The public focus on making healthcare better, more cost effective, and increasingly convenient has resulted in a number of disruptive forces challenging organizations. A small disruption in profitability or timing of cash flows can have large ramifications, especially for companies that have used low interest rates to take on large debt levels. Leveraged balance sheets coupled with disruptive industry forces can leave organizations overwhelmed by debt levels, drained of financial resources and unable to adequately invest in opportunities to improve competitiveness.
In response, leadership must first identify early on the key disruptive forces affecting their organization and consider them within the context of an organization’s obligations. Then a strategy must be developed to adapt, mitigate, and even capitalize on the increased industry disruption
A commitment to these principles will help maximize the value of the enterprise and allow it to end 2018 as a stronger and more creative organization—one that builds value through making the healthcare system better, cheaper, and more convenient for those it serves.
Payers are using their considerable scale and ability to manage and influence patient care decisions to disrupt the revenue models of healthcare organizations. Both commercial and governmental payers are looking to drive down cost and shift risk from themselves to providers and suppliers. This downward rate pressure is forcing organizations to choose between absorbing lower pricing or risk losing the volume necessary to leverage fixed costs. Either outcome can have significant repercussions on enterprise value.
In response to the challenging rate environment, organizations should focus on the following to increase competitiveness and maximize value.
First, corporate leaders must understand the profitability of individual contracts and negotiate within the boundaries of their organization’s cost model. Failure to have a clear understanding of the cost of services or contributions from each contract/customer leaves organizations at risk of chasing volume over profitability.
Second, organizations must push their own vendors for price concessions. The full extent of rate pressure imposed on an organization (and that an organization can impose on others) depends on its positioning within the healthcare value chain. The most susceptible are those that operate in highly competitive, fragmented, and commoditized products and services, such as home health providers, durable medical equipment providers, post-acute care and skilled nursing facilities, and third-party distributors.
Often, organizations most at risk of absorbing these pressures are those least positioned to do so. This creates a natural selection dynamic where the strong get stronger and already weak businesses are increasingly at risk of failure, creating an industrywide contraction in both pricing and profitability throughout the healthcare supply chain. This trend is expected to persist as increasing demand and technology advancements challenge the limited financial resources of patients and payers.
Third, in response to pricing pressure, organizations have been repositioning their strategies around value. Reimbursement levels are depressed so much that competing as the “high-touch” choice is unsustainable. Adjusting service models, however, can be challenging, as it requires the delicate balance of eliminating extra movement within a company without sacrificing patient care or outcomes. Labor, which accounts for large overhead cost for healthcare organizations, is also a key area to focus on, both in the delivery of services as well as back office support. Outsourcing may help reduce costs while also addressing increased regulatory standards and improving focus on value-added areas.
Lastly, managing the payer mix can be an important driver of profitability. Payer mix can mean the individual contractor payer/customer, types of payers/customer(s) (commercial, governmental, self-pay, etc.), or payer model (fee-for-service, bundled, or capitated, etc.). Becoming too dependent on any one payer or payer category can leave an organization’s profitability vulnerable to future price negotiations and put an enterprise’s value at risk due to possible disruption caused by a key customer.
In addition to challenges surrounding pricing and profitability, risk is also shifting from payers to service providers and manufacturers. With respect to service providers, companies can expect to see the continued evolution toward alternative payment methodologies. Payers are looking to transfer risk of inefficient, unnecessary, or improper care to organizations better positioned to limit or eliminate issues of quality control, unnecessary care, and/or avoidable errors, such as care and service providers and even manufacturers. As a result, many organizations are pressed to change how they evaluate and manage risk and to become more comfortable assuming and pricing incremental risk tied to patient outcomes.
The willingness to be adaptors and participants in alternative payment methods could be a clear strategic and competitive advantage. However, this requires different analysis and analytics than the legacy fee-for-service or per unit pricing models. Organizations will need to invest in analytics and risk analysis to help understand and manage utilization within the bounds of alternative payment modes, such as bundled payment or capitated revenue models.
Competition continues to evolve, driving innovation in the space and presenting organizations with a variety of challenges. In particular, the prolonged trend of consolidation within the healthcare industry has created larger organizations that are better equipped to realize operational efficiencies with larger geographic and service reach.
Healthcare organizations have been exploring all their options to build size and scale, such as roll-up strategies in the face of the power struggle to preserve price competitiveness and profitability. Scale has allowed larger organizations to leverage fixed costs and drive efficiencies unattainable for smaller competitors.
Some organizations looking for greater control over process flow, input costs, and patient outcomes have looked to vertically integrate along the supply chain.
Additional key competitive strategies focus on merging or acquiring assets that complement a company’s existing efforts. By adding products or service offerings, organizations are looking to achieve synergies of existing core competencies and/or gain a greater share of the overall healthcare dollar.
Related, but distinctly different, is M&A activity that has resulted in the transformation of healthcare organizations. Historically these organizations have sought to acquire unrelated healthcare assets in efforts to transform legacy businesses and create new value models. Recently, the market has seen an increasing number of non-healthcare companies acquire healthcare assets. Larger and well-capitalized nontraditional organizations are penetrating the healthcare space, eager to tap the industry’s enormous market potential by applying successful strategies from other sectors to the healthcare industry. These new market competitors—and their strategies—are looking to disrupt the status quo and capture value market share, and are behind the transformation of the healthcare industry.
Beyond larger, more influential, and new competitors in the healthcare space, the emergence of specialized care has created select new subsectors targeting desirable revenue streams, such as those coming from customers who have the greatest ability to pay and who place the greatest value on convenience.
Clearly, M&A activity is not the only way to boost a business’s competitiveness. The sellers’ market has allowed companies the opportunity to divest noncore assets and redeploy capital. In distressed situations, where capital is at a premium and significant dollars are not available to pursue a robust growth strategy through acquisition, strategic partnerships are an effective way to reach new customer/referral sources, grow capabilities, diversify revenue streams, and achieve greater scale than individual organizations could as standalone businesses. Forming a strategic partnership may also present a more cost effective, and less complicated, option than an M&A arrangement, which may or may not be a viable option.
The risk of audits or investigations by the U.S. Department of Justice, the U.S. Department of Health and Human Services’ Office of Inspector General, and the Centers for Medicare & Medicaid Services on the federal level, and Medicaid fraud units, attorneys general, and inspectors general at the state level has never been higher. Resolving issues that surface in an audit or navigating the processes of an investigation can be time-consuming, disruptive, and costly.
Organizations with strong compliance departments are better protected against negative outcomes from an audit or an investigation that can significantly decrease value. Investing in and prioritizing a strong compliance department not only can help reduce a key risk factor to value but also improve value by optimizing key operating metrics resulting from stronger internal oversight (i.e., improved revenue cycle management and revenue realization).
The healthcare landscape is complex, and distressed businesses in this sector face myriad challenges in addition to those addressed earlier in this article. The overall complexity of healthcare companies can make these organizations a challenge to turn around in times of trouble, and requires experience and industry know-how. Vital to finding solutions to disruptive forces driving change in the healthcare space is having a strategy that allows for multiple paths to success.
Organizations and their management teams, boards of directors, and other key stakeholders need to carefully consider the implications of their decisions on patients/public health, key financial stakeholders, or relationships with key referral sources. Understanding the interconnectedness—either formally through credit agreements, investor agreements, and partnership documents, or informally through service contracts or supply agreements—of different key constituents is critical to developing a winning strategy.
Developing, coordinating, and communicating a [turnaround] strategy that best addresses the needs of the organization, protects the safety and care of the patients, and builds consensus with critical third parties, can be challenging and time-consuming. But it is vital to achieving success and maximizing value in the face of disruptive challenges. The key is to start the process with enough runway to navigate the nuances of those relationships.
Depending on the situation, time can either be the biggest asset or the enemy of an organization’s value. Overall, the competitive landscape is expected to continue to intensify, and the cost and technology curve will continue to steepen. Organizations facing uncertainty and legacy business models in need of innovation will likely find themselves in a weakened position over time. This weakness, if not addressed, may irreparably damage an organization’s ability to compete over the long term and may make it less appealing to potential investors.
On the other hand, healthcare organizations are susceptible to large and often hard to quantify risks (e.g., outcome of legal disputes, audits, regulatory shifts, etc.) that can make monetizing value in the midst of this uncertainty challenging. Time can help organizations obtain certainty around factors affecting value and can be critical to navigating the complexities of organizations and key constituents.
In many situations, time isn’t a clear asset or liability. The challenge and solution is to assess the situation, implement strategies that can mitigate the impact disruptive forces have on value, and develop timelines to execution that weigh the cost/benefit of time.