A primer for tactical decision-making in times of deep change.

The problem at the core of the “volume to value” movement, the shoals it is running aground on, is this: How do you make it work economically? How does your organization make a living at it?

To put a finer point on it: How do you know that you can make it work? How can you guide your strategy with the maximum safety and opportunity for your organization?

Let’s explore that question.

You know how you made a living under the code-driven fee-for-service “volume” regime. Strategy was complicated, but the underlying question was simple: How do we do more of the specific items that we can get paid for? On that basis you could evaluate building a new bed tower, expanding a line of business like stents or births, or moving into a new business like retail care.

How you make a living under a “value” regime is a much more complex question, requiring a much more robust, extensive and continual analysis of which strategies will work best for you, in what order, with what investment. The questions are not general; they are specific. Because it is complex and will require continual discussion and re-shaping, you need a way for you and your strategy team to see that analysis, handle it, add to it and change it as the situation changes. You need a situation room.

The analysis required is not something all that new and strange, but it seems to be new to many of us in health care because it wasn’t necessary when things were more stable and expectable. What we need is an enhanced version of a revenue-based strategy analysis common in other industries. Let’s call it the 4-Dimensional Strategy Template.

Dimension One: Revenues

Step one: Get some big white boards. Yes, there are software dashboards that help you track the whole enterprise. But every dashboard is an expression of hundreds of assumptions about what data is important and what they mean. At the level of strategy, that is worse than useless; it is misleading. The whole point here is to get behind and beyond our usual assumptions.

starlings-looking-in-different-directions-on-wire-500x184When you are meeting with your strategy team, the brains of everyone in the room do not work precisely the same, at precisely the same speed at every level. Thinking fast is not always a virtue, as the fastest thinkers often get their speed by taking heuristic shortcuts that contain multiple assumptions. Turning the discussion into a visual discussion object that takes time to create gets the assumptions out in the clear and opens the discussion to everyone in the room.

The virtue of white boards is precisely in their limitation: They are only so big, so you can’t infinitely ramify everything. If you are running out of space, you can get a bigger board, you could write smaller, but eventually you have to chunk your thinking better so you can get it all on the board. This means you have to make choices, you have to clarify what you are thinking and examine your logical organization to get the chunking right.

Start by making a list of all your current revenue streams. A revenue stream is anything that you can separate out as a business. For instance, “in-patient room charges” is not a revenue stream, since it lumps together people in beds recovering from surgery, women recovering from giving birth, and people into the cancer center for tests. Rather, the cancer center, the surgical suites, the birthing center are separate revenue streams, because you could expand or contract them independently, separate them out as independent businesses, or even stop doing them.

Now go through the list, and assign a percentage to each revenue stream: What percentage of your business are you getting from that one stream? This will be inexact. In fact, a lot of this process will be inexact. It is the nature of the process to iterate through it to try to get all of it more precise and balanced over time.

Dimension Two: Sources

Now make a big grid. List your revenue streams down the left side. Across the top, list where you get the customers to fill that revenue stream. Do they come in through the emergency department? Are they brought in by local specialists? Did they come to you through a medical tourism program? Did they choose your birthing center because of your ads? Or because you are covered in a particular network? Again, you are looking for independent variables.

Once you have put up all the sources, put percentages under each one: In the boxes that correspond to the revenue stream “birthing center,” take a shot at what percentage show up there because of your ads, because of the network or through local OB/GYNS.

What we are scanning for here are high percentages, because they represent strategic vulnerabilities. If you are getting 80 percent of your income through one payer, you work for that payer. If for whatever reason it designates you a “Tier 2” institution, or muscles your reimbursements down, or anything else happens to disadvantage that revenue stream, you’re road carrion. Time to get a little trailer in Baja and eke out that 401(k) with whatever fish you can catch.

Similarly, if 80 percent of your customer sources come through the biggest employer in town, or any other one source, you are at the mercy of that source.

In stable times, that was not a problem, really. In rapidly changing times, it’s a huge problem, and the solution is to diversify your revenue streams and your sources of customers. For that we need the third dimension: Time.

(Before we move on: Take a picture of the board as a visual note, in case the janitor comes in and erases it overnight.)

Dimension Three: Time man-facing-clock-paris-349030_640

What you have up on the board now represents your present state. Start over with a new set of white boards. Duplicate the basic grid, but add possible future revenue streams, such as taking on a risk-based contract for an employer, opening onsite clinics, joining a captive accountable care organization, taking a risk-based Medicaid role, or beginning a medical tourism program.

Imagine a possible future state in which all of these revenue streams have reached their potential and are bringing in revenue and customers. Don’t put a time frame on this for the moment; just imagine that it’s all working. Assign to each revenue stream what percentage of your income might come from that one, then go across and assign a percentage to each box that represents where your customers are coming from.

At the same time, look at each of your present revenue streams and ask yourself whether you can broaden the sources of their customers. Maybe your spine and pain organization can establish a risk contract for the employees at the distribution center being built near the interstate, and that could bring in 30 percent of its revenue.

Work back through the numbers so that all your revenue streams add up to 100 percent. If spine and pain is bringing in more revenue, maybe it jumps from 10 to 15 percent of the whole, so adjust the other numbers to be less. If spine and pain is servicing the risk contract by being more efficient, effective and preventive, could that efficiency cause a drop in what otherwise would come through the emergency department?

We have entered the stage of “thoughtful fiddling with the numbers” — thoughtful, broad bandwidth working through the streams of data, assumptions and decisions. Make it real, make it real.

Now we are beginning to get a look at how the whole thing might work with a diversified set of revenue streams bringing in customers from an array of sources. But it’s obviously not a full picture, as so far we have been using the most easily available data and just plain guesses, and we have not looked at when these things might happen. Yes, it seems reasonable that if you offered priced, bundled products through your eye clinic and advertised them throughout the region, you might get X number of customers at a margin of Y per customer. But can we get more exact about that? And when can we expect that new revenue to arrive? For that we need the fourth dimension: Effort.

Dimension Four: Effort

This dimension will not fit on the white boards, because we need a whole discussion about each possible future revenue or customer source. For each one, we are going to ask: How much time, capital, human resources, executive attention and luck is needed to effect the change? How likely is it that we can garner all of that? How long will it take? So, how likely is it that the change can happen, and in what time frame? These questions require serious study and data gathering.

This is also where the cost and waste side appears. Traditionally we don’t give serious thought to the waste part, because even if a procedure is medically unnecessary and unproductive, we can still get paid to do it. In risk situations, this reverses: An unnecessary MRI that does not contribute to better outcomes is pure cost.

The cost part similarly alters the picture: If we can reasonably do medicine more efficiently, according to lean principles, with less waste, waiting, do-overs and so on, then the profit picture for each item changes considerably.

Work back and forth from the discussions of each item to the numbers on the boards, digging out your assumptions. Maybe you don’t need to build a stand-alone building for urgent care; maybe you’d be better off taking a lease at the mall. Maybe you could fund it operationally instead of mounting a capital campaign of some sort. Or maybe you could find a private developer to do a public-private partnership. How would that affect the cost, the margin, the patient stream?

Go back to the other three dimensions and adjust your expectations and estimates. Include factors you may have not thought of, and notice where you may have allocated some resources in two different places.

Is this a lot of work? It’s a lot of work. But all of it is necessary.

Look at the interactions between various parts. If you get really successful at an urgent care line of business, how much will that drive down the numbers of your emergency department? Which way might that affect your margin? How long will it take to get it up and running? Will we see the shift in revenues in the first quarter, the third quarter or two years from now?

Use these discussions to reshape the numbers in the time dimension. Eventually you will be able to build 90-day and annual calendars, laying out your expectations for when each initiative will be building, when it will need resources and when its revenue contribution will come on line.

Finally, study all your assumptions, seeking the points of greatest vulnerability. Looking at any one initiative, ask yourself: What change in the environment would make this unworkable? For instance, what if Medicaid expansion in your state is overturned? Or imagine that you are investing in a particular technology that costs millions. Could it lose favor medically, in regulation or in reimbursement (which has happened to other technologies and practices over recent decades)?

Iterate Iteratively

You will come out of this exercise with some obvious candidates for strategies you should start on (or enhance) immediately, others that will take some time, others that might be possible in the future if the market changes in the right way. At each stage of implementing new strategies, you will learn a lot about the real costs, the real difficulties and the real market response. At the same time, the environment will be changing. Bring that information back to the situation room and hash out how the vision shifts.

Doing this continually will get you as close as you can come to a real-time adaptable vision of where you are going, why, and what you need to do today to execute on it.


First published in the American Hospital Association’s Hospitals and Health Networks Daily, January 19, 2016.