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The Opportunity in Disruption, Part 4: Success Strategies for Provider and Payer CFOs

By JOE FLOWER

The system is unstable. We are already seeing the precursor waves of massive and multiple disturbances to come. Disruption at key leverage points, new entrants, shifting public awareness and serious political competition cast omens and signs of a highly changed future.

So what’s the frequency? What are the smart bets for a strategic chief financial officer at a payer or provider facing such a bumpy ride? They are radically different from today’s dominant consensus strategies. In this five-part series, Joe Flower lays out the argument, the nature of the instability, and the best-bet strategies.

Providers:

  • Cost. Get serious control of your costs. Most providers I talk to are dismissive. “Yeah, yeah, you’ve been saying that for 10 years. We’re on it, believe me.” But I don’t believe them. Observation of the industry makes it clear that most healthcare providers have not gone after costs with nearly the ferocity of other industries. Some providers that I have worked with and interviewed over recent years have gotten their full cost of ownership down to a level where they can survive on Medicaid rates (that’s not a typo, I mean Medicaid) and build bigger, stronger systems at the same time. They have proven it can be done. But this is far from the industry norm.
    In the new competition, getting your costs seriously down is not the way to win. It’s just the price of admission. In the new competition, any entity that can deliver any particular service at a lower price will steal that business from you. You need to be that entity.
  • Overtreatment and waste. Do a deep and honest analysis of how much of your book of business is actually not effective, not necessary, does not deliver value or satisfaction to the customer—because that book of business is likely to wither away under alternative financing arrangements. Keep in mind that among various studies, the low estimate of how much of healthcare delivers no real value to the customer (an estimate by doctors about their own specialties) is 20%. The high end (in a PricewaterhouseCoopers study) is 54.5%. Most studies and estimates cluster around 35%.
  • Abandon monopolistic practices. An “all system” fee-for-service contract hidden from public scrutiny is smart, but not wise. It may help this year, maybe next year, but in the longer run it creates vulnerability to political attack, legislation, and lawsuits, and also to shifts in the market. A semi-monopoly position allows you to charge a premium for your products, but it locks you into that ability to charge a premium. As the market shifts and finds ways around paying high prices, you will find that you will be forced to compete at the lower prices, but you will not have developed the partnerships, the strategies, and the product lines to do that. If there is no competition in your area, then compete with yourself to forestall lower-cost competition developing.
  • Birth your competition. The growth area in the new healthcare competition will be: “How to cut into the hospital’s bottom line by keeping people out of the hospital.” The most competitive business models in healthcare will be in the business of cutting off hospitals’ revenue streams upstream.
    Get into this business model, even if you are a hospital. Especially if you are a hospital. Get into this business and get better at it than any potential competition. Create high-performance bundled programs with deeply managed costs well below the industry median. Get into contracts with large buyers for particular niches in which you give financial and quality performance guarantees. If you can’t guarantee that you can drop the cost and improve the quality, you will lose that business to someone else who can show that track record and give that guarantee.
     
    Put yourself into all the business models that are disrupting you, such as outpatient clinics, community clinics, mobile vans, mini-hospitals, stand-alone emergency departments, onsite clinics, personalized management of complex cases, direct-pay primary care and others. Make these businesses able to compete for market share by unshackling them from hospital pricing and facilities fees.
     
    Risky? Sure, but you do not want to end up being just the super-expensive job shop at the end of the line that every single customer and buyer is making every effort to avoid.

Success Strategies for Payer CFOs

Read the list of strategies that healthcare providers have to go through to survive and serve their market. Think through all the assets, connections, and information that you have, and ask yourself two questions:

  • How can we help providers succeed at those strategies?
  • How can we foster competition against them in all those strategies?

Head toward TPA: Employers are frustrated and headed toward disintermediation. So be in the business of helping them realize the full potential of self-funded healthcare. Third-party administration (TPA) can help employers, unions, pension plans and other buying agents to reduce their costs and then push that savings directly toward increased value for their healthcare consumers.

Aggressively push all solutions that are not fee-for-service. Use your research expertise and bargaining power to bring bundled services, medical tourism, full capitation, mini-capitation, reference pricing, onsite and near-site direct-pay clinics, as well as the innovations mentioned above. 

Ignore borders. In some domains, the best value for your customers may be found in Mexico, Canada, Europe, the Caribbean, or even South Asia. U.S. healthcare providers need to be in competition with these foreign providers, and increasingly are. Help your customers find that value. They are already seeking it on their own.

Guarantee the financial security of your customers. It does not help you if your customers feel like they are in an adversarial relationship with you, that you and the healthcare providers are lying in wait to catch them out and cost them vast sums. Today, most of your customers fear exactly that. If your customers know that you will defend them vigorously against surprise billing, balance billing, and hidden out-of-network costs, you have a superior product. Get aggressive in your negotiations with providers to get contracts that prevent them from using these egregious practices on your customers. Go to bat for your customers. Honor your contracts. Honor the promise of the happy, healthy faces on your billboards, not the “gotcha” traps in the fine print.

Fund population health and healthy communities, in cooperation with existing healthcare providers, but even in competition with them if necessary. If you put yourself in a position to do better financially if your covered population is healthier, then the opioid crisis, rampant diabetes, and other population health problems turn into huge opportunity spaces.
 
We can already see this happening in various emerging Medicaid programs that are becoming more responsive to the social determinants of health. In a number of states Medicaid Managed Care Organizations are required to build their plans not just on providing medical care, but by in one way or another offering help for housing, transportation, nutrition and access to healthy food, social contacts, a whole range of the things that we know make a huge difference to our health.

Work with the disruptive new entrants. Bring your data analytics to the next level anduse those analytics, your customer base, and your financial power to catalyze the disruption that is coming.

Are there ways that payers and providers can work together in coopetition? That’s the subject of Part 5.

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