“Winning” by Defeating the Triple Aim

Joe-FlowerYou follow movies? That is, not just watching them but thinking about how they are built, looking at the structure? In classic movie structure there is a moment near the end of the first act. We’ve established the situation, met our hero, witnessed some good action where he or she can display amazing talents but also what may be a fatal weakness.

Then comes the moment: Some grizzled veteran or stern authority brings the hero up short. Think of Casino Royale, that scene where Daniel Craig’s Bond (after those brutal opening scenes) is back in London and is confronted by Judy Dench’s M. Or Obi Wan Kenobi challenging Luke: “You must learn the Force.” Or that moment in the classic Westerns when the tired, angry old sheriff rips off his badge and throws it on the desk, leaving the whole problem to the young upstart deputy. But before he stomps out the door he turns and says to the young upstart, “You know what your problem is, kid?”

And then he tells him what the problem is: not just the kid’s problem, but the problem at the core of the whole movie. He just lays it out, plain as day.

In healthcare, this is that moment. We are near the end of the first act of whatever you want to calloutthis vast change we are going through.

And where are we? Across America, the cry of the age is “Volume to value.” At conferences we all stand hand over heart and pledge allegiance to the Institute of Health Improvement’s Triple Aim of providing a better care experience, improving the health of populations, and reducing per capita costs of health care.

But in each market, some major players are throwing their muscle into winning against the competition by defeating the Triple Aim, by increasing their volume, raising their prices, doing more wasteful overtreatment, and taking on little or no risk for the health of populations. At least in the short term, the predatory strategies of these players are making it more difficult for the rest of us to survive and serve.

I’m not going to name names here. You know who you are. Worse for you in the long run, your customers and potential customers are coming to know who you are, and their strength in the market is increasing every year.

Nap time is over, folks. It’s time to put this discussion in the open.

First Question: Will They Succeed in Defeating the Movement?

These predatory systems are certainly making the movement from volume to value more difficult. Will they succeed in stopping it?

An insight from systems thinking about traffic might be instructive. One way to study traffic is to model it with automata: Create little software bots that mimic the motions and decisions of cars and drivers and set them loose on virtual freeways and streets. If you make them all the same, say all moving at the speed limit when they can, at a certain traffic density they always gridlock. If you make some of them different, if you introduce, for instance, a few slow-moving trucks onto your virtual freeway, the traffic actually moves better as it constantly re-arranges itself to get around them.

Similarly, such predatory systems may slow the rest of us down and be a problem for us, but over the longer term they may well spur faster changes in rival systems and in the customer base that will lead to more rapid and complete change.

Second Question: Will Their Strategy Succeed and Last for Them?

Whether they will succeed really depends on the strength of the other forces in the system — in this case, the forces pushing for lower cost at the same or higher quality.

These forces include employers, other large purchasers such as pension plans, health plans constructing narrow networks, competing healthcare providers, out-of-region and virtual competitors, new market entrants, and individual consumers pushed into narrow network plans with high deductibles and co-pays.

Note who owns the largest “lever and a place to stand” in this concatenation: employers and other large purchasers. They have the direct incentive, the market power and increasingly the information to try new strategies.

Competing structures, including, especially, multispecialty physician groups, are also important in many markets.Why? Because doctors are truly scared. That fear is driving many of them into the arms of hospitals and hospital-based integrated health networks. But the fear is driving others into building their own larger structures and creating specialized accountable care organizations and ACO-like arrangements through them. Increasingly they are seeking direct arrangements with self-funded employers, as with Boeing intheSt. Louis, Seattle and Chicago areas.

The cost crunch driving this price-sensitive behavior will increase as income inequality grows and as more boomers retire. The possibility of “entitlement reform” which unbundles Medicare into a defined-contribution program is slim, but if it happens it will only increase the cost crunch and put more of the decision-making power in the hands of the individual consumer.

The pressure will grow also as buyers become more aware that in healthcare price is truly not a marker for quality, only for market dominance. The prices in healthcare are not justifiable even in terms of the supply chain, as similar institutions in the same or similar markets often have wildly different price structures. In any market, under conditions of full transparency about quality, prices for substitutable products might vary by 50 percent or even 100 percent, not by 500 percent or 1000 percent as they commonly do in healthcare.

Payer and purchaser techniques such as reference pricing, bundled products and medical tourism are capable of picking apart a market and exposing healthcare providers to market forces based on price and quality whether or not those providers wish to be exposed.

Third Question: Does Size Matter?

CEOs of these expanding market dominators will tell you that it’s a defensive strategy: They know that the big crunch is coming, and they are bulking up to own as much of the market as possible as a reserve against that future.

They avoid alternative strategies out of fear: If they engage in risk contracts, if they market bundled products at market prices, if they take on capitated Medicaid contracts, they will be undercutting their ability to extract rentier payments for their market dominance, lower their top line income, and put the organization at greater risk.

Is this true? No. Let’s look at a few reasons why.

First. No, you don’t have to be a certain size, you don’t have to have a certain top line in order to survive. To survive you have to make sure that your top line is greater than what it costs you to bring in that top line. The metaphorical bottom line is the actual bottom line.

Second. Capital costs. Capital costs increase your cost basis more or less permanently. You have to bring in a certain level of business to lay off that bonded indebtedness every year, every month, before you can even think about turning a profit.

Some smart organizations are thinking like this: Look, the environment is changing rapidly. Some parts of what we do (say, primary care for certain populations) are with us more or less permanently, and all signs are that they are likely to grow with time rather than diminish. However we end up getting paid for that, the more efficiently and effectively we can do that, the better off we will be. So this is a good place to take on debt that we know we can service with that line of business, to build whatever is the most efficient business and physical structure for that. (Or we can build a public/private partnership that turns the transaction into someone else’s debt against a leasehold for us.)

Other lines of business, such as specific types of surgery or techniques such as proton beam therapy, have a quite different capital profile. In the changing environment, all techniques that are not truly helpful, that do not have a positive cost/benefit ratio for the customer, are likely to diminish substantially. In the new environment, if the value isn’t there, the volume won’t be there. So in the end, expending scarce capital capacity on building for them may look like you went to a lot of work to weld a ballandchain onto your own ankle.

Third. Different revenue streams have different effects on the bottom line. Let’s look at fee-for-service, bundled products and risk contracts.

If you are getting paid for every procedure and test in a fee-for-service world, it doesn’t matter how wasteful they are, how effective or how efficient, because every expense creates its own addition to the top line, every one of them is reimbursed, and you get paid for your inefficiencies. So as a business proposition, who cares? Volume equals value, at least for you, whether or not it does for your customers.

If you offer a bundled product, the top line is no longer per test or procedure; it is per case. It still doesn’t matter whether the case itself is wasteful. Whether the patient is better off with a new knee is irrelevant financially, but suddenly the efficiency of producing the product (the “total cost of ownership”) is deeply relevant, because every extra CT scan, every mistake, every increased complexity of the operation adds to the cost against a fixed top line. If you can’t get efficient enough to get your true costs below your price (or worse, you don’t know your true costs), then every time you sell that product you are costing yourself money.

If you offer a risk-based product, now your top line is not per case but per life — per employee per month, per Medicaid beneficiary, per patient allocated to your accountable care organization. So the cost concern shifts to that level: What is the total cost of ownership of primary care, or spine-and-pain care, or diabetes care, or total life care for that life? Now it matters not only whether you are doing operations that really don’t need to be done, that are not truly medically indicated. It matters not only whether you are doing what does need to be done in the most cost-effective way possible. It matters even more whether you could have gotten to the actual goal, a healthy pain-free patient, as efficiently, effectively and quickly as possible. And the most efficient path to health for all patients (if you can do it) is to get them there before they ever need complex and expensive care: comprehensive disease management and prevention.

The Odds of Drawing to an Inside Straight

Price is implacable. You cannot game a market that is structurally exposed to price differences, information and options. Market dominators must keep up the opacity of their prices and depend on unrated backroom deals with major payers and purchasers in order to maintain their status.

In turbulent conditions, successful strategies will be those that thrive under conditions of high variance, multiple energy inputs and multiple strategic options. Successful strategies build expertise, experience and capacity for multiple revenue streams with multiple target markets.

Given the other forces in play, we cannot build any reasonable scenario in which the status quo continues. Questions on which we can build credible scenarios include: How quickly will the collapse to a more open market come to your market? And will that collapse be limited to certain revenue streams, lines of business and target markets, or will it be across the board?

Maintaining market dominance is actually a fragile strategy based on a single scenario and a monochromatic set of assumptions about the future. If your entire business structure depends on keeping your prices a high secret, and not exposed to real competition on price and quality, you are on the crumbling edge of a cliff as the seas advance.

Joe Flower is a healthcare futurist and author. He is a contributing editor with THCB.

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13 replies »

  1. Gee Joe, your not a “health care pundit”? Well, not I guess, just a “futurist”.

    If all those great things you list as the solution to making free market health care work then why is health care still stuck in higher and higher deductibles and co-pays and premiums? If the ideas (which aren’t new and which you didn’t invent) are working wouldn’t the industry be flocking to them? Certainly not here in Chapel Hill NC with more health care than you can swallow at one bite.

  2. To argue each of these points would take far longer than the original article, Peter. But let me just make this point: “potential,” “likely,” “I fear,” “I remain skeptical”—your points are opinions and hypotheticals, even in the quotes from the NIHCR. Every one of them is at the least arguable. This is not a cascade of facts making mincemeat of my arguments, but rather a listing of objections that people commonly give, buttressed by insufficiently researched facts and assumptions—the stuff of much healthcare punditry. What is needed is not dismissal of new ideas being tried, but carefully scrutiny not only whether they actually work, but in what way, for what markets, with what details of implementation. That’s what we do not have enough of.

  3. “reference pricing” – “The potential savings from reference pricing are modest for two reasons: Shoppable services only account for about a third of total spending, and reference pricing only directly affects prices at the high end of the price distribution.”

    “centers of excellence” – “In general, public quality reporting likely has been more effective as a spur to providers to improve performance than as a source of actionable consumer information.”

    “medical tourism” – India would be good place for the savings, but unless you can provide quality assessments and travel expenses, plus U.S. followup care, then I doubt it will be largely a viable strategy. As well, the patient does not necessarily get the doctor they want, even if the travel is in the U.S. People want a competent doctor, not a cheap doctor.

    “direct pay primary care” – I agree that cutting out insurance reduces costs. The “concierge” model works because PCPs get paid for patients they don’t see. A doc here in the Raleigh area is cash pay (not concierge), yet many low income chronic patients still can’t afford his services. I also fear that creating a club membership for primary care will, in the long run, reduce access to it. “Get your doc while you still can”

    “cost plus contracting” – Yes, that would produce lower costs, but can you get enough providers to participate. A single-pay system would get you there a lot faster and with much greater forced participation. Medicare patients have problems finding lower reimbursed Medicare providers. Why would a hospital participate in this? How would it justify it to shareholders?

    “auditing medical bills” – Every one? Who pays for that?

    “buying groups” – Isn’t that what insurance companies are for?

    “onsite clinics” – “Most experts believe workplace clinics can best achieve cost savings through better prevention and early diagnosis of chronic conditions. However, the study found that among clinic users, the most commonly sought services were vaccinations and other minor, routine services. Nearly seven in 10 people cited convenience as a major reason for choosing a workplace clinic over other care settings, and four in 10 cited lower costs.”

    Sorry Joe, I’m remain skeptical of the free market work around attempts. They’re just not gaining much traction seeing how, even under Obamacare, insurance premiums are rising so much.

    References above: National Institute of Health Care Reform

  4. Yes, multiple other strategies, including reference pricing, centers of excellence, medical tourism, direct pay primary care, cost plus contracting, auditing medical bills, buying groups, onsite clinics, among others.

    This is a key part of the book: “How To Get What We Pay For: A Handbook for Healthcare Revolutionaries.”


  5. “since major players who do have a number of options (especially employers and other large purchasers) are being active and assertive in searching for real solutions, and have a number of tools that they are just beginning to try.”

    Other than high co-pays and deductibles?

  6. > What’s the choice like where you live Joe? Seeing a paradigm shift yet on the horizon?

    What I am seeing, not only in California where I live, but in many markets, is that what can look like a locked-up system actually has a fluidity built into it, a fragility, since major players who do have a number of options (especially employers and other large purchasers) are being active and assertive in searching for real solutions, and have a number of tools that they are just beginning to try. The next few years will tell us a lot.

  7. How can the ‘cry of the age’ be volume-to-value when all prepaid health plans have offered this combo since time immemorial?

    Value = bundling + offering discounted price


    Lowest possible cost for health care for one year+
    Competitive premium=HMO=value

    What is new?

  8. Straightforward and quite concise. Note, pls, that he frames my argument against bundled payment more succinctly than I, even as CMS requires this strategy in certain states/hospitals. I have to assume it’s because hplans or data companies are pushing this ( I know of several). Insanity, and the public is getting wise to it.

  9. Isn’t volume to value the same incentive structure as an HMO? The value is the all the patient’s care for a year. The price is his premium.

  10. “Worse for you in the long run, your customers and potential customers are coming to know who you are, and their strength in the market is increasing every year.”

    The customer’s so called strength is only if there are options. Between narrow networks and hospital expansions into acquisitions and partnerships, as well as community clinics owned by the hospitals, there’s not much choice. What’s the choice like where you live Joe? Seeing a paradigm shift yet on the horizon?

    “Maintaining market dominance is actually a fragile strategy based on a single scenario and a monochromatic set of assumptions about the future.”

    Well if that’s the fragile strategy then Duke and UNC hospital systems are all in here in NC.
    Non-system community hospitals in rural or semi-rural areas are in trouble.

    Your description of a “risk free product” is probably the closest to single-pay goals, but in single-pay it’s based on universal budgets so that health care is an expense not a revenue.

  11. I am less optimistic than you, Joe, and I worry in particular about two things. First, that mergers suck the life out of small practices, and economically speaking, it’s in the smaller enterprises that innovation occurs. Second, higher costs are driving up premiums, co-pays, and deductibles, discouraging people from getting the care early in their illnesses that will drive down costs. A truly perverse situation.

  12. Great article. Absolutely nailed the self-defeating strategies of health systems. They will rue the day when they were wasting time defending old approaches when they could have been honing skills for the next generation.