Why health systems need a hybrid strategy and ambidextrous leadership to ensure financial sustainability
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Reprinted from the
February 2020 edition
of HFMA’s Financial
Sustainability Report
Why health systems need a hybrid
strategy and ambidextrous leadership
to ensure financial sustainability
When the Affordable Care Act first began to roll out its programs aimed
at encouraging provider organizations to take medical risk from payers
and deliver value-based care, many hospitals faced a daunting challenge
knowing where to start.
T
he ACA offered providers The effect of these combined trends was to force
opportunities to participate provider systems to compete in a much more
in shared savings programs, complex set of inter-related markets, as shown in
bundled payment models and the exhibit.
DAVID G. ANDERSON,
PhD other risk-based programs, and Health systems have little choice but to com-
it created a medical loss ratio floor to give health pete across the board; ignoring any one market
insurers an incentive to shift care management would create vulnerabilities in the others. As a
activities to providers. The underlying result, health systems now compete with each
assumption was that shifting risk from payers to other for inpatient admissions and ambula-
providers would give health systems an incentive tory care, with each other and with insurers
STEVE WEYLANDT, to “manage population health” and make care for members, and with each other and a wide
MHA more affordable.a range of companies for other clinical services
Many health systems’ initial response was to (including insurers, many of which now employ
“launch 1,000 ships” by developing accountable physicians).
care organizations (ACOs), clinically integrated Given this complexity, and facing tighter
networks (CINs) and other vehicles, hoping margins, health systems can no longer afford
that some of them would find safe passage to to launch more ships. They need coherent and
the new value-based world. Because no amount effective hybrid “strategies for the middle” that
of business planning could predict which ships can generate reasonable ROIs, and leadership
would arrive safely, this was a reasonable initial flexible and skilled enough to play in a variety of
response. different markets.b What makes this challeng-
photo – andrea behrend
At the same time the ACA was pushing health ing is that the different markets shown in the
systems to pursue population health manage- previous exhibit require fundamentally differ-
ment, many clinical services markets (e.g., ent approaches to strategy development and
ambulatory care) were being disrupted by new implementation.
competitors and rapid technological change.
a. The Affordable Care Act set maximum medical loss b. Eggbeer, B., Wesslund R., Weylandt, S., “It’s not so
ratios that health insurers can earn on their insurance simple: Why provider organizations need a ‘strategy for
products, limiting their administrative costs and profits. the middle,’” hfm, December 2016.
1 | FINANCIAL SUSTAINABILITY REPORT | February 2020FEATURE STORY
COMPETING IN INPATIENT MARKETS
Inpatient markets are traditional markets that
Examples of the "1,000 ships" provider
health systems understand well. Inpatient care
responses to cost and quality pressures from
is subject to substantial economies of scale, and
ACA-driven health reform
barriers to entry are high. As secondary care
moves to the outpatient setting, inpatient care
has become focused on the most acute condi- Segments
tions, and volumes (numbers of discharges, • Medicaid Temporary Assistance to Needy Families
• Medicare-Medicaid dual eligible
patient days) have declined dramatically. Under • Medicare fee-for-service
these conditions, health systems must con- • Medicare Advantage
centrate on building sustainable competitive • Commercial administrative services only
• Commercial, fully insured
advantage, and consolidation is a proven strat- • Commercial health insurance exchange and private
egy for accomplishing this purpose, as discussed Types of Initiatives
Services
in the sidebar, “Inpatient market consolidation • Private and public exchanges
• Inpatient
• Direct contracting with employers
has led to stable inpatient markets in metro • Outpatient surgery, routine
• Network affiliations
areas.”c • Outpatient surgery, specialized
• Narrow and tiered networks
• Outpatient diagnostics, ancillary
• High-deductible health plans
• Cancer care
• Medicare reference pricing
COMPETING IN POPULATION • Clinical rehabilitation
• Centers of exclellence
HEALTH MARKETS • Emergency department treatment and release
• Value-based risk contracts
• Transplant
Like inpatient markets, markets for population
health are governed by traditional competitive Unique Mission
• Academic research
rules. The principal players in these markets
• Not-for-profit enter
are health insurers, which are paid 10% to 20% • Private enterprise
of total healthcare costs to manage the quality • Complexity of cases
• Subsidization of Medicare and Medicaid
and cost of healthcare services. Competing for
• Payer-broker-employer-consumer dynamics
members is their main way of growing revenue.
Relationships between members and insurers
involve substantial switching costs, making
health plan purchasing decisions sticky, and
“Fortune 500” list, two health insurers (United
creating long-term value for customer rela-
HealthGroup and CVS Health) are now among
tionships. Market share matters because large
the 10 largest public U.S. corporations, each with
insurers can negotiate lower rates with pro-
more than $200 billion in annual revenue.d
viders and gain a cost advantage over smaller
Health insurers have a significant advantage
insurers. As a result, like inpatient markets,
over health systems in markets for population
barriers to entry are high.
health, because they contract at scale with mul-
Building sustainable competitive advantage
tiple providers to deliver a wide range of services
in population health markets requires a variety
across broad geographies. Health systems that
of competencies, including plan design, pricing,
own insurance products and employ physicians
provider network contracting, claims processing,
who can manage the quality and cost of care, like
member services and cost management. Scale is
Kaiser Permanente and Geisinger, can compete
also critical, and since the 1980s, the market for
successfully, but these skills take a long time
managing population health has been consoli-
to develop. Health systems that don’t market
dating rapidly. Based on Fortune’s most recent
insurance products directly to employers or indi-
viduals must have contractual relationships with
c. Porter, M.E., Competitive Advantage: Creating and
Sustaining Superior Performance, New York, The Free
Press, 1985. d. “2019 Fortune 500,” Fortune, 2019.
FINANCIAL SUSTAINABILITY REPORT | February 2020 | 2Health system competition in the world of
the Affordable Care Act
Clinical services markets
Population Inpatient Ambulatory Consumer
health markets care care health services
Traditional Emerging
insurers, raising questions about whose “mem- benefits and unsentimentally disinvesting when
ber” a given person or family is — the insurer’s life cycles start trending down. Success requires
or the provider’s. a portfolio manager’s mindset of making good
As a result, despite all the ACA programs, short-term bets, maximizing benefits from
relatively few health systems are competing investments, getting in and out at the right time
vigorously in population health markets to date. and moving on. Building transient advantage
Most health systems remain heavily dependent does not replace traditional concepts of busi-
on fee-for-service revenue, taking little financial ness strategy, but it does have different rules of
risk. In a recent profile of the not-for-profit and engagement. Some of the most important are the
public health sectors, Moody’s Investor Service following.
found that only 3.7% of the revenue of 284 free-
1
standing hospitals and provider systems in 2018 Pick the right areas for investment. The
was truly risk-based, up from 3.0% in 2014.e most fertile areas are those that meet im-
mediate needs of healthcare consumers and/or
COMPETING IN EMERGING purchasers (“customer experiences and solu-
CLINICAL SERVICES MARKETS tions”).g Go-to-market initiatives – new retail
In contrast to inpatient and population health care delivery vehicles, new risk contracts with
markets, most other clinical services markets employers, etc. – are less risky and more pro-
are local, fragmented and chaotic. Barriers to ductive than projects requiring large, expensive
entry are low, and as a result, new cross-sector infrastructure.
competitors are emerging all the time. Building
2
sustainable competitive advantage is challeng- Choose champions wisely. Introducing
ing in chaotic markets. Professor Rita Gunther new products is an entrepreneurial activi-
McGrath of Columbia Business School describes ty, and provider systems need internal leaders
an approach to strategy development that may with an entrepreneurial mindset to champion
suit these markets better, which she calls build- key initiatives. Independent physicians with
ing “transient advantage.”f business acumen often make good champions,
Building transient advantage requires scaling because they interact in the marketplace every
new business initiatives rapidly, managing day. Clinical investigators also can make good
short product life cycles to maximize near-term champions because they compete in fast-moving,
highly competitive markets for ideas.
e. Moody’s Investor Services, “Not-for-profit and public
healthcare US medians: Revenue growth inches ahead of
expenses as margins hold steady,” Sept. 3, 2019, Appendix I.
f. McGrath, R.G., “Transient Advantage,” Harvard Business g. Zenger, T., “What Is the Theory of Your Firm?” Harvard
Review, June 2013 Business Review, June 2013.
3 | FINANCIAL SUSTAINABILITY REPORT | February 2020Inpatient market consolidation has led to
stable inpatient markets in metro areas
Inpatient markets have consolidated rapidly, and most major metro markets are now
oligopolies with a small number of competing provider systems selling inpatient services to a
small number of health insurers. In a sample of 36 major metro markets between 2010 and 2018,
the median market share for the top two health insurers was 52%, and the median inpatient
market share for the top three provider systems was 61%.a Creating horizontally and vertically
integrated delivery systems has enhanced health systems’ competitive position, built their
brands and expanded their access to capital markets, all of which has improved their financial
performance. Consolidation has been especially important for academic medical centers, which
need substantial scale to support their academic missions.
Over the past few years, the pace of inpatient consolidation has slowed.b As long as anti-
trust laws are enforced — and it appears they will be — most of today’s metro market
oligopolies are likely to remain relatively stable.c Existing players will continue to pick up the
few remaining stand-alone hospitals, and national players (e.g., HCA, Providence St. Joseph
Health, CommonSpirit Health) will acquire local and regional systems across markets. But the
fundamental structure of most metro inpatient markets will not change much.
a. BDC Advisors LLC, analysis based on HealthLeaders Market Overview data, 2019.
b. The average annual increase in inpatient care concentration in 112 core-based statistical areas (CBSAs), as
measured by the Herfindahl-Hirschman Index (HHI), was 53 out of 10,000 points from 2012 to 2016, which is
not statistically significant. [Healthcare Cost Institute and the RWJ Foundation, “Healthy Marketplace Index”;
BDC Advisors analysis
c. Many health economists believe that hospital consolidation has enabled health systems to use their
market power to stifle competition and increase prices without clearly improving quality. See, for example,
Gaynor, M., and Town, R., “The impact of hospital consolidation – Update,” Robert Wood Johnson Foundation:
The Synthesis Project, June 2012. The FTC recently announced it will be evaluating them more closely in the
future. See Prvulovic, M., “FTC Commissioner Warns Hospital Mergers Will Be Closely Scrutinized In 2020,” The
Motley Fool, Jan. 17, 2020.
3
Give champions the tools and support they of internal venture funds. Providing release time
need for success. Entrepreneurial proj- and seed funding, candid advice and counsel and
ect leaders need clear accountability, relevant protection from traditional organizational pro-
metrics and appropriate incentives, both carrots cesses (e.g., budgets) is essential to cultivating
and sticks, to guide their efforts. Incremental successful “intrapreneurs.”h
revenue is a useful metric for champions and the
5
executives managing them. Promote small initial investments and
condition future investments on success.
4
Create internal sponsorship. Champions Innovative companies adopt an incrementalist
need sponsors. In external capital markets, philosophy of business development, captured
venture capitalists with direct financial stakes by 3M’s motto, “Make a little. Sell a little. Make
in the success of entrepreneurs play this role. In
health systems, this role can be played by chief h. Pinchot III, G., Intrapreneuring: Why you don’t have to
innovation or transformation officers or leaders leave the corporation to become an entrepreneur, 2013.
FINANCIAL SUSTAINABILITY REPORT | February 2020 | 4a little more.”i Because the risk is great, initial health plans — like Intermountain Healthcare
investments should be limited until initiatives in Utah, Henry Ford Health System in Michigan
prove they have legs. and Sentara Healthcare in Virginia — manage
their health plans separately from their delivery
6
Encourage partnering. Because emerging systems. Of course, creating separate divisions
markets are dynamic, solo plays are relative- focused on different markets raises the question
ly high risk. Partnering with other companies of how common activities like care management
with similar goals but different skills and net- should be integrated across divisions.
works — e.g., supplier companies or co-investors At the corporate level, implementing differ-
— is a much less risky strategy. ent strategies requires ambidextrous leaders
who can balance the needs of diverse businesses
7
Exploit business interdependencies. In and cultivate diverse leadership teams. Finally,
many cases, ambulatory and consumer scale and resources are essential to success, and
initiatives may not move the revenue or profit- vertical and horizontal consolidation is creating
ability needle much on their own. But they may the large, capable health systems required to
enhance other businesses. Remote patient mon- compete in this complex, chaotic world.
itoring, for example, while unlikely to generate
much revenue, may enable health systems to
react quickly to changing patient conditions and
provide other services that improve outcomes
and generate incremental revenue.
8
Build innovative cultures. Innovative
cultures are characterized by a certain set of
values, starting with an emphasis on sales and
growth. Innovative companies value experi-
mentation and adopt an ethos that celebrates
blockbuster successes but doesn’t penalize good
tries that fail.
THE NEED FOR AMBIDEXTROUS LEADERSHIP
Straddling traditional and emerging markets is
challenging, requiring substantial investments
in people, facilities and systems. One organizing
strategy that some health systems have imple-
mented is creating separate operating divisions
to address these different markets — e.g., an
ambulatory division separate from an inpatient
division. Most provider systems that own large
About the authors
i. Peters, T.J., and Waterman, R.H., In Search of Excellence: David G. Anderson, PhD, is a senior adviser, BDC Advisors,
Lessons from America’s Best-Run Companies, 1982, Boston.
reprinted in 2016. Steve Weylandt, MHA, is a director, BDC Advisors, Houston.
Reprinted from hfma.org. Copyright 2020, Healthcare Financial Management Association,
Three Westbrook Corporate Center, Suite 600, Westchester, IL 60154-5732. For more information, call 800-252-HFMA or visit hfma.org.You can also read
