By Joe Randolph, President & CEO, The Innovation Institute
Having grown up in Southern California as a life-long Dodger fan, it’s that time of year when I’m pulling for them to win the World Series. Having also spent over 30 years as a healthcare executive, I started thinking about how healthcare might learn from baseball. Are there correlations between major league baseball and the healthcare industry? As it turns out, baseball and healthcare systems have quite a bit in common, at least from a business perspective. First, they are both very slow to change and yet they must. They both have critics who want things to remain as they have always been. They have been locked into business models for decades with no real desire or perceived need to change.
Baseball is the only business enterprise in the United States that is allowed, by law, to be a monopoly. Healthcare, while not a monopoly, derives over 50% of its revenues from the government in the form of Medicare payments.
Only recently has baseball begun to be innovative in the approach to the game with defensive shifts and sabermetrics. Healthcare is still catching up to the needed changes in the industry and is beginning to look for new models that can deliver more cost-effective care. For decades both baseball and health systems have been risk averse and laser focused on statistics rooted in an old paradigm or model. Over time, both have had to find new ways to operate to survive and remain competitive. Healthcare is at least 5-10 years behind baseball in making the paradigm shift. Healthcare can learn from baseball!
In baseball, it took Billy Beane to come out with “Money Ball” where he applied different statistical and business analytics (sabermetrics) to improve the team’s performance and profitability. This was brought on because the new owner of the team (Oakland A’s) couldn’t afford to pay the high salaries after acquiring the team in the early 90’s. Beane had to find a way to lower costs and still field a team that could perform and win on the field. In the past, the teams in the larger markets who had the most money would spend big dollars on power hitters and pitchers and try to make it to the World Series. General Managers would focus on the teams batting average and thought that the players with the highest batting average would be the most valuable. Billy Beane took a different view and used correlation analysis to determine that on-base-percentage was a better indicator of a team’s ability to score runs than batting average. So Beane looked for players with a high on-base-percentage who he could acquire for less money than the player with the high batting average. The result was that he could field a team with one of the lowest salaries in the league and yet still make the playoffs year after year.
In healthcare, much like what Billy Beane faced in the early 1990’s, hospitals need to make dramatic cuts to operating expenses. The business model that has worked for decades is being disrupted. In the past, hospitals could make more money by filling beds with patients and leveraging the insurance companies for higher rates. That model won’t work anymore. Employers can’t afford to continue to pay the higher premiums and so the hospitals, much like Billy Beane, need to find new ways to deliver the care and still make a profit. Incremental cost reduction will only take you so far. Hospitals need to be smarter about how they solve this dilemma. So, what statistics or opportunities should the hospitals use in the new paradigm?
Some key drivers or recommendations for the new paradigm for healthcare systems include:
Finding new metrics that capture value creation including earnings growth, cash flow growth, and return on invested capital. Then use capital allocation to maximize the total return. Try to look at these not in the traditional sense but using only the statistics to see where it might lead you in your decisions. Then see if there are any learnings or ideas about how to change the business approach that haven’t previously been examined.
Much has been published on “Population Health.” In essence, population health is “the health outcomes of a group of individuals, including the distribution of such outcomes within the group.” Once health systems are paid to keep a defined population healthy, there is a paradigm shift from a “sickness” model to a “wellness” model. This requires health systems to re-tool their thinking about the business model to focus on improving the health of the population and lowering costs.
Invest in innovation! Transformational change won’t happen without it. Find problems that need solutions and seek new ways to resolve these issues. Innovation is a huge part of the solution! Over time, the most successful organizations in every industry are those that have invested in innovation. It can’t be embedded in operations; it needs to be independent and self-sustaining to flourish. Looking for a quick payback is the wrong approach.
Diversify away from inpatient care and “heads in beds.” Look for new revenue streams. Outpatient models and lower cost delivery settings may be more profitable and drive more value. Diversification can also lower your risk profile. If a health system is reliant on inpatient business to make a margin and reimbursement or costs shift, the health system could be vulnerable. Those that find the right balance can survive the peaks and valleys.
Annual Cost per Covered Life:
The shift from a “sickness” model to a “wellness” model requires a shift in mindset. If a health system is paid for keeping a defined population healthy then the measure of success is a focus on controlling costs and keeping patients out of costly hospital settings by keeping them healthy. The “annual cost per covered life” is a key metric in measuring success!
Lower Cost Settings:
In the past health systems were focused on inpatient care and spent billions on building large hospitals in an attempt to attract patients. In the new paradigm focused on wellness, the focus will shift to keeping the population healthy and out of the hospital with early intervention in lower cost settings.
Sustainability of the Mission:
Organizations that can stand the test of time are those that have strong Mission Statements with clear direction and focus. Most Health System’s Mission statements speak to “improving the health of the community or creating healthier communities.” The Mission Statement along with the Values of an organization are critical to its sustainability over time. This is the one area that can’t be compromised and shouldn’t change!
The healthcare organization that finds a way to be disruptive much like Billy Beane did, will survive. Healthcare organizations in general, tend to be very risk averse focusing on lean, six sigma, evidence based medicine, and standardization. The organizations that will thrive in the new paradigm will be the ones that think differently about their approach. I look forward to seeing who rises to the challenge. I do think the one’s that invest in innovation will be positioned for success and will be the one’s leading the charge and leading the change! Go Dodgers!