation, the PPACA will lead to 34 million more non-elderly Americans obtaining health insurance by 2021. By that time, approximately 95 percent of all non-elderly legal U.S. residents likely will have health insurance, a significant increase over the 83 percent who were insured in 2011.

The population is aging. The U.S. Census Bureau reported in 2010 that the dependency ratio (the number of people age 65 and older for every 100 people of traditional working age) stood at 22. By the year 2030, the Census Bureau projected this ratio would rise to 35. Over the same period, the Census Bureau also forecast that the proportion of people in the United States age 65 and older would climb from 13 percent to 19 percent of the total population. Since annual per capita healthcare costs tend to be much higher for older adults, these two projections suggest a dangerous scenario in which a shrinking percentage of working adults is asked to shoulder soaring

The massive disruptions facing the U.S. healthcare industry are well-known:

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These macro trends are converging in ways that put massive pressure on all healthcare industry participants — gov-ernment, providers, insurers, employers and consumers. Employers, for instance, are putting pressure on insurers to reduce charges and carry more risk. Insurers are pressuring providers to do the same.

Meanwhile, providers are being asked to take on new financial risks tied to quality of care. By 2017, the PPACA requires Medicare to modify payments to all physicians and physician groups based on risk-adjusted quality and cost metrics. The PPACA already has led CMS to reduce payments for hospitals with what it considers to be excess readmis-sions of patients with acute myocardial infarction, heart failure or pneumonia. CMS has proposed expanding this list of applicable conditions for fiscal year 2015.

All this has pushed payers and providers alike to take dramatic and innovative steps to reduce costs while improving quality. In California, for example, Blue Shield has tried to improve outcomes for knee and hip replacement surgeries for California Public Employee Retirement System (CalPERS) retirees by moving toward a centers of excellence strate-gy. Studies have shown that hospitals that specialize in certain procedures, and perform a high volume of them, frequently are able to achieve better outcomes at a lower per capita cost than hospitals that perform only a limited number of such procedures each year. Blue Shield identified 16 facilities with a record of strong results for knee and hip replacement surgeries, and according-ly, announced that it no longer would fully cover CalPERS members’ costs for these procedures if performed at other facilities.

An analysis by outcomes research com-pany HealthCore, Inc. showed that this strategy lowered CalPERS’ health plan costs for these procedures by 19 percent (from $35,408 to $28,695) between 2010 and 2011 for participants in a pilot Centers of Excellence program.

Meanwhile, in the Pacific Northwest, Group Health Cooperative began testing evidence-based medicine (EBM) deci-sion tools in 2009 to guide physicians and patients alike in making go or no-go decisions on knee and hip replacement surgeries. An observational study of more than 9,500 Group Health patients compared six-month outcomes before and after the EBM tools were distribut-ed to arthritic patients who were likely candidates for joint replacement. The researchers found that the video-based decision aids sharply lowered surgery rates. Over the six-month course of the study, knee replacement surgery rates dropped by 38 percent and hip replace-ment surgery rates fell by 26 percent. Group Health also found that the cost of caring for these patients fell between 12 and 21 percent.

Given the massive disruptions facing the healthcare industry, many current business models likely will become unsustainable. Almost every healthcare organization will have to develop new strategies, competencies and tactics in order to survive these changes and stay competitive.

The future of the U.S. healthcare indus-try depends upon enhancing the pri-mary care delivery system. The specific challenges, opportunities, perspectives and strategies will vary among organi-zations based upon their particular role in the industry — payer, provider or em-ployer. For example, a mid-sized region-al hospital network might decide that its future hinges upon clinical pathway innovation and better coordination of care, whereas a traditional payer would have little or no influence over either of these levers.

Even within the payer, provider and employer segments, perspectives and strategies will differ for each organiza-tion based upon its respective markets, personnel, infrastructure and capabili-ties. What makes sense for a large insur-er such as WellPoint or Aetna may not apply to a small regional health plan.

That said, there are three overarching strategies that healthcare organizations must pursue in order to succeed in these turbulent times:

Focusing on Customer Centricity

Every type of organization will need to concentrate on empowering individ-ual customers to improve quality and reduce costs.

For payers, this means refining mem-ber segmentation and product design especially for high-cost or high-risk individuals to identify targeted interven-tions. That encompasses more specific treatments that directly help individuals with particular conditions and, there-fore, lead to better outcomes. For providers, this means developing a patient-centered culture in which coordinated teams of physicians, nurses, and non-clinical staff diagnose and treat patients more efficiently. Many providers already have taken steps in this direction and have made the development of this patient-centered culture a major focus for their organization. For large employers, this means mov-ing beyond one-size-fits-all wellness and disease management programs toward more tailored, analytics-based solutions.

There are certain commonalities among all these strategies. For instance, all organizations can benefit by leverag-ing their information technology (IT) resources in a range of creative ways, from using social media to engage with patients to implementing sophisticated informatics applications to pinpoint sources of cost and waste.

HEALTHCARE TRANSFORMATION: THREE STRATEGIES FOR SUCCESS

Life all comes down to a few moments. This is one of them.”

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1— Bud Fox in Wall Street

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Managing risk with new business models

Again, the specific strategies that organizations should use to manage risk will depend upon the role they play in the healthcare market: For payers, this could mean shifting risk toward consumers by using consumer-driven health plans and value-based benefit design while emphasizing cost awareness and the importance

of preventative care. It also could mean repositioning risk to providers by negotiating contracts that include partial or global capitation and pay-for-outcomes models. In a number of high-profile instances, payers have taken even more dramatic steps by entering the provider space, thereby creating new, integrated healthcare systems where payers have direct control over the cost and quality of care. Examples of this vertical integration include Humana’s 2010 acquisition of more than 300 Concentra medical centers and Highmark’s 2013 acquisition of West Penn Allegheny Health System.

For providers, this could mean beginning to view the taking on of risk as an important competitive advantage in the face of declining in-patient revenues; for instance, assessing a fixed fee to cover an employee population instead of charging for each actual service provided. To take on risk profitably, providers need better visibility of the risks they are covering and more efficient ways to treat costly conditions. To do this, providers often must develop innovative capabilities to stratify risk, create predictive models and redesign organizational processes.

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For employers, this could mean shifting more risk to employees by continuing the trend toward high-deductible health plans with health savings accounts (also known as consumer driven health plans or CDHPs). Over the next three to five years, a certain percentage of small and medium-sized employers likely will push employees out of firm-sponsored plans and into the new private health insurance exchanges mandated by the PPACA.

Building ScaleAll types of healthcare players likely will need to make significant investments in the advanced IT capabilities required to facilitate and manage large-scale consolidation: For payers, larger—for example, national—players have a scale advantage as the industry moves to payment for outcomes. This means that, for instance, regional Blue Cross and Blue Shield organizations would pool resources and partner across state lines in order to be competitive.

For providers, this means consolidation will continue. The larger the hospital network, the deeper the pockets to make vital IT and infrastructure investments. Therefore, hospitals will continue to acquire smaller competitors. These larger entities also will increasingly choose to employ physicians directly in order to own the care continuum. For employers, this means combining resources within regions or specific sectors to increase leverage with payers and enhance the ability to manage employees’ healthcare.

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Business process improvement

Healthcare organizations looking to improve business processes could take a cue from ThedaCare, a health delivery system with more than 6,000 employees based in northeast Wisconsin.

A decade ago, ThedaCare seized the initiative and began focusing on improving processes and reducing waste. ThedaCare took the creative step of looking outside the healthcare industry by consulting with a nearby power equipment company that had successfully reaped the benefits of lean management techniques.

Applying the lessons of lean and the Toyota Production System, ThedaCare created its own organization-wide quality improvement initiative, which it named the ThedaCare Improvement System (TIS). Leaders engage staff in week-long intensive process improvement projects that have succeeded in reducing costs, eliminating waste and improving patient outcomes. From 2006 to 2009, TIS enabled ThedaCare to increase employee productivity by 12 percent, allowing the hospital to save more than $27 million.

These cost savings, in turn, have allowed ThedaCare to increase prices at a far lower rate than its nearest competitors. By improving the quality of care even as it keeps its costs among the lowest in the state, ThedaCare has strengthened its relationships with both insurers and patients.

The transformation of the healthcare industry will have different implications for each type of stakeholder. Nonetheless, payers, providers and employers all need to master (or outsource) many of these 10 distinct capabilities in order to cope with major industry changes and shifting risk burdens:

1. Strategic planning — Develop and communicate a clear strategic vision with quantified financial and operational goals, a sustainable operating model, a set of ranked strategic priorities, and a plan to fill any capability gaps that may exist or arise.

2. Innovative product design — Design payment and incentive mechanisms tailored to the organization’s partner mix, population risk profile, governance structure, and/or strategic goals.

3. Effective clinical integration — Evaluate and modify practices to ensure high levels of interdependence and cooperation during transitions of care. Promote the use of evidence-based medicine and collaborative case management.

4. Business process improvement — Revamp service mix, locations and/or the resourcing of clinical services to grow market share, respond to reimbursement shifts and take advantage of changing consumer needs. Improve business processes to maximize purchasing efficiency, for instance, by strengthening alignment with supply chain vendors.

5. Compliance — Build internal capabilities to ensure compliance with key clinical, financial, regulatory and operational performance metrics while mitigating any financial, operational and reputational risks.

6. Population health management and informatics — Mine and share clinical and claims-related information to improve the practice of evidence-based medicine. Elements of EBM include enabling provider benchmarking, segmenting high-risk patients for targeted interventions, and guiding decisions around strategic planning and product development.

7. Infrastructure — Develop the future capabilities and infrastructure to support real-time eligibility decisions and claims adjudication based on episodic care and billing/payments integration.

8. Patient relations — Attract and retain a critical mass of patients, then focus on educating them in order to help them better manage their own health, thereby reducing provider utilization levels, lowering costs.

9. Payer/provider relations — Payers: Must find ways to maximize value by negotiating provider contracts that include some risk-sharing, cost-sharing, and/or pay-for-performance mechanisms; Healthcare systems: Must be able to select, recruit, sustain and motivate physicians and other providers by finding ways to align their interests with strategic organizational goals.

10. Broad stakeholder relations — Articulate a persuasive organizational vision and strategy to potential investors. Manage potential public relations issues quickly and effectively. Promote organizational achievements within the broader healthcare community while managing a productive dialogue with government regulators.

TEN CAPABILITIES TO ENABLE HEALTHCARE TRANSFORMATION

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CAPABILITIES IN ACTION As mentioned at the right, the diversity and scope of the healthcare industry make it impossible to recommend a general course of action for every player. Yet we can illustrate the ways in which advanced organizations are leading the way to healthcare’s future by establishing or strengthening some of the capabilities listed at right.

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Population health

management (PHM) and informatics

A large, regional health plan implemented an analytics-based PHM program for 100,000 people in an employer group. The PHM program analyzed data from multiple clinical sources to produce a baseline snapshot of the population’s disease conditions and the share of total spending represented by each disease.

This analysis allowed the health plan to identify three of the most expensive conditions and develop guidelines of care and decision support tools to eliminate waste by reducing the number of unnecessary

procedures. For example, the data showed that approximately 15 percent of heart catheterizations during a two-year period had been performed in the normal course of care (i.e., in non-emergency settings on patients without previous interventional treatment for coronary artery disease) without a preceding stress test. Since a simple stress test might have shown that some of these catheterizations were unnecessary at the time they were performed and because the catheterizations performed without a stress test accounted for $3.6 million in healthcare costs, the data analysis enabled the insurer to identify a significant potential source of savings. As the health plan becomes more proficient in analyzing the performance of various providers, it intends to focus on identifying the most efficient providers — those capable of controlling costs without undermining quality — and creating a network model based on bundled payments for the total cost of care. This PHM program has the potential to reduce the insurer’s total annual health expense by up to 2.5 percent.

Effective clinical integration

Geisinger Health System defines itself as an integrated health services organization that serves more than 2.6 million residents in central and northeastern Pennsylvania. Geisinger’s 2011-2015 Vision document notes the organization’s ambition to serve as a regional and national model for integrated health services organizations. At Geisinger, this means a physician-led system that incorporates multidisciplinary physicians’ group practices, clinical programs, a research program and an insurance provider (Geisinger Health Plan) all integrated on a sophisticated IT platform.

As described in Geisinger’s 2011 system

report, one of the most powerful elements of the Geisinger system is the standardization of best practices, that is, the creation and deployment of a ProvenCare® model of treating certain conditions (e.g., low back pain) and performing specific procedures (e.g., coronary artery bypass grafts, hip replacements and cataract surgery) with the same protocols at all its facilities.

Developed in partnership between the clinical and health plan divisions of Geisinger, the ProvenCare model requires Geisinger doctors to follow evidence-based best-practice treatment guidelines. In its Frequently Asked Questions section on the ProvenCare system, Geisinger notes that the ProvenCare model holds multiple members of the surgical team responsible for patient care through a system of checks and balances that are documented and cross referenced in the patient’s electronic health record.

ProvenCare has delivered impressive results. In its 2011 system report, Geisinger analyzed 5 years of data available since implementing the first ProvenCare model for coronary artery bypass graft patients and found that ProvenCare protocols had lowered in-hospital mortality by 67 percent and reduced the likelihood that a patient would need blood products during surgery by nearly 50 percent.

Geisinger is so confident that its ProvenCare model will deliver a favorable surgical outcome that it promises to cover the entire cost of any follow-up care provided by a Geisinger clinician or in a Geisinger facility for Geisinger Health Plan members who experience avoidable complications within 90 days of a ProvenCare procedure. (The company notes that it hopes to expand this “warranty” to other members of other insurance plans in the future.)

Geisinger’s ProvenCare program illustrates how healthcare organizations that excel on one of the 10 capabilities to enable healthcare transformation probably will possess other capabilities as well. For example, while the

The ProvenCare model requires

doctors to follow evidence-based

best-practice treatment guidelines.

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For more information and an online version of this article, visit ftijournal.com.

Phillip L. Polakoff, M.D. Senior Managing Director Chief Medical ExecutiveHealth SolutionsFTI Consultingphil.polakoff@fticonsulting.com

The views expressed in this article are those of the author and not necessarily those of FTI Consulting, Inc. or its other professionals.

program also demonstrates strategic planning (capability #1) and innovative product design (capability #2). In addition, the ProvenCare program relies on strengths in IT and informatics (capability #6) to process the data needed to establish the evidence-based care guidelines and track the program’s success through patient electronic medical records. And its pioneering embracement of a pay-for-performance culture surely helps Geisinger differentiate itself and appeal to both patients (capability #8) and payers (capability #9).

NOTHING’S EASY: OVERCOMING OBSTACLES TO TRANSFORMATION

There are two factors that commonly prevent organizations from implementing the changes they should make.

First, the challenges facing healthcare organizations are so enormous that it can be difficult to know where to begin. To prevent paralysis, organizations should assess their core strengths and capabilities in terms of business models, customer centricity and scale as compared with competitors. Based on this analysis, organizations can

review the 10 critical capabilities listed above and choose several that demand primary focus over the next three years. Second, the scope of the challenges ahead favors the larger players; smaller organizations, with fewer resources and less leverage, will face a more difficult road. But even if it looks as though a future merger might be inevitable for an organization to stay viable and competitive, that should not diminish the organization’s determination to adapt itself to the changing environment. Developing the will to change will be advantageous whether the organization ultimately stays independent or joins forces with another organization through merger or acquisition.

FORTUNE FAVORS THE BOLD

As noted, the pace of change in the US healthcare industry is accelerating. The next few years will see major changes in technology, healthcare economics and organizational structure, particularly as the principle changes prescribed by the PPACA take effect.

Organizations should avoid the trap of assuming that current local dominance will grant them immunity to the wider

forces sweeping the industry. At this moment, innovative national clinics are gaining market share from complacent local providers. Since early 2012, for example, Kaiser Permanente has opened four new medical centers in Virginia, Maryland and Washington, D.C. Meanwhile, Mayo Clinic’s CEO is talking about looking beyond Minnesota as his organization contemplates its 20-year expansion plan. Even retailing behemoth Wal-Mart has expressed interest in taking on a larger role in the healthcare marketplace.

Providers that hesitate will find it increasingly hard to recruit the best doctors. They will prefer to join organizations that are tackling change proactively rather than seeking to hold back the tide.

Even healthcare organizations that recognize the urgency to act can freeze as they try to figure out how to prioritize all the changes needed to stay ahead of the competition and cope with the forces transforming the industry. The key to breaking free of that paralysis is to focus on a three-pronged strategy: empower customers, manage risk by deploying new business models, and scale to take advantage of the IT capabilities that are absolutely critical to future success.