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Does Innovation Mean Cannibalization?

Philip Betbeze, for HealthLeaders Media, August 13, 2012
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An overarching principle, he says, is that the true low-cost provider will always be in the best position, whether it's in a fee-for-service world or population management world. "As long as you're driving to be the low-cost provider, you're always in the best position because someone is going to be chewed up before you," says Van Horssen. "Sometimes we have to help our clients step back and not get caught up in the current without realizing the impact it may have."

In other words, gear everything toward increasing the patient base and cutting costs.


Demand destruction

Texas Health Resources Chief Financial Officer Ronald R. Long has a different phrase for cannibalization that results when moving an organization 180 degrees from fee-for-service to value-based purchasing: demand destruction. He's convinced the Arlington-based, 25-hospital integrated delivery system can do it without seriously impacting margins, so it is jumping in with both feet.

"It means that in order to be successful in partial- or full-risk models, you have to manage utilization better," he says.

That includes managing outpatient as well as acute care, which represents the lion's share of THR's current fee-for-service revenue stream.

"What this comes down to is if we don't do something to reduce costs and improve outcomes, it will be taken out of our rates anyway," he says. "We would rather be in a position of managing our costs down as our unit volumes decrease because of lower utilization as opposed to trying to take cost out with the same unit volume coming through our acute care enterprise with lower rates."

In other words, keep people out of the hospital. But doesn't that play havoc with the revenue stream and, ultimately, margins?

Long and the executive team at THR expect the revenue problem will be made up by right-sizing the enterprise, meaning handling decreased utilization on the acute side and increased utilization in primary care. That transformation seems less daunting, he says, given the advantage of being in a high-population-growth region. It's important not to underestimate the population growth angle, because it can cushion any business transformation's costs.

For instance, "We think it may keep us from building new beds, which is a reduction in capital need, so that's a good thing," he says. He envisions that population growth along with reduced acute utilization will allow the system to delay indefinitely any planned expansions in acute care bed capacity that would otherwise be necessary.

"If you look at [demand destruction] as one factor, it's negative, but in the overall scheme of things, strategically we think it's a better place to be and financially in the long term, it works out better."

THR is placing a big premium on its employed physician model because of doctors' influence on the cost profile of the entire organization.

"These risk models are largely physician-driven, so to the extent that physicians outside of our sphere of influence take up the risk management strategic initiatives instead of us, then we would become the commodity instead of controlling our own destiny," says Long.

 

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