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Research by Marty Stempniak

It is essential to determine now if your board and executive team have the skill sets needed to shepherd the organization away from a fee-for-service culture. Those who lie low to see how others succeed will spend too much time catching up down the line, says Brian Fuller, senior vice president of the consulting firm Kaufman Hall.

"The words of advice are, 'don't wait,' " Fuller says. "The markets around the country are beginning to move fast and are accelerating. You can quickly find yourself at a disadvantaged position if you don't have a clear vision of what you aspire to be in the future, and an understanding of the path it's going to take to get you there."

Some of the biggest missteps Fuller sees from providers in making the shift to the second curve are a lack of leaders with experience in risk management and other value-related skill sets, bloated board structures that don't allow hospitals to change swiftly, and a dearth of outcomes-related data needed to drive change.

Putting physicians in leadership roles is critical to making the shift toward value, says John Combes, M.D., president and chief operating officer of the American Hospital Association's Center for Healthcare Governance. Much of the Affordable Care Act is focused on rewarding hospitals for their medical, not operational, performance.

"These are clinical issues, so you need clinical leadership to help guide the programs and implement the practices that will get you improved outcomes," he says.

Hospiutal leaders are starting to recognize that doctors need to be at the board table and in the C-suite, and more hospitals are training physicians in management and finance, Combes adds. Preparation can come in any form, from sending doctors back to school, to building in-house physician leadership institutes, to having physicians co-manage service lines and build their expertise through experience.

"The relationship with the physician community is changing," says Richard Lofgren, M.D., senior vice president and chief clinical officer at UHC. "At one point they were customers, and then they were partners, and then they were competitors, and now they really have to be part of the integrated whole. The challenge is how do you bring physician leadership into the senior management team?"

Executive incentive structures need to shift away from simply compensating leaders for the amount of activity in hospitals, to rewarding for value-based measures such as the number of covered lives or cost effectiveness of treatments., Fuller says. On the flipside, Lofgren cautions providers not to rely too heavily on incentives "as the motor" for transformation, since they can sometimes bring about unsustainable change.

Some hospitals are creating new positions to shift toward value — chief physician executive, medical director of accountable care, director of population health, etc. CFO is the position likely to require the most reorientation because financial people of the future not only will need to be able to master the balance sheet, but also stay aware of the hospital's clinical outcomes and strategies that will affect reimbursement, says Tim Morgan, chief operating officer of B.E. Smith  and a former hospital CEO. He warns providers not to get too caught up in the latest trend of creating fancy-sounding C-level positions that don't do much to move the organization forward.

"That poses a real question about who is responsible for what, and the more fragmented your leadership team gets, the more confusing it gets," Morgan says. "I always caution our clients to be very careful about the newest fad position that is being recommended."

This gatefold will explore the competencies that boards and executives must have to lead in a value-driven organization, ways to bolster your leadership team with physicians, and incentive and governance structures to sustain second-curve change.  

Jumping to the next curve

Hospitals must make the leap from the "first curve" — current volume-based approach, where success is measured by the number of patient visits, notes health care futurist Ian Morrison. The trick is figuring out when and how to transition to the "second curve," where payment is based on quality and efficiency. Move too quickly before the market does, and a hospital may lose out on large amounts of revenue. Move too slowly and get left behind when the market is realigned.

Volume-Based First Curve

  • Fee-for-service reimbursement
  • High-quality not rewarded
  • No shared financial risk
  • Acute inpatient hospital focus
  • IT investment incentives not seen by hospital
  • Stand-alone care systems can thrive
  • Regulatory actions impede hospital-physician collaboration

Value-Based Second Curve

  • Payment rewards population value: quality and efficiency
  • Quality impacts reimbursement
  • Partnerships with shared risk
  • Increased patient severity
  • IT utilization essential for population health management
  • Scale increases in importance
  • Realigned incentives, encouraged coordination

Source: Hospitals and Care Systems of the Future, American Hospital Association, September 2011

Must-do strategies when moving to the future of health care

The American Hospital Association identified these as the top 10 strategies for hospitals to adopt as they move into the future of health care. The top four are of the highest priority, according to the AHA.

  1. Aligning hospitals, physicians and other providers across the continuum of care
  2. Utilizing evidenced-based practices to improve quality and patient safety
  3. Improving efficiency through productivity and financial management
  4. Developing integrated information systems
  5. Joining and growing integrated provider networks and care systems
  6. Educating and engaging employees and physicians to create leaders
  7. Strengthening finances to facilitate reinvestment and innovation
  8. Partnering with payers
  9. Advancing an organization through scenario-based strategic, financial and operational planning
  10. Seeking population health improvement through pursuit of the "triple aim"

Source: Hospitals and Care Systems of the Future, American Hospital Association, September 2011

Seven steps to a value-structured hospital or health system

While there's no "one-size-fits-all" approach to retooling your hospital's governance, management and incentives structures toward value-based care, Kaufman and Hall has found seven strategies that can be adopted by providers, large to small.

Brian Fuller, senior vice president of the consulting firm, says board and execs shouldn't obsess about the minutiae to the point of inertia, but they do need a plan. Typically, it takes about four to six months to devise a strategy, and another four to six months to roll it out.

"You can't overthink or overanalyze this stuff, but you also can't not act on it," Fuller says. "Just because you might not be feeling the challenge of a burdensome structure, it doesn't mean that you won't. And by the time you do, it's usually late in the game and hard to make changes that are going to be felt and really move your organization in the market."

1.Understand the core organizational competencies required for success, and assess your readiness with these competencies

  • Physician-hospital integration — An well-aligned medical staff that has shared goals, contracts based on outcomes, input on planning and is represented in organizational governance
  • Care coordination/management capability — Use of certain tools to coordinate care by an empowered and integrated workforce to meet regularly measured and reported performance goals
  • Information systems sophistication — An IT platform that supports clinical decision making, information management; simple communication, and access by everyone involved (physicians, patients, administration) to allow for proper treatment and strategic decision making
  • Service distribution system effectiveness — A rational system of serving patients that has easily accessible primary care and easy access (both physically and through referrals) across the care continuum, delivered in contemporary facilities with contemporary equipment
  • Cost management — A right-sized, organization-wide cost structure, highlighted by appropriate levels of staffing, capital spending, overhead support and supply chain costs; constantly reviewed based on other providers' best practices
  • Scale and market essentiality — "Sufficient scale to attract competitive clinical and administrative talent, realize economies, drive marketplace innovation and be an essential provider to health plans and patients"
  • Brand identification — "Well recognized and respected, associated with high quality and service excellence"
  • Payer relationships/contracts—"Maintaining strong relationships with payers and the ability to negotiate support for 'new era' business practices"
  • Financial strength/capital capacity — "Strong appeal to capital markets through sustained operations, revenue growth and balance sheet strength"

2. Identify the core leadership skillsets required for the future and assess the strengths and weaknesses of those skill sets

  • Strategic focus — leaders must move decisively to build their team and find opportunities
  • Network development and management skills — the ability to build relationships, shape networks or find partners to join in the dance
  • Expertise in managing and governing non-hospital operations — with the need to manage across the continuum, leaders need to have expertise outside their normal comfort zone, from home health, to hospice, labs, skilled nursing or long-term care
  • Ability to attract and retain physician leaders — Many hospitals don't have a high proportion of doc leaders in exec roles or on boards or committees, despite the fact that they're essential to population health management
  • Expertise with population health management and its associated risk — an entirely different mindset from episode-based care, with the need for patient-population mastery, a team-based care approach, coordinated care and physician incentive programs
  • Depth and breadth of expertise related to IT — technologies are changing rapidly, and board members and trustees need to have some sense of the ever-changing landscape

3. Determine the organization's desired and achievable position for the future

Kaufman Hall says there are three types of provider organization emerging in the new industry, and leaders need to determine which they are and which they'd like to be under a value-based model.

Class 1
Contacted providers — Smaller, niche providers; important, but not critical, components

Class 2
Major participants — Community hospitals and systems working within a network managed by a population health manager to efficiently provide a broad portfolio of services; will be critical components of PHM networks

Class 3
Population health managers — Large, regional health systems that will be able to provide, either directly or through managed relationships, a full continuum of services, across all service lines and levels of acuity

4. Evaluate current governance and management structures; identify structures that best support goals.

Kaufman Hall says a hospital or health system's ideal structure is one that allows it to "go further faster" toward reaching its goals. Providers can start by developing a core multidisciplinary group empowered by the CEO and board chair to evaluate governance and management structures transparently with communication to leadership at defined levels.

Key, according to Kaufman, is figuring out whether structures enable or impede achieving the aforementioned competencies. As hospitals go through rounds of mergers and acquisitions, they can sometimes gather different committees and boards like barnacles, making governance complex, and transformation more difficult.

The consulting firm says providers must find the appropriate structures that are centered around systems and organizational models, rather than the hospital-centric or site-centric ways of the past.

Hospitals leaders must decide whether they want one board to govern a single hospital in a system, or an entire organization? And should committees be formed that focus on "new-era needs" that the organization is lacking, such as a Care and Risk Management Committee related to population health management.

5. Evaluate current management incentive plans; develop alternatives that would better support organizational goals

Kaufman Hall notes that as much as 50 percent of executive pay, in some organizations, is based on incentives. And thus, those bonuses need to be based on value-related metrics, rather than the volume-tied numbers of the past.

But as providers move from the first to second curve, boards need to have a plan for incentives to transition from one realm to the next, says Kevin Talbot, executive vice president of Integrated Healthcare Strategies. Some are using long-term incentives, that look two or three years down the line using value metrics such as readmission rates, while also accounting for volume metrics, such as the number of patient visits, for current-year incentives.

About 80 percent of hospitals have annual incentives for executives, while 25 percent use long-term incentives, according to IHS. Nearly 100 percent of organizations tie bonuses to some sort of financial metric (net operating income, net operating margin, cash flow, liquidity). Meanwhile, 70 percent use patient experience as a measure, and 80 percent of peer group organizations use a quality measure, the most common of which are:

  • Clinical process care measures used for Medicare's Value Based Purchasing Program
  • Readmissions
  • HCAHPS is becoming a standard measurement

Some long-term incentives, according to Talbot, include:

  • Developing a primary care network sufficient to support a population health strategy
  • Negotiating directly with third-party insurers or with major employers to enter into value-based care contracts for a specific patient population
  • Creating new evidence-based care models that reduce admissions and readmissions
  • EHR implementation and utilization goals that support the exchange of information needed to measure and provide value-based care
  • Bending the health care "cost curve" by reducing the cost to provide care to a specific population
  • Number of lives covered in a medical home model
  • Increasing the percent of patients cared for using evidence-based pathways
  • Reducing admissions in a specific patient population

"Long-term incentives are often used to focus on those goals that are going to take multiple years to achieve, and they often play off some of those annual goals which an organization that's still being paid for volume can't completely ignore," Talbot says. "They work well in tandem with annual goals focused on the daily operating requirements."

Kaufman Hall points out that providers need to establish IT systems that credibly collect, audit and track the measures that these new incentives are tied to. In many cases, such data is yet to exist at hospitals.

6. Understand the obstacles to change and develop and implement potential mitigating strategies

The hurdles that pop up along the way will vary from provider to provider, but Kaufman Hall says every leader should expect and plan for them. Shifting toward service-centric organizations will shift the power base and make some executives feel threatened. Management and government layers will need to be peeled away, and those left behind could be upset. Physicians who may have had an adversarial relationship with the hospital in the past may take on leadership roles. Providers can be prepared by having strong leadership in place that is ready to drive the change required for transformation.

7. Learn from leading providers with organization structures and incentive plans suited to value-based care

Sources: Rethinking Governance and Management Structures and Incentive Plans, Kaufman Hall, 2012; Ready or Not for the New Healthcare Era, Kaufman Hall, 2011; Kevin Talbot, 2013

Finding physician leaders: the old way vs. the new

If hospital leaders want to find physicians who are going to help lead the change movement in their organizations, they need to disregard the old methods of targeting candidates. Here's a look at some of the old and new ways of finding physician leaders.

Traditional Methods

Self-nomination — Most frequent way physicians have surfaced in leadership positions over the years, especially in the voluntary medical staff model

Reward for loyalty—Many providers recognize physicians who are loyal by nominating them for leadership roles

"Looks like a leader" — Some believe that leaders just stand out from the pack

Grievance docs — Physicians who have certain issues or complaints about the hospital and put themselves in leadership positions to address them

"My time has come" — "The classic appointment process," sometimes for someone who isn't even in the room and isn't even seeking a leadership opportunity

Better Methods

Leadership calling

  • Interest in broad, strategic matters
  • Excited about the vision of health care and issues beyond their own practices
  • Aiming to add value to the hospital
  • Ability to get others to cooperate and lead teams

Personality traits

  • High integrity, authenticity and fair-mindedness
  • Servant leaders who do what they say
  • Focused on improvement
  • Communicate effectively

Leadership competencies

  • Use leadership competency models to evaluate entrance into leadership ranks
  • A selection and a competency model must be applied

Sources: Enhancing Physician Leadership: Preparing for Clinical Integration, Dye and Sokolov, 2013

Physicians involved at all levels

To successfully pull physicians into the leadership structure of hospitals and health systems, providers need to engage docs at all levels of the organization.


  • Strong chairman (whether an independent or employed physician) is key
  • Independent doctors play important leadership roles
  • Medical staff physicians also play key roles
  • Hospital-sponsored medical group physician executives provide input


  • Physician leadership at multiple management levels, from the C-suite, to medical group, medical staff and service lines
  • Physicians should bring overall judgment and secondarily content expertise


  • Clinician and financial performance can be optimized by physicians who clearly understand clinical and financial endpoint expectations
  • Performance evaluations should be done by physicians in areas where they have responsibility and accountability

Patient population

  • CIOs and ACOs have specific physician leadership needs related to developing sophisticated care models for complex senior and special-needs populations

Value-based purchasing

  • Physician leadership is needed to assess the ability to implement value-based purchasing exchange products — shared savings, bundled payments, quality targets, patient care performance targets, etc.

Source: Enhancing Physician Leadership: Preparing for Clinical Integration, Dye and Sokolov, 2013

CASE STUDY: Scripps Health reshapes itself to add value to system

Scripps Health, in San Diego, has looked for creative ways to shape its leadership and governance structures to strive toward value.

The five-hospital organization has consolidated governance to a single-system board, and it strives to find members who have different skillsets and aren't all from the same backgrounds. President and CEO Chris Van Gorder says they believe they need members with traits from three categories — mission, business and community, and all three are represented in the current group.

Members include the head of the water authority, the former fire chief of San Diego and a former FBI agent representing the community side, a former auditor, former CEO of a ship-building company and health care lawyer on the business side, and a catholic sister and retired psychologist on the mission side.

"The mix of board members creates value for the organization and patients by balancing the needs of the organization in both running itself as a business, but also focusing on meeting the needs of the community and sustaining our mission and charitable programs and services," Van Gorder says.

Beyond the boardroom, they've restructured their management team into a horizontal approach across the entire system, used physicians as co-managers to help weed out variation, and shifted compensation toward system-wide goals rather than goals focused on single hospitals. Physicians, both independent and employed, have taken part in leadership councils, giving doctors a forum to chew over important issues and speak their mind, and Scripps recently created a new board and mutual benefit corporation to meet the requirements of accountable care.

All the retooling has paid off, as Scripps has pulled some $143 million out of its system in non-value-added variation over the past two years, and expects to remove another $66 million this year.

Source: Hospitals and Care Systems of the Future, American Hospital Association, September 2011