This article looks back at the Vizient Research Institute’s 2019 study with an eye toward the implications in the wake of the global pandemic.
The business model for the typical large hospital or health system depends heavily on a small minority of its total patient population – roughly 10% of all patients who are highly profitable and who subsidize another small but highly unprofitable subset of patients with government coverage or no insurance at all. Most health systems have built enormous ambulatory footprints comprised of low-acuity encounters on which the organizations struggle to break even financially. That low acuity/low margin component of the business encompasses roughly 80% of a clinical enterprise’s patients. The highly profitable financial “core” generates a multiple of the organization’s net operating income. The core margin is partially offset by the highly unprofitable financial “trough.”
The latest economic study from the Vizient Research Institute turned the traditional view of disruption inside-out. Rather than scanning the horizon for new technology or other external threats to a health system’s business as usual, the new study, “A New Look at an Old Business Model: Viewing Disruption Through a Different Lens,” examined the services that health systems provide and assessed their vulnerability to disruption, irrespective of what the source of interruption eventually turned out to be.
Three distinct categories of disruption were introduced in the 2019 study, each closely associated with one of the three segments of a medical center’s business model:
- Competitive disruption: in the small but lucrative financial core
- Innovative disruption: in the vast, break-even ambulatory business
- Purposeful disruption: in the small but highly unprofitable financial trough
In the wake of the pandemic, we will focus on the first two categories – competitive disruption of the financial core and innovative disruption of the high-volume ambulatory enterprise. In each case, the global crisis triggered unforeseen changes that accelerated disruption in ways no one could have ever anticipated.
The vulnerability of the core services to competitive disruption that was described in the study paled by comparison to the virtual shutdown of highly profitable services to conserve capacity and resources for an anticipated surge in coronavirus cases. The research itself focused on the threat of competitive disruption in a health system’s financial core.
According to Tom Robertson, executive director, Vizient Research Institute, competitive disruption can turn a health system’s finances upside down.
“When you are completely dependent financially on as few as 5 to 10% of your patients, if a competitor takes just one core patient a day for a year, it could represent a huge financial hit.”
Rather than incremental loss of volume to competitors, the bottom literally fell out from under the health systems’ financial cores as elective procedures were sharply curtailed or shut down completely. As procedural volumes begin to rebound, health systems must overcome significant patient reticence over the prospect of returning to inpatient or outpatient facilities.
Using patient-level financial data from multiple Vizient members, the Research Institute discovered that patients comprising a health system’s financial core fall into one of three main categories: patients experiencing single clinical events (typically inpatient admissions, particularly those involving surgery); patients who are transferred directly to the tertiary medical center from another inpatient facility; and patients with complex or advanced chronic conditions who are involved in longitudinal episodes of care.
The largest component of the financial core – 45% of the patients accounting for 50% of core margins – involves longitudinal complex or chronic episodes of care. Many of those patients receive more than half but far less than 90% of their care from one health system. Those patients, who tend to identify with that system, are receiving a significant portion of their care from someone else. Increasing the system’s share of those episodes would add appreciably to its core margins.
Another group of core patients receives much of their care from one system while getting more than half of their care from a competitor. Those patients represent an opportunity for core growth if they become more closely aligned, but they also pose a serious threat to existing margins if the competitor strengthens their own alignment with the patients. Finally, a small subset of any system’s core margins arise from patients who are not aligned with any provider group; their episodes are truly fragmented. They represent a core growth opportunity for any system that is able to establish a close relationship with the patient.
According to Robertson, developing an adhesion strategy for high-margin complex or chronic care patients is vital. “First we need to make those patients want to stay with us for all of their care, and then we need to make it much easier for them to do so.”
So, how can health systems better serve complex and chronic patients?
Make access easy
At a typical tertiary medical center, the relatively small number of high-margin complex or chronic core patients compete for attention with the overwhelming volume of low-acuity ambulatory encounters. Core patients call the same telephone numbers to make appointments and enter the same queues for access and availability as patients with far less pressing needs. For the traditional business model to work, economically dependent as it is on core margins, it is essential that those patients don’t get lost in the crowd.
“If a donor contributes $25,000, we know them by name,” observes Robertson. “If a chronic core patient generates $25,000 in operating margin, we don’t know where they went when they left.”
Improve care navigation
A series of focus groups involving complex and chronic core patients and their family members led to a critical discovery. When asked what they were not getting from the health system that they wish they were, and what they were getting that they wish they were not, the answers were consistent and compelling. At a time when they are sick, scared, and struggling to hold their lives together, our core patients complain that we expect them to find their way through a witheringly complicated health care delivery system. Instead of making their lives easier, we make them more difficult. The single most important unmet need articulated by core patients and their families is for care navigation.
“Chronically ill patients need an advocate to help cut through the complexity of the health care system,” says Robertson. “Assistance with navigating the system would improve patient care, enhance their experience and literally change their lives.”
The 2019 study called attention to an entire category of services that were particularly vulnerable to innovative disruption – patient encounters which occurred predominantly for the gathering of information rather than physically administering treatment – what the research termed “reconnaissance visits.”. An examination of member data determined that over one-third of all ambulatory encounters qualified as reconnaissance, and that a significant portion of those visits could disappear if technology enabled the exchange of information without the patient being physically present. The study warned that ambulatory facility expansion may have exposed organizations to the risk of unfunded fixed costs if such innovative disruption were to occur.
As health systems responded to the virus outbreak, face to face encounters between patients and providers, including physicians, were quickly replaced with virtual visits, taking advantage of telemedicine capabilities and widely available mobile technology. Not only were the virtual encounters found to be an acceptable short-term alternative, they have now become the preferred platform moving forward. Conversations with health system leaders commonly point to a future in which virtual encounters will be a central component of the spectrum of services offered, with an expectation that a good portion of the decline in face to face visits that occurred during the crisis will become permanent. There is an almost universal recognition that the ambulatory care footprints that have evolved are considerably larger than near-term needs would demand. The CEO of one large tertiary health system observed “I have built all of the wrong stuff.” As was the case with core disruption, the 2019 study accurately identified a potential vulnerability; the pace at which the vulnerability was exposed by the pandemic would have been incomprehensible just a few months ago.
Looking ahead, the challenge will be to restore as much of the traditional financial core as possible, in the process improving care navigation and continuity for complex and chronic patients, while simultaneously adapting to an environment in which face to face interactions are increasingly giving way to virtual encounters. These two forces appear on the surface to be working at cross purposes. The art will be to discover ways to solve both challenges at the same time.