A close look at four strategic initiatives hospital and health system senior leaders are using to keep their organizations relevant, necessary, and innovative.
This article appears in the May/June 2018 issue of HealthLeaders magazine.
Hospitals and health systems are facing competitive threats from more angles than ever before. From innovative healthcare tech startups to traditional payers making inroads into the provider space, today's threats have multiplied.
For healthcare leaders to ignore them would be at their own peril.
As health systems attempt to pivot toward innovation to fend off a new generation of competitors that seek to dominate specialized pieces of the healthcare continuum, they are burdened with their legacy as high-cost conglomerates that provide everything from high-level ICUs to quick clinics co-located in drugstores.
Most healthcare organizations can't or won't move away from the mission of being all things to consumers, but neither will they ignore the imperative of finding ways to compete by lowering costs.
It may be that both are attainable—if they are smart about integrating both high- and low-acuity care options into a strategy that seeks to capture a greater share of patients' healthcare choices, and thus, their healthcare wallets.
Healthcare organizations are using a variety of strategies and tactics to thwart threats to their competitiveness. Following are four tactics many healthcare leaders think are key to lowering costs and improving efficiency.
1. Vertical consolidation
Vertical consolidation immediately suggests megamergers between large health systems, but that's a hammer in a toolbox that can also feature delicate, intricate tools to thwart lean, niche competitors.
Many of today's forward-thinking health system leaders are looking to bind patients into their ecosystem—in a sense, encouraging patients to think of that health system first for all their healthcare needs. That competitive strategy requires the system to provide a one-stop shop for the entirety of a patient's healthcare encounters, literally from cradle to grave.
The difference in healthcare's competitive landscape now is the influx of nontraditional competitors, says Rod Hochman, MD, president and CEO of Providence St. Joseph Health,
a seven-state, 50-hospital health system headquartered in Renton, Washington.
In his view, his competition is no longer just other hospitals, doctors, nurses, and clinics, as it has been in the recent past.
Instead, other huge players, such as drugstore chains, insurers, and even tech companies, are becoming direct competitors. Insurers are adding provider services to their portfolios.
UnitedHealth Group is one example of an insurer becoming a healthcare provider through its Optum subsidiary, which has bought physician groups that will compete head-to-head with traditional health systems like Providence St. Joseph.
Tech companies such as Amazon are joining with other large employers to cut healthcare expenditures by reducing variation and bringing their economies of scale into direct competition with healthcare providers.
"Competition has become more asymmetric," says Hochman. "It used to be that you knew who your competitors were in the local market. We fought over patients and shook hands at the end of the day. It's not that way anymore. The typical boundaries that we used to see in the past are no longer there."
To anticipate and counter these threats, Hochman says Providence St. Joseph and other health systems should first strengthen what they do well traditionally—that's hospitals, physician practices, and high-end care in general.
Second, these systems must ingrain themselves in their local communities as trusted managers of patients' care, from birth to death. At Providence St. Joseph, whose own health plan has a million members, that means managing care for most of the local population in all its markets.
Providence St. Joseph's population health division has payer contracting fully under its purview, and the medical group is also managed under its umbrella.
Third, Providence St. Joseph has organized a transformation group, which focuses on digital service elements such as direct-to-patient portals and electronic health record management through its Epic platform.
"For instance, we supply Epic to 50 hospitals and clinics we don't own," Hochman says. "Our transformation group is focusing on becoming a service company."
He compares the effort to "creating our own Optum at Providence Health. Fundamentally, they made a decision that staying exclusively in the insurance business is not sustainable. We've made a similar decision that staying only as a provider is not sustainable."
To that end, Providence St. Joseph is further extending its reach and scale by focusing on clinical research initiatives as well as funding and nurturing the startup companies that can sometimes result from that research.
"One way we're transforming ourselves is by managing clinical research across our seven states, which when we put them together is bigger than the Cleveland Clinic's research budget," says Hochman. "That's an example of how we use our scale as a $32 billion organization to create something unique and different."
Another way to leverage Providence St. Joseph's scale is by tackling cost and affordability on a coalition basis. Hochman anticipates building a coalition of hospitals, pharmacy providers, and independent providers to agree on ways to make healthcare more affordable.
"It's not fair to pin all that on these hospital organizations. Just last year we saved $110 million in costs over what Providence and St. Joe's would have had as separate organizations, and much of that savings came from services, supply chain, clinical excellence, and IT," he says.
"We're focused on reducing variability. As a physician, this is very important to me."
Another way to adapt to patients' desires to receive treatment closer to home and free up capacity at larger hospitals in the system is through so-called micro-hospitals.
Cynthia Hundorfean, president and CEO of Pittsburgh's Allegheny Health Network, an eight-hospital health system, sees micro-hospitals as a cornerstone of AHN's competitive strategy, and plans to initially open four in its region over the next two years.
Both of Hundorfean's sons-in-law are physicians in Texas, where micro-hospitals already are a growing presence. That's where she first encountered the concept, and where she began to think micro-hospitals would work well in AHN's region, where patients often must travel long distances to reach acute hospital services.
"The whole intent is to push care out to the community and try to make it so our patients don't have to travel for their care," she says.
She and her executive team, including David Goldberg, who helped develop micro-hospitals for Baptist Health System in San Antonio, will open the system's micro-hospitals under a joint venture with Emerus, an exclusive developer of micro-hospitals.
Each will feature 10–12 beds, operating suites and imaging, as well as an emergency department.
Goldberg says the new facilities won't negatively impact the bigger hospitals. In fact, they'll keep lower-acuity patients closer to home and make room for higher-acuity patients at the bigger hospitals, while enhancing the ability for doctors to manage care in the community.
He sees micro-hospitals as an integral piece of AHN's clinically integrated network, providing doctors and patients a new place for follow-up care.
"This is a population health strategy," says Goldberg, who joined AHN as an executive vice president in 2014, where he is also interim president of Highmark Home and Community Services. "This is a logical next step to broaden health in the populations we serve."
In fact, AHN officials describe the facilities as "neighborhood hospitals," not micro-hospitals. Hundorfean says AHN is on the cusp of a rapidly expanding concept for bigger hospital systems whose main hospitals are struggling with capacity issues.
"This is just starting to explode," she says. "My mom's local hospital in Kentucky is opening two. It will provide more access points for our patients. The future of healthcare is local."
Goldberg says the concept entered the San Antonio market in 2011–2012 and expanded rapidly, as Texas is not a certificate-of-need state.
Pennsylvania also is not a CON state, but the facilities still need Department of Health and CMS approval. Medical office buildings and EDs will also be included in the structures, he says.
AHN's micro-hospitals will feature the same EMR and emergency physician group that staffs the health system's larger facilities.
Further, the same group of hospitalists will rotate on patients in both hospital models, and other support services will come from the same pool as the larger hospitals.
"It will be a game-changer for those communities because they are affordable and scalable and will avoid driving up costs by overbuilding," says Goldberg.
3. Direct to Employer
Seattle's Virginia Mason Medical Center has put quality at the center of its long-term strategy for over a decade.
It developed its Virginia Mason Production System—based on Toyota's manufacturing system that aims to eliminate errors—so thoroughly that it can predict the likelihood of successful outcomes from various expensive interventions.
Virginia Mason has made that ability a cornerstone of a strategy that engages large employers with their healthcare spending tactics. In short, the health system employs a vast depth of analytics to prove that sending employees to Seattle for treatment can save employees money and improve patient outcomes.
It's difficult to convince employers to change their healthcare spending attitudes, but those that have chosen to do it, such as Walmart, Lowe's, and the state of Washington, are pleased. Because they can document better outcomes and cost savings, Virginia Mason's direct-to-employer contracting has become a key staple of its value proposition to the ultimate payers for healthcare services.
Yet uptake has been slower than they would like because employers are reluctant to treat healthcare spending with the same discipline they exercise with other supply chain functions.
"The market is slow, and that's just kind of the reality," says Suzanne Anderson, president of Virginia Mason Medical Center. "Many employers have been hesitant to change their benefit structure."
The successful relationships the health system does have with employers boast two key attributes, she says. The first is a sense of partnership.
"They're not looking for an 'I win, you lose' approach," Anderson says. "It's more, 'What can we both do together to move us forward?' "
Second, unlike many employers, Virginia Mason's employer partners understand that they—not health plans—control benefit design, so they can make the decision to provide incentives for their beneficiaries to make interventional decisions.
For example, employers may choose to offer their employees and dependents a guarantee of no out-of-pocket costs if they choose to be evaluated at Virginia Mason, where physicians will help them make a healthcare decision (such as whether to have surgery) based on evidence and analytics that may predict outcomes.
Practicing healthcare in an exclusively evidence- based manner is a long-term commitment, but
Virginia Mason's senior leaders say it will pay off in the long run.
Major employers such as Walmart already send patients to Virginia Mason from far outside the state because they trust its systems to evaluate proper utilization of expensive healthcare services.
"For example, they can tell employees, 'If you go to one of these centers of excellence, you won't have any out-of-pocket costs,' " she says.
Senior leaders admit it's been difficult for major stakeholder groups, like employers, to move toward value-based healthcare and affordable purchasing because it's difficult and time-consuming to produce reliable standardized quality outcomes and prove it through transparent reporting.
Virginia Mason has made that significant investment not only in analytics capability, but also in clinical practice change, which is arguably an even higher hurdle for some health systems to overcome.
Similarly, Virginia Mason is trying to overcome inertia with many employers, which have typically treated the purchase of healthcare for their employees as a benefit rather than as a healthcare supply chain issue, Anderson explains.
Employers typically outsource the purchase of healthcare to brokers and don't treat the decisions behind the benefits they offer as a procurement opportunity. Virginia Mason is trying to change that calculus, one employer at a time.
"They don't have much of an idea what they're buying, so that's a barrier for them in managing their healthcare supply chain," says Robert Mecklenburg, MD, medical director of the Virginia Mason Center for Healthcare Solutions.
"Then there's the health plans, who are burdened by the fee-for-service model. It's hard to move all three of those together, but that's what it takes. To the extent they can start managing this supply chain and paying attention to what they're purchasing and demanding the best, is where we come in," he says.
Employers will go to great lengths for other goods and services, he says. Healthcare should be no different.
"It is a benefit, which is a warm and fuzzy thing, but it also should have a bit of edge to it," he says. "Employers shouldn't buy defective products, which in this case is unnecessary hospital readmissions. They wouldn't pay for it in other domains."
That's one reason why Virginia Mason is excited to see companies such as Amazon enter the healthcare space with a commitment toward seeking value.
"One of the exciting things is they're going to aggregate a million or more insured customers in their plan, so they'll have the scale to conduct experiments on what works and what doesn't," says Anderson.
The presence of Berkshire Hathaway, Warren Buffett's investment company, in the Amazon partnership shows there will likely be rationality and endurance in what Amazon does, she adds.
"That appeals to Virginia Mason because we have a very long-term horizon. We've been on this [value] journey since 2000," says Mecklenburg.
4. A logistics 'command center'
Many hospitals have capacity constraints. If those constraints are too severe, they can result in serious lost revenue.
To help address this, as well as patient dissatisfaction surrounding transfers, Carilion Clinic, a seven-hospital health system based in Roanoke, Virginia, took over a former patient room in 2009 to handle bed placement and transfer acceptance.
That small control room grew into the new off-campus 24/7 ParkView Mission Control Center that opened in September 2017. Even during its small start, the control room opened the eyes of leadership on the capabilities and possibilities a first-class logistics center could offer.
In fact, the million-dollar center is so important to the health system's efficiency that Nancy Howell Agee, Carilion's president and CEO, likens it to the Johnson Space Center.
"That's what this room looks like, with 20–30 large-screen LCDs with multiple views of beds, and where the [three] helicopters, highways, and ambulances are," she says. "It's the nerve center for flow into, out of, and within the hospitals."
The health system's main quaternary center, 703-bed Carilion Roanoke Memorial, has an average daily census of 90%, "so we're always maxed out," says Agee. "We thought this worked best for the large hospital, but we've extended it to the community hospitals because they're also prioritizing patients coming in and out."
While the top-line technology is impressive, it's the people in the room who are key to the success of the operation, says Melanie Morris, senior director of Carilion's Transfer and Communications Center.
It consists of a transfer center and bed placement center, which handles bed management and transfers for the system's two largest hospitals. It also houses the communications center, which dispatches the helicopter and ambulance fleet.
The Parkview Mission Control Center is staffed by nurses experienced in critical care and organizes the activities of clinical transporters, housekeeping teams, and utilization management professionals.
"That's a lot of moving parts," she says.
The center handles and relieves bottlenecks. Internal "customers," often nurses, call with a need, usually to move a patient. It's the transfer center's job to make room to help put providers back at the bedside, says Morris.
During peak hours, the transfer center is staffed with up to 22 people and scales down after hours to as few as six. While the center currently handles transfers and accommodations for acute care services, it's aiming for connectivity with home health and care management.
"Competition has become asymmetric." - Rod Hochman, MD
"The future is connecting not only to the postacute realm, but we'll also add the community, such as EMS providers and the front end of 911 calls, to deal with the ER," says Paul Davenport, Carilion's vice president of emergency services.
Because there are so many portals into a big system, Morris says the center is almost a necessary addition to a healthcare organization that's charged with being a good steward in matching patients with valuable beds.
Other hospitals and health systems visit the Transfer and Communications Center frequently to learn how they can implement similar programs.
"We're answering the question of how we get more people in and meet needs of the regions we serve efficiently," says Agee. "By bringing together an array of folks who traditionally don't work together as a team in an integrative way, the notion is can you bring more patients in, and that's a metric we look at."
Directly attributable to the center are stats from areas such as housekeeping, which now cleans rooms more quickly and efficiently thanks to better information from the command center.
The increased agility of housekeeping has led to a 30% decrease in time to move patients from the ICU, and a reduction of about 20 minutes to move an ED patient to a clean bed.
"Healthcare is so complex, with so many working parts, it's like a spiderweb," says Davenport. "The ops center connects all those dots and helps break down silos."
“Competition has become more asymmetric. It used to be that you knew who your competitors were in the local market. We fought over patients and shook hands at the end of the day. It's not that way anymore.”
Philip Betbeze is the senior leadership editor at HealthLeaders.
Photo credit: At top: Rod Hochman, MD, president and CEO of Providence St. Joseph Health in Renton, Washington. (Jennifer Boyle/The Verbatim Agency)