Ian Morrison

Health system leaders now have clarity about the work involved in moving to the new future. It requires clinical integration, deployment of sophisticated health care information technology (IT), clinical performance improvement, financial management to break even on Medicare rates, and intelligent business model migration from the first curve of paying for volume to the second curve of paying for value. (See “Let’s Get to Work!” in the June 2012 issue of H&HN magazine.)

Health system leaders are wrestling most with business model migration. They are uncertain about the pace of change of reimbursement reform, they are fearful of taking population health risk and many have nightmares about a big bad replay of the 1990s when hospitals bought doctors’ practices, health plans or both, and lost their shirts in the process.

This time must be different; we really cannot afford to fail.

Not the 1990s Anymore

There are five reasons why this time is different:

We have hit the wall on affordability. The average American household cannot afford the average premium, and even though the cost increases have been slowing, there are signs of the cost trend bouncing back.

We have much better quality tools. The tools of quality measurement and improvement are much better than in the 1990s. We have many more measures, more transparency, more quality leaders and, thanks to the American Hospital Association, the Institute for Healthcare Improvement, the National Committee for Quality Assurance and others, we have a whole host of opportunities to learn how to get better.

Care coordination systems have improved. We now have two full decades of innovation in care coordination and care management: from patient-centered medical homes, to readmission management, to large-scale-care coordination by teams of caregivers, to pioneer accountable care organizations (ACOs), to the use of sophisticated software and analytics in predictive modeling.

Physicians are changing. The recent Choosing Wisely campaign initiated by many of the specialty societies in partnership with Consumers Union signals an important step toward a renewed recognition that financial stewardship of clinical resources is an integral part of medical professionalism.

Large-scale sophisticated business systems are emerging. This time we have big players who bring scale, capital and sophistication to clinical integration and health care delivery redesign. Kaiser Permanente alone is a $50 billion enterprise. Many more mega-billion-dollar health systems are being formed in this round of consolidation among existing regional integrated delivery systems and from novel partnership formation — for example, Aetna’s Private Label ACO partnership arrangement with Aurora Health or CIGNA’ s ACO relationship with Tenet, or Optum’s multivariate relationships with delivery systems across the country.

All of this points to the fact that we are getting serious about moving to a new future. But what is the bridge?

Building the Bridge

Across the country, health system leaders and their advisors, partners and boards are starting to build the bridge. Harris Interactive surveys document rapid clinical integration across the country with 69 percent of hospitals owning a medical group (the sample was weighted by bed size to reflect the distribution of beds) and a full third of physicians are now in practices owned by hospitals (a number that could exceed 50 percent in the next three to five years if current trends continue).

Similarly, a recently released KPMG/Harris Interactive survey of leaders of the largest health systems, health plans, and pharmaceutical and medical technology companies underscores these trends and shows that larger systems are even further along in their path to clinical integration. (http://www.kpmginstitutes.com/industries/healthcare-and-pharmaceutical.aspx).

The KPMG/Harris Interactive study demonstrates clearly some of the elements of the bridge. A sample of more than 100 C-suite leaders drawn from the top 200 health systems cited the following elements as extremely or very important in building a business model over the next three to five years:

It is clear from the survey that integration with physicians is the first priority. It works for two reasons. On the first curve (paying for volume), you cement clinical relationships and volume of existing business. On the second curve (paying for value), you have a platform for migration to more integrated systems of care by redesigning care processes for a world of value-based purchasing. The other wonderful feature in the short run is that provider-based reimbursement allows hospitals to benefit from a change in ownership of clinical practices through higher facilities-based fees. (My good friend and fellow columnist Nathan Kaufman identified this trend in the first column of his series “From the Trenches.”)

The second key observation is that there seems to be less appetite for full risk bearing among health system leaders, with many more leaders preferring to migrate the risk function in stages (89 percent) or partner with health plans (76 percent) rather than outright owning and operating a health plan function (26 percent). This is the core of the bridge dilemma. Many health system leaders anticipate that in the long run, risk and reward will be tied to the triple aim of population health, improved patient experience and lower per capita costs.

Yet, there is no big hurry to jump off the dock. Indeed, in Harris surveys of both hospitals and doctors there is very muted enthusiasm for new payment models such as bundled payment, episode-based payment, global payments or even pay for performance. Private and public purchasers need to send big clear signals to the delivery system that we are moving to a world of accountable care systems delivering coordinated care across the continuum on a triple aim basis; at the same time, the delivery system will need to wean itself from the simple comfort of pay for volume and learn how to build a culture of accountable care.

The final big observation from these data is that none of this can happen without sophisticated health care IT and analytics to support care management, care coordination and population health. Health systems leaders get that and are making rapid progress even though the industry in general is about 20 years behind most other industries in its comfort with and deployment of IT infrastructure.

Barriers to Bridge Building

Bridges are hard to build, but done right, they last a millennium or two. There are significant barriers to bridge building. Here are some I have encountered:

Complexity of health systems. Large integrated health systems, particularly those that have academic missions intertwined with massive clinical systems, are extremely complicated enterprises. None more complex, as Jim Collins or other management gurus would agree. But this does not absolve us of the need to build the bridge.

“Best year ever.” I go to a lot of hospital board retreats, and I always ask the CEO: “How’s it going?” The last couple of years, they nearly always whisper quietly: “We had our best year ever.” Enough said. It is hard to change when things are so good. But go ask Jim Collins or Clay Christensen or Kodak, and they will tell you that is precisely when you have to change.

“Nobody told the specialists.” The wisest comment on health reform and the move to accountable care that I have heard was “Nobody told the specialists.” While Choosing Wisely clearly signals an important change in thinking among specialty society leaders, many rank and file physicians (particularly those in lucrative procedure-oriented specialties) are afraid of many of these changes and see them as profoundly harmful. They need to be engaged fully in the redesign discussion, however hard that may be. And they too need to see an economic bridge to the future, one that doesn’t involve either a default to what I have dubbed hamster care: alienated doctors on a treadmill of discounted fee for service, or conversely, everyone trying to do concierge medicine.

Anatomy, not physiology. Another great learning came from a physician leader in a large sophisticated health system that is on the path to true clinical integration. He told me that “we have the anatomy of an accountable care system, but none of the physiology.” True for many successful regional systems that are contemplating the path to accountable care.

The politics of purchasers: two ideologies. As we gear up for a very big election with sharp distinctions between philosophies, we also will face a big ideological choice among our private and public purchasers — illustrated by the recent pair of editorials in The New England Journal of Medicine, where two alternate visions were presented. (See E. Emanuel et al., “A Systemic Approach to Containing Health Care Spending,” and J. Antos et al., “Bending the Cost Curve through Market-Based Incentives,” www.NEJM.org, Aug. 1, 2012.) On one hand, the Journal describes a Berwickian future of accountable care systems pursuing a triple aim of coordinated care. On the other hand, the Journal presents a much more atomistic view in which patient consumers armed only with high deductible health plans use narrow networks and market forces to transform the delivery system. The election will have a major influence on which view prevails, as will intense budget debates to come. Make no mistake: The federal deficit is a health care problem at its core. Greater emphasis on atomistic views may derail some of our best efforts at care coordination and integration.

What happens if the math doesn’t work? The biggest single barrier to bridge building may be that we run out of money for the bridge. The math may not work. The combination of massive Medicare cuts and the sting of skinny networks may close down a lot of bridge projects, and health systems may simply hunker down in the present.

Bridge Building Techniques

Health system leaders are looking for tools to help them both today and tomorrow, to build solid foundations for the bridge in the present and to build a strong footing for the future. Here are some ideas that may help both today and tomorrow:

Develop continuum of care partners. Some leaders are establishing relationships with retail clinics. They provide a source of referrals today; tomorrow they may be part of a new chronic care delivery system. Similarly, leaders are building closer partnerships with home care, skilled nursing and assisted living facilities that can provide a vehicle for managing readmissions and improving throughput of acute care facilities in a volume-based world. Developing partnerships with alternate sites of care and community-based social services provides an enhanced care coordination platform for a future accountable care system.

Eat your own cooking. Many health systems that are embarking on a journey to accountable care and population health are starting that journey with their own employees. Health systems typically have above average health care users (we know too much and we are not nearly as well-behaved as we should be). By starting population health management pilots on the self-insured health system population, any savings goes straight to the bottom line.

Find some new friends. Bridge building is not an amateur activity. The equivalent of highly specialized civil engineers are required to build business models, to develop shared risk partnerships, to monitor and manage revenue cycle management migration, to develop population health infrastructure. In particular, most systems need adult supervision of spreadsheet migration. By that I mean: What exactly do the sources and uses of funds look like for each of the next five years? How do the spreadsheets synch with the unfolding market reality? And how will those spreadsheets be turned into operational performance?

Leaders and boards are wrestling with design and construction of the bridge. It is empowering to know that bridges can be built, and they can be built to last.

Ian Morrison, Ph.D., is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.

The key drivers of healthcare have different rates of change.  Coverage expansion is on a two to three year timeline.  Reimbursement reform is on a ten year timeline.  Cultural transformation of institutions is on a thirty year timeline.  Yet there are many areas of healthcare on a short fuse.  Budget cuts at the federal level can happen almost immediately.  Network changes or contracts can change in a year.  Some new technologies can have immediate impacts, others take decades to reach full deployment.  Understanding the different half lives of healthcare is crucial to preparing for the future.  Too many actors conflate these forces into a blur of change moving at the same speed.  That can cause big strategic problems.

Understanding the Velocity of Change

Half Life is a term from radioactive physics referring to the time it takes for a substance to decay by half, it is the rate of change in radioactive decay.  Similarly in healthcare, different dimensions of the future move at different rates.  We may understand this intellectually, but as actors in an unfolding game, we have difficulty in judging the pace of change. My old mentor, Roy Amara who headed the Institute for the Future for twenty years taught us a basic principle about the future that we codified as Amara’s Law:  “There is a natural human tendency to overestimate the impact of phenomena in the sort run, and underestimate it, in the long run.”

Another eminent IFTF colleague, Paul Saffo, had a brilliant insight about the pace of the unfolding future:  “Never confuse a clear view with a short distance.”  A phenomenon I dubbed “premature extrapolation”.

We imagine many important changes are close, even though logic suggests that they might move slower than you think.   For example, the aging of the baby boom as a driver of healthcare utilization has been hyped for as long as I have been in the futures business, which is over thirty years.  And yet the very first baby boomers, those born in 1947, only became eligible for Medicare this year!  We have been so eager to anticipate their arrival in Medicare, this particular major demographic trend is old news.

We are eager to see positive changes happen fast and celebrate their progress even though it may be imperceptibly slow.  One of my basic principles in analyzing future trends is that if something is going to be a big deal in the future, it has to start sometime.  And show meaningful progress year over year.

While we have a tendency to overestimate in the short run and underestimate in the long run, that is not the whole story.  Some things can move faster than you think.  Look at the sting of the recession, and its impact on credit availability for hospitals, and on slowing demand for elective healthcare services; or a change in the law that allowed coverage of 26 year olds.  And there may be more rude short term shocks in our future, that we will highlight in a moment.

So it is important to sort out the rate of change for each of the factors that are causing changes in healthcare and weave them into a plausible unfolding reality.

Short Half Life

Some drivers of change can happen pretty quickly (in the next 1-2 years):

• Budget Cuts.  Perhaps the fastest change that could happen in healthcare is for significant cuts in public programs, particularly Medicare and Medicaid, within the next 12-24 months.  The deficits at both federal and state levels (even though states cannot really run them) may force significant action, much in the way that austerity measures have swept the European economies.  Piled on top of the existing reimbursement cuts in PPACA means this sting could hit the field before the benefits of expanded coverage take hold.

• Cost Shifting.  A related impact is the immediate potential for providers to cost shift:  make up for the shortfall in public payment by increasing prices to commercial payers.  In turn, employers can simply cost shift (or as they call it cost share) with their employees.  This has been the game for the last decade and has meant that the typical American household is in a PPO with a $1,000 family deductible.

• Lansky’s Short Fuse.  My friend Dr. David Lansky who leads the Pacific Business Group on Health, gave me the basic idea for this column when he told me that he believes that employers now have a short fuse.  I took this to mean that employers’ patience with inexorably rising costs and cost shifting is wearing pretty thin.  It also explains the speculation that employers may prefer a future where they are off the hook for healthcare, and send their employees to the new health insurance exchanges.  (I would argue that employer exit on a massive scale has a longer half life, maybe in 2018 when exchanges are up and running and the Cadillac Tax kicks in, because by then everyone will be driving Cadillacs).

• Network Contract Changes.  Large employers can make big changes in their employee benefits plans two years out.  Small employers can switch insurers each year.  Providers can find themselves cut out in a skinny network in a year or two.  I have run into a significant number of hospitals, large and small, caught flat-footed by a sudden change in their preferred provider status as payers (plans and large employers in concert) move to skinny networks.

• Mergers and Acquisitions.  Hospital leaders can merge institutions on short notice, and buy medical groups even faster.  Witness the rapid contractual integration of hospitals and physicians taking place across the country.  (I say contractual integration because that has a short half life, in contrast to true clinical integration and the related cultural shift toward accountability and quality which may take decades to fully accomplish).

• Supreme Court Decisions.  The Supreme Court will rule in the summer whether PPACA is constitutional and no matter what the ruling it will have a big and immediate impact.  At the extremes, if PPACA is overturned anticipate less coverage expansion in the future (although the delivery system changes underway will likely continue), at the other extreme if the law is upheld, states like Florida will have to scramble to set up a health insurance exchange in six months, (that will be fun to watch).

Medium Half Life

Some aspects of change have a half life that is two to five years out:

• Coverage Expansion. The major provisions for coverage expansion happen in 2014, a deadline that may drag out if states are unprepared to operate health insurance exchanges or rapidly expand Medicaid coverage.

• Meaningful Use.  Meaningful use of computers got a major stimulus (pardon the pun) and relatively rapid progress is being made in deploying electronic health records.  The vision of interoperability enabled through robust Health Information Exchanges may take a lot longer.

• Value Based Purchasing.  AHA Analysts estimate that approximately 9 percent of Medicare reimbursement to hospitals will be at risk based on quality by 2015, based on the value purchasing and readmission reimbursement provisions on the books.

• Large Group Practice Formation.  Large multi-specialty group practices will be formed through a variety of models over the next five years.  But, we should learn from all the high functioning medical groups that have taken 30 years to become an overnight success.  Culture takes time.

Long Half Life

Some changes take a very long time, perhaps a decade or more:

• Reimbursement reform.  Some reimbursement reforms like DRGs can be implemented to make significant short term changes in incentives that have a major impact.  The proposed reimbursement reforms in both public and private sectors are moving slowly (but inexorably) toward a new future.  Pilots must take take off and become mainstream.  That usually takes time.

• Cultural transformation.  Some organizations like Virginia-Mason in Seattle have shown that leadership and commitment can change the culture, but these are exceptions.  Most high-performing cultures take a long time to build.  Patience, persistence and passion are needed to overcome the cultural inertia in most organizations.

• Medical Education Reform.  Medical education needs to change to reinforce the broader transformation agenda, but it takes a very long time to affect the stock and flow of doctors and other advanced practitioners.  Most of the people practicing 10 years from now are practicing today (do the math).  And academic medicine is not often described as nimble, market sensitive, and change oriented.  There are notable exceptions such as UCLA who are pursuing a rapid and aggressive innovation agenda, but in the main it is hard to turn the academic medicine battleship.

Half Life in Action

Here are some key examples of the half life phenomenon to watch for:

• Medicare.  The future of Medicare will be an enormous issue in an election year.  Medicare must be changed, but how much, how fast, and for whom?  Proposals to shift Medicare to a voucher plan for those who are 55 or younger today, is a long half life proposal.  (It won’t save in the short run but will have big impacts in the long run). Cutting the Medicare budget in 2013, has a short half life.  Bending the trend through reimbursement and delivery reform could take a very long time, maybe forever.

• ACOs.  Accountable care is a megatrend, not necessarily the formal CMS pilot programs, but the general idea that integrated systems of care are being formed to provide accountable care to the population they serve.  You can buy the doctors tomorrow, but managing the half-life of payment reform, and business model migration is tricky stuff.

• Health Information Technology Infrastructure.  We are seeing relatively rapid deployment of HIT and real progress towards meaningful use.  But we must keep the pressure on to build an infrastructure to support the vision of a high performing health system.  Finding faster pathways to interoperability will be required.

My advice to leaders is to discipline yourself to parse the future and use the half life concept to understand the pace of each of the individual elements of change.  If you conflate the future and see all the big changes as clear and close, you may have trouble in developing a sensible strategy, sequenced to meet the unfolding future.   Conversely, try to find ways to shorten the half life of change for elements such as clinical redesign and cultural transformation that are key to meaningful change.  I am very encouraged, because on my travels, I see front line providers stepping up to change clinical processes to make them better, safer, and high performing and they are doing this rapidly.  The best way to have a better future is speed up the good parts.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.

America is a big country. Every summer vacation with my family, I drive exactly 1,000 miles each way from San Francisco to Northern Idaho; I don’t go through another city. If you take a 1,000-mile drive across Europe, you not only have crossed 10 countries, you are now in Asia.

So, as a geography major who has been to just about every state (and a majority of them in the last year alone), I understand that America is one big piece of real estate, and a lot of people, almost 20 percent, live in rural areas. But, even in states like Indiana, Nebraska, Kansas, Oklahoma or Texas, most people live within 90 miles of a pretty fancy hospital, and even more live within 20 miles of a Walmart (which, we are told, may well be a key health care provider in the future).

Critical Access

Part of the reason so many rural communities are relatively accessible to major hospitals is that we built the hospitals before we built the freeways.

However, according to Census classifications, a full 60 percent of rural residents live in rural areas that are adjacent to urban areas, while only 10 percent of rural residents (some 2 percent of the total population) live in remote areas with small populations.

Rural hospitals account for about a third of the nation’s hospitals but only about 12 percent of national hospital spending.

At the core of our national policy toward rural health is financial support for critical access hospitals (CAH). There are 1,327 CAHs across the country, and they must meet three core criteria (among many other complex regulatory provisions), according to the Department of Health and Human Services:

• They must have an acute care average length of stay of 96 hours or less.
• They must have 25 acute care beds or less.
• They must be 35 miles or more from another hospital (or 15 miles from another hospital in mountainous terrains or on secondary roads).

This latter distance provision was debated during super committee deliberations when proposals were floated to change the distance criteria, potentially reducing the number of CAHs. In a lot of states like Kansas, Indiana and Nebraska, that change would dramatically reduce the numbers of hospitals designated as critical access. When I spoke to hospital associations in those states in the last few months and asked whether a 20-mile change in the distance provisions would affect their designation, a significant minority of the audience raised their hands. (By the way, when I asked, “How many of you are within 25 miles of a Walmart?” almost everyone raised a hand.)

In addition, because of the previous provisions in some states that governors were able to designate critical access facilities using an “any necessary provider rule,” you ended up with CAHs that are quite close together. In counties in rural heartland states such as Iowa and Indiana (with not many mountains), you can find two, three or even four CAHS in the same relatively small county or within a stone’s throw of the county line.

The number of counties per 1,000 square miles and per 100,000 population also increases the number of CAHs that are geographically proximal, because so many hospitals built in the Hill-Burton era were county based. To give perspective on this phenomenon, take three large states with large populations and large land area: California, New York and Florida. California has 58 counties, New York has 57 counties while Florida has 67. Compare that with Texas (254), Georgia (159), Kentucky (120), Missouri (115), Kansas (105) and Illinois (102).

There are other relatively small population states — such as Iowa, Indiana and Nebraska — that have more than 90 counties each. I understand that these county lines were derived by natural boundaries based on how far you could ride a horse in a day in the 18th century. But they create a density of local government and health care infrastructure that varies enormously across the country, and it may be fuel for unneeded duplication of facilities and services.

But the really critical thing to understand about critical access hospitals is that they operate under a cost-based system of reimbursement. This seems to be a model that is inconsistent with the trends of the time. As Todd Linden, CEO of Grinnell Regional Medical Center in Iowa and a national thought leader in rural health care, told me in an interview: “Being a cost-based component of a health system that is moving overall to value-based reimbursement is going to be like trying to put a square peg in a round hole.” He’s concerned that CAHs might get left out of accountable health development plans or shared savings models because cost-based payment doesn’t necessarily lead to quality or efficiency.

Grinnell’s hospital is a tweener at around 50 beds, so it is too big to be a critical access hospital with cost-based reimbursement, but it has all the challenges of any rural health facility, such as heavy Medicare and Medicaid dependency.

Critical Community Resource

While many rural health facilities may be sustained economically by cost-based reimbursement, they are in turn a major economic engine, if not the economic engine of rural America. Hospitals are the largest employer (generally after local government) in most small towns. By the way, the same is true in very big cities, but at least in many large cities there are some other employers of scale. In smaller communities, hospitals may be the sole economic engine, and both a platform for and symbol of continued community cohesion. They are important not only for the health care services they deliver, but for maintaining the overall economic vitality and viability of the communities they serve.

Rural Health Challenges

Rural health is tough to manage, from both a policy and practical point of view, for many reasons. UnitedHealth Group (in conjunction with new survey research from my colleagues at Harris Interactive) recently produced a fantastic fact-based review of rural health, which I urge you all to read as a deep dive into rural health. (See “Modernizing Rural Health Care” [Working Paper 6], published in July 2011 by the UnitedHealth Center for Health Reform & Modernization.) Drawing on that paper and other resources, such as the Institute of Medicine’s 2005 report on the issue and the ongoing great work of the Rural Policy Research Institute, the picture is pretty clear, and the challenges for rural health are great:

Dominated by public coverage. Rural health is more dependent on Medicare and Medicaid coverage and has lower levels of commercial insurance and a resultant higher level of uninsured.

Higher health needs. Rural populations tend to be older and in poorer health, with higher rates of obesity and poor health habits, such as smoking. In addition, they have a surprisingly high set of needs in terms of drug abuse, according to the United report. (This squares with my anecdotal evidence: I can’t tell you the number of relatively rural states I have visited that claim to be the crystal meth capital of America. I Googled this question and apparently there is no clear winner: It depends on which denominator you use. Suffice it to say that crystal meth is a big problem everywhere, including the rural heartland.)

Difficulty attracting providers, particularly specialists. A full 12 million Americans live in areas designated as primary care shortage areas (defined as having less than 33 primary care physicians per 100,000 population). Of that 12 million, 5 million are living in rural areas. (Presumably, the residual is found in underserved urban areas.)

It is difficult to recruit new physicians to rural areas. Most new doctors want to be close to big cities with Starbucks and symphonies. They want to eat tofu and drink soy macchiatos, not watch soy grow. Even premium pay for rural service won’t overcome the tendency of young physicians to pick urban areas and employed practice environments. The big question is who will replace the current generation of rural primary care physicians and good all-round generalists in the surgical and medical specialties. As Grinnell’s Todd Linden told me: “I am trying to hire a good generalist orthopedics specialist who can handle a wide variety of cases; they don’t exist anymore.”

Sub-optimal in scale, both clinically and financially. While cost-based reimbursement can cover a multitude of operational sins and inefficiencies, it is pretty clear that rural health violates the basic economic principles of economies of scale and scope. It also violates the well-established health services research linking volume to outcome.

Similarly, there are basic operations research principles that show that the smaller the institution, the lower the occupancy rate. (A CEO of a large Midwestern health system that I visited last week had just toured a critical access hospital in his system that had a census of zero all that week; now that’s low occupancy.) Conversely, cost-based reimbursement can lead to overbuilding and to small institutions acquiring technologies (such as robotic surgery equipment or advanced imaging) that are arguably too advanced for the setting.

Quality of care differentials. The UnitedHealth working paper — using published scientific evidence, Harris Interactive surveys of doctors and patients, and claims data analysis — paints an overall picture of health care quality (both perceived and measured) to be slightly lower in rural areas compared with urban areas overall.

For example, the analysis of quality performance for the 256 hospital referral regions (HRRs) for which there were sufficient data found that 75 percent of HRRs had rural quality lower than urban quality, 20 percent had the same quality, and only 5 percent of HRRs had rural quality that was higher than urban quality. This last group of relatively high-performing rural HRRs tends to be in regions where larger integrated systems of care have been developed, such as in the Upper Midwest.

Aging plant and equipment. Half of CAHs are more than 40 years old. The aging physical plant of these Hill-Burton institutions means that renovation, rebuilding or repurposing is high on the strategic agenda of hundreds, if not thousands, of facilities. (Hill-Burton was a 1946 act that provided funding and support for the upgrading of hospitals, particularly in rural areas.)

Measuring quality with small numbers. Quality measurement and reporting is challenging in rural health because of the small number problem, where it is difficult to have statistically reliable measures of performance because the number of events is low. This is a problem generally in health care as we drive to finer granularity of measurement to the individual provider level. The issue is even more challenging in the case of rural health because of low volumes and dispersed populations.

The Helping Hand of Health Reform

The Patient Protection and Affordable Care Act provides assistance to rural health care in a number of ways, including coverage expansion through exchanges to an estimated 5 million additional rural residents, expansion of Medicaid, increases in rural health funding for rural health clinics, support for telehealth and meaningful use of electronic health records, training grants for rural providers, and differential payments for primary care.

Rural health policy experts seem to advocate a mini version of national health care delivery reform (with the addition of telehealth initiatives). This version would encourage a team-based primary care focus through patient-centered medical homes. (To an outsider such as me, however, it seems like that is what country doctors have been doing for the last 100 years.

Reinvention Options

As we redesign the overall health care delivery system from volume to value, we raise the question of what happens to rural health care. While the challenges described here are real, in my travels I detect a growing openness to reinvention of rural health among community leaders and hospital CEOs across the country.

Here are some examples of promising approaches:

Regional integrated systems. Large urban-based health systems in primarily rural states are building significant scale by bringing regional facilities into systems of care through outright ownership of facilities, or through formal and informal regional networks of affiliation. Examples include Avera Health, a network of hospitals, family care practices and specialty clinics located in South Dakota, Minnesota, Iowa and Nebraska that have created sophisticated e-health links to their more remote partners.

Similarly, while Mayo Clinic is a global brand, less well known is the Mayo Clinic Health System, which describes itself as “a family of clinics, hospitals and health care facilities serving 70 communities in Minnesota, Iowa and Wisconsin.” “Mayo Clinic Health System,” it maintains, “links the expertise of Mayo Clinic with health care providers (including 17 owned hospitals) in local communities to offer patients a full spectrum of health care options. Patients receive quality health care at their local clinic or hospital, and, when needed, can receive highly specialized care at Mayo Clinic.” More and more such regional systems like these will emerge, but not all through direct ownership and acquisition.

High-tech rural ambulatory centers. Many of these new regional systems will repurpose individual facilities into regionalized hub-and-spoke sub-networks (analogous to the transformation in the airline business). Many rural hospitals may have a better long-term future for the institution and the community as a high-tech ambulatory care hub — with limited short-stay capacity and a heli-pad on the roof or across the street.

Rural community-based continuum of care centers for the chronically ill. To a larger extent, the longstanding, valid and important role that rural hospitals have played is as a center for managing the aging rural population with chronic illness. In many rural communities, aging parents remain down on the farm while their children Skype them from L.A. or New York. Preserving the local capacity to have older patients “age in place” with the appropriate level of support for their chronic care needs seems an incredibly valuable asset, nationally and locally.

On a trip to Ireland last year, I was deeply struck by the potential for aging in place as an economic base for rural communities. We drove through fishing villages that clearly have not many farmers or fishermen left, but have seemingly thriving long-term care and assisted living facilities that, as far as I could determine, were the sole economic base for miles around.

Referral platforms. Many urban-based hospitals, faced with tightening appropriateness of care standards and a tough economy for elective procedures, are looking to expand their regional referral footprint. I joked with a large Midwestern system recently that, if you added all the growth aspirations of every adjacent regional hospital system in the Midwest, you would have to bring in the entire population of China for them all to come true. (It’s a wee bit of an exaggeration but directionally correct.) The result will be that, if rural facilities try to remain independent, they may have their economic base eroded by expanding urban-based regional systems that seek to maintain the economic viability of their own high-tech core operations.

A High-Tech Approach to Rural Health Care

Rural communities have as much right to high quality health care as the rest of us. But the answer can’t simply be providing sufficient cost-based reimbursement to keep all systems doing what they are doing, especially if they are under-scale for true quality care. In my view, the solutions will come through a reinvention of rural health care delivery, including:

• imaginative use of contemporary information and communications technology;
• regionalized quality improvement initiatives; and
• rationalized deployment of clinical technology and human resources.

I am confident that regional health system leaders and their rural partners will figure all this out. While the politics of reinvention are extremely difficult, both nationally and locally, rural health leaders (board members, rural hospital CEOs and the community at large) are passionate and committed to doing whatever it takes to serve their rural communities.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.

We are all very busy building massive accountable care behemoths to compete in the new future. Like medieval fortresses, with lords, knights and serfs aligned under a common flag, these new organizations will dominate the health landscape of the future. Or will they?

A counter trend is one in which payers (employers and health plans) are trying to unlock the value inside these massive fortresses, by identifying a subset of the knights and serfs, who are top quadrant (better and cheaper) than the rest of the organization, and encouraging patients to visit only them. Similarly, new organizations are being formed with health plans in direct partnership with physicians that are prepared to contract for the expensive services of hospitals and specialist providers for (the reduced volume of) specialty services, on an as-needed basis. Welcome to the spot market.

The great Wikipedia, from whence all true knowledge comes, defines a spot market as “a public financial market, in which financial instruments or commodities are traded for immediate delivery.” Willing buyers find willing sellers in real time. If supply exceeds demand, prices go down; if demand exceeds supply, prices go up.

For spot markets to function there must be transparency, real-time information on prices and motivated buyers and sellers who are willing to trade. Doesn’t sound much like health care, does it?

But wait, there are a number of forces that are coming together to create change toward a spot market for hospital and specialty services. These trends may have a big impact on providers and may challenge the movement toward massive accountable care systems.

The Reinvigoration of Skinny Networks

The idea of tiered networks is certainly not new. What is giving the high-performance network new life is the fact that health care costs (premiums and out-of-pocket costs) are now so high that consumers are willing to make real trade-offs between choice and costs.

My colleagues at Harris Interactive recently conducted an elaborate consumer trade-off survey to identify what consumers value most and what they are prepared to trade off to get it. The survey showed that consumers’ highest priorities were (in order): low monthly premiums, high technology such as MRIs (and they see no irony in those two top priorities together), keeping dependents on their plan, maintaining their current physicians, and access to inexpensive generic drugs.

What are consumers prepared to give up? The will give up access to prestigious academic institutions (throwing Cedars, Stanford and the Mass General under the bus in the process) and they will, on balance, give up choice of hospitals and, to a lesser extent, choice of specialists. (The rank order of these preferences did not change across almost all demographic segments including those consumers with chronic illness).

We interpret this survey as showing a greater willingness of consumers (even consumers with high health care needs) to accept skinnier networks than the market is currently delivering. In particular, the current high-performance offerings by health plans have been about only about 3 percent cheaper than the norm. What consumers really want, and what variation research tells us, is that a skinny network with only the high-performing providers could be 30 percent cheaper. Advice to health plans: If you build it, they will come.

Mining Variation

A second major trend favoring the creation of spot markets is the growing interest in variation on an all-payer basis. The Dartmouth Atlas work has shown us for 30 years the unwarranted variation in utilization of services for Medicare patients. Provider density (more specialists means more specialty services per capita) and provider preferences are the key drivers of variation. This rich analysis of service variation is being extended to all payer data sets (including commercial insurance claims data) and exposing similar inexplicable variation. For example, Stanford researchers found that the residents of Clearlake, Calif., have 15 times the rate of coronary angioplasty as those in neighboring Sonoma.

In a wonderful newspaper report on the original Stanford study of this phenomenon, journalist Emily Bazar tracked down some Clearlake patients who had stents inserted and had declined the suggestion from local cardiologists to have repeat procedures, even though they were asymptomatic. The patients told their doctors (in effect): “No thanks, Doc, I’m good, I’ve had enough for now. Two’s my limit…” (See “High Rates of Heart Procedures Seen in Clearlake,” San Francisco Chronicle, Sept. 4, 2011, www.sfgate.com.)

But, even more interesting are the new variation analyses using commercial claims data where price information is included. Commercial insurance prices vary much more dramatically than do Medicare reimbursement rates. As a result, formerly inexpensive geographic areas seen through the eyes of Medicare-only analyses (such as the Dartmouth Atlas) become expensive areas when commercial prices are considered.

So, for example, recent total cost analysis of medical groups in Northern California versus Southern California (conducted by the Integrated Healthcare Association as part of its Pay for Performance Initiatives) shows that Northern California has lower utilization of services but higher prices. Conversely, Southern California has higher utilization of services but lower prices. On balance, Northern California is more expensive: Price trumps quantity. It is the up to 10-fold variation in pricing of specialty services such as imaging, colonoscopies and surgical interventions that is fueling renewed interest in spot market initiatives such as reference pricing.

Reference Pricing Schemes

Reference pricing is a model of reimbursement in which payers pay a fixed price for a service and consumers are at risk for the total costs of care beyond that fixed price. Your choice whether you go to the more expensive provider.

A truly fine health care journalist, Julie Appleby of Kaiser Health News, in collaboration with USA Today, scooped me on reference pricing models in her article of Sept. 22, 2011, titled “Companies Steering Workers to Lower Priced Medical Care.” (Honest, check with my editor; I had this idea in the works for a while for this column.) I will not repeat her great points and the examples she cites, because I agree 100 percent with what she found are the important examples of the phenomenon. Just go read it at www.kaiserhealthnews.org. But, let me just reiterate the key message: Reference pricing can have a powerful effect on providers because it is a purchasing method that engages consumers with meaningful information and incentives at the moment consumers have to choose their location of care decisions.

For example, if you the California Public Employees’ Retirement System member want to pick one of the 45 high-quality hospitals in California that have negotiated a fixed-hospitalization payment of $30,000, there will be no additional costs for your knee replacement. But if you select one of the other 400 odd places in California that do it but do not participate in the plan, you the patient pay the entire difference in cost (maybe $20,000 to 30,000)! That will focus the mind. Lest you say “That’s horrible, patients are being effectively bribed to have hip and knee replacements in some Shell Station in Oakland,” let me tell you that Cedars-Sinai in the south and Stanford in the north are participating hospitals.

Now how many knees do CalPERS members have? Apparently, on average two each, but the annual replacement rates for the entire population is not a huge number. More important than the actual impact on volume is the signal it sends to providers: High price-setter beware. It is but a beginning, a shot over the bow.

Registries

As the idea of reference pricing spreads to other frequent high-cost elective services such as maternity care, orthopedic interventions of all types, colonoscopies and imaging studies, more and more science-based evidence will help patients and providers make better decisions. The creation of registries (large databases that capture information on clinical performance, including patient reported outcome measures) can help identify the high-performing method of care and the providers who deliver it. Cardiology has led the way, but orthopedics, gastroenterology and even oncology will follow.

New evidence will come from the fruits of the research investments being made in comparative effectiveness. While the enabling legislation forbids the use of comparative effectiveness research in making reimbursement decisions in public programs, there is nothing to stop private payers steering patients to high-performing providers, and they would be nuts not to do it.

Leveraged Group Practice

New multispecialty group models may provide a further boost to these spot market trends. For example, Kaiser’s Mid-Atlantic Permanente Medical Group under the leadership of Dr. Bernadette Loftus, has recently rocketed to the top of the charts in National Committee on Quality Assurance ratings. Unlike the mother ship of Permanente in California, Kaiser Mid-Atlantic does not have its own hospitals. Instead, it contracts with willing provider partners for those services.

Kaiser Mid-Atlantic is embarking on a new strategy of medical center hubs that combine sophisticated diagnostic and outpatient surgical services with the capacity to have up to 23-hour lengths of stay. These models could enable Kaiser to internalize an increasing amount of specialty care and may provide them (and others) with a replicable business model in hospital-dominant regions such as the Northeast.

Similarly, Optum Health (the artist formerly known as Ingenix, part of United Health Group) has set the provider world atwitter with its recent purchase of Monarch Health, a very large 2,300-physician IPA in Southern California. The smart people at Optum, in combination with the smart people at Monarch, may very well develop reproducible business models that improve the health of the populations they serve by streamlining care coordination, reducing use of specialty services and hospitalization, and applying business discipline across the revenue cycle. In addition, boutique firms such as Accretive Health are fast-rising stars that bring together HIT, business process and re-engineering assets that can enable provider groups to take risk and produce high clinical and financial performance.

Physician-led accountable care organizations may also provide a new force to reduce demand for hospitalization and specialty services in the Medicare population. While enthusiasm for CMS’s original Shared Savings Program has been underwhelming, we may still see some new entrants who find a way to make a good living by doing less, not more, for fee-for-service Medicare patients. And don’t forget about Medicare Advantage plans that have an even greater impact on demand and that I discussed in a previous column, “Medicare Disadvantage”).

All of these emerging models are not hospital centric, and they could put downward pressure on the overall demand for specialty and hospital services.

Over Capacity

But the greatest potential driver of the spot market may be the emerging overcapacity in health care. It’s true that expanded health care coverage will expand demand for services. And true that we have an aging population, and a seemingly endless appetite for new medical interventions. But Harris surveys of hospital executives reveal an astonishingly high proportion of hospitals planning for expansion (for example 72 percent of hospitals with new construction or renovation plans, 65 percent planning on expanding satellite facilities, and 48 percent adding new surgical or operating facilities). It reminds me of commercial real estate: Every developer thinks his or her office building will sell because tenants will come from the other guy. They can’t all win; it is a zero-sum game.

Many strategy consultants point to the ambitious expansion plans that neighboring competitors have in most markets across the country. The capacity being planned may create over-supply—powerful fuel for a spot market.

Watch This Space

My advice is to watch this trend toward spot markets very closely. A newly released AHA report “Hospitals and Care Systems of the Future” (which flatteringly draws on my Second Curve concept) provides an excellent road map of migrating hospital and health systems from volume to value. But migration toward value, not volume, may also create a perfect environment for spot markets to flourish.

The bottom line: Be high-performing and competitive on costs and quality at the procedure level, the service line level, the enterprise level and the population level, and you will have nothing to worry about.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.