Health care reform is the new reality. All stakeholders are reading the fine print, and the tea leaves, and trying to identify what it all means. There are two big themes in the new law: First, more people will be covered but at lower reimbursement; second, there are seeds of change to shift the game from pay for procedures to pay for outcomes. All the rest is regulatory gobbledygook, aimed at making state insurance commissioners insane and giving the alternate universe that is Fox News something to be against.

How do hospitals prepare for these fundamental changes?

Fifteen years ago, I wrote a book called The Second Curve: Managing the Velocity of Change. It was an embarrassingly simple premise: Most businesses and most industries are going along quite nicely on their first curve (the base business, the business they know how to run on a daily basis). But they have a sneaking suspicion that it will be replaced by a second curve: a new business, or a new way of doing business, that is radically different from the first.

The dirty little secret of futurism is that you cannot predict the future, and there is a natural human tendency to overestimate the impact of phenomena in the short run and underestimate the impact in the long run. This causes multiple strategic errors: Companies jump too soon, walking away from all of the profit and revenue on the first curve; even more fatal, they cannot build the second curve and they end up not making it in the long run as the forces of change make them irrelevant in a new world. Or worse yet, the second curve puts them in direct competition with themselves or their best customers. Oops, what to do?

The benefit of writing a book is that people who read it ask you to come and give a talk because they resonate to the premise. The bad part is that you get to meet people who have even better examples of what you wrote than the ones in the book, and it's too late to include them.

What I Know Now

I gave a few hundred Second Curve lectures to many, many companies in many, many industries, and a lot of different countries over the last 15 years. I learned four big lessons that I didn't fully appreciate when I wrote the book.

Americans love the frontier. Every group I talked to was eager to start the second curve. I used to recommend as a strategy that CEOs give $50 million in startup money and a bunch of stock options to a bunch of crazy people in the organization to start the second curve. I thought it was an outrageous and provocative idea. Yet, in every session, there would be instant volunteers. Everyone wanted to be the future, even if it was risky, and even unlikely, and a little nuts.

Premature extrapolation. My old colleague Paul Saffo, the celebrated technology forecaster and master of the bon mot, once said, "Never confuse a clear view for a short distance." I redubbed that classic insight "premature extrapolation." Just because it is obviously going to happen doesn't mean it has to start immediately.

For example, in our work in the early 1990s for Pitney Bowes and the largest, most sophisticated postal services around the world, we built a forecast on the future of mail. Based on research, surveys and countless expert panels, we developed a forecast that mail would eventually start to decline in use because the two main underpinnings of first class mail (bills and statements on the one hand; direct marketing on the other) would migrate to electronic form. But our forecasts and scenarios also showed that in the United States, there was a high degree of attachment to paper-based mail in those two key areas.

We built careful monitoring systems with our clients so they could follow the true path of the first curve, even as they built the second curve. Mail in America grew slowly but steadily until 2007! If our clients had walked away from the first class mail stream, and bet the farm on the second curve too early, they would have walked away from nearly 20 years of steady, profitable growth.

Second curves take time to build. The key challenge of the second curve is that the business model is nearly always different from the first. But, most importantly, it involves a different culture, and cultural change does not happen quickly or easily. If you really want to have a different culture five years from now, you should have started 20 years ago. No kidding.

Most leaders can't deal with strategic schizophrenia. I was like Pollyanna when I wrote the book. I extolled people to manage on two curves. But I had precious few examples beyond IBM, which actually successfully managed the transitions from adding machines to mainframes, then mainframes to PCs, then PCs to the Internet, then the Internet to consulting services. Most organizations don't do well managing on two curves. Second Curve players (disruptive innovators, as Harvard's Clay Christensen calls them) are easy to find. But few know how to manage on two curves because the curves are so different; they have different cultures, people, heroes and incentives.

Reimbursement Reform

So, back to hospitals.

Expansion of coverage, albeit at lower reimbursement, is something a hospital can handle, but reimbursement reform is a new game. The legislation includes important pilot programs to promote accountable care organizations (which take full financial risk for the care of patients) and to encourage bundled payment experiments (where the fee for the hospitalization would cover immediate pre- and post-discharge care as well as the associated physician fees and any risk of readmission). These are but the beginning of a long, inevitable path to changing the reimbursement system to reward value, not volume. We have only just begun.

The future, in the long run, may be very different: You have to prepare, and you must start now, because if you don't, you're toast. But you will be in a world of strategic schizophrenia for some time to come.

Here's my best guess of what to do:

Integrate for accountable care. Take the building blocks of accountable care (financial risk for the care of patients, integrated medical staffs dedicated to high performance, performance measurement and management across the continuum of care, and a business model to sustain it all) and bring them together. Easy to say, hard to do. But this is your work.

Make care cheaper. Any way you cut it, making health care services cheaper will be a good thing. Cheap doesn't mean inferior or nasty. It means that it costs less. Like Wal-Mart with its superior, high-tech supply chain that delivers everyday low prices, hospitals that get ahead of the curves on aggressive cost management will be well ahead in any future.

Make care better. Be a maniac for measurement and performance improvement. You have to constantly strive to measure and improve, and everyone on your team needs to believe that, whether they work directly for you or not. Good morning, Doctor, let's chat.

Focus on outcomes. The bottom line of health care is great health outcomes for patients and populations—not profitable procedures, technically perfected for paying patients. Good outcomes may be death with dignity, or return to health status, or living well with chronic disease. Lose the scalpel; focus on the patients and the outcomes they want.

Innovate on the side. Successful second curves are built from pilots and experiments, often off to the side. For example, IBM's low-cost PC business was first built in isolation in Florida away from the dominant corporate culture. So, too, hospitals may have to pilot medical home initiatives and bundled payment experiments with small teams of innovators, to learn how to play a new game.

Flip the switch. Constantly look to the future: Build the culture and capacity for the second curve as well as the business model for a different game while doing your best to nurture the organization that brought you into the millennium. But then, you, the leader, have to determine when to "flip the switch" and focus the entire organization on that new game. That's leadership.

Ian Morrison is an author, consultant and futurist based in Menlo Park, Calif., and a member of Health Forum's Forum Faculty Speaker Service.