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H E A L T H C A R E R E F O R

Successful Strategic Planning for a Reformed Delivery System

Alan M. Zuckerman, FACHE, president, Health Strategies & Solutions, Inc., Philadelphia, Pennsylvania

H ospitals and health systems continue to consolidate and purchase physician prac-tices; payment reform and quality initiatives are kicking into high gear; 123 new accountable care organizations are being rolled out; and workforce supply issues are emerging or reemerging. These are just a few of the challenges that call into question the enduring value of strategic planning in an environment characterized by increased uncertainty and greater and faster change. Can—or should—we try to plan for three to five years into the future when we do not know how healthcare reform will really affect the field? Shouldn't we be completely focused on immediate needs and initiatives?

While addressing the most pressing and immediate concerns and hot spots tends to be a natural response, leading organizations recognize that strategic planning, and the focus and prioritizing that it calls for, is more important now than ever before for several reasons:

• Increasingly scarce resources require short- and long-term allocation perspectives.

• The larger, more diverse, and more geographically dispersed organizations currently being formed benefit greatly from the alignment that results from strategic planning.

• Uncertainty and fast-paced change call for adaptability, which research demonstrates is greater when there is a clear direction, strategy, and alignment among organizational leaders.

To maximize the yield from strategic planning in these turbulent times, the strategic planning process is being adapted to be more relevant to contemporary organizations. Healthcare leaders are advancing strategic planning from a periodic exercise to a more continuous and integrated (with other key management func- tions) strategic management process (see Figures 1 and 2). This type of process is dynamic and increases an organization's capacity to deal with "curveballs, " emerging developments and threats, and change in general.

A D D R E S S I N G H E A L T H C A R E R E F O R M A N D O T H E R E N V I R O N M E N T A L C H A L L E N G E S A framework that identifies and describes key attributes of major environmental challenges affecting nearly all healthcare providers today is shown in Figure 3. Healthcare reform challenges are significant and complex, with major direct and

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IMPLEMENTING HEALTHCARE REFORM

F I G U R E 1 Transitioning Your Strategic Planning Process to Strategic Management

Periodic Strategic .. Planning ^ ^

' Plans prepared every 3-5 years

' Implementation is unsystematic

' Operations I divorced from

planning ' Finance can be at

odds with planning

Ongoing Strategic Planning

Full plans eve: 3-5 years; updates annually Implementation is managed Finance/ operations interfaced with planning Management unsystematically strategic

Strategic anagement

Continuous, evolving plans

• Continuous, managed

Woperations integrated witli planning Management mostly strategic

F I G U R E 2

Annual Strategic Management Process Components

Environmental

assessment

update

Organizational direction review

Strategy formulation update

Input to capital and operating budgets

Interface with finance and operations during budget and annual management plan preparation

Review and adjustment as needed

Ongoing implementation of plans developed Quarterly (at least) leadership review of progress and adjustment as needed

Ongomg review and testing of opportunities against strategic plan

Adjustment of plan's strategies and actions as needed

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louRNAL OF HEALTHCARE MANAGEMENT 59:3 MAY/JUNE 2014

indirect financial implications, particularly as commercial insurers follow the lead of the federal government in payment reform. In all likelihood, future reimbursement rate increases will lag health cost inflation by at least a few percentage points. This factor alone forces providers to significantly reduce costs while upping their competi- tiveness to try to maintain or increase revenues—a twofold challenge.

While historically strategic planning in healthcare has focused nearly exclusively on growth through increasing share and enlarging the market, strategic planning today includes five new imperatives (see Figure 4):

1. Sufficient scale and scope or niche play: Organizations will need to scale up or focus in order to survive in the future. For most, scaling up will involve inorganic growth through mergers, acquisitions, and new partnerships. In major metropolitan areas, a limited number of consolidated organizations will emerge, probably with annual revenues in excess of $2 billion. These organizations will be the ones that can meet the integration, alignment, and value challenges that result from healthcare reform.

2. Cost competitive: Being cost competitive has never mattered before, but with new underlying financial pressures, all organizations will need to continually reduce costs for the foreseeable future by about 3-5% annually. Competition for patients will also increasingly be based on ability to provide value (quality + service H- cost).

F I G U R E 3 Future Industrywide Development Assumptions: Main Drivers of Industry Change, 2014-2018

Direct Impact

1 Economic decline and slow recovery

2 Healthcare reform • Payment for value • Transparency and

technology requirements

• Coverage expansion • Medical loss ratios and

tax increases for payors • Declining

reimbursement 3 Increasing competition

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• Federal and state budget deficits, funding cuts and cost-containment efforts

• Reduced capital access

• Competing on value • Substantial new overhead • Increasing proportion of provider

volume from low-margin patients • Cost-shifting from insurers to

providers and patients • Real integration

• Limited population growth expected

• Increasingly large, well-heeled competitors

• Increased marketing and ambulatory network developments

Major Implications for the Future, 2014-2018

Horizontal integration: Hospital/system consolidation

Vertical integration: Continuum of care including

insurance products

Physician alignment: Employment; large physician

groups

Payer consolidation: Commerical payer

consolidation

Value competition: Relative cost and quality

performance

The ultimate implication is the widespread proliferation of tightly integrated (and eventually dosed or near-dosed) systems.

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IMPLEMENTING HEALTHCARE REFORM

F I G U R E 4 Strategic Imperatives to Win Under Heaithcare Reform

•ti SufficientScale andScope

3. Demonstrated quality: Quality is part of the value challenge, and it is increasing in importance with reimbursement impacts from the federal government and the initiation of quality incentive-based contracts with certain payers. As quality measurement improves, the focus will shift to outcomes and away from the current structure and process measures.

4. Exceptional service: Also part of the value challenge, a focus on exceptional service has caused nearly all organizations to materially raise their game over the past 10 years. Since healthcare is fundamentally a service business, rigor in this area will continue to be a key aspect of competitive success in the future.

5. Real integration: Success in dealing with cost competitiveness, quality, and service challenges in particular will necessitate not just having all the players or parts of a system of care but knitting them together in a truly integrated manner across the continuum. As healthcare organizations move toward population health approaches and are called on to take financial risk for the populations covered, the ability to provide an integrated, patient-focused product will be critical.

S T R A T E G I C P L A N N I N G I N A C T I O N U N D E R R E F O R M How one health system approached the strategic imperatives challenge is illustrated in Figure 5. This organization consolidated clinical and service quality into one imperative. The figure illustrates a number of aspects of its strategic challenge, most notably in the

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JOURNAL OF HEALTHCARE MANAGEMENT 59:3 MAY/JUNE 2014

F I G U R E 5 How Can We Best Address the Four Strategic Priorities in the Next Five Years?

Priorities

Demonstrated quality and exceptional

service

Cost connpetitive

Real integration

Sufficient scale and scope

Our Influence/

Control Over Future

State

Primarily internal

Both internal and external

Our Gap (Current

vs. Future)

' '̂ ^

•

"•'

'¿¿>

What Is Required to Address Gap

Commitment exists; step up

efforts

Commitment exists; continued strong emphasis

needed

Commitment exists; step up

efforts

Time for building scale is long; need to start

soon

Estimate ot Our Current Position in the Metro

Area'

5 •

6 m

4 •

2 •

What Is Our Organization's

Desired Future

Position?'

^ 8-9

^ 7-8

^ 7+

Strategies to Accomplish Priorities

• Standardized care

• Physician support and engagement

• Culture change

• Board support of changes required

• Focus and execute

Inorganic growth/ system building or

joining

"1 = bottom 10th percentile; 5 = average; 10 = top 10th percentile.

estimate of its current position, in the leadership team's view of the desired future position, and in the key strategies to accomplish these priorities: standardized care, physician support and engagement, culture change, board support of (difficult and politically sensitive) initiatives and decisions, and focused execution (note that the key strategies for the first three priorities are the same; see column 6 in Figure 5).

As the leadership of this healthcare system discussed, the strategic imperatives for most healthcare organizations today will be similar. How well they are addressed, and how quickly, will distinguish the successñil organizations from those that struggle.

C O N C L U S I O N Strategic planning, or better yet, strategic management, is an increasingly important discipline in today's rapidly changing healthcare environment. Addressing the challenges of healthcare reform is paramount, and the interplay of other market dynamics poses additional complications. Strategic management allows leaders to exert a greater degree of control or influence over these external forces and steer their organizations toward a new fiiture, even though it may have many uncertainties.

For more information about the concepts in this column, contact Mr. Zucker- man at [email protected].

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