Written by Dan Michelson, CEO, Strata Decision | January 12, 2017
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If you want to understand the future of the $3 trillion U.S. healthcare industry, the lesson of the past is to 'follow the money.' And no one would argue that the place to do that is the infamous JP Morgan Healthcare Conference taking place this week in San Francisco.
While there are an estimated 4,000 people attending the conference, there's roughly another 20,000 here for 'off the grid' meetings in every nook and cranny you can find. It is a surreal atmosphere in the form of the top executives from more than 450 private and public companies in biotech, pharmaceutical, medical device and technology, as well as healthcare providers, payers, private equity and venture capital firms and investment banks. Simply stated, this is where medicine's flow happens.
With that said, roughly $1 trillion or one-third of annual U.S. healthcare spend flows through hospitals and healthcare delivery systems. So, if you want to understand what's happening now and what will happen in the future, a good place to start is in the nonprofit healthcare provider track, where CEOs and CFOs of over 20 of our nation's largest healthcare delivery systems presented their strategic plans in rapid fire 25-minute presentations.
Together these organizations represent over $100 billion or 10 percent of that $1 trillion spend. Incredible. The average organization presenting had over $6 billion in annual revenue, 15 hospitals, close to 30,000 employees and thousands of physicians on staff. Many of the name brands in healthcare including Downers Grove, Ill.-based Advocate Health Care, Irving, Texas-based CHRISTUS Health, Cleveland Clinic, Detroit-based Henry Ford Health System, Salt Lake City-based Intermountain Healthcare, Indianapolis-based IU Health, Oakland-based Kaiser Permanente, Cincinnati-based Mercy Health, New York-Presbyterian, Chicago-based Northwestern Medicine, Northwell Health in Great Neck, N.Y., and Robert Wood Johnson Barnabas Health based in West Orange, N.J., presented along with leading children's hospitals such as Children's Hospital of Philadelphia and innovative physician focused models such as Marshfield Clinic in Wisconsin and Geisinger Health System in Danville, Pa.
This provided an incredibly important snapshot of both the ground level view of what's happening in the real world today as well as the bets being placed for the future. What follows is a high-level perspective of what was shared by these prominent provider organizations.
So, follow the money…and here's the Top 10 Trends shaping how that money is flowing:
1. The Affordable Care Act
The 'elephant in the room' was the uncertainty relative to repealing and replacing the ACA. Surprisingly, the reaction wasn't what you might have expected.
From an absolute dollars perspective, no one stands to lose more than the folks who were in this room. With that said, the ACA didn't dominate the conversation. As stated by the executive team at Kaiser, "we're not going to get out, we're going to figure it out."
The general consensus is that the ACA has flaws, yet there is also a shared belief that it has been a "great first step at getting more in the door" and that whatever is done moving forward must build on it, not destroy it. The CEOs and CFOs who presented shared an extraordinarily strong view that replacement has to happen at the same time as repeal.
From a financial impact perspective, several health systems believed the ACA has had a net neutral effect. One example is Henry Ford Health System, which cited "favorable reductions in charity and bad debts were substantially offset by Medicare cuts and increased Medicaid losses." This sentiment, relative to the past and future financial impact, was consistent and the level of concern relative to a replacement of the ACA was lower than one might have expected.
The bigger issue was the overall uncertainty of what "replace" will mean. Many believe this uncertainty will be the new normal for some time and that they need to stay the course strategically. The translation of this is that the election is not causing major shifts in their approach. The direction communicated in every presentation was to keep going forward as the focus on value — high quality affordable care and health for a population — has to continue.
An interesting side note: JP Morgan Chase Chairman, President and CEO Jamie Dimon shared that the firm self-insures, spending $1.6 billion per year to cover 300,000 employees. So, add another billion dollar healthcare company to the list.
2. The Need to Manage Margins and Reduce Cost
"Affordable care" and reducing cost structure was a consistent mantra and strategic priority highlighted in nearly every presentation. Cost management has become a board-level strategy as providers continue to see downward pressure on the top line, a shift to ambulatory and a movement to risk-based, bundled contracts in high-volume and high-value specialties.
The focus is on driving out variation and many different strategies are in motion. Intermountain has been ahead of the curve for many years on cost management, coming in at $1,800 less per patient than the national average. They shared that national health costs would be "34 percent lower" if everyone else hit that same mark.
Many are making progress. Cleveland Clinic has achieved $775 million in savings over the last four years, including close to $2 million in their total joint program, partially achieved by discharging 66 percent of their patients directly to their home, delivering better clinical outcomes and a better patient experience. Advocate achieved $73 million in the Medicare Shared Savings Program, with $34 million coming back to the organization. Houston-based Memorial Hermann achieved $93 million in Medicare savings, sharing in $47 million, making it the most successful effort in the country.
There is also a shift towards investing in staffing performance improvement teams on an ongoing basis. Henry Ford Health System now has over 40 people on their performance improvement team, significantly more than most organizations. One would anticipate future investments in this area as the focus on margins is expected to continue, especially as the movement into bundled contracts in specialties such as orthopedic and cardiac care.
In order to enable this new approach from a technology perspective, organizations are investing in more advanced cost accounting systems to better understand both cost and margins. This supports a focus on clinical standardization and reducing variation, from a quality and cost perspective.
3. The Move to Revenue Diversification, Ventures and New Lines of Business
A term that is starting to gain some traction is "revenue diversification," also known as finding new streams of revenue. Healthcare providers have recognized that their business model has to change and they can't just sit around and wait for the next nuance to reimbursement and regulations. They need to go on offense, and there are many different ways they are starting to attack. The biggest focus appears to be on new ventures.
To be clear, revenue diversification represented the biggest shift in mindset year over year at the conference. This form of business "innovation" has become a board-level imperative, seemingly overnight. As an example, Intermountain already has a full pipeline of companies and stated plans to develop "one to two new companies per year." Children's Hospital of Philadelphia commercialized a driving simulator. Northwell has "70+ ventures" in motion. Mercy has set aside $50 million for direct investments in private equity and acquired their own revenue cycle company to serve their needs as well as become part of their investment portfolio. Many are moving deep into genomics. The list goes on.
The summary is that major health systems are recognizing they need to find other ways to drive value, deliver on their mission and create a more viable, sustainable enterprise.
4. Geographic Expansion and Increased Access to Care
Many health systems have expanded their geographic reach significantly in a short period of time. One example is Northwestern whose flagship Northwestern Memorial Hospital in Chicago accounted for 82 percent of revenue a few years ago, but now represents only 38% as the system has expanded into the suburbs. Northwestern executed a methodical acquisition strategy over the last four years and created an impressive balance, both financially and strategically, in a short period of time. RWJBarnabas Health, Hackensack, Meridian, Northwell and many others cited this same approach.
CHRISTUS Health is one health system that many are watching. The system has doubled in size in the last few years, not only through acquisitions in their home base of Texas, but also with an international expansion into three countries — Mexico, Chile and Columbia.
Additionally, many health systems are expanding their access to care through primary care relationships and extended outpatient services. While there is a general slowdown in acquiring physician practices, some are still moving in that direction. Others are focused on forming tight partnerships to coordinate care provided beyond the inpatient visit as they move into longitudinal population health.
5. The Growth of Value-Based Contracts
The expansion in access points across the continuum within a single healthcare delivery system has led to an increased willingness to take on risk and value-based payments in a large-scale population setting. Most of the presenting companies have some form of a health plan, but all have also taken on some form of risk-based contract. Advocate, a pioneer in accountable care, now has 865,000 covered lives accounting for a total spend of $4.6 billion in value-based agreements.
6. Consumer Engagement
The movement from treating patients to building relationships with consumers was a headline last year and this trend continues to mature. There is a major focus on the experience of care. For example, Northwestern is one of a number of providers where every employee has incentives related to satisfaction. Northwell has developed its own Customer Relationship Management system, and many others have made similar moves. Geisinger has now given over $500,000 in satisfaction rebates based on its money-back guarantee since November 2015, arguably the most effective marketing investment in healthcare today. Intermountain is now recording personal, non-health and healthcare related goals to help motivate recovery and compliance. Every health system came up with a pretty full list of investments in this area, and it is clear they are just getting started.
Branding is one part of systems' consumer strategy that is gaining more investment. While health system rankings by U.S. News & World Report were cited by all who make the list — and this will remain a focus — the approach many are taking toward branding is getting much more sophisticated.
7. A New Focus on Mental and Behavioral Health as a Strategy
A welcomed and critical addition to the strategic plan of many health systems was mental and behavioral health, with attacking "social determinants" now making its way to the executive suite. Intermountain outlined an investment in integrated, team-based care practices — clocking out to $22 per member per year — decreased overall medical expenses by $116 per member per year compared to traditional practice management. One benefit of their team-based approach was a 23 percent reduction in emergency room visits.
With that said, this is clearly an area where many are struggling in the early innings of thinking through their strategy. Mental and behavioral health is ripe for collaboration, not just innovation in a silo. The good news is that the discussion and the work have started.
Outside of mental health, many health systems are taking a comprehensive approach to managing social determinants. One example is St. Louis-based Ascension, which has made major investments in applications and initiatives to move the dial in the community, including setting up food pharmacies.
8. Digital Tools and Data
This is the first time where the EHR was not cited as a strategy by itself, but as a baseline assumption. Virtually every organization was on either on Epic or Cerner — it was seen as table stakes. The big shift that has taken place is that the data is now available and accessible. That doesn't mean it's perfect, but it has opened the door on innovation relative to using that data to drive change, and many are now beginning to walk through it. There was a great deal of discussion on how to now use that data to improve outcomes and drive out cost with very specific strategies in motion to capitalize on it.
9. A New Investment in the Workforce of the Future
This was another surprising area of investment with at least four organizations opening new medical schools, you read that right. The move is primarily focused on primary care and family medicine, including Cleveland Clinic, Geisinger, Hackensack and Meridian. In that same light, other systems are investing in physician assistant and advanced practice nursing schools.
10. And the List Goes On…
Additional hot topics included the continued shift to ambulatory care, a focus on quality and outcomes, precision medicine, aligning incentives with physicians and virtual health (for example, Cleveland Clinic which has seen a 168 percent annual increase in virtual visits). There were also newer and interesting strategies that were less prominent, like shared medical appointments at Geisinger where 10 diabetes patients are seen at a time in a supportive group setting.
The bottom line: There is a noticeable shift in strategy for major healthcare providers as many begin to move from defense to offense as they look to the future. How an organization spends their money is their strategy, and it is starting to flow into some new, exciting and important directions.