succeeding in a disruptive healthcare environment

Hospitals and health systems should adapt to the profound disruption affecting health care from an increased emphasis on consumerism.

A wave of new competition, centered on providing consumers with greater convenience and lower prices, is transforming the traditional model of healthcare delivery. Consider a few examples:

* Teladoc provides physician-patient interactions by phone.

* HealthSpot offers physician consultations via web-enabled kiosks in shopping malls.

* Walgreens uses store-based nurses to manage chronic conditions, and, in partnership with Theranos, provides certified lab services at high speeds, with results available to consumers at a fraction of normal costs.

* Paladina Health offers employer-based clinics where employees have no costs and all physicians are employed.

* Human Longevity provides preventive treatments tailored to a consumer's genetic makeup.

Much like Netflix undercut Blockbuster by offering consumers access to a wide selection of low-cost videos from the comfort of their homes, new healthcare competitors are beginning to offer care at levels of convenience, customization, and price that traditional hospitals are highly challenged to match.

A critical strategic question for hospitals is how to avoid Blockbuster's fate. Hospitals and health systems are vulnerable especially because, unlike the emerging nontraditional competitors, the hospital business model centers on large facilities supported by organizational structures, processes, and resources that generate high fixed costs.

Companies in other industries have seen disruption coming and have successfully transformed their businesses while still in a position of strength. To do the same, U.S. hospitals must understand the likely spheres of disruption in health care and the strategies required to succeed in the disrupted environment.

The Nature of the Disruption

Industry disruption commonly occurs when a nontraditional company-Netflix and Amazon being prominent examples over the past two decades-enters the market and makes its products or services more broadly affordable and accessible than the products and services of longstanding, traditional competitors. Often, the nontraditional company's products or services involve a new technology or other innovation that is not dependent on complex or costly organizational infrastructure. Innovative disruption allows less expensive professionals to do more sophisticated things in less expensive and more convenient settings.a

Health care's new competitors are seeking market share by offering services at high levels of convenience and customization and at low costs. This business disruption is not a one-time event; it is occurring in various spheres simultaneously and will advance as market competitors continue to invent ways to deliver services to consumers even more conveniently and at ever-lower prices (see the exhibit above).

Inpatient-centric care, the first sphere in the exhibit, has the highest costs per unit of service and offers the least convenient access for consumers, making it ripe for disruption. Ambulatory care, in the second sphere, typically offers lower-acuity, less expensive services in locations that are more convenient for consumers, making it well-positioned to assume a leading role in a value-based delivery system centered on population health management. Located in the exhibit's upper right corner, web/ mobile-centric care, which does not require bricks and mortar, has even lower costs and is literally at consumers' fingertips. New technologies and new competitors may be disrupting inpatient, ambulatory, and even virtual services selectively or all at the same time.

Many hospitals and health systems function as inpatient organizations that provide outpatient and physician office-based services to support their hospital operations. Hospitals, in fact, typically are defined by their large inpatient facilities. With the exception of a small number of integrated delivery systems, few healthcare organizations fully occupy both the ambulatoiy sphere and the inpatient sphere. Even fewer organizations are starting to move into the web/ mobile-centric sphere, where nontraditional competitors are marking their territory. Competing with disruptive innovators in this space is likely to prove a significant challenge for legacy organizations, particularly in areas such as customer connectivity, tech-sawy human resources, IT sophistication, and value creation.

The first market dislocation involves the shift of services to outpatient settings. Although this shift has been occurring for some time, new competitors well-versed in attracting consumers are redefining where services are provided and at what cost.

The key driver is consumerism, which has emerged as employers move their employees into high-deductible and consumer-directed plans through traditional group insurance or private exchanges. In 2oi3, more than 36 million privately insured individuals were in these new types of plans, in which consumers assume responsibility for paying the cost of most services and drugs until meeting significant deductibles.b Also boosting consumerism, 8 million nonelderly Americans enrolled in insurance through the public exchanges during the 2013-14 enrollment period under the Affordable Care Act, according to the U.S. Department of Health and Human Services (HHS). Plans garnering the most interest thus far are low-cost options, according to HHS data, with 20 percent of enrollees selecting bronze plans and 65 percent choosing silver plans in 20i3 -14. In exchange for keeping premiums low, these plans use deductibles and copayments to engage consumers in decision making about their spending.

Consumerism is bringing to health care a new retail mentality and openness about where to go for services. Nonhospital providers are increasingly the choice for non-acute care needs. For example, urgent care centers and retail clinics located in grocery stores and drug stores are effectively competing with hospitals and primaiy care providers for lower-acuity and well-care services. Convenience, brand, and often significantly lower prices are their competitive strengths (see the exhibit on page 51).

Web, mobile, and other technology-driven disruption is shifting services from outpatient facilities to in-home "anywhere care" and "anywhere health" enabled by virtual technology.

At the center of this disruption is innovative telehealth, which includes virtual diagnosis and treatment as well as monitoring of patients' vital signs through wearable, portable, or ingestible sensors. With mobile or web-based apps, consumers can describe their symptoms to physicians located at a call center and receive a diagnosis and prescription within minutes. Point-of-care kiosks, set up in nonclinical locations such as department stores, are equipped with touch sensors and high-definition monitors for virtual patient visits with a physician. Teladoc (with access to 7.5 million potential users), MDLIVE, and American Well hosted half a million physician-patient interactions last year.0 Thirty-four percent of Teladoc consultations for three top categories of conditions occurred on weekends and holidays, and the top 10 reasons for e-health visits were also the most common reasons for physician office visits.d

Enormous growth is expected in use of wireless, mobile-sensing products and apps for clinical patient monitoring, assisted care, at-home chronic disease management, and general wellness applications. Implantable sensors for monitoring blood glucose levels aim to improve the lives of diabetics and reduce healthcare costs.' Soft wireless patches that stretch and move with the skin are being designed to monitor heart and brain functions.f Tiny ingestible sensors manufactured into medications are activated by stomach fluid, and correlate to behavioral and physiologic information captured by a wearable device.8

Game-changing technologies are likely to accelerate further, reshaping health care as we know it-moving more and more care out of facilities, with new entrants seizing increasing portions of established competitors' vulnerable market share.

Strategies for Hospitals

Faced with emerging disruption, some hospitals may elect to continue operating within the traditional business model. This approach may work for organizations that can aggressively manage their costs while fee-for-service payment predominates. As the value-based model replaces the current model, however, these hospitals will see their financial and clinical strength-and likely their market share-diminish as new competitors attracted by the new business model disrupt the delivery system.

Alternatively, hospitals may choose to pivot to the new business model, in essence disrupting themselves. This path presents the opportunity to maintain relevance and market share-and financial and clinical strength-in the changing market. It requires a commitment to a new view of health care, an investment in consumer-centric outpatient and virtual strategies, a willingness to use new metrics, and a comprehensive blueprint for change.

Commit to a new view of health care. The significant changes needed to operate in a new business model demand that boards and executives unanimously commit to a new view of health care's future. This view requires accepting that hospitals are not assured a position as the controlling hub of healthcare delivery in their communities. That role could be played by a powerful nonhospital entity that builds a system to provide affordable and accessible products and services. Consumers will bypass expensive, inconveniently located facilities, preferring their care in places close to where they live, shop, and work.

Attracted to health care by this new business model, new competitors aim to keep consumers out of hospitals by keeping them healthy and by offering services in outpatient and home settings when consumers do need care. Boards and senior management teams of health systems should be asking themselves whether they are capable of reorganizing and achieving financial and clinical relevance in an outpatient- and telehealth-based delivery system. We believe that a wholehearted commitment to this view of health care is required going forward.

Forces can impede the adoption of this new view. Many hospitals have been highly successful in the traditional business model and have fared well against traditional competitors. Having built a competitive advantage over the decades, hospital executives may find it difficult to walk away from strong margins.

But healthcare disruption is certain to erode those margins as the value model replaces the volume model. The competitive advantages of hospitals in a sick-care system will be less relevant. Leadership teams should understand this dynamic and be genuinely objective regarding the positions of their organizations. Inaction or inadequate action could impair an organization's ability to effectively reposition itself for the longer term. For most organizations, pivoting from behind will be much more difficult-if not impossible.

Invest in an outpatient and virtual strategy. Some organizations will be able to carve out a strategy to deliver only high-end services, but for most hospitals and health systems, an effective outpatient and virtual strategy will be critical to market relevance.

A strategic plan is needed. The plan should position the organization to provide services in a retail-oriented environment that is characterized by better-informed and more cost-conscious consumers. It should identify the pieces of infrastructure required for a robust outpatient delivery system that firmly positions the organization in the ambulatory-centric sphere, and should determine how and where to assemble those pieces. The existing hospital chassis is unlikely to have the right assets in the right geographies to manage population health. Transitioning to population health on a chassis built for sick care is not realistic.

The plan also should include use of new diagnostic and treatment modalities, mobile delivery mechanisms, and pricing, communications, and tactical approaches for gaining consumer market share in the virtual sphere.

Investments should be made in elements of a different chassis-technology for virtual interaction, employees with the technological know-how to meet the changing needs of activated consumers, and intellectual capital in areas such as care redesign, payment/pricing models, and community health.h

Identify and use new metrics to measure progress. Fee-for-service metrics will not be the ones to watch going forward. To help executives and trustees monitor improved performance related to better health, better care, and lower costs, new success indicators include the size of the population an organization covers and how well it performs in keeping that population healthy and providing care. Measures for three types of covered patient lives are controlled lives, which are those specifically covered through contracts; influenced lives, which are those referred by physicians; and incidental lives, meaning patients who self-refer. If care is needed, measures indicate whether high-quality care is provided in the least-intensive settings and at the lowestpossible cost. Identifying and lowering cost per unit of service will be critical to an organization's ability to gain market share and participate in narrow networks.

Organizations also should identify and use appropriate measures for outcomes, care coordination, consumer engagement, efficiency, and other factors. During the transition to value-based care, these measures should be used concurrently with traditional volume - based metrics.

The agencies that rate healthcare credit are monitoring new, value-related measures of progress. In20i3, Moody's Investors Service added demand-related measures of unique patients, covered lives, and employed physicians; and risk-based payment measures of Medicare readmission rates, all-payer readmission rates, and risk-based payment contracts. Standard & Poor's probes performance under capitated contracts (even if current dollars at risk are small), involvement with other value - based arrangements, and population health initiatives.

Use a blueprint to guide change. Re - envisioning and redesigning an organization's delivery system is a transformational process that needs to be staged based on the entity's unique market, capabilities, desired role, and competitive factors. The foundational planning process should be grounded in market, financial, and clinical/quality facts, and the organization's current and expected performance in the context of these realities.

Because the transition will be complex, a structured approach using a blueprint that covers the inpatient and outpatient network and use of virtual systems is recommended. A blueprint identifies the items to tackle first, but all aspects of a system redesign should be on the table to ensure the organization applies objective criteria that drive care delivery decisions and their implementation.

The optimal delivery system will balance population size, access, resources, quality of care, cost per unit of service, and competitive considerations. In driving value-based care for hospital systems, highly complex care will be concentrated in fewer sites, operating and capital resources will be optimized, quality will be enhanced, and efficiencies will be gained. Primary and secondary care services should be located in lower-cost sites away from high-cost tertiary and quaternary care facilities.

A blueprint will help an organization work from a position of maximum flexibility, and implement changes to stay ahead of market expectations for lower costs, outpatient presence, and ability to assume financial risk for a population's health.

The Importance of Prompt Action

Why didn't Blockbuster become Netflix, or Borders become Amazon? By the time online disruptors had gained traction, it was probably too late for Borders and Blockbuster to reengineer their store-based models and avoid losing market share.

Hospital buildings are health care's "stores" and thus face the same sorts of competitive limitations and disabilities.

We encourage healthcare executives to envision their organizations' roles in the disrupted business environment, and move rapidly while they have time and flexibility to gain the intellectual capital, human resources, and infrastructure needed to be an ongoing force in their communities.

Hospital systems may be market leaders in many communities today, but they should not be complacent in that position. "The only way that market leaders can survive 'disruptive innovation' is by disrupting their existing business themselves," says Clayton Christensen, professor at Harvard Business School.1 Serious conversations in healthcare C-suites and board rooms nationwide will move this agenda forward. *

AT A GLANCE

* A greater level oi consumerism in health care is leading to market dislocations that involve the shift oi services to outpatient settings and to web-based and mobile modes of care.

* Hospitals and health systems risk losing market share and clinical and financial viability if they do not adjust their business models to account for these changes.

* When planning for such a transformation, organizations should commit to a new view of health care, invest in consumer-centric outpatient and virtual strategies, use new metrics to gauge success, and create a blueprint as a guide.

Amazon's entry into the retail business two decades ago created lessons in disruptive innovation that apply to hospitals today. Read how in an extended version of this article at hfma.org/disruption.

a. Christensen, C.M., Böhmer, R., and Kenagy, J., 'Will Disruptive Innovations Cure Health CareV Harvard Business Review, September-October 2000.

b. Fronstin, P., "Findings from the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey,' £BRI Issue Brief No. 393, December 2013.

c. Beck, M., "Where Does It Hurt? Log On. The Doctor Is In," The Wall Street Journal, May 9,2014.

d. Uscher-Pines, L., and Mehrotra, A., "Analysis of Teladoc Use Seems to Indicate Expanded Access to Care for Patients Without Prior Connection to a Provider," Health Affairs, February 2014.

e. Comstock, J., "Prediction: Wearables to Lead the 515 Million Sensors to Ship in 2017" Mobihealthnews.com, June 3,2013.

f. White, E., "Wearable Health Monitor Sticks to Your Skin," Northwestern University News, April 3,2014.

g. 'Digital Health Feedback System by Proteus Digital Health,' 2014 Edison Award Winners-Science/Medical Analytic Systems Category.

h. Kaufman, K., "The Crisis of Existing Provider Organizations,' Blog from the Chair, kaufmanhall.com, June 3,2014.

i. Useem, J., "B-School, Disrupted,' The New York Times, June 1, 2014.

About the authors

Kenneth Kaufman

is chair, Kaufman, Hall & Associates, Inc., Skokie, III., and a member of HFMA's First Illinois Chapter (kkaufman@ kaufmanhall.com).

Mark E. Grube

is a managing director, Kaufman, Hall & Associates, Inc., Skokie, III., and a member of HFMA's First Illinois Chapter ([email protected]).