July 25, 2018

In Search of Health System Value

by Chas Roades


Market pressures have led to the consolidation of healthcare into large, regional health systems. These systems must now begin to deliver on the promise of providing better value, even as consolidation continues


  • According to the Agency for Healthcare Research and Quality, by the end of 2016 there were 626 health systems in the US, defined asorganizations with at least one hospital and at least one physician group connected via joint management or ownership, and providing comprehensive care
  • Together, these systems accounted for nearly 70 percent of all US hospitals, and over 90 percent of all discharges
  • The largest 5 percent of health systems own 18 or more hospitals, and more than 100 systems operate across state lines


1. Regional health systems are still mostly about creating negotiating leverage

As hospitals have continued to consolidate into multi-hospital systems, we’ve seen the rise to prominence of regional health systems. In many parts of the country, three or four (if that many) systems dominate local markets, and account for most of the hospital discharges and an increasing proportion of ambulatory care delivery. According to the Commonwealth Fund, 90 percent of metropolitan markets had highly concentrated hospital sectors by 2016. This trend is mirrored by (and has driven) a parallel concentration of physicians, surgery centers, and other delivery assets in most markets. As we’ve written elsewhere, this consolidation trend is accelerating, and is likely to continue for the foreseeable future.

Industry observers and policymakers have expressed concern that this regional concentration of hospital systems has resulted in higher prices for care. That’s no surprise—the primary motivation for regional hospital consolidation has been to increase negotiating leverage in commercial contracting negotiations with insurance companies. We frequently hear from health system executives that their focus is on ensuring “relevance” and “sustainability” for their systems—which is really coded language for securing stable and increasing rates from payers. Often, hospital executives make a “cost-shifting” argument to justify this strategy”—the less we get paid by Medicare and Medicaid, the more we have to charge commercial payers. There’s a robust body of evidence that suggests cost-shifting is a myth. The fact that government reimbursement is relatively lower and under pressure is a separate phenomenon, albeit one that makes the “relevance” strategy that much more attractive for systems.

The evidence is overwhelming that promised cost savings and care improvements have not materialized with the growth of regional systems, at least not yet

Often the promise of “regionalization” of health systems is held to be the opportunity to better integrate care across the care continuum, and to generate cost efficiencies not available to smaller organizations or stand-alone hospitals. There’s no reason to doubt the potential for such savings—surely scale economies exist in healthcare as they do in most other industries. But the evidence is overwhelming that those promised cost savings and care improvements have not materialized with the growth of regional systems, or at least not yet.

2. Regional systems must push to create value beyond pricing

That’s not to say that regional health systems aren’t looking for ways to become more efficient and to deliver higher quality care. As regional consolidation has played out over the past decade, many systems worked to consolidate back office functions (billing and collections, supply chain management, marketing, and so forth) and most have at least begun the tortuous journey of integrating their operational and clinical information systems. To the extent these efforts have resulted in cost savings, those dollars have mostly been reinvested in growth (to continue to enhance “relevance”) or returned to shareholders (in the case of for-profit systems). Until recently, there’s been little incentive to pass cost savings along to consumers in the form of lower rates—payers have had the ability to raise premiums to keep pace with provider rate increases, and consumers have traditionally had little direct exposure to the actual cost of care delivery.

The changing environment has created an imperative for regional systems to create value from consolidation, rather than simply using leverage to drive higher rates

As we know, that’s changing fast. Employers have been more reluctant to passively accept higher premiums and have been increasing employees’ exposure to rate hikes via high-deductible benefit structures. This shift has reverberated back through the purchasing chain, and regional health systems are increasingly confronted with consumers looking for a better “deal” on health services, attempting to shop on “price” or self-rationing their care consumption. This dramatically raises the pressure felt by regional health systems to actually generate cost savings.

This changing environment has created an imperative for regional systems to create value from consolidation, rather than simply using leverage to drive higher rates. Most regional systems will need to pursue a mix of several strategies to create value:

  • Operational cost efficiencies, including consolidation of back office functions, better real estate portfolio management, better labor management processes, more effective supply chain leverage, and more standardized operating approaches;
  • Clinical cost efficiencies, like reduction of unwanted clinical variability, standardized use of expensive clinical supplies (implants, devices, and so forth), tighter management of drug formularies, and more efficient use of fixed clinical capacity (inpatient beds, diagnostic equipment, surgery time);
  • Appropriate clinical resource utilization, including team-based care (realigning the skill mix of clinical labor involved in care delivery), shifting site of care (using lower cost capacity where appropriate, including inpatient-to-outpatient shift, community-based care, and home-based care), and service rationalization (consolidating key services in single, higher-volume sites);
  • Better patient management, including elimination of duplicative care, reduction of over-testing and over-treatment, better coordination of care across settings and time, and more effective management of episodes of care and chronic conditions to ensure that the right care is delivered at the right time.

To accomplish all of this, systems will need to deliver on the common rhetoric of becoming “operating companies” rather than “holding companies”—capturing the value of bringing all the assets they’ve acquired together into one system of care. In particular, there are at least three important dimensions to this effort:

  • Creating corporate value—Systems will need to break down organizational silos and incentive structures that have largely been built to optimize performance at the local level. Managing every hospital, surgery center and clinic to its own profit/loss will not be sustainable, as that approach hinders the ability to put the pieces of the system together to maximize total system value.
  • Creating clinical value—Systems must run one clinical enterprise across a region, with one integrated physician organization managed and governed in a way that enables doctors and other caregivers to work toward common system goals. This doesn’t necessarily require a single incentive model; indeed, most successful systems will use a pluralistic model that includes employment, clinical integration, co-management, and other contracting vehicles. But those arrangements must all be designed to maximize system value, rather than the value of each individual physician organization.
  • Creating information value—Systems must create a common information environment across the region, so that clinical data flows freely across settings of care and is available where and when needed, to both caregivers and patients. This will require breaking out of the “walled data gardens” created by electronic health record systems to ensure true interoperability.

3. Consolidation will not stop at the regional level—and neither will opportunities to create value

All of that sounds hard, and it will be. Our work has taught us that even the highest-performing regional systems are far from achieving the entire vision just described. Making the work even more complicated, the revenue situation for most health systems will continue to deteriorate with government reimbursement cuts, a tougher—and smaller—commercial contracting market, and rising consumer activism. We predict that many regional systems will be challenged to “make the turn” in time, transforming their operations in time to create a sustainable cost structure that allows them to weather the changing market. The likely result? Even further consolidation.

Systems will need to deliver on the common rhetoric of becoming “operating companies” rather than “holding companies”—capturing the value of bringing all the assets they’ve acquired together into one system of care

Indeed, we are already beginning to see regional systems band together into super-regional structures, and even national-scale systems looking to combine into ever larger entities. While there’s reason to be skeptical about many of these deals—some of which we’ve heard described as “two drowning men holding onto each other to keep afloat”—the good news is that these mega-entities create even greater opportunities for value creation…if leaders are able to capture them.

Many of the sources of value described above can be scaled even further beyond the regional level. To be sure, managing an integrated network of physicians or coordinating patient care across the continuum are likely best done at a market or regional level. But standardizing clinical and operational processes, leveraging supply purchasing power, consolidating financial and marketing operations, and many other business processes can be made even more efficient with national-level scale.

Even some clinical care delivery might be best done at a “national level”—consider centralized delivery of telemedicine services and scaled delivery of highly specialized clinical services (transplants, for example). As digital tools continue to proliferate, and the ability to deploy telemedicine and remote monitoring enables even further decentralization of care delivery, there’s a sense in which healthcare is getting pulled “up and out” from the traditional hospital campus. We’ll have more to say about what this means for the delivery model in a future post but suffice to say that at the same time we’re seeing health systems consolidate, we’re seeing care delivery become more distributed. The best systems will find ways to combine those two phenomena to enable a transformation of how care is delivered—and how value is created by health systems.