Bending the Cost and Revenue Curves - Executive War College · Reconstructionist View of Strategy Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School

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Bending the Cost and Revenue Curves D

OLL

AR

S

TIME

Everyone in healthcare is

trying to figure out how to bend

the cost and revenue curves


Succeeding in the Era of Reform

1. Articulate Value

2. Improve Cost and/or Profitability

3. Expand Market

Murphy version of 80/20 rule…


Value Patients

Payors

Physicians

Owners IDN, ACO

IPA, Partners

What Does Value Mean?

Different Things to Different People


80/20 of Cost and Profitability   Benchmarking “gotchas”:

  Comparison to labs with different test menus.   Comparison to labs without comparable

outreach volume.   Profit and loss (P&L) statement.   Collections.   Pricing.


Benchmarking – Impact of Test Menu

Before TCI Adjustment Lab A appears to be a better performer than Lab B, having a supply expense per test of $0.87 less than Lab B.

0 2 4 6 8

10 12

$1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00

Spread: $0.87 Supply Expense per Test

Unadjusted

$1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 Peer Group, Unadjusted (n=24)

Spread: $0.87 Lab A (TCI = 1.02) Lab B (TCI = 1.27)


Benchmarking – Impact of Test Menu (cont.)

After TCI Adjustment After adjusting for test complexity, the supply cost of the two labs is essentially the same (difference of $0.01).

Supply Expense per Test Adjusted

- 2

6 8

10 12

$2.50 $3.00 $3.50 $4.00 $4.50 $5.00 Peer Group, Unadjusted (n=24) Peer Group Adjusted by TCI (n=24)

Lab B (TCI = 0.95) Lab A (TCI = 0.95) Spread: $0.01

$1.50 0 2 4

$1.00 $2.00


Impact of Peer Group Selection for Outreach Labs If you have a high percentage of outreach tests and are not compared to labs with similar outreach volume, you will look like a poor performer.

Metric Percentile Performance1,2

Comment Standard Peer Group

Outreach Peer Group

Unit Cost 30th 73rd Cost of outreach infrastructure

Productivity 29th 67th Additional FTEs associated with

outreach infrastructure

1100th percentile is top performer. 2The same lab compared to two different peer groups.


Have a Profit and Loss Statement

  Created by Finance.   Minimum distribution

quarterly.

Outreach Statement of Operations For the Year Ending December 2012

in (000's) Billable Tests 847

Gross Revenue $ 52,588 Contractual Allowance (40,075) Net Revenue - 3rd Party 12,513

Client Billed Revenue 350 Other Revenue (6)

Total Operating Revenue 12,857

Direct Expense: Outreach Labor Expense 2,220 Outreach Supplies 308 Courier Expense 50 Miscellaneous Direct Expenses 243 Specimen Processing Labor 187 Testing Supplies 1,898 Reference Expense 2,062

Total Direct 6,969

Gross Margin 5,889

Indirect Expenses 1,212

Cash flow from Operations $ 4,677

Additional Laboratory Fixed Expense Allocation * 2,002 Total Expenses 10,183

Fully Loaded Contribution Margin before Indirect Expenses $ 2,675

21%


Hospital Lab Using Hospital Billing

Department

Collections

Hospital Lab Outsourcing to Lab Billing

Expert


Pricing   Transparency.   Push by payors, patients, and competitors to

steer business away from hospitals.   Examples:

  Aetna   Patient deductibles


Aetna


Impact of Hospital Pricing on Patients

Note: All dollar amounts have been rounded to the nearest dollar. 1Average Hospital Charge is approximately 6 times Medicare and assumes five laboratory tests, including high end testing. 2Average Hospital Reimbursement is estimated at 45% of hospital charge. 3Average Commercial Laboratory Charge is approximately 3.5 times Medicare. 4Average Commercial Laboratory Reimbursement is estimated at 90% of the current Medicare Allowable.

Average Hospital Charge1

Medicare Allowable

Hospital Lab Reimbursement from Managed

Care Payer2

Average Commercial Lab Charge3

Commercial Lab Reimbursement from Managed

Care Payer4

Total Lab Test Charges $562 $94 $253 $329 $84

Patient Out-of-Pocket Expense   20% Co-Insurance   $1,000 Deductible (Not Met)

$253 $84

Patient Out-of-Pocket Expense   20% Co-Insurance   Deductible (N/A or Met)

$51 $17

Patient Disincentive 3 times higher -

Out-of-pocket cost to patient is 3 times higher at hospital.


Conversion to Independent Lab Fee Schedule

$9.2 M

$22.4 M $14.98

$10.38

$9.00

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

$0

$5

$10

$15

$20

$25

Ove

rall

Cos

t Per

Tes

t

Ope

ratin

g In

com

e In

Mill

ions

Operating Income Overall Cost Per Test

  Cumulative Operating Income: $126.3M over ten years

  30% reduction in unit costs over ten years


Ultimately About Reducing Costs   Many factors contribute to profitability and you

might get some one-time hits (such as improving collections), but in the end it will come down to a relentless discipline of reducing costs.

  Every lab has opportunity:   Things you don’t know.   Things you know but don’t want to do.


Why Things Stay the Same…

Most people prefer a problem they can’t solve to a

solution they don’t like…

Source: Communication!, Lee Thayer, 2009.


Expand Market   Additional volume of newly insured.   More competition for fewer independent

physicians.   Counter-terrorism.

Define a Unique Competitive Advantage


Ideas for Competitive Advantage   Michael Porter—“how to” of strategic positioning.   Pick some characteristic or, even better, multiple

interlocking characteristics that make you unique and that cannot be easily copied.   e.g., Southwest Airlines


Southwest Airlines – A Low-Cost Provider

©Harvard Business Review, November-December 1996.

No meals

High level of employee

stock ownership

Flexible union

contracts

15-minute gate

turnarounds

Automatic ticketing machines

Limited use of travel agents

No connections

with other airlines

No baggage transfers

“Southwest, the low-fare

airline”

Very low ticket prices

Lean, highly productive ground and gate crews

High aircraft utilization

Frequent, reliable

departures

Short-haul, point-to-point

routes between midsize cities and secondary

airports

Limited passenger

service

High compensation of employees

No seat assignments

Standardized fleet of

737 aircraft


Competitive Advantage (cont.)   Competitive strategy “is about being different—it

means deliberately choosing a different set of activities to deliver a unique mix of value.”

  Idea is to build “fit”—a series of interlocking activities to get the strongest competitive advantage; cannot be easily copied.

  Also means consciously choosing not to do certain things.

  Have to make tough choices—cannot straddle two positions. Neither will work.


Porter Quote

“Companies imitate one another in a type of herd behavior, each assuming

rivals know something they do not.”


Low Cost Lab Value Proposition

“No Frills” Service

Efficient Use of

Resources

Systems to Maximize

Profitability

Low Prices


Continuum of Care Value Proposition

Serve all market segments within a defined geography.

  Complete history—better patient management

  Eliminate duplicate testing

Medical Home

Long-Term Care

Hospital

Physician Office


“Smart” Lab Value Proposition

High Tech

Lab as a Partner in Managing

Health

Identify Patients with Unmanaged/

Poorly Managed Disease

Pathologist Consultation

Sophisticated IT Platform

Meaningful Reports

Identify Patients at

Risk for Disease

*More sophisticated model—two related but separate activities.

Right Test Right

Time

Right Sequence

Patient Doctor

Test Algorithms


Is Value Sufficient?   Do we have to choose between low cost and high

quality?   Maybe we can have both?   Edward Demming—father of quality.   Blue ocean theory.

Red Ocean Blue Ocean Head-to-head competition for

shrinking profits in a bloody “red ocean”

Focus on value innovation makes the competition irrelevant and opens up new, uncontested market

space


Value Innovation

The Simultaneous Pursuit of Differentiation and Lab Cost

Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School Press, 2005.

Value Innovation

Buyer Value

Costs


Reconstructionist View of Strategy


Red Ocean Blue Ocean

Compete in existing market space. Create uncontested market space.

Beat the competition. Make the competition irrelevant.

Exploit existing demand. Create and capture new demand.

Make the value-cost trade-off. Break the value-cost trade-off.

Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost.

Align the whole system of a firm’s activities in pursuit of differentiation and low cost.


A New Value Curve

Four Actions Framework


Create Which factors should be created that the industry has never

offered?

Eliminate Which of the factors

that the industry takes for granted should be

eliminated?

Reduce Which factors should

be reduced well below the industry’s

standard?

Raise Which factors should be raised well above

the industry’s standard?


A New Value Curve

Four Actions Framework – Southwest Airlines


Create Friendly service

Frequent point-to-point departures

Eliminate Meals

Lounges Seating choice/class

Hub connectivity

Reduce

Cost approximating transportation by car

Raise Speed versus car

Efficiency Number of flights/day


A New Value Curve

Four Actions Framework – Cirque du Soleil


Create Refined experience Artistic music, dance

Unique venue Theme

Eliminate

Animal shows Star performers

Aisle concessions

Reduce

Thrills and danger

Raise

Price Multiple productions


A New Value Curve

Four Actions Framework – Low Cost Lab


Create

“LabMart” “DollarLab”

Eliminate Phlebotomy

Multiple courier pickups Same-day TAT

Weekend service

Reduce Price

Geographic coverage Difficult clients

Raise Standardization

All specimens barcoded Batch testing - 3rd shift

Client qualification criteria


Low Cost Lab Value Proposition

“No Frills” Service

Efficient Use of

Resources

Limited Geographic Coverage

One Courier Pickup Per

Day

No Same-Day

Service

No Stats

No Phlebotomy

No Weekends

Standardized Operational Procedures/Processes No Home

Services

Systems to Maximize

Profitability

Selective EMRs

Drop Clients with

Errors (rework)

Set High Minimum

Volume/Day Standards

Low Prices


Value

Payors

Physicians

Owners IDN, ACO

IPA, Partners

What Does Value Mean?

Different Things to Different People

Patients


Porter’s Solution for Healthcare

Source: The Strategy That Will Fix Health Care, Michael E. Porter and Thomas H. Lee, Harvard Business Review, October 2013.

The strategic agenda for moving to a high-value healthcare delivery system has six components; all designed around the patient.

They are interdependent and mutually reinforcing.

Progress will be greatest if multiple components are advanced together.

Build an Enabling Information Technology Platform 6

1 Organize Into

Integrated Practice

Units (IPUs)

3 Move to Bundled

Payments for Care Cycles

4 Integrate Care

Delivery Across Separate Facilities

5 Expand

Excellent Services Across

Geography

2 Measure

Outcomes and Cost for

Every Patient


Teach a man to fish… Living in Uncertain Times

Give a man a fish…


Kathleen Murphy, PhD Chief Executive Officer

Chi Solutions, Inc. (734) 662-6363, ext. 439

[email protected]

Documents

Bending the Cost and Revenue Curves - Executive War College · Reconstructionist View of Strategy Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School