Hospitals and health systems are getting squeezed at both ends of the revenue spectrum. To survive they must effectively integrate a number of healthcare services and add value. But how?
This article appears in the June issue of HealthLeaders magazine.
Whether their operational strategy is dominated by the patient-centered medical home, the ACO model, or other clinical integration strategies, hospitals and health systems are moving heavily into acquisition of physician practices.
In many cases, leaders perceive such acquisitions as a bulwark against revenue declines and a source for continuing referral patterns, despite sometimes steep financial losses from the practices themselves. Meanwhile, lower-level primary care is being commoditized by retail clinics and urgent care clinics operated by drugstore chains or even Walmart.
Although hospitals often lose money operationally on physician practices, hospital leaders feel they can justify employing the physicians because of the downstream revenue. But with low-cost providers nipping at practice revenue and reimbursement pressures bearing down on high-end inpatient services, hospitals and health systems are getting squeezed at both ends of the revenue spectrum.
To survive in the long term, they know they must effectively integrate a number of healthcare services. In other words, they must add value. But how?
Hospitals have begun to think strategically of low-end services as led and managed clinically by them and physicians who are clinically integrated with their care protocols, but they are increasingly interested in providing more care with physician assistants and nurse practitioners as part of a care team. Getting to the end state likely means gambling on lots of steps and complex revenue sharing, but leaders have little choice but to transform. Execution will be the key.
A brief window of opportunity
Almost 1,400 store-based clinics operate now in the United States, mostly in urban and suburban areas. The only substantial requirements: a nurse practitioner, a self-check-in system, and a storefront. Right now, in most communities, such locations complement rather than directly compete with primary care practices.
"There's enough demand for primary care that in most markets the docs aren't feeling the direct impact of these clinics," says Paul Keckley, executive director of the Deloitte Center for Health Solutions, the health services research arm of Deloitte LLP.
But that will change relatively quickly, Keckley says. "There's a race to own the front door to revenue, and that's primary care."
Right now healthcare access, especially in primary care, is constrained. But when most states' Medicaid rolls expand next year under the Patient Protection and Affordable Care Act, and as health insurance becomes a requirement under the same statute, the journal Health Affairs says the demand from this influx of insured patients will mean the nation will require an additional 7,200 primary healthcare providers, 2.5% more than the current supply.
As the system digests the demand for more primary care, a brief window of cooperation opportunities is open for hospitals and health systems to work in partnership with store-based clinics as they seek trusted local partners to help supervise their nurse practitioner and physician assistant storefront practices.
Some already have an urgent care or retail strategy on their own but also see a need to partner within the next three to five years. Michael Murphy, UnityPoint Health's senior vice president for population health strategy, is in the developmental stage of such partnerships even though the health system owns a group of 15 urgent care clinics in its top metro areas of Des Moines, Cedar Rapids, and the Quad Cities, among others.
"We need to move to team-based care where physicians are working with high-risk patients," he says. "An increase in the insured population will start challenging our primary care access models significantly."
Murphy contends that partnerships with low-end providers such as urgent care clinics need not be seen as dilutive to the health system, but instead as another entry point for patients.
"Everyone is concerned about these places taking their business away, but the challenge of primary care is you're always going to have innovation and low-cost providers trying to nip at low-risk easy-patient interaction," he says. "But at the same time, we also look at where the spending is and where the population is moving to. The majority of costs is 55-plus."
That means better care coordination of such patients can pay off more substantially, and, to Murphy's thinking, means the idea of providing clinical oversight and team-based care for such high-cost populations is a great opportunity for hospitals and health systems where urgent care clinics can't and don't want to compete.
Many hospitals' strategies surrounding primary care involve acquiring practices and employing physicians with an idea of introducing such team-based care strategies. But even with the opportunities such partnerships can represent, the physician practice acquisition boom has detractors who suggest it's not a strategy to pursue in hopes of downstream revenue, says Ron Wince, president of Guidon Performance Solutions, the Mesa, Ariz.–based consulting unit of TeleTech, an Englewood, Colo.–based business process outsourcing company.
"I see the primary care acquisition binge as a shortsighted grab for referrals," he says, referencing the rules of the fee-for-service world. "I don't know of many organizations that are not doing it, and moving fairly quickly, but there's a fairly decent amount of cannibalization on the primary care side. The relevance of the primary care referral network will be less and less, and people will self-refer to what's most convenient."
So if you can't compete on price (low-cost storefronts) and you can't compete on volume (high-dollar inpatient procedures), then where can you compete?
Wince says the answer lies in connectivity and what you do with it: "The health system of the future won't be a building or group of buildings, but it will be a cloud."
Wince uses the term to refer to the similarity he sees with cloud-based computing, but he could just as easily be talking about team-based care.
Changing definition of primary care
So how does a leader create the "cloud" that keeps patients and future patients under the organization's management umbrella? Like most successful ventures, it involves a team of people with varied talents working toward the same goal: management of populations.
"The model of the future is much more team-based with interdisciplinary roles," says Deloitte's Keckley. It's a very different operating model, which includes prophylactic dentistry, mental health, nutrition, and vision care as part of a comprehensive view of primary care, he says. Hospitals and health systems can't and shouldn't want to own it all.
"It's a much bigger set of services than most primary care docs are comfortable with, so you'll see entrepreneurs enter the community and become the mainstream," he says.
That suggests partnerships with such entrepreneurial groups (including but not limited to storefront clinics) can be effective. Hospitals and health systems should go about their primary care strategy with forethought but instead, they're often responding to market opportunity.
"That's nonstrategic and reactionary," Keckley says. "Only in communities where insurance companies or a large employer have forced health systems to be strategic on primary care is there evidence they've built out a strategy."
Instead, most CEOs are spending time and effort on opportunities to reduce costs substantially and quickly, he says. Primary care may come into the discussion as a lower priority, which leads Keckley to believe that hospital and health system leaders are misjudging the strategic threats they face as healthcare transforms.
Traditional practices noncompetitive?
Partnering with big national chains is not the answer, at least not by itself. While a partnership with retail clinics may broaden your reach, and it's better than pretending a threat doesn't exist, hospitals can get caught in the crossfire between the economics of such clinics and those of a traditional practitioner, Keckley says.
That's because the profitability of the storefront clinic is not dependent on the visit itself. Though retail clinics will see fewer and less-complex patients generally than the physician office, the cost structure is substantially lower than that of a physician office–based clinic. For instance, retail clinics treat people at half the cost of the doctor's office, but average only 1.5 full-time equivalents compared to the average practice, with 3.5 FTEs, Keckley says.
"These clinics maintain contact with patients following the visit, they push them 10 feet away to get their prescription filled, and while they're waiting they might pick up Diet Cokes and Cheetos," Keckley jokes.
The storefront clinics have processed a key detail about healthcare reform writ large: Not only do hospitals and health systems need radical cost reduction in core inpatient businesses, "but you've got to have revenue streams that are not third-party–dependent," he says. "You can't depend on the government or insurance companies to be your top line anymore."
Approach No. 1: The integrator
So is everyone acquiring physician practices making a strategic error?
Far from it, but the acquisition strategy is only the starting point. Murphy, of UnityPoint Health, is charged with developing the connections among various sites and acuities. The integrated health system, with annual revenues of $2.8 billion, has been active in targeted partnerships with providers not owned by UnityPoint Health as part of its accountable care organization strategy.
Murphy is anticipating a difficult transition, but says a critical issue is the ability to offer a variety of services stratified by patient age. Among younger patients, he sees a big move to telemedicine, and says technology will erupt and lead this transition. Telemedicine, e-visits, and self-scheduling, under which a patient can interact virtually with a physician or physician assistant to determine further treatment, will be big among this age group. He envisions an escalating suite of services depending on acuity and severity.
"That will create a whole new construction on how we deliver and access care," he says.
Murphy anticipates adding some pieces to the puzzle as the system deals with demand from people who are just moving into the insured market. He cites a need to move to team-based care, and to a model where physicians are working with high-risk patients and funneling low-risk, low-acuity patients to physician assistants and nurse practitioners.
"But right now, we don't have a reimbursement system that supports that," he says. "That will change in the next three to five years and will open up new opportunities. It will also start challenging our primary care access models significantly."
The business model he and UnityPoint Health favor starts with a primary care base but, critically, involves looking at risks in patient populations. Those in the low-risk categories are likely to gravitate toward convenient care, such as store clinics and e-visits. Murphy wants to partner with those entities "so we can bring clinical expertise." He sees in-house physicians—primary care and otherwise—working with the more medically complex and compromised patients and developing systems of care for that cohort because it is complex clinically, requires care coordination, and in some cases transportation, behavioral health, and other services, and thus is most costly per capita.
The real challenge, especially under a capitated, full-risk situation, which is where commercial insurers are likely to gravitate, is developing what Murphy calls organized systems of care in each of UnityPoint Health's 27 metro and rural markets.
"Today, many insurers would fully capitate and put us fully at risk," he says. "We are preparing the key capabilities to perform under full capitation to know how well we perform under that."
He says UnityPoint Health's experience with Medicare Advantage plans is a plus under an arrangement like that, and would be instructive, but if he wanted to protect his markets from low-cost competitors tomorrow, he'd accept full capitation indexed to the consumer price index.
"Now, all my work would be around care coordination," he says. "At the same time, we're not there, nor can we succeed in that world right now because we are still building the capabilities."
But the first steps are there. UnityPoint Health has more than 110,000 lives in a commercial ACO contract, more than 90,000 in Medicare shared savings and in a CMS Pioneer ACO. The system has more than 230,000 lives in value-based contracts today.
The timing of entering into fully capitated care will be different in each of its regions, but the era of collaboration is intensifying, he says. Although he doesn't mention the chain specifically, the trick may be in getting entities, such as Walgreen's, HyVee, and CVS, for example, embedded into this innovation.
Murphy and his leadership team recognize that in addition to its core competency of acute care hospitals, UnityPoint Health must expand to an organized system of care in each of its regions that brings care at the most appropriate time to achieve optimum cost and quality results.
"We'll have to adjust where we place our capital. That's why we'll have to work in regions, so independent and employed physicians are all looking at populations, stratifying the risk, while we'll be looking at additional partners we need to bring to the table."
Approach No. 2: The player-coach
James LaBelle, MD, the chief medical officer at Scripps Healthcare—a San Diego–based four-hospital system with 1,411 total licensed beds and $2.6 billion in total operating revenues—is in the midst of engineering transformation as well. But that transformation involves many moving parts and can't be accomplished quickly. Like Murphy, he sees a three- to five-year period of reengineering processes, reimbursement, and partnerships with outside organizations before Scripps can "flip the business model."
The first phase of transformation, which LaBelle estimates is 85% complete at Scripps, centers on standardizing the supply chain: physician preference items and pharmaceuticals. He calls that work low-hanging fruit. The second phase centers on reengineering care on the care units, primarily in the inpatient setting. It involves driving out the waste in the inpatient unit and standardizing the clinical processes that support them. He estimates Scripps has completed 15% of that work.
"The really hard piece is the third phase of our process, which is taking the efficient systems we have and flipping the business model so that instead of being in a heads-in-beds business model, we're reimbursed for population health," LaBelle says.
That requires new competencies in reengineering the continuum by disease state, he says. Put differently, he says Scripps as a healthcare system only adds value at the level of the medical condition.
"The patient doesn't necessarily care about the individual encounter, but the improvement of their condition over the entire episode of care," he says.
Even now, in most of healthcare, the predominant reimbursement is around those encounters, and not in driving value at the medical condition over the cycle of care. Capitation, which has long held sway in California even after it was largely abandoned in many other regions, starts to get there, but even a renewed focus on utilization management and outcomes is more of a general indicator of performance, and not around particular disease states, he says.
"This third transition will be data- and knowledge-heavy," he says.
While many of his colleagues at health systems around the country have taken to saying that primary care is king in healthcare reform, LaBelle says that's the wrong metaphor.
"In order for the transition to occur, the primary physician can't be a king, but a player-coach," he says.
This physician has to coach other members of his or her team to manage a much larger population of patients, supported by chronic disease management infrastructure. Patient interactions with such physicians will not be one-on-one, but the physician will manage a population of patients with a team.
"That transition will be as hard as the one the specialists will undergo in terms of being accountable for outcomes and appropriateness," he says. "A lot of primary care physicians experience frustration about not being able to manage complicated chronic diseases because they need to see 30 patients a day. The work becomes a lot more meaningful if you can move them toward that."
Still, he's concerned that Scripps has the right partners as some of the simplest primary care becomes commoditized.
"It's being commoditized right in front of our eyes. Look at Rite-Aid," he says. "When do we want to admit that the commodity part of the physician workload doesn't really add value?"
What adds value to the patient is physicians' judgment around complex presenting conditions. If your strategy as a hospital or health system is to acquire primary care physicians, that's only the beginning.
"But you haven't added value if you're just doing it for referrals," he says. "You've merely locked in your referral patterns."
In competitive markets, your strategy should center on partnering those primary care physicians with specialists, postacute care, and disease management systems to add value at the level of the medical condition.
"If not, maybe in a few years, you're not competitive."
He argues that small store clinics, being high touch and low cost, can be managed by algorithm. Hospitals should think about partnership with such clinics to leverage the technology and the primary care physician to manage a team of nurse practitioners in storefront locations.
"These venues of care will be essential to being successful in this new system and will become really important as referral patterns are disrupted and access to primary care is disrupted."
Approach No. 3: The disruptor
Allen S. Weiss, MD, president and CEO of NCH Healthcare System—a Naples, Fla.–based 715-licensed-bed system with net operating revenues of $480 million—is seeking to be the disruptor as health reform accelerates. Even though NCH is only a two-hospital system, Weiss is seeking to collaborate, affiliate, and consolidate to remain relevant on both the low and high end of healthcare services.
As for competition from low-cost sites of care like storefront walk-in clinics, Weiss is thinking ahead to another revolution that may supplant the walk-in clinics: the home visit. But such visits will not be in person. Weiss makes the argument that existing in-home IT already allows home visits through Skype or other online means. Remote monitoring is also gaining acceptance and is proliferating, and regular in-home visits from nurse practitioners and physician assistants will be part of the home care revolution, he envisions.
"We need to be location-agnostic and take care of patients where it's most comfortable for them," he says. "Wouldn't you rather have care provided at home? Not being exposed to C. difficile and MRSA and other bugs has a lot to recommend it."
To develop a working model for such interaction, NCH is on the move. The leadership team has charged the system's CIO, CNO, and the chief administrative officer of the system's 100 outpatient providers to do checkups using Skype or Apple's FaceTime within six months.
"We have a fair number of patients who go home [away from Naples] in the summer," he says. "What if they could have virtual visits in the summertime? Why start up with a new caregiver?"
In August, NCH joined the Mayo Clinic Care Network, a collaborative with the famed Minnesota health system to address patient care, community health, and innovative healthcare delivery, but Weiss is under no illusion that it will secure NCH's future. In narrow operating margin industries, which Weiss insists healthcare is destined to become because of cost pressures, "you need economies of scale and scope," and that means an independent existence is not only impossible for a system like NCH, but is undesirable as well.
"We cannot persist independently when you've got to integrate the care we're providing to include prevention, patient engagement, and avoidance of hospitalization," he says.
More tangibly, the partnership allows NCH to introduce new methods of interacting for primary care that Mayo has already pioneered, such as the virtual visits idea.
Reimbursement for such innovations is often the first concern for leaders, but Weiss contends that worrying about reimbursement hampers innovation and cedes patient relationships to organizations that don't use third-party reimbursement as an excuse not to innovate.
"Right now, reimbursement for virtual visits will be cash, but in the very near future we're talking to the major insurers about getting paid," says Weiss, adding that in California, Kaiser Permanente, which has the luxury of its own captive health plan, already gets third-party payment for such interactions.
"We'd be getting $44 a visit versus twice that for an office visit," he says, but half is better than nothing, and doing a lot of work this way is frequently better for the patient. "About 80% of the office visits done right now by primary care can be done by midlevel providers, and 80% of what the midlevels do can be done over the telephone," Weiss says. "That means overall, two-thirds of visits can be done over the telephone by midlevels. Primary care practitioners will be captives of a team that includes a physician, a midlevel provider, an exercise physiologist, a pharmacist, and a dietician. This individual one-on-one doctor thing was adorable for 1980, but it's not going to work in 2020. Neither the government nor this nation can afford it."
Reprint HLR0613-2
This article appears in the June issue of HealthLeaders magazine.
Philip Betbeze is the senior leadership editor at HealthLeaders.