Four key dimensions of health care strategy have two things in common. One is trivial: They all start with T. The other is troublesome and could be tragic: They seem to be missing from many systems' budgets, plans and actions. Two of them, targeting and trust, we have discussed already and will just mention here. The other two need more exploration.
Expect it. Plan for it. Get ahead of it.
Health care pricing always has been opaque. Pricing has been so fragmented and so bound up in contractual secrecy, complexity and ongoing negotiations that nobody could tell you how much something was going to cost. The idea of "shopping" on a cost/quality basis always has been a logical impossibility. Talk of "consumerism in health care" is vapor until the actual chooser knows how much the thing costs, and how good it is — and has reason to care.
This leaves the only real issue in setting prices: the hospital's market indispensability. If the hospital, or its system, was unique in some important ways, or perceived to be so special that it would be hard to sell a health plan that left the hospital out of the network, then the hospital could resist attempts to bargain the contract prices down.
So consolidation has a profound effect on prices. If a significant part of the local hospital market can band together in a system that bargains as one, the system can push prices up. Economists call this "monopoly rents," the pricing advantage of a dominant or indispensible market position. Northwestern University's Leemore Dafny has demonstrated this firmly: When nearby hospitals consolidate, they typically raise their prices by 40 percent or more.
But this works only when your customers have full coverage and no "skin in the game" and can be assumed to want "the best" with no reference to price, and the end payers in the private market are willing to play along.
Opaque pricing is suddenly yesterday's toast. Bundling, transparency, patients with high-deductible plans and activist employers are pulling the spokes out of this whole dynamic. Suddenly there are real shoppers out there, armed with real information, who won't set foot in your store if you have the highest prices and can't show them why they should pay for the luxury model.
Cheaper, high-deductible plans with big co-pays have been taking a bigger part of the market for years. Now we have tens of millions of new customers entering the insured market, most of whom were not in the market before, because it was too expensive. They are most likely to buy health insurance the way most of us buy car insurance: the cheapest product available that fits the legal definition. That will mean high deductibles and big co-pays. Are they going to be price shoppers? Absolutely.
Moreover, most markets will have new (or new to them) insurance companies. The federal government recently said that the 19 states for which it is running exchanges will see an average of 15 companies competing in the state, and the average citizen will have five to choose from. These companies will be competing hard to be better than the other guy at helping these millions of low-price shoppers.
Reference pricing: the monster that will eat your bottom line. How activist are the employers getting? Surveys show that most employers who provide health insurance will continue to do so, but they are gravitating more toward high-deductible plans with big co-pays. But here is a high-leverage fact: A recent survey by Aon Hewitt shows that only 8 percent of employers currently use plans built on reference pricing (paying a set dollar amount for items for which there are wide price variations) — but 62 percent are considering it. Want to guess what the "reference" price is? Best guess: at the 25th percentile of providers with a decent reputation in your catchment area. That is probably not you.
"You need an ankle MRI? There are places where you can get it for less than $720, and there will be no co-pay. You can go to Mammoth General, but they charge $2,220 — and the $1,500 difference will be your co-pay." Who would choose door No. 2 in that game?
Fifty-nine percent of employers say they will actively steer employees to high quality, cost-effective providers for specific procedures and conditions. ("You need a new hip, Ralph? We've got a hospital in California that's great with that. We'll pay everything, deductible, co-pay, airfare and hotel for you and your wife, rehab when you're back, plus a $2,000 bonus and a week's stay at a resort. Why? Because they are better — and way cheaper.") Many self-funded employers who pay the medical bills directly are elbow-deep in this. Employers in your area literally will be paying employees not to take the big, high-cost cases to you.
Activist employers will insist on knowing the real price ("Is that your final offer?") for everything.
Variation and antique pricing protocols: gone. This new market will destroy all antique pricing protocols that do not allow for comparison shopping. A payer (for instance) negotiating one rate for all ambulatory surgical procedures? Gone. A payer negotiating based on a fixed percent of your chargemaster? Forget it. Based on (for instance) the ambulatory surgery center rates in your area, with an upcharge because you're a hospital with an outpatient department? Never mind. Any payer that does a significant market in high-deductible, high-co-pay plans will have to provide their members the opportunity (and the information) to comparison shop.
Expect a future of little or no variation between payers. Payers have for decades depended on getting lower prices than the other guy from providers, and that's why they have insisted on secrecy. Transparency will drive the market to a much smaller spread around what is now the low median price, the 25th percentile. This will greatly decrease the difference between payers. It will become increasingly difficult to insist that Payer B cough up more than Payer A for the same item. Eventually, we may even see this institutionalized in the same "common carrier" rules long legislated for such industries as telecommunications and transportation. Under these rules, volume discounts are not allowed. You can set any price you want, but the price is the price, and is the same for all comers.
That logic applies to today's jumbled, opaque fee-for-service quagmire, but buyers are also opting out of it. Employers and payers are rushing to get around fee-for-service arrangements as much as possible, to pay for outcomes and to pay for bundles of services against performance guarantees.
Your product is what you get paid for. When you are paid per item, you do lots of items, the more complex the better. When you are paid for performance, or for outcomes, you will get very interested in — let's say, maniacally obsessed with — the most efficient way to get to that performance-guaranteed outcome.
We are not used to rapid change. But when these things come together all at once — the new customers in their teeming millions, the newly activist employers, the new information sources, the newly competitive health plans — the change in attitude toward pricing will be like flipping a switch. The music will stop, the lights will come on and there you will be, holding the $2,220 MRI price tag.
Targeting and Trust
Refer to my May 28 column for the full 3-D color version with the dancing elves on these two dimensions. Here's the nickel version:
Targeting. One way or another, the costs of the health of certain populations are ending up on your bottom line, whether they have coverage or not. Five percent of any population spends half the health care dollar; 1 percent spends 20 percent. Of those, a significant portion are in that category month after month, year after year, usually with poorly treated chronic disease. Find this semipermanent 5 percent, 1 percent, give them more than reasonable amounts of attention, and drive their costs down dramatically.
Trust. One way or another, you will find yourself in the business of population health. That is, your bottom line will look healthier the more you can successfully manage the health behavior of large numbers of people. The trick is that you can't do it wholesale; you have to do it retail, one on one. Because people don't change their lives except through a trusted relationship. You can't short-circuit that. Best solution: Become their primary care provider, with the relationship kept alive and constant in all media — phone, apps, live messaging and cheap home monitoring devices.
If there is a hippo on the coffee table of health care, it's this: Everybody's talking about lowering costs. Everybody's talking about what they can do, from apps to pay for performance to whatnot. No one is talking about shrinking their organization, actually doing more with less. The strategic plans, budgets, building programs and hiring strategies I see are based on the old assumptions of eternal growth, sometimes nearly maniacal growth like some '50s horror movie (The Clinic That Devoured Sacramento! "Run!")
Think about this: Even if your strategic plans are not based on how to get to "less is more" — everybody else's strategic plans are about precisely that. Health plans, employers, even Medicare are actively scheming to lower your utilization, your reimbursement, the size of your empire. Are you betting the future of your institution that they will fail?
What would it look like to bet the other way? Actively "right-sizing" and reconfiguring the organization to do more with significantly less money. Imagining ways this could be done, strategizing the steps, the revenue streams, the capital models, the patient flows, the necessary competencies to make it happen; then executing on that strategy.
Betting the other way is not exactly easy. Certain assumptions drive the move toward the Next Health Care, such as the following:
- The need for complex acute procedures and tests can be reduced by smart, constant, trusted early care.
- Medical homes properly constructed and incented can help.
- Many of your customers (employers and individuals) will be price and quality shoppers with full information.
- Quality health care at low cost can be identified, and an increasingly informed and incented market will gravitate toward it.
- Many fee-for-service reimbursements will drop, some drastically.
- The volume of some wasteful fee-for-service procedures will move asymptotically toward zero.
- More of your work will be done under risk contracts (paid for performance-guaranteed outcomes) or in set-price bundles.
If even some of these assumptions are even generally correct, planning based on assumptions of growth begins to look very suspect. Growth in market share: maybe. Absolute growth: no. Year-over-year growth in admissions, census, number of procedures: no.
At the same time, this future is vastly more difficult to predict and plan for. Under these assumptions, some capacities (such as primary care, community-based care and information technology) will grow enormously. Others will shrink. Capacities (people, buildings, machines) will have to be repurposed — in institutions that even now are highly tradition-bound and habit-bound.
Since both the pace and nature of such repurposing and shrinkage are impossible to predict, we will need to do it on the fly, setting a general course with frequent course corrections. This is even harder when we are talking about recruiting the right talent, building the physical capacity, finding the capital support for the changes, grabbing the market share to feed the new capacities — all at the same time. Not easy.
Yet if even some of these assumptions are generally correct, that's what we have to do. We don't have a choice. If we plan our strategies based on the old assumptions, we will find the ground giving way under our feet. We will have no soft landing.
Take a close look at the strategies that are guiding you in this crucial moment. Ask yourself how they address these key dimensions: transparency, targeting, trust and trim.
Joe Flower is a health care futurist and CEO of The Change Project Inc., and its health care education arm, Imagine What If. He is also a regular contributor to H&HN Daily and a member of Speakers Express.