2014 Health Care Providers Outlook

Interview with Mitch Morris, M.D.

Implementation of the Affordable Care Act continues to be top-of-mind for health care industry executives as we plan the year ahead. Mitch Morris, M.D., vice chairman and U.S. Health Care Provider leader, Deloitte Consulting LLP, weighs in on implications for providers, as well as cost management strategies and innovations such as data analytics and new physician incentive models.

What is the biggest challenge facing the provider sector in the coming year?

All a person has to do is pick up a newspaper to see the biggest challenge facing the health care provider sector: implementation of the Affordable Care Act (ACA) and all of its legislative and market-driven implications.

One of biggest ACA implications is managing costs. Providers will be under tremendous pressure due to lowered reimbursement rates and increased patient volume from health insurance exchanges and expanding Medicaid rolls. We are seeing some health systems approach the challenge by trying to reduce costs by 20-30 percent overall. However, this is not a short-term project; it is a journey of several years… a cultural shift in how they do business. How can providers use new transparency requirements so that consumers and health plans really understand their costs, quality outcomes and the value they are producing?
No one knows how big a health system needs to be to survive in this new marketplace, but the days of standalone hospitals likely are numbered—many of them are under considerable stress. Strategically, we are seeing providers increasing scale by engaging in horizontal integration (hospital-hospital acquisitions) and forming much larger entities to better collaborate, prioritize programs, increase purchasing power, consolidate services and cut costs.
We also are seeing more vertical integration. Hospitals are becoming true health systems; they are buying physician practices, ambulatory centers, diagnostic centers, home care services, and durable medical equipment and wellness companies. This integration is being driven, in part, by providers’ needs to prepare for new payment systems such as accountable care organizations (ACOs). However, they also understand that to be successful as a health system, they need to manage risks and control costs along the entire care continuum. Some providers are even forming alliances with health plans or creating their own plan; this is a trend worth watching.

Providers also are looking at their current cost structure—for example, telecommunications contracts, real estate portfolio, shared services, staffing—and deciding whether to provide certain functions internally or outsource them. Providers are looking at clinical efficiency and effectiveness to both reduce cost and prepare for the required reporting on quality. In short, they are using multiple avenues of attack to solve the cost equation.

What trends might disrupt “business as usual” in 2014?

“Business as usual” for health care providers has been disrupted for a few years… and that trend will continue because these changes are both ACA and market-driven. For example, we will need to see how quickly health insurance exchanges take off and what types of plans people choose, as well as how many people will be added to Medicaid rolls. Hospitals may be facing a significant increase in volume from new patients, most of whom will have a relatively low level of reimbursement. There could be many more patients in the system… and hospitals could lose money on all of them. Also, increased provider cost and quality transparency could prompt consumers to select certain hospitals and avoid others, resulting in a redistribution of where people go when they are sick.

If providers can lower costs and manage the risks from the new populations entering the ranks of the insured, they may more effectively deal with these changes and gain a competitive advantage. As ACA implementation unfolds, we expect to see increased M&A and greater horizontal and vertical integration among providers, to help lower unit costs and spread risk.

What are some steps companies can take to foster innovation and/or growth?

Innovation in health care can take many forms. From the perspective of scientific and medical innovation, the industry is constantly reinventing itself. Many developments cross life sciences and care delivery; for example, we have made great progress in understanding the human genome and tailoring treatments to individuals. In addition, some exciting medical advancements are taking place at the intersection of information technology and medical technology, such as using 3D printing to help in preparing tissues for transplants. Change will be rapid and, in some areas, disruptive to established care models.

The use of IT and big data to gain insights we didn’t have before is an active industry trend. Providers can leverage information gathered from a variety of sources to determine the clinical value of specific treatments and how to make them better. Some models even allow us to get answers to questions we haven’t even known to ask.

Another type of innovation is taking place—albeit slowly—in the adoption of new physician incentive models to support the health care industry’s transformation from a focus on volume to value (i.e., I get paid because I have good clinical outcomes and the population I’m responsible for is happy and healthy). How do we incentivize physicians to provide value without waste and inefficiency? Innovation in this space will be critical to differentiating health systems and positioning them for the future, but we need to get better at using new incentives, business models and analytics to help make the transition.

“If providers can lower costs and manage the risks from the new populations entering the ranks of the insured, they may more effectively deal with these changes and gain a competitive advantage.”

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