Monthly Archives: October 2012

Can “Big Med” Save the Healthcare Industry?

Atul Gawande has, once again, crystallized some of the fundamental issues in how healthcare in the United States is delivered by making an interesting comparison to the Cheesecake Factory. He asserts that finely tuned corporate practices have enabled the Cheesecake factory, like many other large corporations, to consistently deliver a high quality, reliable and affordable experience for its customers. Does healthcare need to move in this direction, with transformation being enabled by “Big Med” healthcare corporations? This is a debatable position but two things are clear: (1) what we have is not working and (2) entrepreneurism and the ultimate prize of creating a multi-million dollar corporation from scratch is the “American Way” and part of the American dream.

Our current system has failed, pretty miserably, over the past 40-50 years in particular. The percentage of our GDP going to healthcare has risen from 5% in 1960 to 15% in 2008. We spend twice as much on healthcare as we do on food and more on healthcare alone than China spends on all goods and services. Despite this premium pricing, we have the worse quality of any industrialized nation and therefore the worse value for our healthcare dollar among these nations. Other countries have successfully solved or improved their healthcare issues by heavy governmental intervention including single-payer solutions, national guidelines and requiring use of Information Technology (IT). Although some states have gone a similar route, notably Massachusetts and Vermont, this approach is not generally the “American Way”. Freedom of choice and the heroic entrepreneur are highly valued in our society. Therefore “Big Med” may be the only way to save and transform our healthcare system that actually fits our culture. The government can catalyst and create the right conditions but anything heavy handed will be pushed back against. The Affordable Care Act (ACA) probably represents the most that can be done at the federal level and it has received significant push back, although no one really has a better idea to solve this crises. Nevertheless, the ACA actually has created the conditions for the healthcare industry to transform.

The health plan and coverage impact has received much of the press but the really important and smart provisions are those that are impacting providers of care. Over half of the costs of healthcare is going to hospitals and physicians. One persons’ costs are another’s income. To decrease healthcare costs you will have to impact the income or at least the rate of inflation of the income of hospitals and doctors. Unlike the frontal attack on provider’s income that the Medicare Sustainable Growth Rate (SGR) threatens, provisions in the ACA take a more subtle and more fair and reasonable approach. The payment reforms take a two pronged approach. First, the regulations put providers at risk for efficiently managing the healthcare dollar through bundled payments and shared savings. This means that providers will have to begin to really understand their underlying costs. This has previously not been a major issue for providers because as long as you could negotiate enough at a macro-level to cover your aggregate costs, then you were OK. As a result, consolidating markets and gaining bargaining power with payers has been a fairly successful strategy for many providers. However, in a bundled payment scenario you really have to understand your costs at a micro-level because you will create a margin by being efficient in delivering your services below the revenue envelope created by the bundled payment. Different focus, different discipline but one that few businesses in other industries would or could ignore. The healthcare industry reimbursement model gave providers a pass on understanding their true underlying costs for a long time but that time is now over. Secondly, the ACA regulations are demanding more value for the dollar spent through value-based purchasing. This approach places the performance risk where it should be placed, in the hands of the clinicians that make the decisions. Insurance risk (the risk of catastrophic events) should be placed under the management of insurance companies. Insurance companies are very good at determining and managing risk but their reach into managing adherence to clinical care standards (i.e. performance risk) has been intrusive, disruptive and untrusted. It is time that performance risk is transferred to and shared with providers who make the decisions that drive 80% of the costs of the system. We are already putting patients at risk through various “consumer driven” products. The alignment is incomplete without including the providers more directly.

In this evolving market scenario, dollars will shift to those who can be more efficient while sustaining or improving the level of quality. There is plenty of room for improvement as the recent IOM study estimates that 30% of healthcare costs are due to waste. As a provider, to maintain your income you will need to really understand your costs, rigorously eliminate waste and sustain and improve quality. Even if the size of the pie shrinks, you will sustain margins by reducing your own internal waste and likely gaining market share from those who cannot. High quality and high levels of customer satisfaction will be the ticket to play. Sounds like market forces being brought to bear in the healthcare industry. Sounds like an environment where “Big Med” can thrive. Sounds like the “American Way”.

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