PULSE: In the News

The Leavitt Perspective: Achieving Efficiency in Healthcare Must Bring Consolidation

By: Governor Michael O. Leavitt, Guest Contributor to Modern Healthcare

For generations, America’s healthcare system rested upon a foundation of human compassion. Despite the fragmentation and inefficiency, our system of care has been responsible for an inestimable amount of good in our country and across the world. Today’s economic realities, however, introduce us to another motivating global force—economic dispassion. Decades of chronic overspending by many countries, including ours, is forcing a reevaluation of health spending worldwide.

Coming to grips with the redundancies and inefficiencies in our system of care in the U.S. will include some emotional and financial discomfort. Margins will be squeezed. New efficiencies will be required for survival. Competitors will merge. Some local institutions with rich traditions won’t survive. But healthcare, like other modern industries, must follow the path of innovation, integration and consolidation in order to maintain quality while lowering costs. This is an inevitable and absolutely required process in re-balancing America’s economic equation.

Lack of coordination in providing healthcare is a major contributor to overspending. Ours has been a system without real care coordination. Integration is difficult, but necessary. Anticipating this change, hospitals, physician groups and payers have begun a quiet scramble to secure the role of general contractor.

Success as a general contractor in healthcare requires at least five key assets: an esteemed local brand; financial capital to develop necessary infrastructure; control of patient relationships; the ability to aggregate lives in groups; and the ability to manage risk. Since no one entity singularly possesses all of these features, healthcare players are joining forces and combining the necessary assets to be accountable for clinical and financial outcomes.

For instance, while hospitals generally possess a strong community brand and have enough capital to invest in the IT and administrative infrastructure necessary to attract and coordinate care, hospitals do not have control of patient lives, the ability to aggregate groups of lives, or experience taking risk. Many hospitals will seek to add these missing pieces by forming, merging or partnering with health plans and physician practice groups. The data makes this consolidation clear. For the first time, more than 50% of physician practice groups are owned by hospitals and that figure is growing.

Payers have a recognizable brand (not always favorable), sufficient capital, experience managing risk, and the ability to aggregate lives. Though they have relationships with patients, their level of patient control is questionable. This explains, in part, why insurers have begun to compete with hospitals in acquiring physician practices, clinics and service companies.

There have been a notable number of combinations among large health-services companies. They understand that to develop the capacity to improve care and reduce costs, they must scale and innovate in order to achieve needed efficiencies for payers and providers. Healthcare companies must follow a path not unlike other sectors where economic realities and technological advancement have made consolidation, integration and collaboration necessities for survival. Consumers have benefited because they received better value.

The Greek philosopher Heraclitus made famous the idea that nothing endures but change. While change is admittedly difficult, healthcare consolidation holds great promise. It will unleash a healthcare system that provides more attention to patients and more accountability to budgets. The combination of human compassion and economic dispassion will become the winning formula in healthcare.