They avoid alternative strategies out of fear: If they engage in risk contracts, if they market bundled products at market prices, if they take on capitated Medicaid contracts, they will be undercutting their ability to extract rentier payments for their market dominance, lower their top-line income, and put the organization at greater risk.
Is this true? No. Let’s look at a few reasons why.
First: No, you don’t have to be a certain size, you don’t have to have a certain top line to survive. To survive you have to make sure that your top line is greater than what it costs you to bring in that top line. The metaphorical bottom line is the actual bottom line.
Second: Capital costs increase your cost basis more or less permanently. You have to bring in a certain level of business to lay off that bonded indebtedness every year, every month, before you can even think about turning a profit.
Some smart organizations are thinking like this: Look, the environment is changing rapidly. Some parts of what we do (say, primary care for certain populations) are with us more or less permanently, and all signs are that they likely will grow with time rather than diminish. However we end up getting paid for that, the more efficiently and effectively we can do that, the better off we will be. So this is a good place to take on debt that we know we can service with that line of business, to build whatever is the most efficient business and physical structure for that. (Or we can build a public/private partnership that turns the transaction into someone else’s debt against a leasehold for us.)
Other lines of business, such as specific types of surgery or techniques such as proton beam therapy, have quite a different capital profile. In the changing environment, all techniques that are not truly helpful, that do not have a positive cost/benefit ratio for the customer, are likely to diminish substantially. In the new environment, if the value isn’t there, the volume won’t be there. So, in the end, expending scarce capital capacity on building for them may look like you went to a lot of work to weld a ball and chain onto your own ankle.
Third: Different revenue streams have different effects on the bottom line. Let’s look at fee for service, bundled products and risk contracts.
If you are getting paid for every procedure and test in a fee-for-service world, it doesn’t matter how wasteful they are, how effective or how efficient, because every expense creates its own addition to the top line, every one of them is reimbursed, and you get paid for your inefficiencies. So, as a business proposition, who cares? Volume equals value, at least for you, whether or not it does for your customers.
If you offer a bundled product, the top line is no longer per test or procedure; it is per case. It still doesn’t matter whether the case itself is wasteful. Whether the patient is better off with a new knee is irrelevant financially, but suddenly the efficiency of producing the product (the “total cost of ownership”) is deeply relevant, because every extra CT scan, every mistake, every increased complexity of the operation adds to the cost against a fixed top line. If you can’t get efficient enough to get your true costs below your price (or worse, you don’t know your true costs), then every time you sell that product, you are costing yourself money.
If you offer a risk-based product, now your top line is not per case but per life — per employee per month, per Medicaid beneficiary, per patient allocated to your accountable care organization. So the cost concern shifts to that level: What is the total cost of ownership of primary care, or spine-and-pain care, or diabetes care, or total life care for that life? Now it matters not only whether you are doing operations that really don’t need to be done, that are not truly medically indicated. It matters not only whether you are doing what needs to be done in the most cost-effective way possible. It matters even more whether you could have gotten to the actual goal, a healthy pain-free patient, as efficiently, effectively and quickly as possible. And the most efficient path to health for all patients (if you can do it) is to get them there before they ever need complex and expensive care: comprehensive disease management and prevention.
The Odds of Drawing to an Inside Straight
Price is implacable. You cannot game a market that is structurally exposed to price differences, information and options. Market dominators must keep up the opacity of their prices and depend on unrated backroom deals with major payers and purchasers to maintain their status.
In turbulent conditions, successful strategies will be those that thrive under conditions of high variance, multiple energy inputs and multiple strategic options. Successful strategies build expertise, experience and capacity for multiple revenue streams with multiple target markets.
Given the other forces in play, we cannot build any reasonable scenario in which the status quo continues. Questions on which we can build credible scenarios include: How quickly will the collapse to a more open market come to your market? And will that collapse be limited to certain revenue streams, lines of business and target markets, or will it be across the board?
Maintaining market dominance is actually a fragile strategy based on a single scenario and a monochromatic set of assumptions about the future. If your entire business structure depends on keeping your prices a high secret, and not exposed to real competition on price and quality, you are on the crumbling edge of a cliff as the seas advance.