Impact Advisors’ Peter Smith on the Persistence of the “One Foot in the Boat” Challenge

June 26, 2020
Peter Smith, CEO of the Impact Advisors consulting firm, sees multiple short-term and longer-term trends reshaping the strategic and operational landscape of healthcare for traditional provider organizations

Last month, Healthcare Innovation Editor-in-Chief Mark Hagland interviewed a range of healthcare industry experts and observers regarding the ongoing challenge referred to as “one foot in the boat, one foot on the dock”—or “on the shore” problem—that is to say, the challenge of operating in two worlds at once, the world of fee-for-service payment and of value-based payment.

All those interviewed for that web feature agreed that the leaders of patient care organizations—hospitals, medical groups, and health systems—are having to adapt to a split-screen payment landscape, in which they will continue to receive a significant portion of their reimbursement in the form of discounted fee-for-service payment, even as they move ahead into value-based reimbursement, via such vehicles as accountable care organizations (ACOs), bundled payments, and other incentive-based forms of payment, with the federal government through the Medicare program, with state governments through Medicaid managed care programs, and with private health plans.

And, even with the immediate crisis around the COVID-19 pandemic at least temporarily rearranging the landscape, all those interviewed agreed that the shift into value-based, including risk-based payment systems, is inevitable, as the U.S. healthcare system eventually returns to something resembling pre-COVID operating conditions. In other words, even as patient care organization leaders are currently managing situations around the COVID-19 pandemic, the future remains one of gradual progress towards a bigger and bigger share of patient care organization revenues coming from value-based contracts. It is also a future involving ongoing business consolidation and changes in the business landscape in which patient care organizations are operating.

One of those industry leaders whom Hagland interviewed this spring for that feature was Peter Smith, CEO of the Naperville, Ill.-based Impact Advisors consulting firm. Below are excerpts from Hagland’s longer interview with Smith.

What is the current landscape around business consolidation in healthcare—among hospitals, among physician groups, among hospitals AND physician groups, and among health plans?

I would preface this by saying, let’s say that COVID-19 didn’t exist; and what we may see as the result. I think what you’re seeing is that, obviously, there still continues to be consolidation, at all levels, at the hospital level and the physician practice level, and in skilled nursing, and post-acute, and in every single segment. You’re seeing providers looking to aggregate. And you’re also seeing private equity-backed entities buying up physician practices and skilled nursing. There’s this heavy infusion of private equity money carving out some physician practices and skilled nursing facilities, while IDNs continue to consolidate. IDNs [integrated delivery networks] are looking for pieces that fit into their model of care—strategic acquisitions to round out certain markets or regions that are complementary. So, less consolidation around scale, and more strategic consolidation now.

In terms of private equity, you’re seeing much more financially driven carve-outs. That world is looking to consolidate areas like dermatology and skilled nursing, and in radiology and anesthesiology, too, segments that had been fragmented until now. In that regard, I think the motivations will be more driven by financial factors.

Among the specialties of radiology, anesthesiology, and dermatology, what do medical groups in those medical specialties have in common, from a business and organizational standpoint?

It’s a lot of the same dynamics in all three specialties. If you’re in an independent small practice in some specialties, the information technology cost burden is extremely high relative to your revenues. There’s tremendous overhead from that, as well as from insurance and other factors. Aggregation gives you economies of scale. And I think the wave hit primary care first, but now, the wave is hitting everyone. And you’re seeing scrutiny on revenue enhancement by payers. So increased expense burden and increased revenue scrutiny, they’re being hit by both. And Private financing, particularly private equity firms, are coming in, and are putting together really compelling financial deals. So if I can aggregate dermatology, and can help them drive out their technology and insurance cost burdens, that provides a very compelling story for many physicians

How might the COVID-19 pandemic impact the longer term financial landscape around all of this?

I think that COVID-19 is going to put a number of organizations into financial distress; so the folks who already don’t have good financial infrastructure are going to be hard hit. And a lot of hospitals are emptying out beds from elective procedures, to prepare for the surge that’s coming. So I think you’re going to see financial distressed organizations really go over the edge. So organizations become potential targets for folks looking for additional capacity. So there will be an uptick in acquisitions because of it.

What are the main dynamics pushing this forward or influencing business decisions in the next two years?

If you take the COVID-19 element out, our industry is in a major conversion from fee-for-service to value-based payment. And there are players that have learned to be successful, and some not. And many organizations have one foot in both realms. Astute organizations recognize that they need to continue to ride the fee-for-service wave as long as they can, so they’re continuing to harvest and maximize that environment, while preparing for the value-based world. They’re putting in all the infrastructure needed—the people infrastructure, the population health management, the wellness element, and of course, the data analytics. And so they’re using the more cash-flush world of fee-for-service to help fund their preparation for the value-based world. So they’re doing the right things, and it’s been an accelerant for doing the right things.

Do you see a widening gap between the forward thinkers and the not-so-forward thinkers in patient care organizations nationwide?

Yes, I absolutely do, and it’s unfortunate. And it would portend that there are going to be some winners and losers. But there is regional variation. Some areas are more heavily penetrated with value-based payment than others. So you get some laggards because the wave hasn’t hit them yet. But if were them, I’d prepare for the wave that’s going to hit them. But I agree with you. Like any industry in transition, you’ll have leaders who step up, others who follow and survive, and then a group of leaders who don’t adapt.

How will the entry of “disruptors”—such as CVS/Aetna and its minute clinics, corporate medicine, etc.—affect the consolidation trend?

I think the disruptors will put pressure on the traditional physician practices that are not consumer-responsive.

And when you combine the COVID-based impacts and the disruptor-based impacts, we will see some lasting changes, correct?

I think that’s exactly right. COVID-19 will fundamentally restructure the way we deliver care in multiple ways. It’s not just videoconferencing; telehealth changes everything. And we’ve seen a relaxation in reimbursement because of this crisis. I think it will be very difficult to go back. I think we’re seeing a new model of care that will fundamentally change healthcare going forward. And that’s the most exciting thing moving forward, and the silver lining to COVID-19, it’s that it will rearrange models of care. And I think COVID-19 will help any disruptor that will be more consumer-responsive. The more traditional providers will be forced to react, in order to survive.

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