I travel a lot. In fact, I fly so much that the airlines I frequent actually treat me fairly well. In my role I get to engage with provider organizations across the country and come to understand the unique dynamics of each market I visit. While it can be argued that the uniqueness of each market creates a highly variable health care supply chain that leads to significant inefficiencies, for me personally, the wide variation means the problems I’m trying to solve are always different and nuanced, which makes my work more enjoyable and intellectually stimulating. When you have seen one healthcare market, you have seen one.
Health systems are no longer safe
I work primarily with health systems (and have for most of my career) and I’ll admit that I have a bias toward working with them. I find the majority of systems to be filled with talented, mission-focused individuals who truly put the care of the community first. That being said, I worry a lot about their ability to evolve in a rapidly changing market. So many health systems still believe their only or primary competitor is the hospital across town. Unfortunately, health system leadership teams with this mindset are missing the forest for the trees. The biggest threats to health systems’ long-term viability over the next decade are not the competing hospital building out a new cancer center or cardiovascular center of excellence. Instead, they are:
- shifting payer mix resulting from aging demographics;
- stagnating rates from government and commercial payers;
- private equity and venture capital backed physician aggregators entering the market; and
- vertical integration of payers.
While there is a lot to be said about the impact of the first two items, for the purpose of this piece I’m going to focus on the latter two.
Because I get to see so many different markets, I’m able to witness how trends that are progressing across the country impact local markets and the different phases along these trends. One of the more interesting healthcare markets I’ve seen in my travels is Corpus Christi, Texas. I believe it reflects what many markets will look like in the near future if health system leaders continue to focus on their old business model, think about competition in a historical context, and don’t evolve.
Corpus Christi: a network battle
Corpus Christi is a two-health system town, each of which has its own hospitals in the market. The market also has a history of independent physicians who are highly competent in managing value-based contracts. One large national payer has deep roots in Corpus Christi and has had strong relationships with the independent physician community for a long time. Additionally, it is a market where a successful risk-taking physician practice, which began back in 1990, entered early on.
Over the last decade, vertical integration has occurred as the longstanding national payer started aggregating primary care physicians in its employed group and supporting an independent practice association (IPA) in the market. Another national payer’s subsidiary also employed a large medical group and extended services contracts to a number of other independent physicians in the market. In contrast, the two health systems in the market have not been nearly as successful as the payers in aligning physicians in the market, as shown below in Figure 1.
Figure 1. Approximate share of primary care physicians (PCPs) by aligned organization in Corpus Christi
|National payer employed group & IPA||National payer subsidiary employed group||Health system 1 employed group||Health system 2 employed group|
|Market Percentage of PCPs||50%||35%||10%||5%|
Additionally, partly because of their vertically integrated primary care base, the parent health plans have thrived, particularly in Medicare Advantage, which is the primary long-term value-creation vehicle for primary care providers. Both national payers have a combined 96% market share.
This market dynamic has created a very challenging environment for the health systems. Both systems were late to align physicians and as a result have relatively few employed or aligned primary care physicians in the market. Additionally, these systems find themselves hamstrung by fair market value (FMV) rules as the payer-employed and independent physicians are generating significant income from their value-based Medicare Advantage contracts. The health systems, which must abide by regulated compensation ceilings, simply can’t compete. This has led to an environment where the two hospitals:
- have become largely dependent on the vertically integrated physician organizations in the market for their viability;
- have limited ability to participate in obtaining more of the premium dollar and capturing value given their small primary care footprint and associated attributed lives; and
- will be forced to compete on price even more aggressively as the physicians in total cost of care contracts will transition referrals to the lowest cost facilities.
Historically, the focus of value-based contracting in the Corpus Christi market has been in Medicare Advantage. However, we are seeing an evolution as these physician organizations are starting to take on value-based commercial contracts—and large commercial payers may push out capitated models in the near term. This represents a significant concern to the health systems as utilization of the high margin commercial business will come down and the business will likely be moved to the lower cost provider (where one of the health systems will likely always have an advantage because of its national scale and intense focus on efficient operations).
Which market will be next?
Markets across the country are starting to evolve to resemble the Corpus Christi market. Massive amounts of capital are flowing into healthcare from Wall Street to aggregate primary care providers and transition them to value, and vertical integration has become a common strategy for many payers. To maintain relevance health systems must create strong alignment with primary care in their markets. But this strategy will require much more than simply developing clinically integrated networks. Health systems will need to support their physician communities in the transition to value through the deployment of people, processes and technology that allow them to participate in very meaningful value creation. Health systems that are not capable of supporting their network physicians in attaining strong outcomes and value participation are seeing physicians in their networks get picked off by aggregators with successful models.
The opportunity for primary care to be reestablished as the centerpiece of healthcare, and participate in the economics that come with it, has never been higher. If health systems don’t recognize this and help primary care on this journey, they will become highly marginalized in the health care ecosystem. Corpus Christi is a wonderful community and a great place to live—unless you are a health system operator.