Many organizations are finding they can standardize clinical care and achieve economies of scale through deals that stop well short of a traditional merger or acquisition. But can such partnerships last?
This article first appeared in the June 2015 issue of HealthLeaders magazine.
One question plaguing hospital and health system senior executives is whether their organization has the size and the scale to effectively manage a major business disruption underway in healthcare. If it doesn't, seeking to acquire or be acquired may once have been the only choice—but no longer.
Many organizations believe they can find the same benefits on a much quicker time frame, and with less of the political fallout that arises in hospital M&A. Earlier this year, Tenet Healthcare finally bowed out of a proposed acquisition of five hospitals in Connecticut after years of regulatory and political wrangling. With time of the essence in adapting to provisions of the Patient Protection and Affordable Care Act, as well as the commercial shifts going on simultaneously, such delays can put necessary changes on hold amid the uncertainty. Even if a merger does go through, the cultural aspects often are much trickier than the financial details involved in M&A.
Hospital and health system consolidation is on the upswing for a variety of reasons, chief among them the belief that growth will come from efficiency, economies of scale, and lower-acuity health interaction and management. However, traditional mergers and acquisitions decreased to 72 hospital transactions in 2014 from 86 in 2013, a 14% decrease, but remained elevated historically, according to Irving Levin Associates, which has tracked such statistics for decades.
Despite what you think, patients aren't really rating you on whether you 'always' communicated well with them or 'always' controlled their pain well. Ultimately, they're rating you on whether they got better.
It may not be fair, a Carilion Clinic senior executive says, but outcomes are how patients ultimately judge your organization, and that judgment will eventually be reflected in your patient experience scores.
Of course, outcomes are often not in the direct control of the hospital, clinicians, or other employees. Nevertheless, your patient experience scores will most closely track whether patients, following their hospital visit or visits, are still able to do what they were able to do prior to their hospitalization.
Why? For one, the simple reason of survey bias. Those who have good outcomes are coming back less often than those who have bad ones, generally. That may ultimately skew results. But the main reason is even simpler.
Steve Arner
"We do lots right, but if they go home and they can't do what they used to do, they're not satisfied," says Steve Arner, senior vice president at seven-hospital Carilion Clinic and president and chief operating officer of Carilion Roanoke Memorial Hospital, the system's 703-bed flagship. "When we think about making sure people have the right outcomes, we have to think about what that means to the whole person."
What it means to hospitals and health systems whose revenue (not to mention the fulfillment of their healing missions) depends at least in part on patient satisfaction, is that they need a better way to gauge how they are doing at improving the chances of good health outcomes of the patients in their care.
Some organizations, by contrast, are probably paying too much attention to how they can improve performance on the multitude of narrow areas patients are asked to score in patient experience surveys. Patient experience is more than box-checking though. It's a reflection of an accumulation of experiences.
Focusing on the questions in a vacuum can lead to a misapplication of talent and resources if organizations aren't cognizant of the importance of the overall holistic goal—restoring patients to health. Restoring patients to complete health can't always be done—we're all going to die after all—but regardless, it's how patients will rate your organization, and working toward a goal of health restoration, somewhat paradoxically, can lead to better performance on those darn surveys.
A Shift in Thinking Another problem with focusing on the questions themselves and on patients' responses to them is that by the time you get the results, they are weeks or months old—ancient history.
That's unacceptable latency in a customer-service sense, says Arner, who adds that that's how hospitals and health systems should increasingly view themselves—as customer service organizations. A shift in thinking is required.
"It's frustrating to not be able to give and receive real-time feedback to what's going on," says Arner. "If it's later, there's no self-interest for the patient, and staff can't do much with it either. We need rapid cycle improvement and real time feedback and service recovery while the patient is still here."
The health system wanted to think about patient experience differently, in that it's a service issue, not an issue with whether patients would check off the right boxes in a survey.Also, says Kathleen Baudrau, Carilion Clinic's senior director of nursing quality, relationships between clinicians, hospitals and patients can't be pedantic anymore. Instead, they need to encourage patient and family participation in developing a care plan for after discharge.
"We were purposeful in calling it 'interactive patient care,'" says Baudrau. "That helped our team think about it differently."
To better execute on that vision, a technology-based platform was a must. It would be critical to improve patient health literacy, to provide a tool for patients and family members to watch videos about medication administration, for example, and learn more information about their diagnosis—information pre-vetted by the clinicians on Carilion's own staff.
"We wondered how well we could engage them in their own self-care, and whether quality and patient safety could be improved through this philosophy," says Baudrau.
The technological solution Carilion's leaders ultimately chose helps patients and families not only with their immediate needs for comfort while in the hospital, but more importantly, can help the hospital improve the patient's post-discharge care pathway to ensure the best chance at the good outcome they're shooting for.
Tech Help "A challenge is that when our unit directors get HCAHPS results, those results are anonymous, and they lag, so if a score is not good in one area, there's nothing actionable," says Baudrau. "With this system, they can identify a measure they need to move and can ask a daily question, approved by CMS, to allow them to follow up on patient responses. That often allows for real time service recovery."
In September 2014, Carilion installed tablet-based equipment at the patient's bedside that uses information from GetWellNetwork to help coordinate care, vet, and standardize clinical information and interactions, and compile performance measures in real time. It's integrated into the patient stay. Patients and their families use it for everything from ordering food to developing a care plan for post-discharge and medication education and reconciliation, among other tools for both patient and staff. They can use it post-discharge too.
"We've always said we have patient-centered care, but this is a paradigm shift from the old hierarchical or pedantic relationship," says Baudrau. "It's a shift not only for the clinicians, but also for the patients and families. With today's shorter stays, we don't have them very long and a lot of this has to happen in the [physician] office and at home. When we provide the information using the network we have a library that is evidence-based and clinicians here vet this information so that they agree with and understand the information they're getting."
One key advantage from an operational perspective, Arner says, is that the system allows for real-time service recovery and doesn't rely on the imprecise messages HCAHPS surveys convey.
"We can follow up immediately and trend and track," he says. "It used to be you would try something and six to seven months later, you would see that measure tick up, but you were not really sure if it was because of what you did because of the time lag," he says. "Also, with 700 beds, we might have had good compliance in one unit, but not in another and we wouldn't know it for months."
The value of participating in risk-based reimbursements is not only in the (short-term) gainsharing achieved, but in redirecting processes and protocols to achieve (long-term) lower costs and higher quality healthcare.
I was talking with a source the other day for a story I'm working on for an upcoming issue of HealthLeaders magazine. During our conversation about a related topic, we chatted briefly about how hospitals and health systems are torn between whether participation in risk-based reimbursement is the right thing for the organization or not—that is, if they have a choice. Most still do.
Such initiatives make no secret about shifting risk to the provider. Broadly, the carrot is the opportunity to "gainshare," or keep at least part of the savings achieved over the life of the contract. This makes such contracts not only a risk for the organization, but for the careers of the executives who are charged with executing against them.
A baseline is set, and rewards or gainsharing can result if a provider, be it a hospital or health system or an individual physician, generates savings above that baseline. Those savings come from reduced readmissions, or from better postacute care, or from better adherence to care protocols—or any number of other metrics. Physician alignment is a prerequisite, of course.
The concern from many in top leadership is generally not around their organization's ability to perform under the first such risk sharing agreement. There's an abundance of low-hanging fruit to be found in standardization, operational efficiencies, and improvements in pre-and post-acute settings, which are often the responsibility of the risk-taking entity to arrange in the most effective and efficient way possible.
Gary Whittington
Those incentives didn't exist before, but these contracts go a long way to align them. For those reasons, executives who enter into these programs on behalf of their organizations are generally confident about the ability of their teams to meet initial performance targets generally, and expect to perform well.
Where the concern lies is when that contract comes up for renegotiation. Say, in three years, and the baseline is reset after the easy improvements have already been made.
Gainsharing Fades, Then What? "That is the major concern of everyone involved—that gainsharing fades," says Gary Whittington, chief financial officer at Baptist Health System in San Antonio, TX, a pioneer in various successful value-based purchasing initiatives in recent years. "Physicians tell us, 'this is great, and we can do this for a while, but they will see how efficient we've been and reset at a lower rate.'"
Yes, they probably will. The major goal of such contracts is to slow, and ultimately reduce, the cost of healthcare, especially the kinds of healthcare services that can be commoditized to a degree.
But it strikes me, and for the record, Whittington as well, that if this concern is preventing your organization from at least dipping its toes into the value-based reimbursement world, that concern is at least somewhat misplaced.
Baptist is still investing heavily in remaking the organization to perform better under value-based purchasing, because it understands that's where the industry is headed. Better to help shape and learn how to perform under such radically different payment schemes than have it forced upon you after others have already leapt ahead.
Lasting Value The value of participating in such risk-based reimbursement, whether in pilot form or in its fully implemented form, across the organization, is not only in the gainsharing achieved, but in redirecting processes and protocols to achieve lower cost and higher quality healthcare. Those gains are probably permanent, for the most part, which improves healthcare efficiency for everyone.
In the end, we're all likely to be patients, after all.
Not only that, but demonstrably better, cheaper, more efficient care provides your organization with a better competitive foundation, that is, if you believe value-based purchasing, no matter how imperfect, is the future.
Even if you don't, you gain insights into how to operate more efficiently in areas where you may not be participating in value-based reimbursement, provide higher quality care, and appropriately determine what care costs you do provide. This happens for all your patients, not just those who are attributed to an ACO or bundle.
I concede, the reset of the baseline, when it comes, will feel like you're being punished for your achievement. But sell it to yourself the same way you'll probably be selling participation in Medicare's new proposed mandatory bundles to the outpatient partners you are busily rounding up: You may have to push down your length of stay, but your beds will stay full because if you are more efficient, we'll send patients to you more frequently.
The same will be true for your hospital. This is already going on in limited geographic areas in the private sector. Many big employers are already effectively guaranteeing volume for their partners, assuring them that if they meet certain performance and quality targets, they'll send all of their employees with a particular condition to that facility.
It seems a better bet to expect more of this, not less.
"There are CEOs who stay on too long, either for the money, or the prestige, or whatever… That's not good for staff, patients, or the community," says Jeff Thompson, MD, who is vacating the top slot at Gundersen Health after 14 years, and defining a new role for himself.
Jeff Thompson, MD, president and CEO of Gundersen Health System, is always in motion, so it came as no surprise that he mentioned the term "momentum" at least 20 times during our conversation a few weeks ago, after he had announced that he would step down as CEO, but before his successor was named.
Thompson is in good health, fit, and only 62, so many were surprised when he announced his impending exit as the leader of one of the nation's more progressive health systems. So progressive, in fact, that former CMS administrator Don Berwick, MD, in closing remarks at the Institute for Healthcare Improvement's annual conference in late 2014, suggested six items healthcare leaders should accomplish in 2015. One of them was to contact Gundersen, which is based in La Crosse, WI.
Jeff Thompson, MD
Why He's Leaving Thompson's decision to leave hinged on his desire that his successor not lose momentum in a rapidly changing environment for both the business side of the organization and clinical practice.
"There are CEOs who stay on too long, either for the money, or the prestige, or whatever," he says. "If they do stay on too long, the organization starts to lose momentum. That's not good for staff, patients, or the community. I thought I would not allow that to happen."
He's careful to avoid the term "retirement." Gundersen and its predecessors are the only places Thompson has ever worked as a physician and he'd like to continue to work with staff development and external opportunities in addition to a limited practice schedule. He's board-certified in critical care, neonatal and perinatal medicine, and pediatrics.
"My request is that the next CEO will let me stay with the organization, at arm's length from the executive suite—and allow [him] to steer [his] own ship."
Last week, the organization named Scott Rathgaber, MD, a gastroenterologist and fellow longtime Gundersen employee, to replace Thompson.
Thompson, who says he's "not tired of the job at all," says he decided last year to make the change while things were going well, "not when we're in an organizational crisis, or a health crisis for me."
He didn't set a hard timeline, which gave the organization's board time to fully vet all internal candidates before expanding to a national search. The search committee, three Gundersen physicians and three community board members, did not include Thompson.
But Rathgaber can thank Thompson for the creation of a CEO training program set up to identify top leaders so that the next leader of Gundersen wouldn't have to go through a protracted and divisive selection process, as Thompson did 14 years ago. And the committee can thank him because no outside search was necessary.
That Thompson was able to ensure a much smoother transition for his successor is not lost on Rathgaber. "Jeff has proven to be a tremendous transformational leader," he says. "I will use what I have learned from him to chart my own leadership course and style… but his imprint will be on me as well and will inform my actions in the future."
Thompson explains his lack of involvement in the selection process for his successor: "I wanted [the board] to pick my successor because they will need to be behind this person to lead us into the next decade," he says. "I will be vigorous in my support, but… the board is responsible for the success of the CEO."
Scott Rathgaber, MD
A Legacy of leadership Under Thompson's leadership, Gundersen has ranked in the top 5% of hospitals in the nation for clinical quality care for seven straight years, as ranked by Healthgrades, and has recently opened a new patient tower.
Less visibly, but more importantly, says Thompson, the organization has had a longstanding focus on quality improvement. In fact, its top leaders still gather each Friday morning for an hour to review and share quality improvement efforts. As a physician-led organization, Thompson says all of Gundersen's clinicians are expected to lead and contribute to these initiatives.
Other achievements of his tenure include being among the key organizers of AboutHealth, a 47-hospital regional collaboration among Wisconsin's top-performing healthcare organizations. The coalition's goal of improving quality and lowering costs through regional partnership is in its early stages, but members have the same electronic health record platforms and care for 90% of Wisconsinites as well as sizable populations in parts of Illinois, Iowa, Minnesota and Michigan.
And, Gundersen is the only health system in the nation to achieve 100% energy independence through a combination of efficiency initiatives and renewable energy projects.
The Transition and Beyond With that momentum solidly established, Thompson was ready to transfer the reins.
"It's a very hard job. It takes a lot of courage and durability. If not, you can't live your values. I get up every morning and I say, boy, I have hundreds of thousands of lives, seven thousand employees, and billion dollars of the community's money that I'm responsible for," Thompson says. "I have to admit over time that that does wear one down, but I have a fair amount of energy and I love making a positive impact."
Thompson plans to stay on in a leadership capacity during a transition period, but will leave it up to Rathgaber as to how long that period will last.
"I'll start moving in the direction of letting [him] get a feel for this, but there are a lot of things he can benefit from, including external people he needs to know," he says. "So I will leave it up to him. A few weeks would be fine, but several months would also be fine."
In the meantime, Gundersen's five-year strategic plan, which debuted this summer, is rolling along. Among the priorities are continuing to build out Gundersen's outlying clinic presence and developing the AboutHealth network.
Thompson says the biggest challenge for Rathgaber will be to avoid becoming overwhelmed by the complexity of the job's challenges. "You can't get buried in the complexity to the point where you're not delivering improvements to care and health to the individuals we serve," he says. "The people who will serve their communities best will be those who can rise above the complexity."
As for the shifting ground caused by health plan and provider consolidation, senior leaders need to keep in mind the ultimate goal—improving the health of the communities they serve, he says. If that can be done better through consolidation, Thompson is all for it. But it's easy to lose track of the top goal.
"Staying independent or not is not the goal, it's a tool, while the goal is serving the community," he says. "Sometimes that might be [merging], other times it might be partnering."
Though he'll chart his own course, Rathgaber says he'll try to imitate Thompson's admirable qualities. Rathgaber told me that before he embarked on leadership training, he was quite sure his career would have been very satisfying providing the best care for patients one at a time. But as he took tentative steps into leadership, he understood how much more impact he could have at that level.
"I was surprised by how energizing and exhilarating the learning was," Rathgaber says. "I came to understand and believe that I could positively affect more people's lives (both patients and staff) if I could lead successfully. With each increase in leadership responsibility, I found this to be more true and quite gratifying. The CEO position became a natural progression to the opportunity to enrich the most people's lives."
It's a valuable lesson for all health systems.
On a personal note, I will miss Thompson. He was one of the first health system CEOs I interviewed when I started covering finance, and later leadership, for HealthLeaders Media. He was not only routinely a great, thoughtful quote, but he always made me feel as though I was talking with a peer, and treated me with respect. He never big-timed me—that happens surprisingly often in this business—and was always ready to share best practices generously with our readers.
Insurers claim that their industry's consolidation will benefit provider organizations through economies of scale. But hospital and health system CEOs don't buy that argument.
In some ways, the announcements that the nation's "big five" health insurers intended to shrink to a big three, with Anthem and Aetna consuming slightly smaller prey in Cigna and Humana, respectively, was unsurprising. Both deals were telegraphed for weeks prior to their announcement.
But unusually, stock prices of both the acquirers and the acquired soared. The markets think the mergers make huge sense, obviously. But the markets are interested in one thing: profits—and that, say many who plan to oppose the deals, is evidence the public will not be served if they are ultimately allowed to combine.
Mark Laney, MD
The Department of Justice and the Federal Trade Commission will weigh in eventually, but if they're leaning toward challenging either or both mergers, they'll get plenty of support from hospital and health system CEOs, who say, among other complaints, that any savings from such consolidation will accrue not to patients but shareholders, as the market reaction suggests. Hospitals can expect more pressure to lower costs—and their revenues—from negotiators who will have a stronger position in many markets.
"I'm opposed to both deals," says Mark Laney, MD, president and CEO of Mosaic Life Care, a health system headquartered in St. Joseph, MO, that covers 21 counties with its hospital and clinics in northwest Missouri, northeast Kansas, and southeast Nebraska. "It is likely these would result in cuts to hospitals and physicians groups, who are already struggling with decreases in Medicare and Medicaid reimbursement."
Laney cites the "dramatic" increase in stock prices of the four companies over the past six months (Cigna is up 57% this year, while Anthem is up nearly 30%) as evidence of where investors think the money will flow. Laney and Mosaic will oppose both mergers on principle through the Missouri Hospital Association and the American Hospital Association. Laney says the consequences of such a concentration of power among three companies would lead to greater pressure for providers themselves to consider following the insurers' lead by creating mega-systems, which indeed is already happening.
That's one area for opponents of these mergers to find hope that they will never be consummated. The Justice Department and the FTC have recently both been more aggressiveand successful in denying or dismantling what they've ruled as anticompetitive mergers in the hospital and health system space. This leads some observers to believe the feds will be extra tough on the health insurance company mergers, especially given that the two huge deals have to be considered a package deal in some ways, given the likely dramatic effect on the marketplace from their combinations.
The four companies involved in the announced deals are claiming that economies of scale will reduce costs for both purchasers and consumers because of reductions in administrative costs that will ensue.
"I am highly skeptical of that assertion for several reasons," says Ron Paulus, MD, president and CEO of Mission Health, which operates six hospitals around its headquarters of Asheville, NC. He says with administrative costs at currently at 10% of total premiums, there's little room for premium reductions. Even with a reduction of administrative costs of 10%, which he calls likely unattainable, total premium costs could only be reduced by 1%.
Ron Paulus, MD
"Further, post-merger, it is common for insurers to actually incur higher administrative costs as they consolidate claims processing and customer service systems—a process that often takes years (and many insurers have been on such a journey for decades)," he adds.
Paulus, whose organization is likely to be among the least affected, because none of the payers involved have more than a tiny presence in the local market, nevertheless opposes them and says the mergers are a growth strategy rather than an efficiency play.
"Three or fewer insurers already control more than 50% of the market in 29 states prior to the most recent mergers," he says. "Insurers are operating in a mature market (where those who can be insured are already insured) [and] where the only other way to grow in the market is to acquire a competitor."
Paulus says policymakers and those in government who may be in a position to challenge the mergers should remember that only care transformation can reduce costs while simultaneously maintaining, or hopefully improving, quality and safety of care.
"These mergers drive horizontal consolidation, when in fact vertical integration with care delivery is the only real path to transformation," he says. "Looking back to history for lessons, for all the consolidation we have seen previously, the market has not seen lower or even moderating premiums. In fact, the only time we saw moderating healthcare premiums is when the ACA passed with the various mandated pricing parameters."
Even other insurers will likely oppose the deal, including those organizations that have the state Blue Cross licenses to which Anthem doesn't currently own the rights.
A Race to the Bottom for Hospitals?
Kurt Barwis, president and CEO of Bristol Hospital, not far from Cigna's headquarters in Bloomfield and Aetna's in Hartford, says the consolidation is concerning but inevitable. He says his hospital, a 154-bed standalone organization, enjoys excellent relationships with Aetna, Anthem, and Cigna, and that the consolidation among insurers is understandable because the same thing is going on with providers, in his state and many others.
"It seems logical that payers would do the same," says Barwis.
Kurt Barwis
But Barwis says Bristol, as a high-quality, low-cost provider versus its peers, is positioned well, although he concedes payer industry consolidation could be disruptive to the hospital's future, specifically through contract negotiations. That's where Bristol's affiliation with a geographically diverse group of providers can provide some protection.
"Consolidation will happen. We need to adjust [and] evolve our capabilities in parallel to sustain our mission and future," says Barwis. "High quality, low cost alone will not cut it."
Barwis says even if payer megamergers are quashed or altered by regulators, Bristol Hospital already feels downward pressure on reimbursement, which will continue regardless of what happens with these big mergers.
"With our low-cost position, you think we'd be the sure bet for continued contracting success. But competition in our market is intense. The CEO of the largest system in my region said to me the other day that 'It seems like it's a race to the bottom' in terms of cost [and] reimbursement."
Bristol fits the profile of low cost, says Barwis, but health plans are getting ever more granular with that definition.
"When I say we are low cost, I'm typically referring to the overall cost per discharge," Barwis says. "The payers are very sophisticated. If I'm not careful, I could be carved out of a critical, high-contribution service line."
Private sector hospital and health system turnaround specialist David Shulkin, MD, takes on his biggest career challenge—turning around the troubled healthcare system of the Department of Veterans Affairs.
Almost 15 months following the embarrassing and deadly wait time scandal at several Veterans Administration hospitals, the agency has a new leader who is a physician, who cut his teeth in private healthcare administration, and who has entrepreneurial experience.
With those three boxes checked, the hope of the selection committee that recommended him to the President is that he'll bring new thinking into an agency that sorely needs it. They hope he'll be a leader who can break through entrenched practice patterns and bureaucratic snafus to build an organization that serves veterans as efficiently and selflessly as many of them have served their country.
David Shulkin, MD
His name is David Shulkin, MD, and he took the oath of office July 6.
Until he accepted the undersecretary role, Shulkin had been president of Morristown Medical Center, Goryeb Children's Hospital and the Atlantic Rehabilitation Institute (part of New Jersey's Atlantic Health System). Prior to that, he led a high-profile financial turnaround for New York's Beth Israel Medical Center from 2005–2009.
He also has entrepreneurial chops, as founder of Doctor Quality Inc., one of the first consumer-focused healthcare quality information web sites, which was acquired by Quantros Inc., in the early 2000s.
Shulkin says he didn't seek the VA job, but when approached, felt a duty to try to serve. He cites his father's role as a as an Army psychiatrist—the younger Shulkin is an internist—and his grandfather's role as a VA pharmacist as reasons he would like to take a crack at helping reform the organization.
Although Shulkin is not a veteran himself, many veterans groups supported his confirmation. He says their support will be critical as he tries to reform the organization. That support may become stronger if he commits to concrete reforms. A recent editorial urged him to focus on specialty care within the VA, while farming more routine care out to private providers. That specific recommendation is only one example of the scope of structural change that many veterans, taxpayers, and congressional leaders are counting on him to deliver.
Following is a conversation between myself and Dr. Shulkin shortly after he took the oath of office, edited for clarity and brevity.
HealthLeaders Media: I'm sure there's a good story behind your desire, and your selection for this job. Why did you want it?
Shulkin: Well, the issue about what's been happening at the department has been a very public story over the past 15 or 16 months. Certainly when I read about the wait crisis, I had the reaction of so many people, which was that I was really disappointed that our veterans weren't getting the type of care they should be getting.
After that sort of sunk in for a while, I began to ask myself if there was anything I could do to be helpful. Then, when I was approached… to be part of the solution, it was something that I really thought long and hard about: First whether I could be helpful, and second, whether I thought that I had the duty.
I decided that I just couldn't walk away from this opportunity—that it is too important for the country and that I personally have a mission to help be part of the solution.
HealthLeaders: How did the offer materialize?
Shulkin: First, I was approached by the administration on whether I would have an interest in exploring this. The process takes quite a while, starting with a commission appointed to identify the skill sets and competencies of the right leader of the VA.
As you know, one of the things I bring to the table is the private sector perspective. I have not worked in the VA system in quite a long time. In fact, the last time was when I was a resident rotating through medical centers.
So one of the issues that I considered was whether it was important [to the search committee] to bring someone from the outside who would bring this perspective and sort of challenge the status quo, or [whether there] was an interest in maintaining and possibly bringing someone from the inside who knew how to change things.
So that was part of the discussions we had. There is a recognition that within VA that we do have to relook at our practices and be willing to make some hard decisions and some major changes going forward.
HealthLeaders: What is your top priority as you take over at the VA?
Shulkin: My top priority, the overarching priority, is to restore the trust and confidence of the veterans' health system in the minds of the people we care for: the veterans. That's my most important mission.
What we've experienced and seen over the past 16 months is really a break in the trust between the people who rely on us and the system.
Now, how you get there, that really breaks down into a number of different strategic priorities for me, but overwhelmingly, we're not going to be successful if we don't have that confidence back in the system.
The absolute priority right now is to fix the access issue. We can't provide high quality care if people aren't able to get appointments to get the services they need.
HealthLeaders: Many of the recently exposed failings of the VA are, at some level, both a failure of basic customer service and lack of accountability. What are your views on how you instill a culture of customer service not only in healthcare, but in government healthcare?
Shulkin: When you talk about this issue of customer service, I think it's important to differentiate. Largely, my assessment is that this is not a people issue. The VA has about 350,000 employees, and for the most part my assessment is they are extremely committed people who are committed to the mission and who want to do the right thing.
There were a few, a relatively small number of people, who had lost their way around the values and mission and we've worked hard to remove them from the system. But this is really a systems failure, not a people failure.
The systems we have become so cumbersome and bureaucratic that it really has let the veteran down. So my goal is to help the people who work in the system become empowered to really be able do what they came to work to do which is to serve veterans. Everything I'm doing is to refine the way we do business to help our people do a better job serving veterans.
HealthLeaders: Who do you view as your top "internal" constituents? What among your strategic plans requires their cooperation?
Shulkin: When you operate in a public system like we do, there are large numbers of constituents. Clearly our number one constituent is the veteran. Everything we do needs to put veterans at the center of what we focus on. So establishing—as we're doing our planning—making sure there is feedback and input from veterans themselves is the number one internal priority.
We're fortunate in that we have veterans' service organizations that represent millions of veterans that are very effective at being able to help us get a correct assessment of the voice of the customer, so those relationships with veterans service organizations are absolutely key.
I've never been involved in a change effort that doesn't involve your internal staff that has been successful, so it's very important that there be buy-in not only from the people we serve but also our staff and physicians.
HealthLeaders: How do you think your experience running private sector hospitals will help you as you take over the VA?
Shulkin: I think that one of the root causes of what led to some of the issues in VA was a sense that the VA system was different, and that the VA system was in many ways not comparable to what was going on in the rest of healthcare.
Frankly, my perspective is that the same market forces that are impacting private hospitals and private physician groups are impacting VA. That is, a strong drive to reexamine what you're doing, a drive to create better value, to be more customer focused and to improve your outcomes.
I think my experience in the private sector in having to sit down and really relook at business models is going to allow me to come in and to challenge some of the issues in VA that frankly probably need to be challenged. Bringing those best practices from the private sector into the VA will help me in being effective in achieving the outcomes we're looking for, which is better care for veterans.
HealthLeaders: What's the biggest difference/similarity between running a thousand hospitals and clinics versus one?
Shulkin: The biggest difference is the size and the scale. Implementing change efforts on this large a level is clearly something that is very different than when you do it on a smaller and geographically restricted group of hospitals.
But the similarity is that the leadership principles do translate in running either a small or large group of hospitals. As a leader, you need to effectively articulate a vision that is communicated with consistency and with clarity, and feedback to the organization on whether we are achieving the goals or not is extremely important when you get to the size of an organization we're talking about in the veterans' health system.
One of the differences for me is that creating an effective team so that there is consistency and clarity around what the goals are is going to be extremely important because no one person can have an impact on a system this big.
HealthLeaders: How do you plan to instill a culture of accountability throughout the organization?
Shulkin: The way you do that is by really adhering to the principles of transparency. [It is] setting goals, having data that is reliable, and having those measures essentially understood and available to your leaders in the system and to the frontline staff.
Feeding back the progress or the lack of progress with those goals and measures, I think, is the way you hold people accountable. The data that's available in the VA system makes this extremely possible to do if you adhere to the principles of transparency and regular communication.
HealthLeaders: How much difference do you think one person can make in any bureaucratic institution the size of the VA?
Shulkin: Well, I guess we're going to find out. That's the best I can say. I'm a realist about this, but I am going to approach every day as an opportunity to make a difference and improve. That is the way I've thought about coming into this job. This is a very big task. It is a very big system and, as you said, the impact of any individual is really unknown.
But the way I am approaching this is that it is not only a critical mission but this is also a huge privilege to be given the opportunity to lead this system, so I will take advantage of every minute that I have in this role, give every effort, [and draw on] all my past experience to help me work within the system to make a difference.
Getting a handle on your cost structure is a meaningful first step toward competing in the future. But more is required, especially from small healthcare providers.
In the May cover story of HealthLeaders magazine, "The Great Transparency Movement?" I looked into the issues complicating the ability of consumers, hospitals, and employers to remove some of the opacity surrounding what we pay for healthcare. All still have plenty of challenges—even companies whose express purpose is transparency. One big mistaken assumption many have made in dealing with this issue is that if enough information is made available to patients, they'll choose wisely.
That question mark in the headline for the story was intentional. It's not necessarily the case that greater transparency on price will move the needle on patient involvement in their care or quality, or that price transparency by itself will make much of a dent in the unsustainable cost of healthcare.
Rita Numerof, PhD
Let's be clear: the lack of solid info for prices is a big part of the problem.
"Not only have consumers been shielded from the cost of healthcare, but healthcare leaders, physicians, and even payers have also historically been shielded," says Rita Numerof, PhD, president of Numerof & Associates, Inc., and a source for the article. Many healthcare organizations are just now trying to tackle what was resolved years ago in most other industries: what it costs to provide a particular service, product, or set of services and products. Price is usually the result of knowing what it costs to provide a service, and adding a reasonable and competitive margin, so that the purveyor can effectively compete.
But price transparency is only part of the equation that will encourage value in healthcare spending. And it's not even the first part.
Think of it this way: when a department store executive buys a load of T-shirts and finds that a batch has a defect, she knows how to get appropriate credit and replacement. When it comes to healthcare, executives historically have had no such recourse. But that's changing, and in fact has been changing for a few years now.
"That's why we need to look at transparency as more than just price," says Numerof. "We are so far from a true market-based model in healthcare delivery that it should be concerning to most healthcare leaders, because most of the money flow in healthcare has been at a gross-up level. They can't even see their cost structure from a service line perspective."
What's needed is a move toward activity-based costing, Numerof says, which means the cost of all the resources required to produce a certain service, or in healthcare, even an outcome. Without that focus, which includes calculations on the raw costs of goods and materials, some formula for overhead and indirect costs, and the amount of time to deliver that service or product, value-based healthcare is just an already-tired buzzphrase.
I'm no accountant, but activity-based-costing sounds complicated and seems to involve some guesswork. But Numerof says that even if many of the variables are approximated, "executives will be a lot smarter about what it really costs them."
One of my sources for the transparency cover story, Robert Pendleton, MD, chief medical quality officer at University of Utah Hospital and Clinics in Salt Lake City, agrees. His health system has set up a somewhat complex internal infrastructure to help them understand what it costs to provide care delivery down to the patient encounter level, as he puts it.
"Understanding costs at that level helps us learn from variation. If with Provider A it costs X dollars while Provider B costs Y dollars, you can look at the process of care delivery to understand where the price is coming from," he says. "So it allows us to really prioritize and direct improvement efforts on a system level and also provides a sense of ownership for individual providers in context of their peers."
Robert Pendleton, MD
Over the last several decades, most health systems have focused on their biggest cost, personnel, as opposed to looking and rethinking care delivery processes, Numerof says. But many more sophisticated healthcare organizations are looking seriously at activity-based costing as a starting point as they negotiate discounted rates with payers and even employers directly. Over the past several years, delivery processes have gotten increased attention in cost reduction efforts, but much more work needs to be done to eliminate waste and overutilization.
When size trumps efficiency
All the repositioning, mergers, and jockeying for position as healthcare reimbursement changes can distract from the need for efficiency. Large, dominant payers or providers won't necessarily reward those that are really seeking to add value to the healthcare services they deliver.
An example: I've heard from senior executives who complain they are the low-cost provider in their area or region, yet they're not rewarded for their cost and quality advantages—either because they don't have the heft of being the dominant local provider, or local employers won't contract with them because they're too small, or payers don't reward them for their efficiency. All of these arguments tend to begin and end with the fact that it's not a fair playing field for smaller organizations. Size matters.
Don't give up, Numerof says. "I get involved with clients who tell me they're the low-cost provider and not getting recognition. But how are you demonstrating it? Who are you negotiating with in that payer organization? Let's talk about the quality of that conversation. Payers are also under a lot of pressure to change their business model and engage with providers very differently than they have historically. This is an opportunity to do that."
The U.S. Supreme Court's decision settles one argument, but the ruling does not affect all hospitals or patients in the same way—and it doesn't even address other big problems with healthcare access and cost.
In a decision that probably should have been expected, given previous rulings on the Patient Protection and Affordable Care Act, the U.S. Supreme Court voted 6-3 Thursday to keep in place federal insurance subsidies in states that did not set up their own health insurance exchanges.
I spoke with several hospital and health system CEOs afterward to understand how the King v. Burwell ruling affects their organizations. The long-awaited decision provides clarity, if nothing else, that Obamacare is alive and well. But the ruling does not affect all in the same way.
Mark Herzog
In Wisconsin, for example, which is one of 34 states that decided not to create a state exchange and not to expand Medicaid, a different ruling would have thrown healthcare in the state into chaos, says Mark Herzog, president and CEO of Holy Family Memorial, a 62-bed hospital and associated health system in Manitowoc. "Without subsidies, a significant portion of Wisconsin's strategy for reducing the number of uninsured would have been dismantled. Absent a legislative fix at either the federal or state level, thousands of people could have become uninsured and a huge financial burden placed on Wisconsin taxpayers."
He says that's the opposite of what Gov. Scott Walker and Wisconsin lawmakers intended when they adopted a "hybrid approach" to coverage expansion in 2013. That plan included expanding Medicaid eligibility for those below 100% of the federal poverty level ($11,670 a year) and eliminating Medicaid eligibility for those above 100%.
"Under Wisconsin's plan, the 60,000 people who lost their Medicaid coverage would be able to purchase low-cost, subsidized health coverage on the exchange," Herzog says. "And today, they still can."
Herzog says the irony of the entire healthcare dialogue from both political camps is that, while something like half of the targeted uninsured population retains insurance coverage, the quality of the coverage that's being bought is really quite low.
"Most family deductibles are in the $10,000 to $14,000 range, something even middle and upper income families would consider catastrophic coverage only," he says. "Time will tell whether these plans—which are not restricted to exchange offerings—really meet the intent of the ACA to engage consumers proactively in managing their health with a provider partner. That kind of deductible scares many from even seeking preventive care for fear of the follow-up bills if a test or procedure is needed."
Herzog contends that many such individuals really are not aware of their coverage details and only find out after they have to cover several thousands of dollars in uncovered services.
The cost of healthcare, and who bears it, indeed feeds into the circular nature of the debate surrounding Obamacare, what it's intended to do by those who passed it, and now, thanks to several top court decisions, what it can do.
"Implementation of the ACA will continue to be tumultuous and dynamic," Herzog predicts. "This is just another of many momentous decision points to come over the next five-plus years."
Fear of sowing chaos may have factored heavily in the court's decision. What many on both sides of the debate fail to recognize is that healthcare costs will be borne ultimately by taxpayers, both individual and in the business community, through cost shifting.
Doug Luckett
In fact, the Supreme Court's decision gives opponents of Obamacare a paradoxical sort of political cover, in that now they do not have to face the fallout that would have come with a different court ruling in which at least 6 million potential voters would have been alienated.
(Imagine the stories queued up to hit the local news about tests and procedures now canceled because of this decision. That load of bad PR has now been averted.)
"Moving more people to an insured status, no matter your political leanings, is the only thing that can reduce the cost-shifting burden to employers and employees who pay most of the health subsidy in our country," says Doug Luckett, president and CEO of 435-bed CaroMont Health in Gastonia, NC. "The burden can't be borne for long by our working population without it."
North Carolina uses a federally run exchange, and state residents would have lost subsidies had the court decided for the plaintiff.
"There is no free lunch in healthcare. It seems that we have moved to the side of the thought that quality healthcare is a right in the USA, not a privilege," says Luckett. "Equity in paying for the quality, adequacy, access, and capacity for this system, no matter how imperfect, is easier if most everybody picks up some of the freight."
Some things won't change with the decision, according to Jim Nathan, president and CEO of Lee Memorial Health System, a 1,423-bed public health system in Fort Myers, FL, where the governor and legislature has had a long-running battle of hot potato over whether to expand Medicaid and accept federal subsidies. At the moment, expansion seems unlikely. So yesterday's decision is both good and bad for Nathan's organization and for those who need healthcare coverage.
"This decision will not make states that have chosen not to expand any more likely to do so," he says. "There is strong political leadership simply opposed to Obamacare, and I do not see this decision changing that opposition."
Nathan says it's unfortunate that Florida did not follow the lead of the state senate this year, which he says proposed a businesslike, conservative approach to expansion.
Jim Nathan
Ultimately, people should be cautious about taking too much meaning away from this one court decision, not matter how momentous. In a snapshot of the ruling's meaning to hospitals' business prospects, the top rating agencies at Standard & Poor's and Moody's were quick to contend that the decision should have no effect on the healthcare sector. Period.
Paul Keckley, managing director for Navigant Healthcare, who accurately predicted a 6-3 decision in favor of Burwell prior to its release, agrees that the ruling will have little effect on the financial prospects for most healthcare organizations simply because it maintains what has become the status quo.
"Hanging in the balance was a substantial uptick in bad debt, so [the decision] takes that off the table, at least for the time being," he says.
He also says that although the decision settles a lot, much is still uncertain. For example, the continued instability of the individual insurance market is what people will miss in dissecting the Court's decision, he says.
"This didn't fix young people entering the workforce who don't have access to employer coverage. All this did was eliminate a part of the puzzle, but it doesn't solve it," says Keckley. "If more and more companies are dropping coverage and more people are working for themselves, we need a vehicle for coverage, and the exchanges are only a piece of that."
Nathan goes further. Throughout all the health reform debates of recent years, he says it's been forgotten, or it's conveniently not in most politicians' talking points, that commercial health insurance, which has borne much of the gross payment for health insurance for the past 50 years or so, "is dying."
"This [court decision] dovetails on the widening gap [between] the very wealthy and the very poor in our nation," he says. "The movement to high-deductible health plans may make the premiums more affordable but when someone is seriously ill, they often won't be in a position to pay their out-of-pocket expenses. We are far from resolving how to pay for healthcare services and how to assure the appropriate use of healthcare dollars to deal with chronic health conditions, preventive care, and coordination of care."
Many organizations are finding they can standardize clinical care and achieve economies of scale through deals that stop well short of a traditional merger or acquisition. But can such partnerships last?
This article appears in the June 2015 issue of HealthLeaders magazine.
One question plaguing hospital and health system senior executives is whether their organization has the size and the scale to effectively manage a major business disruption underway in healthcare. If it doesn't, seeking to acquire or be acquired may once have been the only choice—but no longer.
Many organizations believe they can find the same benefits on a much quicker time frame, and with less of the political fallout that arises in hospital M&A. Earlier this year, Tenet Healthcare finally bowed out of a proposed acquisition of five hospitals in Connecticut after years of regulatory and political wrangling. With time of the essence in adapting to provisions of the Patient Protection and Affordable Care Act, as well as the commercial shifts going on simultaneously, such delays can put necessary changes on hold amid the uncertainty. Even if a merger does go through, the cultural aspects often are much trickier than the financial details involved in M&A.
Hospital and health system consolidation is on the upswing for a variety of reasons, chief among them the belief that growth will come from efficiency, economies of scale, and lower-acuity health interaction and management. However, traditional mergers and acquisitions decreased to 72 hospital transactions in 2014 from 86 in 2013, a 14% decrease, but remained elevated historically, according to Irving Levin Associates, which has tracked such statistics for decades.
Healthcare is becoming longitudinal instead of episodic. Post-acute and "pre-acute" care is where the money will increasingly be spent in healthcare. Provider organizations focusing on only one cog of the continuum may get left out.
If your organization is not involved in post-acute care beyond finding a place to send patients when their acute stay is over, you may not be relevant much longer. That's because healthcare is becoming longitudinal instead of episodic. That's a fancy way of saying that in a more capitated environment, those that are focused on only one cog of the continuum may end up on the outside looking in.
Don't think you won't ultimately end up in a capitated environment, by the way. State Medicaid plans are leading the way in many regions that have resisted capitation. More generally, it was evident even four years ago that risk was being shiftedto the provider and the patient. If healthcare executives didn't feel capitation pressure then, you certainly do now, likely both as a patient and a senior leader in healthcare.
If you are an executive at an acute care hospital or health system, you must have a post-acute strategy that you think you can count on—and preferably a "pre-acute" strategy as well (more on that in a moment). I've heard it said that those in acute care view themselves as the quarterbacks of healthcare while viewing the post-acute care space as the equipment managers. That attitude will have to change.
At a post-acute care conference I recently attended organized by naviHealth, a Brentwood-TN based manager of post-acute care services that partners with hospitals, health systems, and health plans, I was reminded that patients no longer need to wait for care, so neither can those that provide them services. And patients increasingly won't stand for uncoordinated care, which is why developing that post-acute strategy is so important: it reflects back on your organization not only reputationally but increasingly financially, as both government and commercial payers move toward rewarding for outcomes versus services.
NaviHealth itself is evidence of this shift: it is the post-acute care benefit manager for more than 10% of the nation's Medicare Advantage beneficiaries. It's doubled in size in a year, and is itself backed by Select Medical, Ascension Health Ventures, BlueCross BlueShield Venture Partners, and other big-name private equity investors. Post-acute care represents up to 25% of the spending for Medicare beneficiaries, and with a fragmented and wasteful industry to reform, naviHealth has a lot of opportunity, as do other organizations that seek to improve transitions and better coordinate patient recovery from acute care stays.
As healthcare futurist Anders Sorman-Nilsson put it so well during his keynote speech at the conference, the healthcare customer—just like in other industries—is moving from analog to digital. "Healthcare needs to move into the space where the digitally enabled customer is; that is, move from focused episodes to a digital arc of information, helping people make smarter decisions," he says.
That shift to digital has big implications for how customers/patients will be making choices about where to receive their healthcare. They'll share data with those they think are working in their best interest, and that data is the key to improving the quality and the cost of the healthcare they receive. "The patient is tired of waiting and is taking their personal health plans into their own hands. Healthcare needs to be a fusion of the physical episode and the preventive digital arc," Sorman-Nilsson says.
Thus, winners in healthcare will have more communication with patients, not less-—but much of that communication will come digitally, in smaller and smaller bites. This shift applies to "pre-acute" care as well—that is, primary care. That's one reason why health systems are acquiring primary care physician practices left and right: it's a way to get an early connection with your future patients.
"Losers will be those who ignore the empowerment that comes from digital data flow," says Sorman-Nilsson. "Winners will curate a human-centric patient journey that is not just a physical event but a digital arc."
Think of banking, where customers used to have to visit a branch to get business done. Now, nine times out of 10, they're doing it from their phone, their laptop, or the ATM. We used to book trips with travel agents.
With a primary care patient relationship, healthcare organizations can build that early connection. Then, combining pre-acute care with a post-acute presence encourages patients to remain in with one provider organization for much of their lifetimes. Given trends in payment, that is what executives should want.
How you structure these capabilities as a business model is entirely up to you. You can build contractual relationships, build from scratch, purchase what you don't have, or do a combination of all three. What's important is that you're not myopically focusing on your own business segment within the healthcare industry, whether that's acute care or something else.
But make no mistake, post-acute, and even pre-acute care is where the money will increasingly be spent in healthcare. You'd be wise to make sure you can add value to that stream.