Sunday, April 21, 2013

Future of Some Digital Health Startups Depends on Whether ACOs Will Thrive

The Affordable Care Act has created a powerful incentive for health systems to test the value of transitioning from volume to value based reimbursement. Accountable Care Organization (ACO) pilot programs are at the forefront of this multibillion-dollar experiment. An ACO is a coordinated system of healthcare providers and services that are incentivized through reimbursement to improve the quality and reduce the total cost of care for a designated patient population. [1] A major unknown variable in the ACO model is the optimal interaction between ACOs and academic medical centers (AMCs). Depending on the ultimate relationship between ACOs and AMCs, there may be varying degrees of opportunity for digital health startups to add value.

Academic medical centers can either go the route of developing strong relationships with ACOs or operating independent of them in the current paradigm of fee-for-service (FFS) care delivery. And the two potential outcomes of ACOs after the demonstration projects run their course are ACOs either becoming the standard care delivery system or becoming extinct. Below are the implications to digital health startups of these hypothetical scenarios depending on the viability of ACOs and the interaction between ACOs and AMCs.

Interaction between ACOs and AMCs

A major distinguishing feature of AMCs is their specialized inpatient services, which make them suitable as tertiary and quaternary referral sites for less specialized hospitals and ambulatory centers. Specialized or inpatient services may include surgical interventions, intensive care, radiology services, management of multiple comorbidities, and rare disease management, among others. ACOs require access to specialized healthcare services in order to manage complex or intensive medical needs for its patients.

ACOs and AMCs can interact in one of two ways (Figure 1): 1) AMCs can create their own ACO and build outpatient, less specialized services to complement their specialized inpatient services. I will refer to this as the Build Your Own ACO Model (BYOA). 2) AMCs can serve as referral sites for ACOs that are primarily comprised of outpatient providers. I’ll refer to this as the Specialized Referrals Model (SR).

Figure 1: Interaction Between ACOs and AMCs

If ACOs Become the Standard Delivery and Reimbursement Model

If ACOs prove to decrease cost and improve the quality of care, they may become the standard care delivery model and the following scenarios could arise depending on the interaction between AMCs and ACOs.

AMCs that choose to never engage with ACOs and continue being reimbursed by the traditional FFS model would loose out on a major influx of referrals. Currently, many AMCs are forming partnerships with outpatient ACOs or providers that may eventually coalesce into an ACO. These partnerships are intended to drive referrals to the AMC. If ACOs become the norm, then the AMCs that bet on the ACO model not working would have missed the opportunity to build the foundation for referral relationships and may end up being crowded out by competitors that did invest in networking with ACOs. The unaffiliated AMCs would subsequently have a very difficult time getting new referrals for tertiary care.

If ACOs become the standard and AMCs do engage with ACOs at an early stage, then the outcomes for the AMC would depend on the type of interaction they developed with the ACO. In the SR model, the AMC would have a strong referral network from the ACO. The financial incentives would be mutually aligned: The AMC would still be reimbursed through a FFS model with likely bundled payments; their incentive to provide high quality care would be to continue getting referrals from the ACOs; and the ACO would be incentivized to refer to the AMC with the best specialized care to optimize management for their complex or acutely ill patients so that more patients would choose to participate in that ACO.

In the BYOA model, the AMC would build its own ACO capacity resulting in competing and counterproductive incentives. On the one hand, the overall ACO mission would be to keep patients out of the hospital in order to decrease costs. On the other hand, the AMC within the ACO would be incentivized to increase patient volume to demonstrate the need for its services. The ACO as a whole would need the tertiary services of the AMC, but the AMC would be a cost center and patients would have the choice to go to other AMCs, which is a separate and complex challenge.

If ACOs Are Phased Out

If ACOs fail to decrease the cost and improve the quality of care, they will become extinct and our health system will likely revert to the existing FFS system. AMCs that chose to never engage with ACOs would be well positioned to continue their current business model without the wasted opportunity costs of interacting with ACOs. Although they may lose the opportunity to increase their network of referring outpatient providers, they would have maintained the efficiency of their existing ambulatory and general services.

If ACOs fall out of fashion, then the outcomes for AMCs would be very different depending on the type of interactions that were established with ACOs. In the SR model, the AMC would have maintained and streamlined its core competency of specialized services. Although the AMC may have to bear the cost of reestablishing its general practice and ambulatory services, it would likely maintain the upside of building a large referral network for tertiary care.

In the BYOA model, AMCs would suffer much greater losses than in the SR model. By building out a population health management infrastructure, the AMC would have created an expensive and largely useless shell for care management. With reversion to a FFS model, there would no longer be a financial incentive for comprehensive population health management and billing would once again be directly managed through CMS rather than the ACO.


On the whole, the best business model for AMCs to adopt is refining their tertiary and quaternary capabilities, slimming down on general ambulatory services that can be provided by outpatient delivery systems, and growing their referral networks from ACOs. This would expose the AMC to the upside of sustainability if ACOs remain in vogue and minimizes their downside risk if ACOs go out of fashion because they retain their core competency of specialized services.

There are major implications of the future of ACOs and their interaction with AMCs on opportunities for reimbursement for digital health companies. If ACOs prove to be valuable and become widely adopted, then there will be more incentive for interventions that 1) improve population health management, 2) keep patients at home and out of the hospital, and 3) facilitate care coordination.

If ACOs fail to be adopted universally, then the reimbursement environment will suffocate startups focusing on value-based care. However, startups that aim to 1) augment workflow management, 2) increase hospital efficiency, and 3) improve aspects of surgery or procedures will potentially benefit from the failure of ACOs.

In both scenarios, startups that aim to 1) improve patient satisfaction, 2) reinforce personal health data security, and 3) decrease 30-day hospital readmissions, stand to win either way.

Generally speaking, the digital health startup community stands to benefit more if ACOs prove to work and become universally adopted. Startups may not only benefit from ACO adoption, but they can also help to facilitate it. In a future post, I will explore the potential for a symbiotic relationship between ACOs and startups and how they can help one another discover value more efficiently with little capital investment if the right innovation environment can be created to minimize barriers to piloting.


1) Accountable Care Organizations.

Sunday, April 14, 2013

50 Shades of Lean Healthcare: Comparing Lean, 6 Sigma, Quality Improvement, and Lean Startup

Healthcare reform is catalyzing a shift from quantity to quality in healthcare delivery. This change places a substantial financial burden on hospitals because of a contracture in reimbursement over the next 5-10 years.[1]

For hospitals to successfully navigate the changing financial reform, they will need to effectively balance cost cutting with new revenue generation while improving the quality of care. To achieve these objectives, hospitals will need to employ all varieties of lean thinking to eliminate inefficiencies, improve outcomes, and discover commercial value.

The following diagram is a comparison of the major lean approaches and how they can be applied to healthcare. No single approach can be used to solve all problems in cost-effective healthcare delivery. But the combination, particularly the last approach, lean startup, may help hospitals survive and even thrive in the changing healthcare reimbursement landscape.

Comparing Approaches to Improvement [2-4]

 Applying Improvement Approaches to Clinical Innovation


1) Healthcare Industry Leaders: “What is profitable today is not going to be profitable tomorrow.”

2) Moen, R. and Norman, C. “Circling Back: Clearing up myths about the Deming cycle and seeing how it keeps evolving,” Quality Progress November, 2010:22-28.

3) Loyd, R & Balla G. Building an Integrated Approach to Improvement with Lean, Six Sigma and the Model for Improvement. IHI. 2012.

4) Reis E. The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. 2012

Wednesday, April 10, 2013

Healthcare Industry Leaders: “What is profitable today is not going to be profitable tomorrow”

I had the good fortunate of being accepted into the Startup Health Incubator last week. At the inaugural CEO Summit, Startup Health brought together several healthcare industry leaders to share some profound insights about drivers of healthcare innovation in the years to come. The overarching inference from the summit is that the Affordable Care Act (ACA) has unleashed a furious dash toward value-based care delivery business models among provider and payer organizations. Although I suspected it before, I have empiric proof that the ACA is an enormous catalyst for companies that aim to transform population health.

Two specific themes emerged that may be a harbinger for what hospitals face in the next few years. The first theme was beautifully stated by an executive at a major hospital system in NY: “What is profitable today is not necessarily going to be profitable several years from now based on changes in regulation and reimbursement.  Profit centers can become cost centers quickly.” [1] By some estimates, hospitals are poised to have their annual revenues contract by 5-20% over the next 5-8 years as fee-for-service (FFS) is displaced by pay-for-performance (PFP) reimbursement models. The challenge that hospitals face is that they are inherently risk averse organizations.  “People are holding onto the past because it’s simply what they know,” according to one pharma executive. [1] With narrow profit margins of 2-4%, it makes sense that hospital CFOs are reluctant to take much investment risk. Unfortunately, slow and steady will not win the race as an investment thesis in this healthcare reimbursement environment.

The second theme that was reinforced several times is the importance of listening to customers. Another pharma executive stressed that “Organic movement with data will drive change in the system, and the little guys/consumer knows the answer.” [1] Furthermore, we heard a cautionary tale to about making market assumptions. According to one of the thought leaders at the AARP, it is important to “Know your market, but don’t make assumptions about it – be open to finding out new things about it.” [1] Both comments reinforce the underpinnings of lean startup methodology which is to build something that a customer is willing to pay for. Adopting the startup mentality within hospital walls is an effective way to ensure responsiveness to customer needs. This is particularly important when up to 30% of Medicare value-based bonus payments will be contingent upon patient satisfaction scores.

Although the audience of these presentations were 13 startups, the takeaway lessons apply to innovation within hospital walls as well. The old way of reimbursement is going away. Hospitals need to find new ways to create value, both in the form of revenue and improved health. By taking down barriers to innovation and updating IP policies, ensuring flexible and fair conflict of interest standards, and keeping an open mind towards entrepreneurism, hospitals have an opportunity to experience substantial financial and social returns with very little up front cash investment. Although one speaker gave very pointed advice to "avoid using the word 'disrupt'" because it makes hospital executives nervous, I think forward thinking hospital c-suites will suck up the anxiety and start incorporating more of a startup culture into their innovation portfolios in the interest of staying afloat. And if it makes that (understandably) disruption-phobic hospital executive feel better, I can change the name of this blog to

1) Startup Health CEO Summit. April 2013.