Tom Jacobs of MedHQ on Impact of ACOs, Value of Outsourcing

Now more than ever, healthcare providers must consider strategies that will enable them to maximize their ability to provide excellent patient care, while at the same time reducing cost. The June 7 Becker's ASC Review article by Leigh Page, "11 Things to Know About Accountable Care Organizations" describes Accountable Care Organizations (ACOs) as a key part of the "Reform" legislation that has the potential to be a game changer in the healthcare industry.

My take away from much of the healthcare reform discussion is that if the healthcare providers learn from regulated utilities, I think they will recognize the value of outsourcing more and more non-core services so that they can focus more and more on their core service: patient care. What does the regulated utility industry have in common with the healthcare industry? I'll explain.

Prior to the 1990s, a typical electrical utility was a vertically integrated business: it owned the power plants that produced the electricity, owned the transmission lines that sent the electricity to local communities, and owned the retail distribution system that delivered the electricity to the homes and businesses, i.e., the customers. During the 1990s, the industry went through a period of deregulation. This deregulation stopped short, however, of a full-fledged free market. The resulting structure was a "retail" utility whose prices are government controlled, that is supplied by a non-price-controlled "wholesale" generation industry. In other words, power plants (analogous to "providers" in the healthcare space) are not price-regulated; but have to compete in the wholesale market for the opportunity to deliver power to the regulated utility (analogous to the "insurance company" in the healthcare space) whose prices are government controlled. The result was massive cost cutting in the power generation industry that has resulted in stable, low cost electricity during the decade that followed.

The healthcare industry has gotten to a place that is similar in structure to the electrical utility business, albeit, it has arrived there from the opposite direction: prior to healthcare reform, prices were not government controlled (at least not to the extent that they soon will be); after healthcare reform, insurance prices will soon be largely government controlled. But, providers will still compete (at the "wholesale" level) for access to revenue through the accountable care organization structure.

Notice that, like regulated utilities, ACOs will be virtual monopolies in their respective "regions" (as stated in the first bullet of the Becker's ASC Review article, there will be "one ACO per region"); this is analogous to the regional utility. The only way governments will allow these monopolies is if they can also control price. As a result, like a utility, the ACO will be analogous to the "retail" point of access to the system through which price-controlled revenues flow to the providers. At the wholesale level, then, providers will offer services and compete for the revenues as demand is driven by the needs of the customers/patients.

So, what can healthcare providers learn from this? One of the successful strategies of wholesale electrical generation businesses (analogous, in this discussion, to the "providers" in the healthcare industry) was to put a laser-like focus on their core service areas. For a typical electrical power plant their core business is "operating" the plant, including the maintenance planning and management, that enables it to achieve maximum operations "up time," known as "capacity factor" in that industry. Everything else that was not core to the business was a candidate for outsourcing or partnering with best-of-class providers. Power generation companies outsourced many such non-core services:
  • design engineering services
  • employee leasing for worksite/contract staffing
  • IT services
  • human resources management
  • "best of class" providers handled specialty maintenance services

In healthcare, many providers already outsource or partner with best-of-class providers, such as:
  • management services (including capital financing)
  • pharmacy services
  • lab services
  • payroll and human resources administration
  • accounting services
  • billing and collecting services

What providers will never outsource, of course, is their core service: patient care.

Whether healthcare reform remains as currently enacted is an open debate. Bottom line, however, is that there is now tremendous pressure to reduce overall cost of healthcare services. The ACO structure would theoretically increase average reimbursement to areas that "deserve" more reimbursement (e.g., primary care), while squeezing and/or eliminating areas that don't "deserve" as much (e.g., wasteful or unnecessary diagnostic testing services); all the while overall reimbursement will decline. What providers should consider now, more than ever, is to learn from the power generation industry and outsource as many services as possible to eliminate distractions to its core function of providing excellent patient care at as low a cost as possible.

MedHQ, a professional employer organization and business office outsourcing service for healthcare, ASCs, surgical hospitals, imaging centers and other physician-affiliated businesses, is a provider of many of the non-core, but essential, services needed by healthcare providers. MedHQ offers "one throat to choke" and vendor consolidation. Learn more about MedHQ.

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