With costs spiraling out of control, and quality lagging behind that of other developed countries, it's clear that health care needs to change. But because many hospitals and systems are uncertain about the best way forward, some have adopted a watchful waiting approach. This is a risky strategy, however, and providers may find themselves too far behind to catch up.

Boards have an important role to play in leading this complex transition. In partnership with organization executives, trustees need to ensure that they focus on the right issues, ask the right questions and know when they are receiving the right answers.

Lessons from IBM

Health care is undergoing what ultimately will be a radical transformation, and providers across the continuum are struggling with the turbulence. Fortunately, we can learn from organizations that navigated transformative change in their industries, such as IBM's turnaround in the early 1990s. The challenges its leaders faced, their missteps and the eventual restructuring that proved vital to the company's new business model offer valuable lessons for health care leaders facing upheaval today.

In the mid-1980s, IBM had achieved market dominance as a mainframe computer company. It helped large companies install complex, mainframe-based computing systems. But leaders underestimated — even disregarded — the disruptive threat of PCs to the mainframe business. In a few years, IBM found itself in serious trouble. In 1991, the company began posting substantial losses, and by 1993, IBM had lost $16 billion, and company leaders were making plans for liquidation. IBM had ignored the warning signs that the market was moving away from mainframes, clinging to the belief that the business computer was, and always would be, the big box.

After coming close to filing for bankruptcy, IBM reinvented itself by building on its strengths and the advantages centered around the services and software it provided, rather than the hardware. Company leaders studied the market and determined that an integrated approach to providing high-margin software and services would reinvigorate the organization. Although the transformation process was not completed during the 1990s, by 1995, the company was back on solid financial footing and began growing again.

The lesson for board members of any company dealing with the challenges of being part of an industry in transition is that smart, experienced leaders of highly successful companies can fail to address major change in their market and cause the company to fail.

Start with Bundles

This transition is driven by a fundamental problem: Today, health care is a volume business. The fee-for-service payment model does not align with the goal of better health outcomes at lower cost because it rewards volume instead of value, and someone else pays. Hospitals and systems need to prepare to shift from today's volume-based model to a future, value-based one that will deliver better health outcomes at lower cost. The requirements for ensuring better care have implications for hospital leadership.

A shift to more accountable care means transferring responsibility for outcomes, increased sharing of risk for costs, and increased gain-sharing as improvements are realized. Creating different incentives and focusing on outcomes-based performance will require a coordinated effort by all stakeholders. Payers already are engaged in changing the way providers are paid. In the broader context of constrained resources, all those who pay for care — including patients — are increasingly focused on the value they receive.

One approach already in use is bundled pricing. Johns Hopkins Medicine, SSM Health Care and other systems are providing value to stakeholders by using a bundled price, which is not necessarily the least expensive, for services in certain areas. These providers are demonstrating the value of their services in terms of high-quality care and patient outcomes to compete for patients on a national basis — redefining the nature of competition.

Creating a bundled price is a difficult undertaking. The hospital or system must identify the key drivers of treatment cost and quality variability, which requires the ability to manage data, people and resources. Then, it must develop the right financial and clinical infrastructure (that is, predictive care paths and evidence-based medicine) to deliver a standard set of services.

Providers must ensure that treatment protocols are followed in a consistent fashion to reduce practice variability. Mechanisms for managing variability enable the organization to implement fiscally safe new pricing. Providers also will need to define the economic and clinical components of value they provide to patients, payers and employers, which involves developing the data needed to demonstrate better health outcomes with commensurate value for the price.

This business model already exists in other areas of health care. Lasik surgery and cosmetic dermatology are examples of market-based, patient-centered health care. These areas exhibit very different market dynamics from those of other health care services, because, as elective services, the consumer pays. And when consumers are more responsible for costs, they demand greater transparency. They want data about price, quality of care, and expected outcomes to comparison shop for the facility that offers what they value most at a price they can afford.

New Expectations Raise the Bar

Changing incentives to close the looming value gap between market expectations and what their organizations deliver is a critical job for trustees and executives. New payment models have important implications for board members, who are responsible for ensuring the continued viability of their systems. Looking to the future and identifying risks and opportunities is part of their fiduciary responsibility.

Expectations for board members are changing, and the job is becoming more demanding. In addition to industry and social pressure, regulatory and accreditation pressures are building for greater board oversight of clinical performance. Eliminating unnecessary care and harm can save money and vastly improve quality and safety.

Boards also are beginning to understand that competition is no longer just local: Some providers are partnering with national employers in such areas as cardiac surgery and joint replacements, as in the case of Johns Hopkins' partnership with PepsiCo.

Uncertainty and hesitancy in addressing demands for change can show up in a number of ways in health care organizations. Governing boards of any business are obligated to recognize the magnitude of change facing their organizations and determine how to meet future demands. Boards should listen carefully to what senior administrators are telling them, being sensitive to signs of resistance.

New Competencies, Questions

On a practical level, boards must develop new capabilities and change how they govern to address new demands and requirements to move from a volume to value orientation. This means trustees face specific challenges that include:

  • overseeing and understanding efforts to reduce variation in medical practice;
  • understanding what care costs and how to charge and get paid for it;
  • determining the organization's effectiveness in removing inefficiencies and waste to reduce care cost and improve outcomes.

Boards need to understand quality issues in connection with financial issues. Questions for boards to consider include:

  • What are the goals of the quality improvement effort? What are the metrics? Is the reported data meaningful?
  • Are discussions about quality issues at the board level sufficiently robust?
  • Does the board understand the links between quality and compliance and quality and payment?
  • How is the quality improvement effort reflected in organizational policy?
  • Do clinicians understand the relationship of quality to payment, including accurate documentation to justify payment?
  • How is this effort linked to management accountability?

Finally, as organizations move to new payment models such as bundled pricing, there are specific questions that boards also need to examine. They include:

  • What organizational capabilities do we have in place to develop a bundled price?
  • Where are we in the process of developing a bundled price?
  • How well do we understand where variation in cost and quality exists for the top five service lines?
  • How well do we link variation to outcomes?
  • How are we reducing variation and optimizing outcomes?
  • Is the price linked to relevant quality metrics and how?
  • How do we compare with other systems?

Competition Going Forward

Demonstrating value means providers must meet demands for transparency in quality and cost. New payment models create operational and cultural challenges for health care organizations. The volume-to-value transition will require boards, administrators and clinicians to change their perspective on care delivery and look differently at their operations, financials, quality metrics, patient engagement data and outcomes.

Care delivery demands a broader perspective than in the past, one that focuses on costs and patient outcomes across the care continuum. Those who engage in the journey today in a disciplined way will be the leaders tomorrow. It isn't a matter of "if we should," it's a matter of "when and how we start."

Portions of this article are adapted from Healthcare at a Turning Point: A Roadmap for Change, R. Numerof and M. Abrams, CRC Press, 2013.

Michael N. Abrams, M.A. (mabrams@nai-consulting.com), is managing partner and Stephen Rothenberg, J.D. (srothenberg@nai-consulting.com), is a consultant at Numerof & Associates Inc., St. Louis.