Healthcare at the tipping point: 2018 has high risks for hospitals

http://www.philly.com/philly/health/health-cents/healthcare-at-the-tipping-point-2018-has-high-risks-for-hospitals-20180104.html

Innovation has been a buzz word and marketing tagline in healthcare for more than a decade.  Virtually every organization has invested in staffing an innovation activity.  Despite these investments the pace of change has been frustrated by an entrenched reliance of providers on traditional ways that they make money.  Healthcare organizations remain disproportionately dependent upon high utilization rates of expensive inpatient services.

There has been a constant effort to aggregate physicians, align them with hospital providers and organize care more economically across the inpatient and outpatient settings.

Nonetheless change has been painfully slow.  Two recent transactions, Optumcare’s acquisition of DaVita Medical Group and CVS’s acquisition of Aetna herald that change will rapidly accelerate in the near future, threatening those that rely on historic business models.  The tipping point is here.

The common denominator of the CVS and Optumcare transactions is the focus on the provision of care outside of hospitals coupled with creative strategies to manage financial risk for populations. 

Both CVS and Optumcare have insurance capabilities and data to manage excess utilization.  The CVS and Optumcare strategies are aimed at producing enormous profits by moving care from high cost fee-for-service competitors.

  CVS’s acquisition includes Aetna’s “transformative markets initiative” which is focused not on expanding its insurance base (United), but rather becoming a healthcare provider with an economic orientation to care outside of hospitals.  Optumcare’s war chest to acquire physician practices in key markets combined with the analytics of its sister organization, Optum Analytics, places them in a position of materially disrupt markets and drive down costs.

The basis for the economic battle is clear.  The table below represents the stratification of the highest components of cost in healthcare:

Total national healthcare expenditures

$3.2 Trillion

$1.04 Trillion	Hospital costs
$.84Trillion	physician and professional services
$.43 Trillion	pharma and retail medical products
$.21 Trillion	private health insurance expenditures

Both CVS and Optumcare have direct control over all the factors listed above except for hospital cost.  Their intent is clear.  They will move as large a portion as possible of the $1.04 Trillion spent on hospitals to less expensive care outside of the hospital environment. They are incented to invest in easier and more convenient ways to meet patient needs.  They will be early adapters of new technology, expanded roles for nurses and physician assistants, and care in the home.

What is the risk for hospitals now that we are at this tipping point?  Though inpatient care is a critical part of healthcare services, the demand for hospital admissions will dramatically decline resulting in less financially sound hospitals with increasingly burdensome overhead costs.  Because a majority of capital available to healthcare has been invested in inpatient facilities, many hospitals will lack the capital to transform and directly compete with disruptive organizations like CVS and Optumcare.  The fundamental question to be faced by hospital leadership is “can we move at a sufficient pace to counter the predictable changes which will come from the disruption of these new and well-funded competitors”?

Unfortunately, historical evidence suggests that many hospitals will continue to embrace traditional economics of their current business models.  Many will dismiss the implications of this critical junction, this “tipping point”, until they find themselves in highly compromised economic circumstances.  This tipping point will result in the sudden and dramatic economic decline of many hospitals which now are seen as stable and strong organizations in our communities.

Filed under: General Problems