Call it what you want, disruption or evolution, but when two of the largest for-profit hospital chains, HCA Healthcare and Tenet Healthcare, and one of the largest insurance intermediary services companies, Optum (part of UnitedHealth Group), invest billions of dollars in capital for building new care settings, everyone should take notice. From freestanding ambulatory surgery centers (ASCs), to urgent care centers, to retail pharmacy-sponsored clinics and employer co-located clinics, the disruption of care delivery is all around us.
How does General Community Hospital compete with Walmart, CVS and Walgreens (retail clinics)? How does it compete with Urgent Care Centers? How will it compete with freestanding ASCs? How does a hospital stop consumers’ desire for savings and convenience? How does it stop physicians’ own desire for convenience and efficiency? This is the disintermediation of hospitals in a very big way! General Community Hospitals can zero base care, but they need to have answers more in line with a consumer retail operation than those of a charity. How many product lines does a focused factory operate?
I joined Bill Simon, former CEO of Walmart, to learn more about the potential and continued disruption of the US Hospital industry. Hospitals and Walmart? Yup!
Simon underscored several key points about health care disruption and the potential impact of ambulatory surgery centers on US hospitals.He said, “The real learning is that in health care, as in the rest of the economy, when price matters, consumers respond.” Simon was the architect of Walmart’s $4.00 generic drug pricing initiative and introduced health care consumer initiatives as CEO. He went on to confirm that: “$4 Rx worked for most generics because the cost of goods is low. There were some economies of scale…and some supply chain benefits but the math works on its own. You have to zero base the equation.” He added.
We all have been tracking the migration of care for decades, yet now we are seeing surgically complex cases moving to the ASC environment. Most ASCs are now reporting on quality placing them in the center of the Value-based purchasing equation, especially due to an ASC’s lower rates of reimbursement (ASCs receive about 55% of what a similar hospital-based procedure is paid for the same service by Medicare). Can they further “zero base the equation”? Focused factories for routine care are the future of care delivery, yet every market is different and developing at different rates. The winners will be communities across America, and whichever provider wins in those markets will be determined by share.
We used our FranklinBI™ platform to learn about market differences.
Summarized in visuals below are The Mayo Clinic’s Jacksonville, FL. and Phoenix, AZ. Markets. The markets are different in population size, with Jacksonville being about half the size of Phoenix, yet the service location mix is quite different for the same service lines in the two markets:
Each market has a unique story and the detail is found at the hospital and ASC level, by service line, one community at a time.
In the Top 50 largest U.S. markets there are three types of evolving markets:
1) Advancing markets where ASC penetration is well past the 60% of market share (n=14),
2) Converging markets representing the largest segment with penetration at 40-60% (n=23),
3) Opportunity markets where ASC share is below 40% and ripe for development (n=13).
As we evaluate markets across the country, we see many of the largest markets in 60/40 or 40/60 splits. These are Converging Markets or transitional. Opportunity knocks big or hurts hard depending on which side of that equation the ASC or Hospital-based provider rests. A swing of 20 points is big business especially in NYC where the 40% is the ASC share. There is empirical proof that the shift is setting new records. San Jose, Memphis and Ft. Worth are good examples where ASC locations break records for successful migration from hospital-based setting to freestanding ASCs; these are the Advancing Markets.
The Opportunity Markets are notable exceptions to the 60/40/60 in markets like Chicago, San Antonio, Detroit, Boston, and many more where the potential upside for ASCs and further hospital-based outpatient migration to ASCs is significant! These markets have patients getting care the old fashioned and expensive way. Whether a health system looking to lower costs or an ASC operator looking to grow share, these are the green fields of disruption.
The greatest insight for hospitals and ASC operators is that some of the largest hospital-based volume markets have very low ASC market penetration. While this may speak to the brand and relationship referral control hospitals have over physicians, these markets are also ripe for disruption on economics. Chicago, Detroit, Boston, Long Beach and Cleveland are a few prime markets for ASC operators to target for development. These same markets are “at risk” for hospitals depending on those elective service lines.
There is no question, major markets have already moved. The pace is accelerating with hospital-based ASC median revenue up 41% year over year. The complexity of cases will continue to advance making further inroads into what was exclusively hospital-based delivery. Consumer and surgeon sentiment on price/convenience, along with economies of scale will continue to disrupt the US Hospital industry. Narrow insurance networks, high-deductible health plans and federal value-based payment programs will also lever local market migration. Can or will Optum, Tenet or HCA become the Walmart of the ASC industry? Can they or will they zero base the equation to further their own cause?
Change or be changed. This time the influencers are less about quality and more about convenience and cost. As WalMart’s Bill Simon said, when price matters, consumers respond. Economies of scale, supply chain efficiency, focused factories and retail thinking about price and convenience all apply to this evolving sector.
John R. Morrow is Managing Director of Franklin Trust Ratings, a business intelligence company helping health systems to grow by finding new opportunities in markets across the US.