Health System Growth Strategy for the Value-Based Market

Learn why the old drivers of growth will be insufficient for future success—and how to win customers in the post-reform marketplace.

Hospitals can’t rely on their existing growth strategies.

Hospitals and health systems have used a common set of proven growth strategies for decades. They have successfully grown—in size, scope, and revenues—by consolidating their market position, locking up referral streams, and demanding steep price increases from payers. But these same strategies will not lead to growth in the future.

For one thing, annual price increases are no longer a reliable certainty, as the number of Medicare beneficiaries rises and purchasers become more active in managing cost.

Across the next decade, hospitals alone will absorb over $260 billion in Medicare rate cuts from the Affordable Care Act. They will also lose another 2% from the sequestration process and $56 billion from the reallocation of DSH payments.

But volumes, too, are harder to come by. Overall hospital demand is not expected to increase like it has in the past. And it’s harder than ever before to consolidate for growth’s sake. Existing markets are already concentrated, hospital mergers are drawing greater scrutiny, and capital for acquisitions can be scarce.

The most critical evidence of structural change is the slowdown in spending growth per Medicare beneficiary—virtually flat in 2012.

Medicare beneficiaries don’t face high deductibles or new cost-sharing tactics. But they’re being readmitted less frequently and receiving better care management and coordination. Both deflate long-term volumes.

Providers themselves are further eroding volumes by becoming full-service population health managers. Our analysis suggests that aggressive population health management efforts could reduce inpatient volume growth by more than six percentage points over ten years.

With softer overall demand and ever-fewer unaffiliated physicians, competing for physician referral streams won’t be a recipe for growth either.

So hospitals and health systems need a new playbook for growth.



To fuel future growth, hospitals must win share in the new value-based market.

Instead of, in effect, extracting growth from purchasers, hospitals need to focus on earning their market share, marking the shift from price-extractive growth to value-based growth. Increasingly, hospitals will get bigger by being better, reaping the rewards of superior performance in a competitive marketplace.

Embracing value-based growth will require notable changes, including new success factors, new targets of strategies, and potentially even some new leaders. It will also require a new outlook on the role of growth in hospital economics.

In the old era of price-extractive growth, hospital leaders often justified growth as an input, as a means to advance some larger end—securing access, funding innovation, or extending the mission.

But in the emerging era of value-based growth, where purchasers are selectively buying care in a competitive market, leaders must reposition growth as an output rather than an input. Hospitals will grow because they are providing services that purchasers want.

And what if hospitals remain stagnant, or even shrink? In a competitive market, that means purchasers are actively choosing someone else. Hospitals that don’t grow are failing.

In sum, future growth is an essential measure of success.



Health care providers should think about their customers as 'wholesale buyers' or 'clinical shoppers'.

To capitalize on new growth opportunities, health care providers—especially hospitals and health systems—need to appeal to the individuals and organizations that make market share decisions. We have identified two critical types of empowered decision makers, whom we’ve termed “wholesale buyers” and “clinical shoppers.”

Wholesale buyers are risk-bearing entities that purchase care on behalf of broad populations of patients. Examples include commercial payers, self-funded employers, and population health managers. By attracting or contracting with these wholesale buyers, hospitals can capture large segments of market en masse.

Clinical shoppers are individual stakeholders selecting discrete care services for distinct episodes of care. The key clinical shoppers are individual physicians and consumers. Many health care purchasing decisions are still made at retail level, so attracting these decision makers remains critical.



Successful hospitals will win share by embracing new market identities.

Hospitals and health systems must reshape their strategies to appeal to empowered decision makers, especially wholesale buyers and clinical shoppers. As part of developing their new competitive strategies, hospitals will need to evaluate potential market identities that can appeal to the new decision makers.

Four dominant provider identities are beginning to emerge:

1. Best-in-class acute care destination
Consistently delivers efficient, effective acute care episodes and ensures reliable coordination, communication, data sharing across the care continuum.

2. Consumer-oriented ambulatory network
Maintains extensive network of outpatient care sites and offers convenient primary care, diagnostic, procedural services at competitive prices.

3. Full-service population health manager
Assumes delegated risk from institutional purchasers and prioritizes care management, coordination to limit avoidable demand.

4. Financially integrated delivery system
Assumes full risk by offering health plans to subscribers and unifies care financing and delivery into single coordinated care enterprise.



The right identity depends on the intended purchaser—and payment model.

The four emerging market identities are not mutually exclusive; many organizations will effectively fill multiple roles in their market. But the four identities reflect different strategic priorities, infrastructure investments, and growth opportunities. They also attract different decision makers and rely on different payment mechanisms.

The best-in-class acute care destination and full-service population health manager appeal most directly to wholesale buyers. These identities are designed to help risk-bearing entities—commercial payers, activist employers, and ACOs—successfully manage their financial accountability.

Conversely, the consumer-oriented ambulatory network and financially integrated delivery system most directly attract clinical shoppers. These two models appeal to price-sensitive individuals when they’re selecting sites of care or health insurance plans.

The best-in-class acute care destination and consumer-oriented ambulatory care network compete for share of volumes, so they’re principally paid through episode-based payments. These can include traditional fee-for-service payments or a range of new bundled payment models.

The full-service population health manager and financially integrated delivery system compete for share of lives, typically accepting riskbased payments as part of the contractual relationship. The full-service population health manager typically signs shared savings or capitated contracts, while the financially integrated delivery system accepts the full risk of selling health insurance.

Keep reading to explore each market identity and decide which one best fits your organization.

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