A Critical Condition

Healthcare is witnessing brand new business models, innovations and competitors. "The industry is ripe for a Southwest Airlines," notes Lance, North Highland's national healthcare leader. "Quick turnaround, lower costs, peanuts instead of a meal—Southwest was a breakthrough when it appeared. I think you'll see similar types of breakthroughs in healthcare in the coming years."

The opportunity to help healthcare companies create breakthrough approaches is riper than it has been in decades. Hoffman harkens back 10 years to recall a highly innovative program in which a healthcare provider devised a way to slash costs related to back pain by 70 percent. The approach reworked all of the pre-surgery steps, including the diagnosis, lab tests and physical therapy; in doing so, it drastically reduced the need for expensive back surgeries.

The organization went to the markets and said: Look, we make a lot of money doing it the old way, but if you insurance companies paid us a different way, we could save you ton of money and provide better care. "Nobody wanted it," Hoffman recalls. "Nobody bought into it. That's completely different today."

Minoo Javanmardian, a partner in the health practice at Strategy& (formerly Booz & Company) and leader of the firm's health provider business, agrees. She says that the general response to innovative risk-sharing payer-provider partnerships five years ago was: very nice, but not interested. "Today, they all recognize that the shift is underway," Javanmardian continues. "Suffice it to say that I don't know any provider or payer systems that are not thinking about this issue."

FOUR INDUSTRY STATUS STATEMENTS
While providers and payers—nudged by the ACA as well as even more formidable forces—are more receptive to new and innovative approaches, getting them to buy into wholesale changes and specific consulting engagements requires an understanding of the complexities roiling the industry. Healthcare consultants indicate it is useful to keep in mind the following dynamics:

1. THE MAGNITUDE OF CHNAGE IS UNPRECEDENTED. "The healthcare industry and healthcare consultants are facing some challenges I don't think we've ever faced before," notes Jim Costanzo, EY's global health care practice leader. "This is a fundamental shift in the way healthcare is delivered in this country, and frankly, around the world." Two dynamics at the core of this fundamental shift include the blurring relationship between payers and providers and the ACA-driven move from fee-for-service to value-based care.

"Payers and providers," Costanzo says, " realize that to survive, they have to change their interaction and their fundamental relationship with each other. And I see that happening … payers are buying providers, and providers are buying or starting payers." These historic changes set in motion cascading challenges that healthcare companies need help addressing. "There is a whole new range of consulting opportunities opening up in the provider sector and in the insurance sector," Hoffman reports. "What are the new strategies that organizations need and how can we implement those? How do we change from a fee-for-service reimbursement system to a value-based reimbursement system? How do we change the incentives? And then there's population health…"

2. REGULATORY CHANGES CONTINUE TO CREATE COMPLICATIONS. Population health refers to the segmentation of patients into different categories for the purpose of providing more effective care, or "outcomes," in a more efficient way. By adding millions to the insured population, the ACA greatly expanded the scope of population health.

"The Affordable Care Act obviously has caused a lot of disruption," notes James Gallas, managing director of Huron Healthcare. Gallas and other healthcare consulting leaders emphasizes that the ACA is not the only regulatory challenge. The surprising and confusing ICD-10 implementation delay this spring, for example, has exacerbated regulatory uncertainty. "When that kind of thing [the ICD-10 delay by Congress] happens," says Vreeland, "it's natural for providers to wonder, 'What's going to happen with this Affordable Care Act? Maybe it will be gone in six months, too."

3. THE INDUSTRY'S CHALLENGES EXTEND WELL BEYOND THE ACA. The most formidable industry challenge Vreeland mentions is not the ACA. "The first thing you need to look at is that our country faces an inevitable macroeconomic problem," he says. Vreeland notes that the country's budgetary challenges are smacking headlong into the fact that an outsized portion of federal discretionary money goes to Medicare and Medicaid, which provide the largest component of healthcare provider reimbursement.

"When you look at the various programs causing problems for our budget over long term, it's not the Social Security program—it's Medicare and Medicaid," he adds. "Those programs are going to have to get fixed one way or another, and providers recognize that it may end up happening on their shoulders … The provider sector is clearly facing a period of uncertainty. They're trying to do the best they can, but what the world is going to look like in the next two or three or five years is hard to say."

4. SOME OF THE INDUSTRY'S LARGEST CHALLENGES ARE MULTI-DIMENSIONAL AND CONFLICTING. Healthcare insurers are poised to gain tens of millions of new customers in the next few years thanks to the ACA. "That's a huge amount of new money flowing into the insurance industry," Hoffman notes. "So it's a growth industry—but they cannot manage along those lines. Insurers will lose money if they cannot operate more efficiently and in a way that satisfies patients."

Providers have operated for decades under a model in which they are paid based on services dispensed; in the decades, to come, they will be paid based on the value they deliver. This change has ripple effects that touch nearly every facet of strategy, people, process and technology. Wouldn't it be easier, for example, in most cases to e-mail your doctor and get an immediate response rather than scheduling an office visit? Of course it would, but physicians get paid based on office visits.

"We're in this odd period where healthcare financial incentives do not support the standard approach to customer interactions in 2014," notes Vreeland. Or, consider hospitals, which most large provider systems manage as a revenue-generating operation. Instead, these systems ought to recognize that hospitals represent high cost centers as well as a source of low customer satisfaction. Hospital systems should "start thinking about keeping patients out of the acute-care center, and thinking about that as a good thing," says Junghans. "That really turns the traditional model on its head."

FIVE CONSULTING OPPORTUNITIES
These topsy-turvy forces are pushing providers and payers to seek more—and more involved—assistance from their consulting partners. The industry's transformation, Hoffman says, "creates an increasable opportunity for consultants." The most notable of these opportunities include the following:

1. NEW MODELS AND NEW LEADERSHIP
In clinical terms, the search for new business structures and operating models resembles a search for a cure to a change-ridden environment. Strategy&'s Javanmardian says that providers are asking a "whole host of operating model questions—and the operating models they choose will have major implications on their people, processes and technology."

Lance agrees, pointing to a specific people challenge: physician engagement leadership. "Regardless of all the changes, physicians are still the people who are touching the patients and proving much of the care," he explains. "How do we get them more engaged and help them provide a different form of leadership. They've been clinically trained, but now the model has changed, and I would think that every part of their world feels like its moving. How do you equip them to lead in this new era of change?"

2. DATA AND INTEROPERABILITY
Costanzo and his EY colleagues coined the term "Managed Care 2.0" to describe the emerging way healthcare companies will deliver affordable, high-quality patient care via new risk-sharing methods. The challenge is that to achieve this, providers, insurers and pharmacies have to share data. Right now, the pharmacies and insurance companies have most of the data. "The providers who succeed in providing the highest quality of care will be those that work collaboratively with insurance companies and pharmacies to collect data," Costanzo says, "and then uses [subsequent data] analyses to understand the health of different patient segments.

Lance describes the predictive analyses required to make so-called population health improvements as a major opportunity. "We have more healthcare data than we've ever had in the history of the world, and that's not hyperbole," he says. "But how do we use that data to lower costs and improve outcomes? The [provider] alone does not possess the data it needs to perform the predictive modeling necessary to understand what's going to happen to the patient population."

3. M&A ACTIVITY
In a year of surging M&A activity, consolidation in the healthcare industry is off the charts. As of early May, roughly $638 billion worth of mergers or acquisitions had been proposed or agreed to by U.S. companies, according to a Wall Street Journal article citing data tracker Dealogic's figures. Healthcare industry M&A activity represented, by far, the largest portion of this activity—$125 billion worth, or about 20 percent. Gallas reports rising interest in Huron Health's post-merger integration services.

"Consolidation is here, and it's pushing more organizations together," Lance agrees. Many of the challenges bearing down on healthcare providers require greater scale to contend with; that requirement should sustain the pace of consolidation for some time. Vreeland believes that the minimum annual net revenue that health care systems need to attain to thrive, given all the changes enacting on the industry, will be roughly $5 billion. "I think we're going to have a bunch of $5 billion-and-up health care systems around the country," he says. "The days of the small $1.5 billion-a-year system are probably going to be over in the next five or six years. That's just the scale that's required to survive."

4. COST-REDUCTION
Javanmardian estimates that providers will endure a reimbursement decrease of somewhere between 11 percent and 30 percent in the next five years, primarily as a result of ACA. Melling and Gallas each cite 20 percent to 40 percent as the target range for cost reduction. Each of these consulting veterans stress that these coming cost-reductions: A) follow recent (and substantial) cost-cutting efforts; and B) will occur at a time when providers also need to improve quality. "You are expected to reduce your costs somewhere between 20 and 40 percent," Melling explains. "How do you deliver that in a way that does not become completely destructive to the organization while at the same time delivering on quality?"

5. TELEHEALTH… AND OTHER INNOVATIONS
In the past four years, telehealth firms have raked in more than $270 million in venture capital funding, according to a recent Wall Street Journal report citing IT research firm Mercom Capital Group. "Mobile technology is really coming into play, especially around things like telehealth and other ways that care will be delivered in a more cost-efficient fashion in the future," Costanzo notes. Some early examples of the Southwest-esque disruptors Lance describes have already appeared. Consumers can pay $1,500 per year to join MDVIP, a personalized healthcare program that provides immediate access to primary care doctors who provide remote care via the Internet and also develop personalized wellness programs. "You can e-mail your doctor and get a response right away," says Vreeland, an MDVIP member.

The challenge of harnessing these types of care innovations is threefold: they must be delivered safely (think of unregulated mobile health apps that could soon be downloaded from iTunes or Google Play), enhance patient satisfaction and integrate with existing technology environments that generally (and generously) require varying levels of optimization. "Some of these new technologies solve tremendous problems, which is truly great," says Javanmardian "But whatever the new technology is, it absolutely has to deliver the best care for the patient."

Melling agrees, sounding a stronger note of caution. "Anybody can download an application that promises improvements in health," he says, not that there is very little regulatory control over health-related apps as well as other forms of mobile-health technology. "If your application hasn't been approved from both a calibration perspective and an efficacy perspective, the end users don't know what they don't know," Melling adds, emphasizing that this issue marks one of many technology challenges healthcare companies face.

These technology issues—which represent only one of many different challenge domains—are completely different than the technology hurdles providers faced just a few years ago. Remember when physicians bristled at adopting electronic health records because they didn't see the value in doing so? That seems quaint compared to today's raft of never-seen-before challenges and opportunities—just ask any healthcare-consulting veteran.

"I've been doing this for 28 years," asserts Gallas, "and I don't think I've ever been busier."