THCB

The Next Health Economy

Screen Shot 2014-06-24 at 6.09.38 AMThere’s a growing view in U.S. healthcare circles that the industry is on the cusp of remarkable – perhaps even revolutionary – transformation. At a recent summit sponsored by the Altarum Institute’s Center for Sustainable Health Spending, speaker after speaker returned to the theme that we are slowly but surely moving from a volume-based system (paying for stuff) to a value-based model (paying for results).

The health sector is moving toward the traditional economic principles of other industries.  Revenues flow to businesses that are high quality, efficient and knowledgeable about customer desires. In other words, high performers reap the financial rewards, not those that are simply doing more. We at PwC describe this future state as the New Health Economy.

Several stars have aligned to make this shift possible. Cost pressures have turned attention to getting our money’s worth in healthcare. Technological advances such as cloud storage, mobile devices and data analytics provide the tools to deliver the right care to the right patient at the right time. And consumers today have both the freedom and responsibility that come with making more decisions and spending their own money.

What was striking at the Altarum summit was the widespread agreement on where American healthcare is headed. Speakers referenced the rise of myriad alternative payment programs, including overall spending growth limits in Massachusetts, site agnostic payments for specialty care such as oncology and provider bonuses tied to patient satisfaction.

But if the destination is clear, the journey ahead remains difficult to navigate. As Peter Orszag, former director of the White House Office of Management and Budget observed, “The worst place to be is one foot on the boat and one foot on the dock when the boat’s moving away from the dock.” So how do we make the leap from the dock of volume-based payments to the value-based model?

There is no single answer but healthcare can find clues – and inspiration – in other industries. Consider banking, music and travel, all businesses turned upside down by the forces now descending upon healthcare. So the question is no longer what, but when and how?

Disclaimer: Ceci Connolly serves on the national advisory board of non-profit Altarum Institute.

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allanJoe FlowerGranpappy YokumCara AlmiJohn Ballard Recent comment authors
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John Ballard
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A short segment was on the radio this morning describing how the “budget” mind-set differs from the more practical (mercenary?) mind-set. Virtually no budgets are “zero-based” in accordance with this Wikipedia definition. Zero-based budgeting is an approach to planning and decision-making that reverses the working process of traditional budgeting. In traditional incremental budgeting (Historic Budgeting), departmental managers justify only variances versus past years, based on the assumption that the “baseline” is automatically approved. By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes. Zero-based budgeting requires the budget request be re-evaluated thoroughly,… Read more »

Granpappy Yokum
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Granpappy Yokum

Could someone give an example of a profession or industry that is not a volume-based system?

Joe Flower
Guest

Obviously when any industry is able to produce and sell more of its product at a price greater than its costs, it makes money on volume. The question in healthcare is really “volume of what?” Your “product,” in any industry, is what you get paid for. Under fee-for-service, the product is doing stuff (procedures, tests, and such) that can be construed to have something to do with the patient’s problem. That is, the product is processes. This would be like getting a fender fixed, and being billed for each piece of sandpaper and can of Bondo. If we could pay… Read more »

Cara Almi
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John Ballard
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BobbyG is right. Joe Flower is all over this. Imagine going through every service, from performing a pregnancy ultrasound to excising a brain tumor, and doing the arithmetic. Run down every step of every task, the labor cost of the person doing it, the actual cost of the supplies involved, then throw in something for overhead and for margin. Add it up to determine how much it costs you to install a hip or repair a hernia. That’s “time-driven, activity-based costing” or TDABC. Thanks for the heads up. I got so tired of reading the same stuff at THCB I… Read more »

allan
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allan

“Imagine going through every service,…” John, that is what the free market does and is one of its most important functions. I am not sure where Joe stands on all these issues. Hospitals today have little knowledge of actual detailed costs nor do they have knowledge of exactly how much money they are making from their different profit centers. What many are trying to do is duplicate the free market in a non free environment which doesn’t work too well. The failure of our hospitals to be knowledgeable about these things is caused by too much intervention and micromanagement that… Read more »

John Ballard
Guest

@allan, I spent my entire working life in the private sector, mostly in retail management and food service. We worked diligently to squeeze a nickle or two out of every revenue dollar and I have combed through more P&Ls than I want to think about. So I have a better than average appreciation for the dynamics and efficiency of the free market. But when I come across phrases like “government shouldn’t interfere, etc” my Libertarian warning light comes on and I start filtering what comes next differently. I agree that hospitals have little knowledge of actual costs and the idea… Read more »

allan
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allan

“I come across phrases like “government shouldn’t interfere, etc” my Libertarian warning light comes on and I start filtering what comes next differently.” John, the problem with that statement is that I was explicit in stating government has its place. You certainly don’t sound Libertarian. With regard to the mingling of profit and not for profit I don’t find much difference between the two though the not for profits have a tax status that permits them to accept tax free gifts. Some major well known medical centers would likely be under water without those endowments. ” I don’t agree that… Read more »

John Ballard
Guest

As I said previously, you and I need to agree to disagree. We are light years apart and do not speak the same language. When I said my Libertarian warning light comes on it doesn’t mean I’m Libertarian. To the contrary, it means I expect a slew of Libertarian arguments that leave me speechless by their ignorance. My non-profit/for-profit observation is that the typical “non-profit” organization is typically a money-laundering center servicing a raft of ancillary for-profit companies, typically a large hospital surrounded by acres of related businesses (profit-centers) with no accountability to, and little coordination with anyone except themselves.… Read more »

allan
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allan

Yes, we will have to agree to disagree, but one inroad to agreement was seen. You seem to recognize the perverse incentives of third party payer. Now, if you could apply that knowledge to the problems we all note in our system you might recognize that our system has not been a marketplace. Then you might be able to follow the chain of events that made prices increase and overall satisfaction decrease. At that time we could more easily debate how the healthcare sector should be managed. What surprises me is that you made no remark about those working people… Read more »

Joe Flower
Guest

Hey, Allan! > I am not sure where Joe stands on all these issues. I suspect that is for two related reasons: 1) A lot of people read about healthcare through a lens “government interference” vs. “free market.” If you read my writing with that lens, you might find yourself wondering, “Okay, what’s he _really_ getting at?” Because I don’t lay out the problem that way at all. When I look at systems that really work and those that really don’t across the world, it is not at all clear to me that you can draw the bright line between… Read more »

allan
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allan

@Joe 1) Joe, stop looking at all the different plans where the lines aren’t bright and start looking at the incentives. Incentives give you the ability to predict what will happen. The two most important incentives are: 1) profit through over treatment: In general provides too much marginal care that in some cases can be useful. There is a paper trail. 2) profit through the denial of care: Dangerous as large amounts of money can be saved by denying necessary care. There is no paper trail, but there were plenty of suits and court decisions that demonstrate this is a… Read more »

Joe Flower
Guest

Thanks for the shout-out, John. Your observations of the how little the healthcare industry understands and speaks the normal language of business, how little it uses such basic concepts of real cost and real margin correlate perfectly with my observations over the years. The reality is that they don’t think that way because they have not had, because that’s not the way they have been paid. Now that is changing, and many of the people running healthcare institutions find themselves playing a game in which they are beginners.

John Ballard
Guest

Thanks for the followups, Joe. After plowing this field for the last several years I’m starting to get tired. Since my wife and I are into Medicare range it’s no skin off my nose what happens with healthcare reform. I’m mostly concerned for our kids and grandchildren. FWIW, I jumped ship this year and enrolled in a Medicare Advantage plan. I sense the ACO concept is beginning to crystallize and the two local systems involved (Piedmont and Wellstar in Atlanta) are both top-notch. I still advise people who travel a lot to stick with original Medicare with a supplement, but… Read more »

allan
Guest
allan

Well, John, I think you mean well too, but meaning well and having a good grasp of the healthcare problem are two different things. I am sorry you think I am being condescending, but I don’t think that is the case. Maybe you are having problems arguing your case and perhaps some of your data is faulty. That is understandable because healthcare wasn’t your life’s work and perhaps your ideas about healthcare are a bit to fixed.

John Ballard
Guest

The defense rests.

allan
Guest
allan

The defense rests. It takes the plea of guilty as charged. 🙂

allan
Guest
allan

“high performers reap the financial rewards, not those that are simply doing more” Who is the judge of high performers? Except for a few stars its difficult to tell because each patient is different and the results might not be completely known for decades. So far quality determinations have been relegated to simple yes/no issues which lead to terrible determinations of quality and lead physicians to focus on those things at the expense of other things that might be more important. Additionally what is good in one patient may not be good in another so the idea might incentive the… Read more »

@BobbyGvegas
Guest

Joe Flower is all over this.

https://thehealthcareblog.com/blog/2014/03/28/strategies-for-doing-more-with-less/

J writes: Edited to point to THCB post …

@BobbyGvegas
Guest

LOL. Well, Had I been able to find the TCHB link, I’d have cited it instead. Y’all need an internal search function. And, comment edit functionality. For a health care tech blog, you’re pretty dated. Maybe you should outsource the commenting to Disqus 😉

John Ballard
Guest

Hits *like*.
(And an edit function would also be nice.)