Market Sophistication is Growing Rapidly
Newtown, CT - May 16, 2015
Recent conversations with health system leaders indicate that market sophistication is growing rapidly, but there are lingering gaps that must be closed - The market seems to be divided into four provider categories: Integrated systems that have a history of taking risk by managing a percent of total premium; newcomers that aspire to be integrated and grab as big a percent of premium as possible; entrepreneurs who are eager to focus on specific market segments; and academic centers that have never taken risk but understand they must. The second segment, the newcomers, are the ones who will likely burn up the fastest, because they neither have the management sophistication nor the experience to weather the inevitable losses they will incur. The third segment will see winners emerge, and they will absorb the losers, growing horizontally and extending their reach throughout the country. The winners are the ones who understand two important market facts. First, the current variability in episode prices is the source of margin, and second, focused clinical reengineering is very difficult to achieve across product lines. The fourth segment, academic medical centers (AMCs), can learn a lot from the successful entrepreneurs, and can still emerge strong from the on-going transformation of the delivery system, but time is running out.
What this means to you - We sometimes take for granted that the lessons learned in the rest of the economy will be adopted in health care. After all, management and business theory has been successfully applied to highly complex industries and resulted in the complete transformation of whole swaths of the GDP. And while many researchers are quick to point out that health care is different because it involves complex decisions about people's lives, that's not really why health care is different. It's different because the professionals trained in and for that industry were done so without any of the ubiquitous management training techniques used on professionals of all other industries. Consider the results of a recent study reporting the attitudes of clinicians at Fairview (a "first segment" provider) whose compensation was tied to the team's performance. The majority expressed frustration about free riders who failed to pull their weight and dragged down compensation. Consider further what will happen in a "second segment" provider when the organization experiences an overall loss on its total population risk contract. The answer is simple, internecine warfare and a likely break up of the vaguely integrated organization. The entrepreneurs understand this and that's why they focus on specific clinical episodes for which they can more easily define protocols, required clinical skills, boundaries of financial risk, and the ability to reduce variability and create financial windfalls. They will grab market share from the others as transparency of price and quality increases. The AMCs are therefore in a bind. They understand better than most the management challenges they face and are prudent to avoid the inevitable clashes that will ensue from taking on global population risk. But as they tread into more manageable risk by accepting bundled payments, they want to keep the boundaries of the episode tight. And yet, the tighter the boundaries of risk, the more price matters, and that's not a winning game for AMCs. The good news is that reality is settling in, and sooner or later the experience of the winners and losers will close the knowledge gaps. For some it will be too late.