In our last post we introduced two potential scenarios.
- “Provider bastions” in which buyers of health care services select upfront the network that they will trust to deliver their care in a coordinated manner.
- “Value-based deconstruction” in which buyers of healthcare choose the site-of-service for every interaction with the delivery system based on incentives built on micro level information about value – outcomes and cost.
Obviously there are factors unique to firms that will have a tremendous impact on optimal strategic choices for them. All we do here is raise some key strategic implications at a high level. We’ve chosen to use a provider lens but clearly one can do the same exercise from a payer perspective.
“Provider bastion” scenario
Imagine a world in which today’s provider consolidation trends continue such that you have a market with just 2 or 3 large systems. These systems have strong consumer branding. They are able to offer almost all if not all medical services within their own or contracted network. They are able to use technology to coordinate care and improve population health while cutting down on unnecessary care and administrative waste.
Here are 4 key implications for a provider in this world?
- Provider systems will need far superior care management than has been seen to date. Care management that actually lowers total population cost despite being now delivered via a concentrated system that by definition will include some gold-plated high cost anchor hospitals. The decimal point level savings delivered by ACOs to date are not sufficient. In the long term if health systems fail to bend the cost curve, they could face regulatory controls such as inflation caps.
- Assumption of insurance risk introduces dramatically different conditions. There is a high cost of getting it wrong for instance by overestimating their ability to keep a lid on cost or wanting to buy share. Buying share will seem attractive especially in the short term but whether for-profit or not, systems need to be extremely careful about going all-in.
- While such a world may seem attractive to providers, no market is getting there overnight. Any moves providers make in this direction put them into conflict with their insurance customers who may want to retain control. How they manage payer relationships – direct interactions and through signaling is going to be key.
- Finally, these systems will need to learn how to market themselves to and contract directly with a range of players from benefits consultants, private exchanges, public exchanges, employers and consumers. Payers have been the “bad-guys” and an easy target to blame for escalating premiums, reduced benefits and high admin costs. This new world puts providers in the cross-hairs.
“Value-based deconstruction” scenario
Now, imagine a world in which there is sufficient information available about provider quality and cost (and demand management) for every procedure. Consumers are motivated (in whatever way) to use that information (presented to them in a consumer-friendly way) as the predominant driver of how they choose which provider to go to for a given need at a given point in time.
In this scenario, provider systems face an even more difficult terrain. Some implications:
- Leakage of the most profitable services out of health system means that brand name hospitals will not be able to cross-subsidize aspects of their business with other aspects of their business. This is a system’s problem as there are legitimate reasons to do that, for instance, to serve community needs and train future generations of medical professionals.
- Price deterioration is a natural result as systems will need to match freestanding rates from high quality but low cost specialized providers and carve-outs.
- Providers will need to look out for out-of-state competition. You’ll see more deals like the one between Lowe’s and Cleveland Clinic.
- Co-branding from marquee brands such as the Mayo Clinic could impinge on local markets as well and reduce the barrier for consumers to deselect the local leader
Which of these scenarios is better for a particular provider depends on their cost-performance position their local market, their brand strength, the competitive environment, the payer and employer mix in their market, their relative financial strength and a host of other factors. Based on these factors, it’s also relatively easy to figure out the bets to make. It’s much harder to figure out what order to make them in and how much to put down on each one.