I entered medical school in 1990, at a time when it was still shockingly crass to advertise for any medical service. Managed care and other economic changes had begun, but the full impact of the “medical recession” hadn’t yet hit. As a medical student and resident in the 90s, I never heard a word about the business of running a practice or hospital. Clinical decisions were disconnected from finances and made purely on medical criteria. Up until then, there had been more than enough money in the healthcare system to cover costs, generously pay medical personnel, train new doctors, and provide free care to those who needed it. Financially and operationally efficient “business” was not necessary. However, by the time I was fully trained and in private practice in 1999, the medical recession had morphed into a new healthcare status quo: less revenue and higher costs every year. For me, understanding the business of medicine could no longer be ignored.
That downward pressure on revenue combined with upward pressure on costs continues to the present day for most medical organizations. Because these organizations’ core competencies lie in healthcare rather than business operations, they have been slow to do what other businesses experiencing an industry-specific economic downturn have done: get smarter about how they do what they do. As a result of this slowness to adapt to its new business environment, the U.S. medical system is not performing well medically or financially.
According to Gartner:
- The U.S. spends 18% of GDP on healthcare—more than any other country.
- The World Health Organization life expectancy ranking lists the U.S. as 37th in the world.
- The U.S. has one of highest infant mortality rates among developed nations (6 per 1000 live births).
- Adult and childhood obesity rates are among the highest in the world.
Today, regulations such as the Affordable Care Act show that the U.S. has begun holding the medical system accountable to deliver increased access and higher quality of care along with unprecedented medical and financial transparency. Value-based healthcare is here.
Some features of the new reality for healthcare are:
- Requirements for adoption of electronic medical records (EMR).
- Hospital payments based upon outcomes rather than services.
- Regulation to keep insurance premiums and Medicare payments low.
- Public and private payers are challenged to hold down costs while increasing access.
- Required publication of Medicare provider fees, resulting in increased price comparison shopping.
- According to Gartner, an unsustainable imbalance between those consuming healthcare and those paying for healthcare (shifting demographics and economics).
- Increasing shift of healthcare costs to patients.
Increasing emphasis on preventative care over more expensive treatments.
In this new era of value-based healthcare, financial factors and healthcare outcomes are moving to the forefront of decision-making for providers as well as patients. When physicians are made aware of costs of treatment choices, they tend to choose a less expensive option. Further, as patients become increasingly responsible for more of their healthcare expenses, they will continue to demand higher price transparency and shop for healthcare based upon value. Successful healthcare organizations will demonstrate excellent medical outcomes in combination with healthy balance sheets and clear justification of the fees they charge.
How does a legacy industry that faces unparalleled responsibility, regulation, and a uniquely labyrinthine economic environment meet these evolving expectations?
Just like many other industries have done, healthcare must employ powerful information technology such as ERP systems that integrate enormous amounts of data combined with smarter management processes throughout the organizations.
A healthcare system that adopts full integration by using ERP can combine smart business with world-class medical knowledge. If medicine is approached as a well-run business, then its product, quality of care, improves as well. If we continue to pretend that medicine is not a business, then quality of care will continue to decline.