08/27/2013 04:13 pm ET Updated Oct 13, 2013

Losing Patients: What Healthcare Organizations Have to Do to Survive Inevitable Changes

For many years there has been withering criticism aimed at executives in publicly traded companies tending to focus on short term gains to please Wall Street as opposed to engaging in a strategy that would yield long term growth and prosperity. Most often, the short term answers are designed to help the organization survive for another quarter by kicking the can down the road for the next leader who will certainly have problems of his or her own to deal with. Surviving, not thriving becomes the goal and all the tactics are just that-tactics for the short run with no real strategic end game.

In much the same way, healthcare has been quite effective at keeping the status quo in place and much-needed serious efforts at fundamental system reform at bay. But there is a big hitch for healthcare that publicly traded companies don't have: legislation that requires fundamental change in a hurry or experience a hard landing as the Patient Protection and Affordable Care Act (PPACA) is fully implemented.

Healthcare straddles two different worlds, with a tenuous foot in each of them. In the status quo world of fee-for-service, healthcare leaders and providers struggle to maintain margin and seek new ways to leverage services to offset legacy costs, while preparing to move to capitation redux. This world creates its own financial peril as outpatient technology and reduced reimbursements are creating havoc with legacy assets as inpatient volumes continue to decline.

For those of us who don't remember the capitation effort from the mid-90's, this payment model is the opposite of fee-for-service and is centered on an insurer paying a healthcare system a fixed amount of money to care for everyone insured under its plan. The healthcare system providers then hold the financial risk in delivering all necessary care within this "budget" as opposed to fee-for-service where the insurance company and insured are financially responsible for all care given to the patient with no upper limit. The insured population, in return, pays a fixed amount every month to the insurance company, hence the term "per member per month."

The other foot is firmly planted in a world where fee for service is formally rejected as an effective and efficient way to maintain the health of our society. This world embraces value-based compensation, outcome transparency and community health accountability.
So, how will healthcare reconcile and bring together these two worlds?

Over Capacity, and Still Building
From the leadership perspective, the status quo is in a downward spiral and the new world has unknown risk, untested concepts and tenuous changes. Recently, in speaking with three hospital executives they shared that only 40 percent of their licensed beds are occupied and that they fully expect inpatient volume to continue to drop every year moving forward. One of these executives stated that in his region there are 16 hospitals where only six should exist, while another stated that his rural community has two underutilized MRIs in competing hospitals within eight miles of each other.

While the census figures are dropping across the nation, healthcare systems are actively protecting current bed size and in some instances seeking to add more in the face of documented overcapacity. In another conversation with leaders of two competing hospitals in a Midwestern city, both were in the process of building very large extensions of their hospitals focused on attracting people beyond their geographic region for specialized care. While these new assets have a payback in a fee-for-service world, the future may be very bleak for this sort of gambit. Over the next few years, PPACA will be fully implemented, shifting payment to a value-based model. Under the new payment model where the payment is based on per-member-per-month, both organizations and providers with excess capacity will be challenged to provide value-based care under the new model.

While talking about this with healthcare executives, it is apparent that the frequent response to the current conflict is not markedly different from those short-term thinkers we often criticize in other industries: to maximize revenues as best they can while finding partners to merge with to ensure access to capital and a future pool of patients in order to survive as an entity. To address the growing cost pressures, they are borrowing from other industries' knee jerk strategy of poorly designed cost cutting: mass layoffs and across the board cuts without taking into account the impact on the patient needs and subsequent services of the organization.

In contrast, what does it look like to do "the right thing" and put patients first?

This new world requires a different path and strategy because putting the patient first directly correlates with the potential for improved patient care and strong margins.

So, with that in mind, here are some thinking and action items that might begin to bridge the gap between these two worlds:

• Don't confuse working in today's world with getting ready for tomorrow's. Continued capital investment in inpatient capacity is a non-starter. Mergers may yield a patient population, but overcapacity will drive facility rationalization: there is no positive correlation between too many beds and better patient care.

• Focus on what's important to your customer: patient outcomes. Period.

• Accept the reality of an outpatient future for your organization. Focus on the technology and process improvements that can re-purpose your facilities to be ready for the PPACA and the progression of the industry as a whole. By repurposing instead of adding capacity, sound investments can be made which reflect the future of health care.

• Learn how to create better outcomes in a patient population without hurting your existing margins. Use the merger activity as an enabler to learn how to provide more effective and efficient care by extending the patient care path. And, begin in areas that are now unprofitable services. Improving those will help both short and long term efforts without cutting into existing margins in profitable services.

• Don't confuse traditional cost reduction activities with an integrated strategy to align resources and assets (fixed and variable). Be thoughtful about what you NEED to provide and how to do it. Knee jerk reactions are easy, but most often they turn out to be lethal in the long run.

Ready to end this messy straddle between two worlds of healthcare? Be deliberate in your efforts to exit the old one and enter the new one. Learn as much as you can by piloting new ways of delivering better care at lower cost to the community.

And above all else do one thing: Think outward, and put the patients and their care first.