Blog Post June 17, 2015 Value-Based Enterprise Conversation Series: Scaled Authors Kevin Forster A health system that is scaled can support services and initiatives that individual organizations cannot. Economies of scale enable systems to spread overhead across a larger revenue base, strategically utilize resources and deploy capital, and succeed in more dynamic contracting models. Healthcare executives and hospital boards across the country are realizing that they must build greater scale within their organizations if they want to remain competitive. Yet many healthcare leaders are still trying to determine how exactly to achieve the desired scale. Kevin Forster is the leader of ECG’s Healthcare – San Francisco practice, and his 15-plus-year consulting career has emphasized hospital strategic planning and business development, physician/hospital relationships, and detailed financial and operational assessments of medical groups/physician networks. As healthcare organizations attempt to position themselves to deliver care in a value-based environment, their leaders engage Kevin to address key issues related to scale and strategic positioning, with matters ranging from acquisitions/partnerships to geographic expansion. As part of our ongoing series of conversations about the value-based enterprise, Kevin shares his insights on the advantages of scale and the challenges that health systems encounter as they strive to achieve it. In the ideal scenario, without any limitations, what does it mean for an organization to be “scaled”?It means the organization is large enough to provide distinct or significant performance advantages. And I think those advantages appear in several dimensions. Access to capital is the most common. However, given the shift to value-based care and the related implications, access to human talent and infrastructure are probably more important. Given enough scale, organizations can realize unit cost advantages that can significantly impact the bottom line. Then just the depth and breadth of service line offerings that a larger organization can have versus a smaller one. Let’s face it, successful organizations will need to be able to rationalize services, and those with scale will be able to do this more easily. Obviously, not every organization is there yet, and many have a lot of work to do before they get there. So what does that look like in a more practical, realistic sense?Organizations are putting together a system of care and a system of services, and those services may be clinical or nonclinical. And in most cases, the emphasis has been on the nonclinical side. But they’re putting together a system of support services that start to look scaled or are starting to get to some of the benefits we noted above, such as the infrastructure, the human capital, the unit cost advantages. They’re noticing tangible value because it allows them, for the most part, to be less expensive and drive lower costs, which is increasing the value equation. I think the next step is organizations starting to put in place a system of care that differentiates them. In many ways, a smaller health system could have early advantages, as it may be easier to implement care protocols and eliminate waste and unwarranted clinical variation over a smaller number of providers. However, this takes resources, and scale is often needed to afford these resources. Most systems are at the tip of the iceberg when it comes to creating a scaled system of care. Some of the long-standing HMOs and risk-bearing provider groups are pretty far down the path, but in general, the industry is still very fractionated and not realizing the benefits of scale. What systems have done this well?Some of the larger for-profits have done it well on the support side, but they have huge opportunities on the clinical side. Nonprofit systems are following suit, with more and more centralization of support services and greater “systemization” in general, but again, the industry still lags in this regard. Of the clients you see or organizations you are aware of: on a scale of 1-10, (1 being fully independent, 10 being the utmost of scale), what is the average in terms of how they’ve achieved economies of scale?I think there are very few organizations that are at a size where they’re really getting a considerable difference or significant performance advantages because of their scale. I’d say most organizations are in the 2 to 3 range. From a clinical perspective, what are the advantages of a scaled system?Consistent outcomes. They can develop greater depth, greater expertise, and increased experience because they’re doing more of the same thing. Most studies indicate that that drives lower costs and better outcomes, because you’re consistently applying best practices, evidence-based medicine, and clinical protocols across an organization as opposed to being siloed and doing it differently in each location. What financial advantages can a scaled system enjoy?Certainly access to capital. But also unit cost advantages and operating efficiencies in being able to spread fixed costs across a larger footprint. Scaled organizations can also better utilize labor resources. You’re not as affected by variations and fluctuations in volume, because you’re able to smooth your staffing resources across a broader base. When we talk about scale, it’s often in reference to a health system. Does this have application for a smaller enterprise? Say, a community hospital? A medical group?For a community hospital I absolutely think it’s germane. They’re going to continue to be under financial, operational, and compliance pressures, and scale is certainly one way for them to address those. They’re also under pressure from their communities to provide a depth of services and at a reasonable cost basis, and scale is one way for them to address those issues. It’s often the driving force behind community hospitals seeking linkage to a bigger system. Likewise on the medical group side, I think the market’s showing that scale is important, and you’re seeing the continued decline of small solo practices into either larger, independent medical groups or employed physician networks, and they’re absolutely doing that for many of the reasons we mentioned around the advantages of scale – the cost advantages, the infrastructure and the ability to build infrastructure, the human talent that they need to deal with an increasingly complex health system. I think it’s actually more pronounced on the physician side than on the hospital side. Purchasers want their decisions simplified, and we’ve seen instances where even good-sized medical groups – in the 50- to 100-physician range – have been shut out of narrow networks. If you’re a system, how do you approach this differently than would a medical group?There’s a process that’s the same regardless of the organization, but the considerations start to be a little different. In a medical group they’re going to be evaluating more of the direct or specific financial implications to the individual shareholders or the individual physicians, whereas a health system’s going to be looking at the overall financial stability of the organization and their ability to provide services to the community. Both of them have to deal with real or perceived control issues, in terms of how they achieve that scale and also maintain their desired level of autonomy. What are some of the common roadblocks that organizations might encounter when they’re looking to achieve scale via alignment or integration?I think for smaller organizations, one concern is leadership support. Leadership are worried about where they fit into a larger-scaled organization. They may fear loss of the influence they enjoy in a smaller organization, or even losing their job. Perceived loss of control at the board level is another barrier. There is a tremendous amount of local pride in community hospitals. Boards rightfully worry about maintaining a community asset. While it’s imperative to think through all the concerns, it’s equally important to judge what the benefits might be; how the community could be better off. But there’s another barrier, and I’ll make an analogy. Think of the banking industry 25 years ago. Wherever you lived, there were plenty of local banks around. And now there are very few local banks – they’re all part of a few large national chains. I think one of the barriers in healthcare is that we haven’t quite gotten to the burning platform, from a financial pressure standpoint, to drive massive-scale efforts, like you’ve seen in the banking industry, where it’s now too difficult to compete if you aren’t part of a larger system. And certainly some of the implications of the ACA have moved in the direction of scale being important in terms of ability to manage a population, take on risk, and support the infrastructure that’s required to deliver on value. But there’s still enough money flowing through the system that smaller organizations are surviving; they may not be thriving, but they’re surviving, and it’s somewhat of a barrier, because it’s easier to stay put than to change. What risks does a system encounter if it doesn’t achieve economies of scale?Don’t get me wrong, there are and will continue to be successful health systems and hospitals that are relatively small. On average though, I think scale is going to be more important in the coming years. Without scale, organizations will struggle to meet the downward financial pressure that is mounting. Scale will be an important strategy to drive value and meet both employer and consumer demands. How does “scale” relate to the other pillars of the Value-Based Enterprise?Scale requires greater responsiveness, because with size and resources come more complex management structures. Some of the large organizations we work with have developed intricate organizational structures with system, regional, local, and matrixed resources to help them make sense of it all. Some of these folks probably feel like they’re spending their whole lives in meetings, but these systems are also able to do things like introduce new clinical protocols much more easily. It also allows for greater rationalization, because it’s hard to rationalize within a very small organization. So what happens in our system is that we have five independent organizations in a community, all trying to be everything to everybody. As we scale, and as we get more integrated, you’re able to rationalize services based on minimum efficient scale. Access to information is playing a bigger and bigger role. Scaled organizations have the infrastructure to both capture and decipher or use this information, as well as to identify internal best practices with greater ease. In short, scaled organizations can be more informed. Similarly, scaling also sets the stage for greater integration, both clinically and nonclinically.