In 2006, geologists discovered that the world’s longest river, the Amazon, used to flow from east to west. As tectonic activity pushed up the Andes mountain range along South America’s west coast, the river’s flow shifted from west to east.

Healthcare is having its own tectonic moment, and shifts in the landscape are driving the flow of business in new directions. Incumbent healthcare providers that fail to recognize and respond to these changes risk being left high and dry.

For years, the business model for hospital-centric health systems has focused on patient flow into inpatient beds. Outpatient care has been measured in terms of its “downstream impact” on acute inpatient care. But the flow has shifted. Utilization of inpatient services has steadily eroded, while utilization of outpatient services has surged. Figure 1 shows growth in outpatient services as a percentage of hospital revenue for Medicare patients over the past 15 years; the percentage is likely higher for the general patient population.

Figure 1: Outpatient Revenue Grows from One-Third to One-Half of Hospital Business in 15 Years

Total Hospital Inpatient and Outpatient Revenue All US Hospitals

Forces of Change

The Amazon’s reversal was the result of two forces. First, the rise of the Andes pushed water flow to the east. But a mid-continental ridge held that flow back. The second force was sediment erosion from the new mountains. Sediment filled in lowlands behind the ridge until the water was able to flow over the top and continue eastward to the Atlantic.

Incumbent healthcare providers are feeling the force of two factors that are pushing healthcare to a turning point. First, they are under pressure to deliver care more efficiently and cost-effectively. To do so, they must invest in primary care, chronic disease management, and lower-cost outpatient settings.  But this is precisely the space that is quickly being filled in by the second factor: A new range of competitors, including urgent care chains, retail clinics, physician super groups, freestanding imaging companies, telehealth providers, and primary care providers such as Oak Street, Chen Med, and Iora Health. These competitors recognize that outpatient settings are where most patient needs are met, where consumer impressions of the healthcare experience are formed, and where the consumer’s healthcare journey is mapped out. Unburdened by the resource needs of inpatient facilities, operating online or in retail storefronts, they can move quickly into new markets with a lean cost structure than enables them to compete aggressively on price and convenience.

These two factors put incumbent providers at risk of being disintermediated by an entire ecosystem of new, well-funded competitors that have developed independent of hospital-based systems and is taking control of the very resources systems need to compete effectively. Without a competitive outpatient delivery system, incumbent hospital-based providers may be left with little more than a shrinking portfolio of inpatient services.

Reversing Course

The tectonic shifts that are reshaping healthcare require incumbent healthcare providers to rethink their business model from the ground up.

The first step is to let go of the “downstream impact” focus on inpatient care. Instead, providers must reverse course, turning their attention upstream to the outpatient services where the primary market for healthcare now lies, and where the most significant activity is occurring.

Next, incumbent healthcare providers must make three decisions:

1. Do we have the capabilities and infrastructure we need to compete in the outpatient market?

Providing the answer to this question requires a deep dive into the organization: the presence of a chief transformation officer or chief innovation officer in the C-suite is not enough. Instead, a full and frank assessment is required.

To compete effectively, organizations must develop the following:

  • A culture of customer service. This includes building excellence in customer service into the organization’s mission, goals, and compensation structures.
  • A robust digital platform. This goes beyond having an app. It requires the ability for consumers to interact seamlessly with providers, their health record, schedulers, and other consumer-facing departments.
  • A network of outlets and touchpoints. A digital strategy is part of this, but consumers will also need convenient access to a blend of physical sites and live individuals to get the services they need, when and where they want them.

To the extent this assessment identifies gaps, organization leaders must decide whether they will try to fill the gaps internally or partner with other organizations. Factors such as urgency of the need and the comparative costs of building or partnering for needed resources will determine the organization’s strategy.

2. Where can we win, and where are we likely to lose?

To make this decision, organization leaders must look both inward and outward to assess the current state of their market and their organization’s position within it. Key factors in this assessment will include:

  • The competition. What is the market position of current competitors? What value proposition do they offer, and what competitive advantages does their business model provide?
  • Market needs. Are there unaddressed needs in our market that make us vulnerable to new competitors? How much time do we have to act?
  • ­Service portfolio. Can we expand services where we are a market leader? Are there services we cannot afford to cede to competitors? What “value killers” could we prune?

The end product of this assessment will be a tiered ranking of winning, competitive, and losing services that drive future decisions about strategy, investments, and resource allocation.

3. What is the edge that will help us compete?

For services in the “win” and “compete” tiers, the organization must decide what will be required to maintain a leading market position or compete for additional market share. Questions include:

  • Should we offer additional or alternative means of accessing these services?
  • To what extent will we need to compete on price?
  • Would moving services to a new setting lower costs or improve convenience for the consumer?
  • How will we measure our success, and how will that differ from how we measure success today?

These decisions will require hard choices, and there is no clear route that will guarantee success. Every incumbent provider needs to determine its own future course, based on decisions that are grounded in its current capabilities, market position, and available resources. The currents are changing quickly, however, and competitors are already exploring new channels to determine the best course forward. The time to act is now.