As hospital operating expenses keep outpacing operating revenue growth, many are facing an impending margin crisis. Indeed, Advisory Board's modeling shows that, absent any intervention, margins could become negative for the average system before 2021.
To reverse this course, it's clear that hospitals and health systems need to make big changes now. Today, I want to talk about one part of the solution: harnessing the power of systemness.
Let's start by defining some terms. By "system," I mean any health care organization that provides services at more than one facility. Those don't have to all be acute care facilities; even so-called "standalone" hospitals often have multiple outpatient sites, ambulatory clinics, and ancillary facilities to manage. And by "systemness," I mean the capability to make decisions that are optimal for the organization as a whole, rather than for individual service lines, facilities, or stakeholder groups.
These definitions may seem simple, but I think they are important to clarify (as too often in health care we use words that sound clear enough but have multiple interpretations). In this discussion in particular, those multiple interpretations are part of the problem.
The term systemness has been around for at least two decades in health care, if not longer, though it has really come to prominence in the past decade, as industry consolidation has resulted in larger and larger organizations. But just because the concept's not new doesn't mean it's generally well-executed. I'll be direct here: Most organizations that call themselves health systems are still, in my view, Systems in Name Only. Most still act like a confederation of individual parts. This is in contrast to many other industries, like manufacturing, banking, or hospitality.
A framework for understanding systemness
My colleagues and I are often asked to advise boards and executives teams on this issue, and we generally guide that conversation using the four-part framework below. I'll provide a quick summary of each stage of the framework now, and, in subsequent posts, explore each stage in more depth.
Before diving into the details, I'll make two observations about systemness, and I apologize in advance if I offend anyone with my bluntness. First, health system leaders need to stop making excuses about why it's too hard to act like a system. Yes, it is definitionally more challenging to optimize performance across sites and stakeholders. But this is clearly a big part of what leadership is: Helping people see the bigger picture, providing an aspirational vision to achieve something together that we can't achieve alone, and being able to make difficult decisions when tradeoffs become inevitable. I'm convinced that almost every challenge health systems face today—margin enhancement, quality improvement, increased access, fending off disruptive competition—becomes substantially easier when the whole works as something greater than the sum of its parts. When I hear a leadership team tell me that these decisions are too difficult, I find it impossible not to ask myself if what they are really saying is, "We are not ready to lead our organization through these challenges."
Second, systemness is most certainly not a one-size-fits-all proposition. It does not mean centrally led, command-and-control leadership at all times and in all places, and it certainly doesn't mean that every organization needs to look and act the same. Rather, as the framework makes clear, there are at least four levels of systemness, and a system can be successful at any level. The key is making sure that your aspiration and level of competency within this framework matches your organizational strategy.
The four levels of systemness
These are the four levels of systemness—in increasing order of difficulty:
1. Level one: 'We recognize, pursue, and capture obviously beneficial economies of scale'
The first level of systemness is to recognize and pursue obviously beneficial economies of scale on an operational level. This approach includes centralizing most business operations, driving efficiencies in the supply chain, and aggressively identifying and adopting best management practices across the organization. At a minimum, health systems today need to be good at this level or they stand no chance of managing their way out of the current margin crisis. Therefore, I consider level one systemness to be non-negotiable in our current environment.
2. Level two: 'We work together to identify best practices and reduce unwarranted variation with all patient-facing activity'
The second level of systemness comes when systems address and—where appropriate—standardize patient-facing operations, which include both clinical care as well as administrative processes like scheduling, access, communications, and billing. This level almost certainly has to follow level one, as engaging clinicians in discussions about evidence-based medicine almost always requires a track record in evidence-based management.This level is often very challenging for organizations to achieve, and it requires meaningful effort to sustain. It goes without saying that this level is completely impossible without highly engaged clinical leaders (and I don't just mean physicians and nurses in formal leadership roles).Health systems that cannot achieve this level of systemness are probably disappointing their patients and are certainly not ready for any sort of value-based payment.
3. Level three: 'We routinely make decisions that benefit the system as a whole—even when doing so disadvantages parts of the organization'
The third level of systemness is a big shift. Many organizations have achieved at least some level of success at levels one and two, but far fewer have any sort of track record in level three. One way of thinking about the difference is that levels one and two are mostly about variable costs, and level three is mostly about fixed costs. At level three, organizations have a robust process for making and executing decisions such as: consolidating service lines, allocating investment capital at the system-level rather than the facility- level (so that we don't open duplicative cath labs, for example), and even repurposing acute care facilities into ambulatory centers. Each of these decisions are complex and require sophisticated management and communication skills. For example, the decision to repurpose an acute facility into an outpatient center likely entails a multi-year campaign to address concerns among medical staff, media, local government, and the affected communities. Done well, this process can increase community engagement, not to mention significantly improve margin. Done poorly, it can lead to lasting PR damage or even lawsuits.
4. Level four: 'We are willing to disrupt our whole system rather than waiting to be disrupted by others'
The fourth level of systemness requires both long-term vision and the strongest organizational resiliency. At level four, organizations recognize that market and/or regulatory forces require fundamental changes to the business model, and such organizations make a conscious decision to lead those changes without being forced to do so by government fiat or a nimble competitor. Rather than waiting for some mythical “tipping point” to value-based payment, organizations at level four make their own tipping point. Not every health system is going to be able to make it to this level—but not every market needs this in 2019. Therefore, I am most assuredly not saying that every health system should aspire to get here. But for those who can—and do—aspire to this level of systemness, the payoff is controlling your own destiny, and forcing others to respond to you (rather than the reverse). An example of an organization operating at this level might shift from a mindset of "our market is not ready for risk" to one of "it's our obligation to define, articulate, and sell a risk-based value proposition to potential buyers."
Having outlined these levels, it's worth reiterating my point that not every health system needs to aim for the fourth level. The key is to make sure that whatever your organizational strategy is, your level of systemness is commensurate.
In my next blog post, we'll start unpacking these four levels, and look at some specific examples of health systems who have achieved them. Stay tuned by making sure you're subscribed to At the Helm.
Next, learn more with our expert perspectives on 'systemness'
Many health systems are only scratching the surface of the potential their scale offers. But today’s market leaders are leveraging purposeful integration and cohesive effort—what we call "systemness"—to streamline operations, deliver more reliable and coordinated care, rationalize fixed costs, and even transform entire delivery models.
Download our report for expert perspectives on how your organization can achieve "systemness."