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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
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Succeeding in the Era of Reform
1. Articulate Value
2. Improve Cost and/or Profitability
3. Expand Market
Murphy version of 80/20 rule…
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Value Patients
Payors
Physicians
Owners IDN, ACO
IPA, Partners
What Does Value Mean?
Different Things to Different People
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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.
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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)
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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
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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.
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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%
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Hospital Lab Using Hospital Billing
Department
Collections
Hospital Lab Outsourcing to Lab Billing
Expert
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Pricing Transparency. Push by payors, patients, and competitors to
steer business away from hospitals. Examples:
Aetna Patient deductibles
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Aetna
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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.
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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
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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.
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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.
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Expand Market Additional volume of newly insured. More competition for fewer independent
physicians. Counter-terrorism.
Define a Unique Competitive Advantage
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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
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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
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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.
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Porter Quote
“Companies imitate one another in a type of herd behavior, each assuming
rivals know something they do not.”
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Low Cost Lab Value Proposition
“No Frills” Service
Efficient Use of
Resources
Systems to Maximize
Profitability
Low Prices
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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
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“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
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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
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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
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Reconstructionist View of Strategy
Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School Press, 2005.
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.
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A New Value Curve
Four Actions Framework
Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School Press, 2005.
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?
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A New Value Curve
Four Actions Framework – Southwest Airlines
Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School Press, 2005.
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
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A New Value Curve
Four Actions Framework – Cirque du Soleil
Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School Press, 2005.
Create Refined experience Artistic music, dance
Unique venue Theme
Eliminate
Animal shows Star performers
Aisle concessions
Reduce
Thrills and danger
Raise
Price Multiple productions
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A New Value Curve
Four Actions Framework – Low Cost Lab
Source: Blue Ocean Strategy, W. Chan Kim and Renee Mauborgne, Harvard Business School Press, 2005.
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
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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
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Value
Payors
Physicians
Owners IDN, ACO
IPA, Partners
What Does Value Mean?
Different Things to Different People
Patients
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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
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Teach a man to fish… Living in Uncertain Times
Give a man a fish…
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Kathleen Murphy, PhD Chief Executive Officer
Chi Solutions, Inc. (734) 662-6363, ext. 439