Leadership in the healthcare industry during the next three years: Insights from the Oliver Wyman Healthcare CEO Survey 2014
To understand how the wave of change sweeping through healthcare will affect the strategic thinking, leadership and culture of healthcare providers, Oliver Wyman interviewed C-suite executives at more than 40 major integrated healthcare delivery systems and integrated medical groups. All interviewees were promised complete confidentiality and that their responses would be aggregated to illustrate cogent trends.
The executives predicted a tumultuous three years ahead for U.S. healthcare. They expect the system to transition to "budgeted care" (a term they believe will come to replace "value-based care"). As it does, new organizational models such as accountable care organizations (ACOs) will become institutionalized and supplant the historical drivers of capital formation: hospital-based services and subspecialty physician care. Patients armed with more data and saddled with more financial responsibility will drive the industry toward clinical integration and service innovation. New business models around management service organizations (MSOs) will emerge to service population health management strategies and challenge traditional health plan models.
While openly worrying about how this rapid transformation will affect their finances and organizational cultures, they prescribe a plethora of solutions. They believe a combination of an ambidextrous management focus, recruitment of many more physicians into leadership roles and American innovation will get them through these tough times. They believe that the industry will continue to consolidate and that partnership business models will become increasingly important. Three years from now they see an industry moving forward through organizational partnerships, aligned sector incentives and new patient-centered services.
Below are five of the ten key trends we identified. (The remaining five will be unveiled in the next part of the series.)
It's no surprise that our respondents foresee tough financial times. Medicare rate increases have fallen below inflation, payers are turning to narrow-network products and the cuts mandated by the Affordable Care Act have begun to be implemented — all of which inspires pessimism about traditional revenue streams. One unexpected concern: Public and private exchanges are growing rapidly, leading many executives to predict a corresponding growth in high-deductible health plans — leading to more self-pay, lower collections and unsustainable levels of uncompensated care.
While most respondents still see size as an asset, there is an increasing sense that it no longer guarantees success. Several respondents pointed to the way margins are shifting dramatically away from traditional hospital business lines that create capital capacity toward budgeted care. They predict that over the next three years at least one national delivery system will stumble in making the transition and be unable to get its bonds refinanced. As one respondent said, "It will collapse under its own weight."
Respondents believe that, except in isolated geographies, the "irrevocable" shift of financial risk to providers will drive organizational transformation. Because of an affordability crisis ("Our own employees can't even afford our service," lamented one CEO), respondents believe, within three years, more than half of government and commercial contracts will be for budgeted care, and they will have to assume many, if not all, of the health plan skillset.
This will fundamentally shift the way executives manage their businesses. To be successful under budgeted care they plan massive expense-reduction campaigns, exploration of "health plan like" patient management tools, increased investment in analytical tools and further consolidation. There was a sense of relief that, while this transition will be hard, at least the industry has clear direction and the transformation is on its way.
Interviewees were quick to point out that "ACO" is merely an umbrella for a larger set of integrated, coordinated organizations that assume financial risk and deliver care to populations. Nevertheless, the number of these organizations will soon reach critical mass, and most of the nation's care will be delivered through them. Over the next three years, these organizations will become more sophisticated, investing in infrastructure, hiring talent, and "writing the playbook." And though they are currently associated primarily with Medicare, in three years, ACOs and ACO-like structures will dominate all lines of business.
Interestingly there was strong sentiment that healthcare delivery organizations of the future will be far different from what we see today. Executives anticipate consolidation and industry-wide shakeout as winning models emerge and financially unsuccessful experiments collapse. They expect to spend a significant amount of their time discussing affiliation ("Everyone wants to partner"), carrying out mergers and acquisitions, and managing integration. They worry that the pace of change may overwhelm their organizations.
All respondents talked about the growing trend of empowered patients and their impact on the nation's healthcare system. They believe that growing transparency, increased financial responsibility, and greater health awareness is leading to a patient population that is demanding, informed and oriented toward outcomes. Thanks to customer-based health management companies and an explosive growth in patient interaction tools, consumers will finally take a leadership position in healthcare. The rise of the new patient will contribute to reduced utilization of traditional hospital services, increased access to community-based care, and the quick adoption of electronic physician visits.
Only one respondent coined the phrase, but others wondered aloud how the industry will capture the "free labor" of patients, family members, neighbors and friends and connect them systematically to delivery systems. They discussed social media such as Twitter and Instagram and speculated about a "new medical record" that includes the real-time patient health information. There is a growing belief that community care, social networks, and family based services will be a growing part of the solution.
There was lots of disagreement about what hospitals will look like three years from now, but universal agreement that they will look different. A major theme was that as utilization of specialty services declines, hospitals will rationalize the services they offer, with community hospitals bearing the brunt of reductions. Although new technology and advances in genomic testing may save some specialty services in community hospitals, most respondents said that a new round of service centralization and hospital closures is on the horizon. Hospitals and delivery systems will look outside of their four walls and into the community for growth opportunities in the next three years. As one respondent put it, "We are all just becoming ICUs and observation units" — a tongue-in-cheek acknowledgement of the belief that observation care is emerging as a new specialty and that hospitals will compete with community-based facilities over the contiguous space occupied by emergency medicine, observation and post-acute care.