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Wednesday, June 29, 2011

Morphing triangles into lines

I have previously blogged on how messy triangles can be, whether economic or relationships. The three-way transactions in health care create all types of problems in terms of mission and resource allocation. Patient motivations to over-consume at the all you can eat health care buffet, encouraged by the pay per click culture are leading us to bankruptcy.

Today Pittsburgh insurer Highmark announced it was to acquire a large chain of hospitals in western Pennsylvania. This is an interesting scenario. When health systems and payers form single entities, it goes a long way to eliminate the three way economic transactions in the health care economy. We end up with patients who pay for a service and health systems which provide that service for some sort of fee. How the fee is structured and what it actually pays for is up for grabs. I suspect it will be some sort of hybrid where the public will pay up front for something and then be nickeled and dimed to death when they find that everything is ala cart.

I suspect it will not be so simple to pull this off. We are talking about the merging of two different types of business with two very distinct cultures and business models. The product of these mergers is will either be a company which uses a health care delivery system business model and culture or an insurance model and culture. In some sense, the ACOs model is attempting to do the same thing, encouraging partnering of traditional payers and those who deliver services to patients, primarily to limit cost although some lip service is devoted to safety and quality. It is easy to measure money and difficult to measure relevant quality and safety metrics. Success will primarily be measured financially.

In each case, the last entities standing will be ones which adopt the most of the insurance company culture and business models. Hospital business plans for the most part look to bill aggressively and focus on high margin (expensive) interventions. When payers and providers merge into single entities, these activities just represent cost centers. I suspect that insurers will look at hospitals they acquire like any other business entity would new acquisitions.  Hold on to the assets that bring value to the company and gut the rest. Hospitals cost insurers great amounts of money. When they acquire hospitals is there any reason to think they will not still cost them huge amounts of money?

Obviously some elements of hospitals will need to exist in order to deliver services which bring value to patients. The question is, what are those services and who and how will they be delivered? It is easy to predict they will be delivered in such a way that will cost the least amount possible. Pressure from government may come to bear to force these merged private entities to deliver high end services. I doubt this since both the Feds and states will be looking to save money in the health care realm. They are unlikely to champion expensive interventions when they will also be earnestly exercising cost control. 

With the evisceration of hospital power, where will still be a need for physicians and other health care professionals. In contrast to the current state, those who will be most valuable will be those whose activities will bring the most value to patients while costing their health systems the least amount of money. In the present hospital culture, those who bill the most are celebrated as the rainmakers. In the future culture where insurers run hospitals, these physicians are just overhead. Those who have the knowledge, know how, and processes to care for patients in low cost settings will control the resources. 

How quickly will this happen? Someone will get the rules right. If early hospital/insurer mergers show financial windfalls, there may be a stampede to the merger altar. Free standing insurers without linked health systems will be at the mercy of integrated systems. Similarly, health systems without captured covered lives may also find themselves out in the cold. 

Survival will require flexibility, nimbleness, and ability to ruthlessly cut costs. Those who can cut costs while also demonstrating quality and safety will be the new nobility of health care. Those who just cut costs will be part of a large commodity business.

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