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HCAD Chair Report

HCAD Chair Letter 
Spring 2015 

This is a fascinating time to be studying the health care industry. The big topic today is the movement from "volume to value." How do we transform our health care system from rewarding beds filled and tests ordered to one that rewards the actual production of health? How do health care organizations handle the dynamics as the business model gets flipped on its head? If they move too fast to a value-based world, they risk putting themselves out of business. If they move too slowly, they risk being left behind. And what exactly does this value-based world look like? 

These are some of the questions we have been engaging our students with this year. Just about everyone agrees that the traditional fee-for-service world is not doing a very good job of utilizing our limited health care resources. It creates incentives to overconsume health care from both the demand and supply sides of the market. If you consider all the things that produce health such as lifestyle, medical care, environment, education, socioeconomic status, etc., medical care accounts for only about 20 percent of health production. Yet, we currently put about $3 trillion per year into health care and much less into the other areas. Thus, we practice "flat of the curve medicine" in the US, meaning that the last dollars we put into spending did very little to actually improve our health, and if we move money from health care into some of the other factors, we would achieve a higher level of health status. 

This is an issue that we have known about for decades, yet we have had little political or economic traction to change this. With the implementation of the Affordable Care Act and other market-based reforms, there is hope that this might be changing. As I see it, there are two alternative paths to a value-based world. On the one hand, there have been many recent supply-side innovations. These are so-called value-based purchasing programs that give the providers incentives to more efficiently provide care for their patients. These include Medicare's Value Based Purchasing program, bundled payment, shared savings programs, and other programs that move towards a fully capitated reimbursement model. In these models, the supplier holds varying degrees of the risk and to the extent they can more efficiently produce health, they receive a larger share of the premium dollar. This movement gives providers incentives to more closely integrate with other providers. Thus, we see a huge push towards both vertical and horizontal integration. Instead of the typical siloed providers, hospital systems, physician groups, post-acute care providers, and payers are aligning themselves in various ways to take advantage of the economies of scale and scope that these new payment models afford. As a result of this movement, we expect to see increased concentration of providers and the health care landscape will be characterized by a few very large health care systems. While this will allow them to take advantage of the cost savings due to better coordination, the danger is that it will also give them the market power to push prices higher increasing the threat of further regulatory control in the industry. There is a tenuous balance between coordination and competition. 

At the same time, we are also seeing the rise of consumerism in health care. These are demand-side programs that give consumers the incentive to more efficiently produce health on their own. More than 20 percent of employer-provided insurance is now high deductible plans with a savings account option, and around 60 percent of workers in firms with fewer than 200 workers have a $1,000 or higher deductible. Employers are moving towards private insurance exchanges, direct primary care is becoming more common, and narrow networks are becoming more and more predominant. All these movements are shifting the risk to the consumer to more efficiently produce health. This is causing a large influx from nontraditional players in the health care arena as consumers are demanding care that is centered around the patient's needs rather than the provider's. We are seeing a huge influx of venture capital investment around this as DIY medicine and other types of innovation are appearing aimed at allowing the consumer to be his/her own shopper. 

Note that these two movements (demand side vs. supply side) may not be compatible. In a capitated world, the providers hold the risk and are incentivized to create large integrated systems that can be a one-stop shop for the consumer. Providers will need to find ways to engage the consumer, keep them in-network and coordinate their care. However, in a demand-side world, the consumer would hold most of the risk of producing health, would push for increased transparency, and would increase demand for non-health care ways for producing health. Rather than a large integrated system, this may push providers to become "focused-factories" specializing in doing a few services very well. This would result in a much less integrated health care system which is much more consistent with other sectors of the economy where the "invisible hand" will be able to do its thing. 

So note that not only are we moving away from a volume-based system towards a value-based system, there may also be two alternative paths to get there. In addition to organizations needing to navigate the chaos zone between volume and value, they need to be able to navigate two alternative routes to get there. From a strategy standpoint, this implies health systems need to be even more nimble and aware of where things are headed than ever before. 

Our classes at Trinity have been exploring many of these issues and we have had a lot of fun discussing these ideas. We are emphasizing innovation and out-of the-box thinking. For example, our On Campus students were challenged in a joint project with my economics class and Shay's health policy class to identify a problem area in the system and to design a solution as a start-up firm to that problem by presenting in a Shark Tank presentation. We did our first "Tiger Tank" competition just recently and it was a lot of fun to see some of the creative solutions they generated. Some of them are receiving serious attention as you will see elsewhere in this newsletter. Whether they are part of a large health care system, or are entering the venture capital world, our students need to be innovative thinkers who can use their creativity to solve the many problems ahead. 

I would love to hear your thoughts on these issues. As I said, this is a very exciting time to be a student of the health care industry and hopefully we all consider ourselves as such. We would love to engage our alumni in creative ways as our industry evolves. Thank you for your support of the program: our alumni are a key component of what makes Trinity special and are critical to our future success. 

Edward J. Schumacher
Professor and Chair


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