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By Kenneth Kaufman
I have given a number of talks over the past few months, and despite the fact that all of those presentations have been delivered virtually, the question-and-answer sessions have remained interesting and robust. The most frequent question asked has been about possible consolidation of the provider space post-COVID. Most of these questions start from the perspective that another round of significant consolidation is coming. That perspective seems to rest on two key assumptions:
What is clear is that every hospital organization must have a well-held point of view about its own role in the next phase of healthcare mergers, acquisitions, divestitures, and partnerships. That point of view will pivot around three significant strategic questions:
First, COVID has catalyzed a major shift in economic and competitive dynamics. Few organizations of any kind can expect pre-COVID strategy to be unaffected. Hospital and health system executives need to carefully and thoroughly assess their organizations’ capabilities, their competitive environment, and their path forward. Second, as Jim Collins notes, a most important corporate character trait is preparedness and readiness. There is no way to anticipate the pace of post-COVID change. Now is the time to prepare, to be ready, and to consider your organization’s options. Later, in fact, could be too late. Planning your virtual event? Get in touch with us at the Capitol City Speakers Bureau today to book your healthcare speaker!
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By Kenneth Kaufman
One hallmark of the rapidly changing COVID-19 crisis is that any statement about the situation one day is likely to be incorrect the next day. However, after more than eight months of battling the virus, we have enough data to make several important observations about the state of play that are highly relevant for the strategy—and indeed the very thought processes—of healthcare organizations. When the pandemic hit in the early spring of 2020, the most hopeful scenario was a steady decline in number of new cases, with the virus at very low levels by late summer or early fall. Less hopeful scenarios suggested a series of subsequent surges of gradually decreasing intensity. The reality, of course, has been very different. As of early November, almost every day brings a record high in the number of new cases. The graph on the far left above illustrates the story extremely well: New cases are coming in waves, and the waves are getting larger. As of this writing, the number of daily new COVID-19 cases in the U.S. is more than 50% higher than the number of new cases during the previous spike in mid-July, and it is an increase of more than 200% over the number of new cases in the mid-September trough. As we have learned more about how to treat patients, and as we have identified cases earlier, the number of deaths from COVID has declined since April. However, as shown in the graph at the far right, that number also has been trending higher during October and November. Very concerning for hospital executives is the center graph, showing the number of people hospitalized for COVID each day over the course of the pandemic. As of early November, the number of hospitalized COVID patients is back to very near the peaks we experienced in April and July. And the number has been rising daily. Thus, fighting the virus for most of 2020, we are at the greatest level of uncertainty yet. Far from the temporary pandemic many of us expected, the virus is moving from pandemic to endemic and back to pandemic, with the intensity and duration of the crisis impossible to predict. Further, every hospital and health system is experiencing its own version of the pandemic, with its own short-term and long-term consequences. The ongoing pandemic has challenged our most basic assumptions about organizations and organizational decision making, about organizational strategy, and about the organizational thinking process itself. Let’s summarize these assumptions through a series of questions... 1. In a pandemic of uncertain intensity and duration, what is now the appropriate direction for a complex healthcare organization? 2. In such an environment, how is capable leadership defined, and what does competent management look like? 3. In the fog of one of the worst public health crises in American history, what tasks and strategies must be attended to and which can be left undone? These questions are in no way theoretical, nor are their answers. Rather, these questions and their answers are as real as it gets. Given this state of play, it is not possible, nor is it useful, to define a so-called pandemic roadmap at this time. What is more helpful is to call out a series of strategic observations and identify a series of management thought processes that can act as an organizational gyroscope in times of unprecedented macroeconomic turbulence. Planning your virtual event? Get in touch with us at the Capitol City Speakers Bureau today to book your healthcare speaker! By Kenneth Kaufman
With the end of the Cold War, the U.S. Department of Defense faced a new geo-political reality. The Berlin Wall came down. The Soviet Union was dismantled. Communist regimes fell out of power in many parts of Eastern Europe. The Iron Curtain was lifted. As promising as this new reality was for global politics, it was a problem for the U.S. military. For almost five decades, the military had been structured to provide defense based on the global structure of a Cold War world. Military personnel, capabilities, weaponry, and installations all were informed by the reality of the Cold War. Now that the reality had changed, the U.S. military was structured for a geo-political map that no longer existed. At the broadest level, this structural mismatch resulted in three serious problems. First, the U.S. was not ready for potential new defense needs. Second, the outdated structure was highly inefficient, spending huge amounts of resources on assets that were no longer required. Third, this waste meant that funds were not available to invest in post-Cold War defense. The most significant source of waste was the outdated physical structure of the military—installations that were located in areas that no longer needed military bases, or that needed different types of military facilities. To realign the military’s physical presence with the new reality, the U.S. Department of Defense began a process of base closures that continues today. The process involves a systematic and continuous comparison of military needs with the military’s physical presence, and engages the many groups affected by these decisions. The result has been new rounds of recommended base closures or repurposing initiatives every several years. Recently, a healthcare executive I have worked with for many years pointed out to me how apt base-closure is as an analogy for the situation faced by hospital-based health systems, and as a way to make difficult but positive changes. Over the past 10 years, we have seen a major migration in healthcare demand from inpatient to outpatient settings. Surgeries that 10 years ago were almost exclusively inpatient-based are now routinely performed in outpatient settings. The length of inpatient stays for other procedures and conditions has dramatically reduced. Payment rules increasingly create incentives for care to be performed in outpatient rather than inpatient settings. And advances in telehealth are moving care encounters out of healthcare facilities altogether, and into patients’ homes. Over the past 10 years, MedPAC reports a 43% growth in outpatient visits, compared with a 20% decline in inpatient discharges. The American Hospital Association reports that inpatient and outpatient revenue for hospitals is nearly equal, whereas in 1995, inpatient revenue made up 70% of total operating revenue. Hospitals’ traditional facility footprint simply is no longer aligned with the realities of how healthcare is being delivered today, or how it will be delivered in the future. This misalignment has a similar effect on the U.S. healthcare system as the post-Cold War military base misalignment had on U.S. defense. An enormous amount of healthcare spending goes to facilities that are underused or mis-matched to community healthcare needs, and that waste prevents investment in healthcare resources that can advance the quality, efficiency, and experience of healthcare for a new era. As I wrote last year in the blog post Getting Serious about Costs, hospitals have long struggled to manage their high fixed and operating costs. Traditionally, hospitals have focused their cost-reduction efforts on labor and supplies—high-cost areas that continue to warrant attention. However, the basic mismatch between U.S. healthcare facilities and healthcare needs, and the unsustainability of healthcare spending to the U.S. economy, requires that legacy hospitals and health systems take on costs at a greater magnitude and with more permanence. That means taking a very hard look at the value being provided by each asset of the facility portfolio. Where assets are not contributing sufficiently to the healthcare needs of the community, and not meeting the strategic or financial needs of the organization, some very tough decisions are in order. Repurposing or closing a hospital is one of the most difficult decisions healthcare leaders can make. The decision involves a major change to a trusted community presence. It can bring community outcry, political scrutiny, and unfavorable press. At the least, it involves helping community members transition to a new approach to care. Yet, in an environment that is rapidly transitioning from an inpatient to outpatient focus, some hospitals are no longer serving a relevant purpose in the U.S. healthcare system. A 2018 study identified 13 states in which average hospital occupancy rates for urban hospitals were 50-60%, and 28 states in which average occupancy rates for rural hospitals were 40% or less. These averages mask even greater variation from facility to facility within smaller areas. Dealing with hospitals and other high-cost assets that no longer provide necessary value in the healthcare system of today is among the toughest and most important steps in managing healthcare costs. Today, hospitals are at a “base closing” moment. In order to be competitive and relevant, hospitals will need a structured, continuous process that results in informed decisions about their facility and real estate portfolios. These decisions may be challenging in the short term. However, in the long term, a base-closure approach can improve care, improve the viability of healthcare organizations, and create a healthcare system that is more sustainable, more cost effective, and better able to meet the health needs of our nation. Planning your virtual event? Get in touch with us at the Capitol City Speakers Bureau today to book your healthcare speaker! By Kenneth Kaufman
For five months, hospital leaders have been responding to what will likely be the biggest challenge of their careers: managing the operational and financial threats from the COVID-19 pandemic. An already difficult environment is likely to become even more challenging this fall and into 2021. Surges and resurges of infection, ongoing macroeconomic threats, and widespread uncertainty about the stability of regained volumes and revenue are likely to persist for some time to come. Against this backdrop, achieving credit and rating “success” will require significant performance improvement. Given revenue uncertainty and potential volatility, the focus must be on expense containment and careful capital and resource allocation. More than ever before, this will emerge as a rating differentiator. Preparing for these realities starts with critically assessing every aspect of an organization’s toolkit—from financial resources to decision-support infrastructure to management capabilities. This preparation itself will yield clarity, which can be used to guide a more proactive and productive next conversation with rating agencies, investors, and other external constituents. The difference in outcomes from doing this well or doing this poorly will be material. The ability of executive teams to successfully multitask will be a core driver of success. In this context, multitasking refers to the ability to both confront the myriad of new pressures COVID-19 is producing right now and reposition the risk profile of the organization to be prepared for what is coming next. Organizations have no choice but to address these two priorities simultaneously. And their success will heavily influence whether they thrive or struggle in a post-COVID-19 environment. Different leaders and organizations possess a wide range of needed multitasking capabilities, which leave them in relatively better or worse position to succeed in the current and emerging environment. As a result, CEOs and hospital boards should be critically assessing right now where their organization finds itself on this key skill continuum, and how to improve its performance. Enterprise-oriented frameworks that bring analytics and decision-support under a common umbrella are another critical element of improving multitasking. These frameworks—ideally limited to just a few critical needs—can create clarity around resource utilization and risk management, offering senior executives the greatest amount of management leverage. Ultimately, CEOs should be then able to create a “multitasking enterprise,” where downstream activities roll up to a manageable and common number of resource deployment and risk management decisions. As part of this approach, organizations that embrace predictive methodologies can begin to better understand the potential long-term impact of various externalities. At the same time, such methodologies can help identify internal actions to mitigate those external risks. For example, through careful financial planning, organizations might realize the need to move swiftly on securing financing for the next 18 months, or address looming expense problems before they wreak havoc. In the early days of the COVID-19 pandemic, many disciplined, resilient organizations quickly and simultaneously tackled a wide range of unexpected clinical needs. At the same time, these organizations addressed a rapidly deteriorating financial picture and crafted strategies for the post-COVID-19 world. As the external environment grows even more uncertain, hospitals will need to take their multitasking to an even more sophisticated, enterprise-wide level. Moving forward, success will require continuous and coordinated monitoring of the external environment, timely evaluation of the associated implications, and proactive steps to mitigate the many, varied, and unpredictable risks of a world that is more volatile than any we have ever experienced. 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
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. 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! 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! |
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