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By Kenneth Kaufman
There is an old saying in sports: “We’re looking for character, not characters.” Sam Walker found that this old saying doesn’t lead to the most winning teams. For many years, Walker was a sportswriter and he is now the leadership columnist at The Wall Street Journal. When researching his excellent book The Captain Class, Walker found that captains of the most successful teams in sports history had very little in common with the Hollywood version of a leader and a captain. They did not have superstar talent. They were not the best-known or the most individually successful players. Surprisingly, they weren't fond of the spotlight. They often played subservient roles to others on the team. They were not angels. Sometimes they were divisive. Carla Overbeck, the largely unknown captain of the 1996 gold medal–winning U.S. women's soccer team, was “average at best” as a defender, and her offensive totals were “anemic.” She was so selfless that she often carried teammates’ bags to their hotel rooms. However, her humility created trust among team members and lent power to her relentless pushing of teammates during training and games. Richie McCaw, captain of the New Zealand All-Blacks rugby team, talked with referees before each game to find out how tightly they would enforce the rules so he could play up to the very edge of what was permissible—and frequently over the edge. However, his rule-pushing created an atmosphere of assertiveness that was a large part of his team’s success. New York Yankees captain Yogi Berra could barely put sentences together. However, his constant one-on-one communication helped him understand each player’s strengths and helped bring out the best in his teammates. And Valeri Vasiliev, captain of the Soviet Union Olympic hockey team, once threatened to throw his coach out of an airplane. However, this was in response to the coach breaking a promise and calling out individual team members after the team, favored to win the gold medal in the 1980 Olympics, fell apart. Vasiliev's act, which was unimaginable for a Soviet player, galvanized the team and contributed to a stretch of great success. Longstanding organizations—such as hospitals—typically have strong, highly valued cultures. The potential problem is when an organization begins to play to that culture to the point that human resources decisions, especially for leadership positions, are constrained by culture. People hired tend to fit within that predetermined cultural mold.Given that view of culture, many people who would make great leaders in our organizations—like the captains that Sam Walker profiles—may never get hired, much less placed in leadership positions. Walker found, at least in sports, that teams benefited from putting people in leadership roles who did not fit the mold. Each of the captains that Walker profiled was a “character.” Each person behaved differently from the norm, pursued leadership in nontraditional ways, and in general looked at the world differently than most people. Yet those were the very characteristics that separated those people from their peers in terms of their ability to motivate, push, and lead their teams to levels of performance few teams can match. Walker found that these captains were dogged and focused to an almost unnatural degree. They played aggressively. Many projected humility and gained respect through their willingness to do thankless jobs and to stay in the shadows. Many communicated in a low-keyed, one-on-one manner. And despite their intensity—or perhaps because of it—these captains displayed ironclad control of their emotions. Hospitals and health systems are facing a time of basic business model change. That means not only a new way of doing business, but an entirely new breed of highly aggressive competitors. To face this challenge, we need leaders who look at the world in new ways. Those leaders may seem different from those that the current culture deems “a good fit.” The captains in Walker’s book lead from a very different direction from our usual expectations. Success is very personal to these people, and their leadership styles come from that personal drive and their very personal traits. Therefore, these leaders can’t be screened by measuring their relationship to the existing culture. These leaders don’t fit a pre-existing culture; they are the culture. Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success!
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By Kenneth Kaufman
For all of Jeff Bezos’ talk about customer centricity, the disruption Amazon has brought is not based on customer demand, but on Amazon’s supply. Customers did not demand Alexa, Amazon Prime, or 100 million products from one portal. Rather, Amazon supplied innovations that consumers didn’t know they wanted. But once they got a taste of these innovations, consumers flocked to them. The same is true for other consumer-focused giants like Apple and Google. Consumers didn’t demand a phone that doubled as a hand-held computer and digital communicator, or a search engine that returned millions of results in a second. Most of us couldn’t have dreamed of such things. But once the iPhone and Google search were supplied to us, they were so useful that they became necessities. And once Amazon shopping, the iPhone, and Google search proved their worth, the resulting demand migration disrupted the nation’s economy. In the space of just weeks, the COVID-19 pandemic has radically changed consumer behavior. In most cases, the virus has dramatically increased the speed of adoption of behaviors that were at various stages of taking root: meal delivery rather than eating in a restaurant, grocery delivery rather than wheeling a cart through a store, streaming events rather than attending in-person, online learning a client’s place of business. The effect of supply-side disruption has been unprecedented in the world economy. However, the short-term effect of this disruption on healthcare has been limited. Disruptors like Amazon have not yet caused a major change in any healthcare organization’s core delivery model. Demand-side disruption, on the other hand, could have a much more direct and powerful effect. If, as a result of the COVID-19 pandemic, a significant number of patients chose to receive healthcare in very different way, that could create the need for rapid and fundamental change in the healthcare delivery and care models, which in turn would create a serious potential strategic problem for healthcare organizations. One of the best examples is telehealth. Despite billions of dollars flowing into telehealth start-ups and product development, and the increased options for telehealth, adoption has been slow. As of 2019, only 20% of hospitals reported having video visits widely available, only 22% of physicianshad used telehealth, and less than 10% of patients had used virtual visits. With the COVID-19 pandemic have come numerous forces moving providers and patients toward telehealth options: lack of capacity for providers to handle people suspected of having the virus or to handle people with other conditions, reluctance of patients to be in a healthcare facility during the pandemic, and increase in payment for telehealth services among government and commercial payers. Forester is predicting more than 900 million telehealth visits will occur in 2020, compared with its original estimate of 36 million. Anecdotal accounts of the rising in telehealth use have been equally startling. “We were seeing approximately 10-20 patients a day on our telehealth platform prior to the COVID-19 pandemic,” Ken Samet, President and CEO of MedStar Health told us in a recent interview. “Right now, we’re flying past 500 patients a day, and we're on our way to 1,000 patients a day.” Providers, too, may have become more open to telemedicine. Claude Deschamps, MD, President and CEO of the University of Vermont Health Network Medical Group, told us recently, “It has been a big 'a-ha' moment for many providers that they can do a lot of their work via telemedicine.” The question for any organization seeing these kinds of radical changes in consumer demand is whether that change will last beyond the pandemic. When it comes to telemedicine, I believe we have every reason to believe that there will be a permanent change in demand. As the pandemic winds down, a greatly increased number of consumers will have used telemedicine and appreciated its far more convenient access and agreeable experience. And consumers will have appreciated the additional safety they feel by not entering a facility populated with other sick people. Many more clinicians will have conducted virtual visits and found it a viable and effective means of care. And payers and policymakers may permanently lift constraints on telehealth reimbursement. In the case of telehealth, the COVID-19 pandemic may have moved the healthcare industry rapidly into a state that, before the virus, seemed a point in the distance. This kind of rapid disruption could have varying and hard-to-predict consequences. A rapid rise in telehealth demand would have implications for the healthcare workforce and training. It could mean a reduction in the number of facilities and real estate needed. It could have major economic impact if telehealth reimbursement is not commensurate with reimbursement for in-person visits. It would place new demands on hospitals for investment in technology and talent. The rise of telemedicine could have deep implications for the competitive landscape. Healthcare’s long-held state as a cottage industry could change as digital access removes geographic boundaries. Well-known centers of excellence could draw market share from local providers by offering care digitally. Broad-based companies that currently provide many hospitals’ telehealth on a white-label basis could gain visibility as their own national brands of telehealth. Telemedicine is only one example of how a rapid and unprecedented change in consumer behavior caused by the COVID-19 pandemic could speed the disruption of healthcare and many other industries. At a time when organizations are financially weakened by the virus’s economic damage, they could find themselves needing to make major strategic pivots to a future that only a few weeks ago seemed at least somewhat distant. As fast and furious as supply-side disruption has been, demand-side disruption may force even faster strategic thinking and a more furious response at a time when such a response is especially difficult to model and deliver. Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success! By Kenneth Kaufman
Rural America encompasses a broad geography. Almost 20 percent of the U.S. population lives within the 84 percent of the nation’s land area that the Federal Office of Rural Health Policy (FORHP) defines as rural. But rural America is a very diverse place, and there is no single solution that will address the healthcare needs of the many people who live there. Challenges to the Future of Rural Healthcare Provider organizations in rural America are subject to the same forces that are reshaping healthcare across the nation. Demand for inpatient services is weakening as many procedures and services migrate to outpatient settings and other alternative sites of care. The aging of the Baby Boom generation is shifting payer mix away from commercial insurance to Medicare. Technological advancements are enabling new healthcare delivery models that have the potential to significantly disrupt traditional care models. These trends can have a unique or magnified impact on rural healthcare providers:
The Future of the Rural Hospital Reports on rural health often start with statistics on the number of hospitals that have closed, or are threatened by closure, in rural communities. It is true that 104 rural hospitals closed between January 2010 and April 2019. It also is true that, of these, only 63 facilities completely shut down. Five were converted to nursing or rehabilitation facilities; 16 were converted to outpatient/primary care/rural health center use; and 20 were converted to urgent or emergency care facilities. The most relevant question is not how many hospitals closed. Rather, it is whether the residents of affected communities retained access to needed healthcare services. The decision to close a hospital is never easy. There is a hospital in Streator, Ill., that OSF HealthCare has converted to serve as a rural health center. The facility in Streator, Ill., was one of the 16 closed hospitals that have been converted to outpatient, primary care, or rural health center use. The decision to close a hospital is never easy. Hospitals often are among the largest employers in a rural community, and local business and political leaders often feel a community needs a full-service hospital to attract economic development. Based on several factors, however, we believe the decision to convert the hospital to a rural health center with 24/7 emergency care will be the right decision for Streator in the long term. Here's why:
Conversion of the Streator hospital helped the community avoid the two greatest impacts associated with rural hospital closures. Conversion of the Streator facility could serve as a model for other health systems seeking to rationalize the provision of services within an owned network of rural facilities. A health system can provide clinical, financial, operational, and technological support to a rural health center. In turn, the center can serve as a spoke to the hub of larger facilities within the system’s network. Within the context of a system as a whole, a rural health center’s return on investment can be tied to downstream revenues from referrals. A health center’s focus on improving community health also can result in savings under a system’s managed or accountable care contracts. Without the backing of a health system, or the opportunity to capture downstream revenues or savings, independent rural hospitals have more limited options, particularly in communities that face both declining populations and declining inpatient volumes. One possible solution—found in both the Medicare Payment Advisory Commission’s recommendations to Congress and the bipartisan-sponsored (but not yet passed) Rural Emergency Acute Care Hospital (REACH) Act —would end the requirement that rural hospitals maintain inpatient beds to receive Medicare payments. Instead, rural hospitals could convert to stand-alone emergency departments, with the option of changing back to an inpatient hospital if circumstances change. A converted facility would still be able to offer ambulance and outpatient services, and be paid for these services as well as for emergency care. The future of the rural hospital will be brightest in areas that are experiencing population growth. In areas were population trends are flat or declining, the number of hospitals that can be sustained by the local population likely will continue to shrink. The future of those hospitals will depend on the ability of larger health systems to grow and support the conversion of facilities in their networks, or the willingness of legislators to support a more flexible model for rural healthcare facilities. Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success! By Kenneth Kaufman
As I speak with healthcare executives around the country, I get many questions about the CVS Health/Aetna and UnitedHealth/Optum business models. The questions have intensified with two recent announcements. UnitedHealth Group CEO David Wichmann said that Optum plans to grow from $16 billion to $100 billion annual revenue by 2028, and will do that without building any hospitals. A few days later, CVS announced that it would expand its three-store HealthHUB pilot into 1,500 locations by 2021. HealthHUB is CVS’s in-store health and primary-care experience. The best way to explain the growth strategies of these two companies—and the implications for hospitals—is by examining what I call the “funnel business model” of the internet economy. This business model asks four basic questions:
The top of the Apple funnel was very broad, with devices from desktop computers to iPods. Apple attracted people into the funnel with products that were so intuitive and elegant that they became status symbols. And inside the funnel, the compatible and interconnected nature of the devices, along with a sizable content library, created multiple opportunities for further transactions. At Amazon, Jeff Bezos has taken the funnel business model to an entirely new place. How many people could be inside the Amazon funnel? Basically anyone. Not only does Amazon offer a mind-boggling number of products, but it also offers a broad array of highly desirable personal and business services, including cloud hosting and fulfillment. In addition, Amazon’s platform that is so technologically advanced that it allows almost an infinite number of people to be in the platform at any given time. Amazon attracts people into the platform with unmatched first-mile and last-mile experiences—the ability to find and select products easily and to get them into the hands of consumers rapidly. Inside the funnel, Amazon’s extraordinary algorithms, Prime subscription service, and cross-marketing offer limitless opportunities for complementary transactions. Almost any click generates additional revenue for Amazon. In short, Bezos’ genius has been to create an extremely broad top of the funnel, to make it extremely attractive to enter the funnel and to offer seemingly infinite opportunities within the funnel. The funnel is the internet business model that both United/Optum and CVS/Aetna are using. For United/Optum, the top of the funnel is very broad: it extends to consumers, employers, and providers throughout the country and overseas, with a focus on developing concentrated services in 75 markets. People are drawn into the funnel via about 50 million UnitedHealth memberships; about 45,000 employed physicians; and Optum services provided to four out of five U.S. hospitals, more than 67,000 pharmacies, and more than 100,000 physicians, practices, and other health care facilities. Inside the funnel, United/Optum offers an incredibly broad collection of interrelated services for individuals, employers, and healthcare providers, including insurance, population health management, ambulatory surgery, primary care, occupational care, urgent care, pharmacy benefit services, and analytics. For United/Optum, hospital services are not seen as something that adds much breadth to the top of the funnel or that draws people into the funnel—certainly not enough to justify Optum taking on the high fixed costs and poor pricing of inpatient care. Rather, hospitals are an additional interaction within the funnel that can be accomplished through partnerships rather than ownership, according to Wichmann. Those partnerships, he says, “will occur in markets where there is maybe fewer assets for us to accumulate and build from." United/Optum is largely focused on adapting the traditional healthcare delivery and insurance system to the funnel business model. CVS/Aetna, on the other hand, is taking a bolder approach. CVS is creating an even broader top of the funnel. The CVS funnel targets practically any consumer—someone wanting to fill a prescription, take a yoga class, or buy a bag of potato chips. The entrance to the CVS funnel combines a massive physical footprint with a growing digital presence. CVS has about 10,000 retail stores. Eighty percent of Americans live within 10 miles of a CVS store. With the expansion of CVS’s HealthHUBs to 1,500 locations, one analysis suggests that 75 percent of Americans would live within 10 miles of a HealthHUB. In addition, CVS/Aetna has access to about 18 million Aetna medical insurance members in all 50 states. On the digital front, CVS has 62 million loyalty program members whose purchasing patterns can be tracked and who can be the target of tailored promotions. Inside the funnel, CVS is aiming to create large collections of products and services pertaining to health and wellness that combine in-person and digital interactions. These include retail products organized around health themes (for example, pregnancy or healthy diets); in-person experiences such as yoga and exercise; digital engagement through education and wellness apps; assistance with insurance navigation; wellness services such as nutrition counseling and sleep assessments; and low-intensity healthcare services including immunizations, physicals, routine primary care, and chronic care. CVS plans to expand its digital care services, particularly through in-home monitoring. United/Optum appears well on the way to making its version of the funnel business model a success. For CVS/Aetna, the jury is still out, but the company’s strategy has been very carefully created and aligns with other successful business models of the internet economy. The funnel business model is a reality for healthcare. For hospitals, the question is not if but how to participate.For some, participation will include building or rethinking their own funnel. For others, participation will mean partnering with other companies. Capital, scale, and technological capabilities clearly will be requirements for hospitals to succeed. More important, however, will be a new way of thinking about several foundational issues. One is intellectual capital. Hospitals will need people who speak the language of the total market served, who are steeped in contemporary means of personal and commercial interaction, and who have a demonstrated ability to draw traffic and create a first-class consumer experience. These individuals need to be given sufficient position and authority to truly influence how a hospital interacts with all the people it touches. Another is a new approach to interaction. Organizations will need to look beyond traditional inpatient and outpatient care when they think about interaction with consumers. They will need to look at all the personal and commercial activities of their consumers, to find ways to become part of those activities, and to ensure that health-related interaction is continuous, not episodic. Finally, hospitals will need to think about their relationship with consumers in a new way. In the internet economy, the traditional paternalistic viewpoint of healthcare providers toward patients will only attract people in times of specific need. To make an organization the destination of choice requires a relationship of mutual respect. It requires a deep understanding of consumers’ experiences within and beyond healthcare. It requires a fierce dedication to the highest level of service. And it requires creativity to design the kind of interactions that will delight and even surprise consumers. Traditionally, hospitals do have a funnel. They touch many people in a community and offer many interrelated services. However, speed and scale are the coin of the realm in the internet economy. So it’s no surprise that new entrants in healthcare are aiming to take the healthcare funnel to a new level—to create a funnel that is exponentially broader, more attractive, and more engaging. For these new entrants, the funnel business model is deeply embedded in organizational culture, capabilities, and strategies. Virtually every major business decision these companies make has the goal of achieving a more active funnel. For hospitals to be a competitive force at the top of the funnel, they will need to have this same strategic orientation and discipline. Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success! By Kenneth Kaufman
We have all seen the attacks on hospitals for exercising their right to merge and make decisions about how to best fulfill their missions in a rapidly changing competitive environment. In this blog post, Kaufman Hall presents its point of view on this critical issue. For more information, see the American Hospital Association’s resources on hospital integration. Each day seems to bring a new outcry that hospitals are attempting to get bigger in order to raise prices. A recent article, for example, said that hospitals have “enormous clout”…are “behemoths” that are “throwing their weight around”…have “essentially banished competition and raised prices for hospital admissions.” Reading these articles, you would think we were living in 1985, rather than closing in on 2020. The healthcare environment that these articles describe no longer exists. In 1985, hospitals competed with the hospital across town for inpatient business. Today, hospitals are struggling to hold onto large chunks of their outpatient business in the face of new competitors that have scale and technological knowledge never before seen in healthcare. UnitedHealth/Optum and CVS Health/Aetna are aiming to unbolt outpatient business from legacy hospitals. Amazon, Apple, and Google are investing heavily in healthcare from numerous angles, looking for the most effective entry points to care and services. Hospital organizations are doing what any company would do when confronted with a highly disruptive environment like this: They are trying to gain the financial and intellectual resources to compete in a new world. Hospitals are making this transition in the face of a difficult financial reality. The Moody’s 2019 outlook shows revenue growth for hospitals will continue to decline under pressure from weak inpatient volume and low reimbursement payments. At the same time, expenses continue to grow faster than revenue. This puts hospitals in an extremely difficult economic and competitive position—one in which the status quo is simply not an option. The normal response of any company in any industry in this situation would be to seek scale in an effort to meet this different level of competition and adjust to a new business model. That is exactly what is happening among hospital stakeholders. The opening sentence of a recent Crain’s Chicago Business article states the obvious and the inevitable: “The news that Walgreens is in preliminary talks to link up with Humana showcases just how critical it has become for healthcare players of all stripes—from pharmacies to hospitals—to bulk up….” Of course. “Bulking up” is the logical response. Legacy hospital organizations need to grow along with everyone else. Scale will help ensure that America’s hospitals can keep pace—that they can continue to build on their deep community connections, expertise treating the full range of health conditions, and history of serving our most vulnerable populations. In this competitive milieu, pricing is of minor consequence. It is immaterial to competitive position. Raising prices would not have helped Borders to compete against Amazon, or Blockbuster to compete against Netflix, and it won’t help hospitals compete against healthcare’s new entrants. UnitedHealth’s revenue grew 12 percent in the third quarter of 2018, compared to the third quarter of 2017. Moody’s projects 2019 mean revenue growth among rated hospitals will be 3 percent to 4 percent. The new competitors like UnitedHealth and CVS Health/Aetna are among the largest companies in the country and, in some cases, the world. The very largest hospital systems are ten times smaller. Scale will be critical, but it is not an end in itself. Scale is a means to gain intelligence—to get the best intellectual capital, to tap information about a vast group of people, to test new ideas, and then to scale those ideas. A recent New Yorker article described scale at Google as “the beginning of a feedback loop—bigness would be the source of Google’s intelligence; intelligence the source of its wealth; and wealth the source of its growth.” The competitors that hospitals face are not just large; they also are among the smartest organizations on the planet. These companies draw on a huge amount of data, apply sophisticated analytics, and have the capabilities to develop radically new tech-enabled care and digital connections. This is the state of play today. Scale is the platform that will allow hospitals to acquire the resources—such as more working and intellectual capital, and significant digital capabilities—to compete in this brand new healthcare marketplace. Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success! By Kenneth Kaufman
Legacy healthcare organizations see innovation as a crucial path to staying relevant in a fast-changing world. Innovation has the promise to solve longstanding problems with the healthcare system, and to move legacy organizations into a digital world and help them discover new revenue channels as volumes and payments from traditional channels soften. Adding to the momentum for innovation is the rise of competitors—from start-ups to tech giants—that have innovation in their DNA. 72% of larger hospitals and health systems have built or are in the process of building innovation centers. Structurally, hospital innovation programs range from projects or departments housed within a hospital, to subsidiary companies, to partnerships with tech companies. Traditionally, hospital innovation programs have focused on developing internal ideas to be used within the hospital to improve issues like operational efficiency or utilization management. In the face of new competition and rapid change, these programs increasingly develop and fund start-up companies aimed at selling new products to new markets. As the need for innovation intensifies, so does the need for a new orientation toward innovation. The capabilities, culture, and mission that support ongoing operations of a legacy healthcare organization are not those that drive successful innovation. For innovation to generate ideas that become commercial successes, it must be backed by an entrepreneurial culture with characteristics that are different from—and even antithetical to—the characteristics of legacy organizations. 8 Characteristics of Entrepreneurial Leaders An innovation center cannot simply be an add-on to the ongoing operations of a legacy healthcare organization. It must be rooted in a culture of entrepreneurialism, led by individuals who demonstrate eight critical characteristics. 1. Have really good ideas. Breakthrough ideas are the foundation of a successful entrepreneur. Such ideas are transformational. They offer solutions to needs that may not even be previously recognized. They are the product of thinking differently about how important tasks can be done, and how important goals can be achieved. They open up new demand from the largest possible markets. 2. Work hard in a different way. Legacy healthcare organizations are full of hard workers, but entrepreneurial organizations need people who work hard in a different way. In legacy organizations, people work hard at doing their best within existing workflows. In entrepreneurial organizations, people work hard at disrupting those workflows in search of something better. They will be relentless in asking questions, conceptualizing solutions, and making them successful. 3. Tolerate risk. Healthcare organizations have a reputation for being averse to risk. They are not alone in this. All companies are subject to organizational forces and natural biases that make their leaders reluctant to take on risk. In contrast, innovation and entrepreneurialism are by definition about taking risks. They require leaders who can recognize these forces and biases, and move beyond them. 4. Persevere. In part because legacy healthcare organizations tend to avoid risk, they have little experience with meeting unexpected problems or confronting failure. Instead, they develop processes and protocols designed to avoid failure. Surgical procedures, for example, can’t go bad because a surgeon wants to go down an unknown path that may or may not produce a better outcome for the patient. Entrepreneurial organizations encounter obstacles and outright failures regularly. They need to develop perseverance as a business emotion that enables them to get over obstacles and failures and keep going. In 2014, when Amazon’s introduction of the Fire smartphone failed, Fortune magazine reported that the company “is now left scrambling, and it’s unclear whether it can recover from its flop.” Amazon persevered, recovered fully, and continues to grow. 5. Feel a sense of urgency. Because hospitals want to be careful, methodical, and tactical, they don’t want to rush. Entrepreneurial organizations face forces that push them in the opposite direction. These forces have grown only stronger in the internet economy. In a phenomenon that has been called “big-bang disruption,”innovation can now “come out of nowhere and instantly be everywhere.” Being first to market with a new idea is more important than ever. Adding to this pressure is the fact that entrepreneurial organizations typically make their run at innovation with limited funds. They have neither time nor money to waste. 6. Integrate disassociated ideas. Netflix did not invent the technology for streaming video. It realized that existing video compression technology could be deployed to deliver movies through lines that internet service providers had already run to consumers’ homes—and it continues to refine this strategy as it expands internationally across varying digital infrastructures. Uber combined existing geolocation, texting, and digital payment technologies to transform an untapped supply of independent drivers into a worldwide fleet that has disrupted the taxi business and threatens legacy automakers. An entrepreneur takes two ideas that are disassociated and puts them together, creating a new idea and a new product or service for sale. 7. Develop strategic intuition. Legacy healthcare organizations and entrepreneurs share a commitment to numbers and data. But entrepreneurs are dealing with the new. They can’t know in advance if their innovations will become game changers, so they must be willing to go beyond data and market research and trust their intuition. When Steve Jobs introduced the iPhone, predicting that it would be a “revolutionary product… that changes everything,” he was met with skepticism from many. Microsoft’s then-CEO Steve Ballmer said, “There’s no chance that the iPhone is going to get any significant market share.” Ultimately, it was an innovation that did indeed change the world. 8. Obsess over sales. Legacy hospitals are concerned with market share, but their focus is on referrals: How can we get clinicians to bring their cases to us? Entrepreneurs are starting with an idea that needs to be sold to bring in revenue that covers expenses and allows further growth. First, they need to convince people to try their idea, and then to pay money for it. Because innovations are new, consumers will not have heard of them, and may not even understand why they might need them. Entrepreneurial organizations need people who not only are excited by the innovation, but also obsessed with bringing it to the attention of others. Creating an Entrepreneurial Culture Because the characteristics of entrepreneurs and entrepreneurial organizations can differ so much from the characteristics of legacy hospitals and health systems, healthcare leaders who are thinking about adding an innovation vertical at their organizations face some challenges. First, they should be willing to make the work of the innovation center completely separate from the work of the legacy organization. Without this separation, the work of innovation will too easily be set aside in favor of work that sustains a current business model. Second, they should understand that even though innovations may seriously disrupt the legacy organization’s current business models, innovators need free rein to pursue disruption. If they don’t do it, there are others who will. Third, and most important, they must be sure that the capabilities of those who are given the task of pursuing innovation are compatible with the characteristics of entrepreneurial organizations. Some of these capabilities may be found within the legacy organization. More often, the legacy organization will need to look beyond its existing talent if it wants to create an entrepreneurial culture that will drive innovations from ideas to commercial success. Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success! By Kenneth Kaufman
Warren Buffett famously said that if a farsighted capitalist were present for the Wright brothers’ first flight, that person “would have done his successors a huge favor by shooting Orville down.” Historically, operating an airline profitably has been one of business’ biggest challenges. Between 1979 and 2016, 57 airlines filed for bankruptcy. Southwest Airlines has been the exception to this grim track record, as pointed out in a Slate article. For 44 consecutive years, Southwest has been profitable. The reason: Southwest thinks about running an airline in a very different way from its competitors, and the foundation of that thought process is containing costs. Where competitors use a hub-and-spoke model for their routes, Southwest uses direct flights, resulting in shorter travel times. Shorter travel times allow higher density seating, which results in lower per-seat costs. Where competitors use a variety of aircraft, Southwest uses only variants of the Boeing 737, which reduces costs for training and maintenance. Where competitors use major airports, Southwest prefers less-expensive secondary airports. Where other airlines book flights through third parties, Southwest sells directly to consumers. Each of these choices radically lowers the airline’s cost structure, allowing lower fares, a more streamlined consumer experience, higher market share, and higher profitability. No Regrets The degree of uncertainty in healthcare is higher than ever. Under the Trump Administration and the 115th U.S. Congress, uncertainty surrounds health policy, tax policy, and payment levels. Uncertainty surrounds the trajectory and structure of value-based payment. Uncertainty surrounds the influence of new healthcare models such as direct primary care and medical homes. Uncertainty surrounds the effect of new technology such as artificial intelligence and genomics. Uncertainty surrounds the potential influence of new competitors, from giants like IBM and Apple to digital health start-ups. It is natural for people to want to reduce uncertainty, to base strategy on a clear sense of the future. Amazon CEO Jeff Bezos says that people frequently ask him what will change in the next 10 years. A more important question, he says, is what’s not going to change, “because you can build a business strategy around the things that are stable in time.” For example, Bezos said, “It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff, I love Amazon, I just wish the prices were a little higher.’” What will not change in healthcare is the need for lower costs—dramatically lower costs. The central role that healthcare plays in the U.S. budget deficit demands dramatically lower healthcare spending. Constrained government budgets demand dramatically lower healthcare expenses. Employers burdened by double-digit increases demand dramatically lower health insurance premiums. And consumers, who are experiencing premiums and out-of-pocket expenses rising far faster than wages, demand dramatically lower healthcare costs. These demands will only get more intense as healthcare’s share of the gross domestic product—already at record highs—continues to increase. As one small-business owner recently told The New York Times, “People can’t afford the healthcare they need, and that’s becoming a crisis.” In a time of uncertainty, a no-regrets strategy for hospitals is to reduce costs—dramatically. Imagine the competitive advantage of a provider being able to approach a large employer and offer, for example, direct contracting for treating their highest-cost conditions along with top-quality outcomes at 30 percent lower costs. However, for an industry that has been working on costs for decades with limited success, the question is: how? A Legacy Company Tackles Costs Southwest shows that low costs are best achieved when they are built into the company’s mission, business model, and operating model. However, Southwest had an advantage that legacy organizations, including America’s hospitals, do not have. Southwest built the company from the ground up around the principle of low cost. In contrast, legacy organizations need to make major changes in culture, structure, processes, skills, and technology to achieve a dramatically lower cost position. For large organizations in complex industries, this degree of change is incredibly difficult both to conceptualize and execute. The experience of Ford shows what is involved. In 2006, Ford lost $12.7 billion. Testifying before Congress in 2008, Ford’s then-CEO Alan Mulally presented a veritable tutorial in how a legacy organization can transform its costs. It used to be that we had too many brands. Now we have a laser focus on our most important brand: the Ford blue oval….It used to be that our approach to our customers was: If you build it, they will come. We produced more vehicles than our customers wanted….Now we are aggressively matching production to meet the true customer demand. It used to be that we focused heavily on trucks and SUVs. Now we are shifting to a balanced product portfolio, with even more focus on small cars and the advanced technologies that will drive higher fuel economy in all of our vehicles. It used to be that our labor costs made us uncompetitive. Now we have a ground-breaking agreement with the UAW to reduce labor costs….It used to be that we had too many suppliers and dealers. Now we're putting in place the right structure to maximize the efficiency and the profitability for all of our partners….We have moved our business model in a completely new direction, in line with the most successful companies—and competitors—around the world. Between 2006 and 2008, Ford did the following:
In 2016, Ford’s net income was $4.6 billion. Implications for Healthcare The Southwest and Ford examples present three key lessons for healthcare:
The kind of dramatic cost reduction needed requires a more fundamental approach: Reconfigure the portfolio. Health systems need to do a top-to-bottom review of demand and performance for every one of their facilities and services. They must be willing to make tough decisions about selling, converting, or closing facilities that do not have sufficient volume or are otherwise unable to perform up to necessary financial or clinical standards. They must be willing to divest service lines that are not delivering value for the organization and community. They must be willing to consolidate services that are performed at multiple locations in close proximity. Radical approaches to facility design should be considered to ensure a match between patient needs and appropriate levels of care. Older facilities have inherent inefficiencies and an inability to evolve with changes in care delivery, while newer facilities often are designed based on backward-looking perspectives. For most hospitals and health systems, facilities and services grow over time, often without a governing plan. Hospitals need to ask themselves what a completely redesigned system would look like—one that meets demonstrable community needs in the most streamlined manner possible. Then they must be willing to take action based on these insights. Redesign the care model. Waste resulting from problems with care delivery design, coordination, and standardization cost the U.S. between $285 billion and $425 billion annually, according to a study by Donald Berwick and colleagues in JAMA. For healthcare organizations, redesign of care delivery holds great promise to both reduce costs and improve quality. This redesign should include the sites of care, who delivers the care, and standardization of clinical protocols and operations. For example, at Kaiser Permanente, more than half of primary care visits are performed virtually. Kaiser sees many hospital services in the future being performed in the home. The result of clinical care redesign will be greater efficiency and a better experience for both caregivers and patients, and reduction in unwarranted variation that can undermine quality and increase costs. These are perhaps the most difficult changes for a provider organization to make, but are at the core of making leaps in improving quality, patient experience, and efficiency. Reconfigure use of labor. Hospitals need to leverage the highest cost (per unit and in total) resources to their highest and best use. The clinician workforce is highly trained and expensive. Unfortunately, the application of its skills often is inefficient at all levels (for example, physicians doing excessive paperwork, nurses transporting patients). Optimally matching expertise to the tasks at hand is inherently difficult in such a complex system, but the potential payoff is enormous. A New Mindset The existing culture of not-for-profit healthcare tends to value incrementalism, avoid political sensitivities, and allow autonomy. The kind of radical shift in costs that will truly distinguish an organization requires a new mindset. Health systems need to function as operating companies, rather than holding companies, with system executives having the authority necessary to implement changes and influence performance at the facility level. Throughout the organization, executives and physicians need to be held accountable to transparent measures of performance. Hospitals should be run as cost centers, with tight focus on operations. As with Ford and Southwest, there needs to be a leadership commitment to thinking differently about the purpose and design of the organization, and to making the major changes necessary. In a time of great uncertainty, a no-regrets strategy for hospitals focuses on core principles. And for healthcare, the dominant principle is the need to reduce costs—dramatically. Looking for your next healthcare speaker? Get in touch with us at the Capitol City Speakers Bureau today to make your healthcare event a success! |
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