In my last two blog posts, I've explored two related themes. First, there's a growing body of evidence that M&A is dilutive, not accretive, to margins. And second, many health systems are "SINOs" (Systems in Name Only), functioning more as a confederation of individual parts than as a unified entity.
In my discussion of "systemness," I shared an overview of what that term means, why it matters, and a framework for how it can be broken into four stages. Today I want to dive deeper into this first stage of that framework—using scale to build operational advantage—and share my observations on systems that have done it well, and the most common barriers that I observe in those systems that haven't.
Make sure you keep an eye out for subsequent posts where we'll explore each of the other stages in more depth.
'Level one' of systemness: Operational advantage
Organizations achieve "level one" systemness when they leverage their scale to deliver maximum efficiency in non-clinical processes. As I've said, doing so is vital. With operating margins for many health systems under 3%, there is simply no room for inefficiency (and excess costs) in supply chain, revenue cycle, payroll, and other back office functions. If there is one place where larger health systems should be able to achieve a demonstrable advantage, it is in level one systemness. So far, that advantage is not apparent.
Still, we know that success in this arena is achievable. In recent years, my colleagues have published extensive research documenting best practices in achieving economies of scale in operations and sustainable low cost performance (see here, here, and here for three highly recommended pieces). A number of health systems have been highly successful (and continue to push the envelope), including HCA Healthcare (whose margins and overall operational efficiency are legendary), Mayo Clinic (whose supply chain is often cited as best-in-class), and Ascension (who recently announced a first-of-its-kind global group purchasing organization (GPO) with Ramsay). It's not just the mega systems that have demonstrated exceptional capability—one of the best recent examples of breakthrough revenue cycle performance has come from St. Luke's in Boise.
3 common barriers to 'level one' systemness
Yet, for each example just cited, I can name many more examples of health systems that have been either reluctant or unable to achieve meaningful performance improvement. When I speak with these organizations, I typically find that they face at least one of the following three self-imposed barriers:
- Adopting a "we're different" mentality. In my 25 years as a management consultant, I have heard the phrase "we're different" many times and in many different guises. However, having worked with more 500 health systems in more than a dozen countries, I see far more similarities than differences. In almost every case when I hear "we're different," it's a symptom of an organization that's willing to accept mediocre performance rather than challenging themselves to improve.
Certainly, no one should just blindly implement a best practice without considering the context of the operating environment and how it would fit. But, too often, average performers use that caution as justification for why best practice shouldn't apply to them at all. Conversely, high performers look at the same practice and ask: "What's the essential idea here, and how can we apply it?" And exceptional performers ask: "To the extent we are unique, how can we use that uniqueness to compel even better performance?"
One memorable example of the latter stands out for me. In the late 1990s I was studying health system supply chains, and my team and I visited St. Alexius Medical Center in Bismarck, North Dakota. The organization was one of the first in the nation to implement bar coding for all supplies. The reason? Experience with extreme winter weather and the accompanying supply chain disruptions had taught St. Alexius that it needed to be better than anyone else at knowing exactly what it had, and where those supplies were located. St. Alexius used its differences to justify a higher level performance, not accept a lower one.
- Grading yourself on a (favorable) curve. In my snarkier moods, I sometimes call this mindset "Willis' Law of Benchmarking," which observes that individuals and organizations manipulate benchmarking data until it makes them look as good as possible. I recall one working session with a faith-based health system who compared its operational performance only to other health systems within the same faith tradition. The system looked good against that very narrow benchmark, but that approach prevented the system from investing in areas in which it was below the median performance nationally.
At a minimum, organizations need to be comparing themselves to their local and regional competitors. Moreover, considering that bond rating agencies increasingly use national trends in their evaluations, benchmarking should really be across the widest possible comparison set. I'll have much more to say about this in the next post, when we look at "level two" systemness (minimizing unwarranted clinical variation).
- Fearing that centralization will limit agility. There is certainly some validity to this argument. In corporate America, the pendulum between centralization and decentralization in decision making has swung back and forth many times over the years. However, in an era of 21st century communication tools and analytics, it's no longer clear to me that there needs to be a meaningful tradeoff between these forces. Organizations should have nearly complete visibility into on-the-ground performance challenges at all sites, in much the same way that an airline or railroad has a command center that allows them to seamlessly manage operational challenges from one central location. This doesn't require a massive investment in technology.
For instance, I'm particularly impressed by Intermountain's daily huddles, which go well beyond the safety conversations that many health systems use. Within 90 minutes every morning, Intermountain's most senior executive team gains full visibility into any operational challenges that need responses across the entire system. These huddles have allowed Intermountain to remain agile in supporting local performance—at the same time that it's moved to a more centralized operating model.
In my view, there is an inarguable case that health care organizations need to be able to achieve, at minimum, this first level of systemness. With industry margins at historically low levels, the imperative to achieve best-in-class operational performance has never been greater. Further, organizations that are unable to achieve level one of systemness stand very little chance of engaging their clinicians in a conversation around level two—creating a clinical advantage.
Stay tuned for my next blog post where I'll dive deeper into that second level and explore more about what's required to work towards shared, but difficult, objectives.