Tag: Mckinsey

THCB 20th Birthday Classic: McKinsey wants to inspire lots of change; caveat emptor


So to celebrate 20 years, we’ll be publishing a few classics for the next week or so. This is one of my faves from the early days of THCB, back in 2006. It’s interesting to compare it with Jeff Goldsmith’s NEW piece from yesterday on vertical integration because at the time a pair of Harvard professors, Michael Porter and Elizabeth Teisberg were telling hospitals to change their operations in a way that seemed to me were going to destroy their business–cut down to one or two service lines they were best at and stop with the rest. McKinsey picked up on this and I went to town on why they were all wrong. In fact in the next decade and a half, despite all the fuss and consulting fees generated, almost no hospital system did anything other than merge horizontally with local competitors, stick up its prices, and buy feeder systems of primary care doctors or ally with/bribe specialists to keep their procedural referrals up. The result is the huge regional oligopolies that we have now. Despite all the ignoring of their advice, I don’t think Porter/Teisberg or McKinsey went broke in that same period.–Matthew Holt

McKinsey, an organization that prides itself on increasing the amount of consulting dollars it gets paid by improving the strategic direction of American business is making another foray into health care.

You may recall their last study on CDHPs was roundly criticized (see Tom Hillard for a good example including a hilarious and brutal smackdown of their research methodology in the last couple of paras), and this time they cleverly aren’t bothering with data—in fact they’re basically copying Porter and Teisberg. The piece, by Kurt Grote, Edward Levine and Paul Mango, is about hospitals and how they need to get into the 21st century.

And of course the idea is that hospitals need to change their business approach.  Well, given that I hadn’t noticed a rash of hospital closings and the the industry as a whole has been growing its revenues pretty successfully over the years, what exactly are the problems?

The rise of employer-sponsored insurance in the 1930s and 1940s, and the emergence of government-sponsored insurance in the 1960s all insulated hospitals from the need to compete for patients. Today hospitals are “price takers” for nearly 50 percent of their revenues, which is subject to the political whims of the federal and state governments. Hospitals are also required to see, evaluate, and treat virtually any patient who shows up, solvent or not. Furthermore, physicians were productive because hospitals put a great deal of capital at their disposal. Yet these hospitals didn’t enforce standardized and efficient approaches to the delivery of care. At many hospitals today, doctors still bear only limited economic
responsibility for the care decisions they make. Little wonder that it is often they who introduce expensive—and sometimes excessive—nonreimbursable technologies or that hospitals not only suffer from declining margins but are also performing less well than other players in the health care value chain

The piece then has a pretty incomprehensible chart that compares the EBITDA (profit) of hospitals compared to drug companies and insurers. Surprisingly enough they make a whole lot less EBITDA than those businesses–although long time THCB readers will know we’ve been well down that path. And apparently their margins got worse and then better (from 25% in 1990 to 15% in 1995 to 10% in 2000 but back up to 15% in 2004).

McKinsey’s answer, basically filched from Porter/Teisberg, is for hospitals to specialize in particular service lines, stop being generalists and start trying to please the consumer who’ll be choosing among them. As a general mantra, this might be good for consultants to stick up on Powerpoint, but to be nice it’s massively oversimplified, and to be nasty it’s just plain wrong for most hospitals for the current and foreseeable medium-term future.

Their analysis ignores the fact that there are (at least) three broad categories of hospitals–inner city and rural  safety-net providers, big academic medical centers, and suburban community hospitals. Each of these has a completely different audience, completely different set of incentives, and more to McKinsey’s point, different profit margins.

Right up front they talk about the 50% of revenue that comes from the government–but for the first two categories, it’s more than that! And for everyone, as public programs grow, it’s going to be increasing.

Those hospitals relying on Medicare make most of their money but playing very careful attention to the DRG mix. The ones who play that game well and make most profit on Medicare outliers (like the for-profits McKinsey features in its metrics) don’t really want to change that by stopping their patients becoming those outliers, because if they get better at treating patients, they make less money. Brent James’ famous Intermountain story tells the truth, and until Medicare really changes the way it pays, you don’t want to be ahead of that curve. Intermountain may have spent more than 10 years leaving money on the table, but those rich Mormons can afford it.

Meanwhile, for the mainstream community hospitals, as more and more services and patients leave the building, the imperative is not to change their business model, it’s to get their hands on that revenue that’s leaving with them. That’s why most big hospitals are now-co-investing with physicians in specialty hospitals et al. But while that’s a defensive battle to build better “hotels” for the star surgeons, it’s still about building better “hotels”–not junking the model of being the nicest possible host to the big time admitting surgeons.

The McKinsey/Porter/Teisberg theory is of course that if you get good at one service line, you’ll be attractive to consumers, and that they’ll choose you. There is more truth to this notion now than there was five years ago, but not much more. Doctors choose hospitals for their patients. That’s always been the case, other for those that get admitted via the ED, and that’s a function of location. That’s why hospitals suck up to surgeons. But even when consumers make choices, they’re not very active consumers beyond the deductible, and basically all hospital spending is beyond the deductible, and even in the cash non-hospital business (the stuff like genetic testing) most consumers take their doctor’s advice.

Which leads of course to who the other real consumer for the hospital is, and that’s the third party payer. First rule of dealing with payers is to figure out how to play the Medicare system well enough that you make it very profitable, but not too “well” that you get busted, a la Columbia/HCA, Tenet & St Barnabas.

Second rule is that you need to get bargaining strength against the health plans. No one can pretend that health plans really care in a global sense about having their providers cut costs and improve care delivery. They may say they care about it, but health plans add a chunk on the top of what they pay providers and stick that to their clients (usually employers) — who basically take it in a mealy mouthed way.

There is, though, a fight in any local market about where to draw the line on hospital pricing. But this fight is not about having providers from outside (or even within) the region swooping in to capture all a payer’s business with better pricing on certain service lines, and payers moving patients to these disease-specific treatment centers.  Well, it is about that in the McKinsey/Porter/Teisberg fantasy land, but in reality the fight is about setting global pricing for all the services a payer needs for its members in that region.

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Why Hospitals Continue to Fail in ‘Connecting the Dots’ With Their Data, and What They Can Do to Change

The world is awash in data. It is estimated that the amount of digital information increases ten-fold every few years, with data growing at a compound annual rate of 60 percent. The big technology company Cisco has forecast that by 2013, the amount of traffic flowing over the internet annually will reach 667 exabytes. Just to put that in perspective, one exabyte of data is the equivalent of more than 4,000 times the information stored in the US Library of Congress.

This data explosion – now rather imprecisely dubbed “big data” – is both an opportunity and a curse. Having all of that information makes it possible to do things that were previously never even imaginable. Last year, the McKinsey Global Institute (MGI) conducted a major research study on big data, calling it “the next frontier for innovation, competition, and productivity.” The MGI study noted that big data is becoming even more valuable as our analytical and computing abilities continue to expand.

On the “curse” side of the big data phenomenon, the growing mountains of information also pose massive challenges to those who need to manage it. Having ever greater volumes of data to sift through to find critical insights (the proverbial needle in the digital haystack), is a growing problem for companies, organizations, and governments the world over. Sometimes, there really is such a thing as too much information.

The data deluge is especially urgent for hospitals, which are factories of data. In the typical hospital, data flows from every department and function – from emergency department admission records and HR systems, to purchasing and billing information. But, hospitals are not exactly known for effectively managing data. The healthcare provider sector is probably 20 years behind other major industry domains in terms of how its uses data. Many hospitals fail to realize the value of the data they do have – or they are overly focused on EMRs.

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Lost in the Mckinsey mire

It’s a good week for Bob Kocher, a key architect of the ACA, to be leaving Mckinsey and moving into the word of venture capital. There’s lots of fuss in wonkdom about whether Mckinsey’s survey of employers was statistically correct and peer reviewed or more of a push poll. There’s lots of fuss even apparently within the firm about the validity of the estimate that 30% of employers (or is it employees) will be moved over to the exchanges. But despite ballyhoo over the Mckinsey report, because in 2009 the White House got stuck into the mantra that “if you like your insurance you can keep it” the fact that it’s good to get employers out of providing health insurance has been missed. If you have insurance from an employer that puts you in the exchange it’s a fair bet that your coverage was anyway going to move to levels worse than that mandated by the government. And the levels of coverage and behavior of the plans in the exchange which will hopefully actually be enforced–with the threat of being booted out being a motivator. And as we all know employers are the worst purchasers of health care out there and need to be got out of the game. That was what the very sensible Wyden-Bennet plan did, but as the collective stupidity of the nation’s unions and chambers  of commerce is very high, we ended up with the ACA instead. Oh well, welcome to America.