Larry Scanlan

There is an old proverb that goes like this: "The prudent see danger and take action; the simple keep going and suffer for it."

The decade ahead will be challenging, but healthcare financial executives have seen other times that were deemed to be equally challenging. We don't have to look back far.

The 1990s were dominated by three overarching market dynamics (environmental factors):

  • The Clinton healthcare reform proposal
  • Capitation: Revenue capture and risk for a population
  • For-profit encroachment into the heretofore predominant not-for-profit sector

Trends or Fads?

Interestingly, many leaders, with board approval, made decisions based on what was seen then as ironclad industry trends. But were these in fact trends? Or were they fads (or perhaps, before their time)? Either way, these three events dominated the thinking in the executive suite and the boardroom.

These "trends" caused more organizations to merge in the five-year period from 1994 to 1998 than we have seen in the 12 years since then. As organizations began to merge, others felt a need to react. These alliances often proved to be flawed, and a fair number failed to meet predicted benefits. Furthermore, the fear of managed care capitation caused organizations to either form managed care plans or to joint venture with others forming such plans. In essence, hospitals got into the insurance business. The overwhelming pressure was to "grow" membership ("covered lives") with little or insufficient attention to cost. It raises the question, Where was the financial leadership? Many organizations won the "market share" game, but lost on the financial front, as more members only exacerbated the financial risk and cost. Most organizations eventually got out of the insurance business.

As to the for-profit hospitals, their growth and encroachment was tempered when a couple of large hospital companies faced compliance issues with the government, thus diminishing the threat of their presence in the market.

So when all was said and done, the "trends" that fostered strategic decisions (actions and reactions) in the 1990s did not materialize anywhere near to what had been predicted and envisioned. They turned out to be fads-fads that nevertheless caused many organizations to make key strategic decisions based on these so-called "trends":

  • The Clinton healthcare reform bill did not pass.
  • The revenue capitation wave was defeated by the public reaction to health maintenance organizations.
  • For-profit encroachment never materialized to the degree feared, with for-profits representing less than 20 percent of all acute care hospitals today.

Lessons Learned

What can financial leaders and aspiring leaders learn from this? Hopefully a lot, because the environment of the decade of 2010 looks eerily similar to the 1990s.

There clearly are differences between now and then, but management judgment and discernment will be equally as challenging. For-profit encroachment is no longer feared as it once was. In fact about 60 percent of all hospital mergers and acquisitions in the past decade involved for-profit organizations, either with not-for-profit organizations or with other for-profit organizations. Not-for-profits have gotten quite comfortable in doing deals with for-profits (either publicly held or private equity companies). In a number of cases, for-profit systems have invested and saved hospitals and healthcare access in communities around the country.

The issue facing all hospitals now and in the future is the challenge to prove and document the quality of care and provide it at a competitive cost while complying with increasing rules, regulation, and laws, and tightened reimbursement. Although this appears to be a trend, is it actually a trend or a fad?

As to revenue capture, accountable care organizations (ACOs) have a similar feel to the days of capitation, with options being tossed about to include shared savings, bundled payments,
and perhaps outright capitation. It feels a little like the movie, "Groundhog Day," with physician groups, insurance companies, and hospitals aligning to provide care for the health of a region or population. Is this a trend or a fad?

And of course the salient driver of the current environment is the Affordable Care Act, given it is the law of the land. Where the Clinton reform failed because its proposed solution was deemed more complicated than the complex problem it was trying to solve, is the Affordable Care Act any less complicated? The stars aligned for one political party to get President Obama's reform legislation passed, but it may still prove to be a costly alignment. However, in one sense it does not matter, because the three overarching market dynamics facing us early in this decade are already causing organizations to take action, and as they do, many other organizations feel forced to react. The seating of a new Congress within the past few weeks will require only more executive discernment as to what the future holds on healthcare reform, and what actions your organization should take.

Leading in a Reform Environment

The question is, how do we as financial leaders read this environment and lead our organizations? Are we now dealing with true trends, or will these "trends" turn out to be fads (e.g., will the Affordable Care Act be underfunded, slowing its potential impact; will ACOs suddenly not be in vogue)?

As financial leaders, you can help your own organization size up its financial strategic report card and take appropriate action as opposed to later being in a position of having to react:

  • What are your organization's critical success factors?
  • Are you tracking on target in meeting strategic, operational, and financial milestones?
  • Is operating and financial performance consistently meeting or exceeding budget?
  • What factors are enhancing performance? Are these sustainable or temporary?
  • What factors are impeding performance? Are these likely temporary or permanent? Can we course correct these impediments?
  • Do you size up key national, regional, and local healthcare environmental factors as trends or fads (remember the 1990s)?
  • Finally-the bottom line-is your organization a growing business, stable business, or slowly going out of business?

One additional environmental factor to consider in discerning your organization's current and future strategic position is that the hospital industry, despite more than 1,500 mergers over the past 17 years, is still relatively unconsolidated compared with other industries, such as insurance, telecommunications, airlines, and food. For instance, in the insurance industry, about 50 percent of the insurance revenue is captured by just 10 companies. In the hospital industry, no one health system owns even 5 percent of the country's beds, or even 5 percent of the hospitals.

It would seem with or without health reform legislation, ours is an industry ripe for considerably more consolidation. The scale needed to grow revenues, achieve measurable quality outcomes, comply with increased regulations, and make investments in information systems and other capital-intensive venues will require profitability, balance sheets that provide flexibility, scale, and access to capital. As financial leaders, we need to ask a number of questions if we are to lead our organizations to appropriate conclusions:

  • Does our organization have the financial staying power to keep going as it is today?
  • How do we stay on top? Or how do we improve?
  • Do the management team and board clearly understand our critical success factors?
  • Have we effectively communicated our analysis and observations, and clearly made our case to management, board, and other stakeholders?
  • In terms of our mission in providing health care to the community, what makes the most business sense and will provide the best options for patient care?

Remember the proverb "the prudent see danger and take action, the simple keep going and suffer for it." If we keep doing what we are doing now, are we betting on trends or fads-facts versus prognostication? Are we sufficiently discerning, so as to not be reactive and perhaps too late in making the right decisions?

In summary, what intelligent, prudent actions do we take now and in the near future to help our organizations and ourselves be competitively positioned to provide service through this decade? We need to make decisions that translate into sound business and sound patient care decisions? We need to think about where we and our organization will be in 2020 and how we can successfully get there. The decisions we make in the next 12 to 24 months will have a ripple effect that will go a long way in influencing how viable our organization will be in 2015 and 2020.


Larry Scanlan is president, Insight Health Partners LLC, St. Petersburg, Fla. (lscanlan@insighthp.com).

Publication Date: Monday, January 03, 2011

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