Better Healthcare at Lower Cost

The layoff recently announced by Healthcare was one more in a series of cuts made recently by local hospitals that have all recently announced headcount reductions. And while nearly all of them represented less than 1% of the workforce, it’s begun to create some unease. After all – healthcare was the “safe” choice through the recession – the one sector that seemed impervious to the slowdown. What’s going on?

Hospital Layoffs are a Storm Warning

What’s going on is the evolution of a “perfect storm” for healthcare. These layoffs are just an early hint of future pain for an industry still coming to terms with a new economic reality: that at nearly 20% of GDP, healthcare expenditures are growing at an unsustainable pace. Healthcare organizations need to reinvent their business model to remain viable, or they will fail.

Healthcare’s overwhelming focus on inpatient treatment (instead of trying to keep people out of the hospital) is rapidly becoming less profitable and more demanding. The Affordable Care Act (ACA) is a key driver at this moment, reducing the reimbursement growth rate and linking it to quality metrics. Projected savings to CMS (losses to hospitals) approach $500 billion over the next decade. And let’s not forget sequestration, which lops 2% off the top of every check from Medicare, with no end currently in sight.

Also becoming obsolete is the old fee-for-service payment model, in which the more services a hospital provides, the more money they make. The ACA incentivized experimentation with a “bundled payment” approach, in which all services connected with a specific treatment are included in a fixed price. The effect will be to force closer attention to the value of treatments given, likely leading to a reduction in the 30-40% of treatment that most administrators acknowledge are unnecessary. Expect too that, where CMS goes, private payers will follow.

Domestic and international competition for patients is growing, prompted by employers fed up with skyrocketing premiums, and employees who bear an increasing share of the cost. Both are increasingly demanding that hospitals document the quality of their outcomes – which most can’t do.

Cuts in Medicaid Funding

Combine these changes with freezes and cuts in state Medicaid funding, Medicare penalties for failing to meet mandated quality metrics, and reduced utilization driven by financial uncertainty and unemployment, and the stage is set for a massive shortfall in operating margin approaching 20% over the next decade.

Too many hospital executive teams are delaying, tweaking the current model at the margins and hoping it will somehow be enough. It won’t, and the sooner hospitals turn their attention to genuine business model innovation, the more likely they are to survive the storm to come.

With the Patient Protection and Affordable Care Act (PPACA), there were really 3 goals: insurance reform, delivery reform, and payment reform. So when I read the legislation and saw the 9 pages describing the ACO, I thought, “This is not going to work.” It flies in the face of everything we know about organizational design and human behavior. And to make matters worse, it’s an overlay on the existing fee-for-service model.

ACO model

Theoretically, the idea of combining all providers across the continuum of care under one umbrella sounds good. But if you’ve ever worked at a large company, you know that having everyone nominally working for a single organization doesn’t mean that everyone is aligned, and it doesn’t mean that you won’t have silos. And as designed, the ACO model is very complex, and it’s very difficult to implement. It creates a bureaucratic overly on a broken system.

So that 2% that Advocate has saved? They’ve got a lot further to go to get to $750 billion.

Accountable care is needed. But as I’ve argued consistently, ACOs are not. So the obvious question becomes, what will get us to better health outcomes at lower cost?

Imagine an alternative where primary care physicians are able to take time to diagnose patients and help them make better choices for their own health. Insurers incent beneficiaries financially to make better health choices. Employers create financial incentives to make good decisions about health. Physicians make information about cost and outcomes available, like in any other industry. It’s a fundamentally different approach — one that is market-based and patient-centered, not organization-centered.

Consider the example of Lasik and cosmetic dermatology. When the technology was first developed, it was very expensive. But in the years since, the costs have gone down while quality has improved — like in any other industry. Years later, many more people are able to take advantage of these services. And they pay for them differently — it’s a bundled price for a whole procedure, instead of paying separately for every minute detail.

Sustainability & Scalability

The only way to get costs under control is by changing payment. Providers need to have incentives to keep patients out of the hospital. We’re starting to see some signs of that already — outside of the PPACA legislation — in CMS’s refusal to reimburse “never” events. Ironically, CMS already had the administrative authority to do this and didn’t need PPACA.

In the end, it’s all about payment for outcomes and putting the consumer at the center. The ACO model fails to do this.

One of the most disappointing things about the recent commentary is that while some questions have been raised about sustainability and scalability, what’s largely been absent from the debate are questions about ACOs’ viability. ACOs will fail to improve healthcare costs and quality because they take a fundamentally broken system and create a complex bureaucratic overlay, making an already complicated system even more complex. And each layer of complexity will only add cost, decrease efficiency, and reduce transparency.

The answer isn’t a new, complex organizational model, but rather greater transparency and greater accountability for costs and outcomes. Creating incentives that focus on achieving quality outcomes, providing choice and allowing real competition will get us there — ACOs won’t.

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