Making the journey into the networked enterprise, part 2.

The health care landscape is strewn with an almost Byzantine set of structural choices for the organization of the future--MSOs, IPAs, PHOs, IGPs, HMOs--an alphabet soup of options, decisions, and trade-offs. Today's health care strategist is more than likely bewildered by the possibilities. And, to make matters worse, the wrong choice in this highly competitive environment may mean the loss of strategic position, competitive advantage, or the closing of a medical practice or facility.

It is all too easy to make the false assumption that if one chooses the right structure all will be fine, the delivery of health care will escalate, and a profit will ensure future stability. All those alphabet soup options really are just traps which obscure the real issues confronting a health care organization today.

Rather than focus primarily on organizational structure, it is far more important to understand both the key strategic issues and architectural design characteristics (see Figure 1) that enable the networked enterprise to outperform its vertically integrated competitors.

Begin with a strategic value proposition

A powerful strategic vision and value proposition is essential for beginning the transformation process from the traditional fragmented and hierarchical systems into fast, response, efficient networks. Take, for example, the vision of David Campbell, MD, CEO, of St. Vincent's Hospital in Melbourne, Australia. When constructing a new hospital, Dr. Campbell was concerned that the building would be nothing more than a modern version of what already existed.

Dr. Campbell and his team set forth a bold future at the outset: "to be the best hospital in the state in three years, the best in the country in five years, and among the 10 best in the world in 10 years, as measured by standard industry benchmarks." An organization mobilizes around a strong and measurable vision, people become passionately committed to it, and it becomes the "soul" of the organization itself.

To further empower the vision, Dr. Campbell ensured that the value proposition was clear, specific, and measurable. He was emphatic about benchmarked breakthroughs in performance being embraced by all the participants. He knew that he had to create a quantum jump for the future, and that to achieve this goal, he would have to create a clear measurement that stretched each and every member of the team. Measurability motivates the mind to creative action.

Value chain redesign

St. Vincent's was also faced with multiple problems, including:

1) Inefficient Care Delivery Processes: An analysis revealed that health care professionals were spending only 53 percent of their time on patient care and 10 percent of staff time was wasted on logistical problems.

2) Fragmented Structures: With more than 500 basic job descriptions and seven levels of management, along with highly specialized departments, there were serious coordination and communications problems.

This situation called for a look at how the hospital's value chain produced results. As Sister Claire Nolan explained it: "We were building a new hospital, but it started looking like every other hospital. We realized we had to look at everything as a system--the ward structure, the patient, the community, the family."

An overhaul of delivery systems resulted in 16 care processes being winnowed down into five patient care and six support processes, with considerable cost reduction and time savings. Wards and specialized departments vanished, replaced by eight patient care units (PCUs) dedicated to specific ailments and staffed by cross-functional care teams. After nonvalue-added work was eliminated, staff analyzed outsourcing non-core competencies. Central services, such as X-ray and accounting, which could not cut costs through reengineering, were contracted out.

Redesigning the value chain does not have to be limited to the organization's boundaries, however. In the case of Cascade Healthcare Alliance in Bellevue, Washington, value chain reengineering spans an entire range of activities between a number of health care providers. Cascade aims at creating a collaborative health care delivery system where all the providers are aligned on the same objectives and share risks and rewards (as illustrated in Figure 2, below).

Cascade first addressed the issue of nonalignment between primary care physicians and specialists. In the words of Greg Aeschliman, MD, one of Cascade's cofounders:

"The current system is rife with conflict between primary care and specialists. We wanted to ensure that, from day one, Cascade was collaborative. We consider primary care physicians and specialists to be equal partners in this system, so it is a win-win for both."

Comprising, at this time, only medical doctors, Cascade decided early to outsource its hospital requirements rather than acquire a hospital as most vertical integrators typically choose to do. In this way, Cascade keeps its capital investment low, while maintaining its focus on the core strategy--patients and wellness--instead of emphasizing structures, such as buildings and bureaucratic organizational hierarchies. It currently has alliances with Overlake and Evergreen Hospitals. But these are more than a vendor relationship. Cascade rewards the hospitals for quick turnover and lower price of entry. In addition, Dr. Aeschliman states: "We reward the low-bidders with higher revenue streams and other benefits."

Systemwide risk and reward structures

One of the most frustrating aspects of the health care delivery system is the highly fragmented nature of how risk and reward is spread across the participants in the system--medical providers, payers, businesses, and patients have all pulled in different directions. Historically, physicians have been paid on a fee-for-service basis, with the heavy consequence of escalating costs. While managed care has begun to curb rising costs, it often pits provider against payer, catching the patient in the middle of the tug-of-war.

Cascade aims to create an aligned risk and reward system that promotes incentives to work together on wellness, using a "cocapitation" model that splits the budgeted pool of money 50-50 between primary care physicians and specialists. According to Dr. Aeschliman:

"Co-capitation is a risk stratification strategy. It tells everyone what fees they are going to get ahead of time. In co-capitation, the way to make money is not by doing more procedures, but from increased enrollment and greater system efficiency. Low enrollment means the risk pools become more volatile, therefore patient satisfaction is a high priority."

Value is generated for doctors on a long-term basis. Unlike the fee-based models, wealth is not created by fee-for-service activities (the more you do, the more money the physician receives), but rather from the equity in the risk pool-the healthier the patient population, the greater the equity build-up.

Shared decision-making and control

Networked enterprises realize that extraordinary value can be created, not by unilateral control or by giving up control, but by enjoined and aligned control. At Cascade, Dr. Aeschliman "knew that the monolithic, command and control model simply couldn't provide the variety of services the community needed." Similarly, at St. Vincent's, Dr. Campbell eliminated the vertical hierarchy by giving decision-making and budgetary authority to PCU leaders, putting them in charge of day-to-day staffing and other basic decisions.

Flexible structures

Inherent in any organization today is the need to be able to change and adapt in the rapidly shifting environment. This is an area in which the networked enterprise excels beyond the more oppressive centralized systems of the monolithic, vertically integrated organization.

At Cascade, community interests require a variety of delivery systems and adaptations. For example, in the more industrialized community of Everett, where the paper mills are located, patients have a different set of medical requirements, such as labor injuries from shift work. However, in Bellevue, where Microsoft is located, software programmers encounter carpal tunnel and stress-related problems. A community-based model has a far higher likelihood of providing high levels of patient (and provider) satisfaction.

Flexibility requires a stability of culture and an emphasis on critical values and principles. Without this alignment of cultures, it is difficult to push the decision-making out to the periphery of the organization where the patient-provider decisions must be made. At St. Vincent's, several value-based principles prevailed that remained constant when everything else was in turmoil:

1) Patients are central to the hospital's operating processes. They are no longer to be treated as objects in processes optimized for others (namely doctors, nurses, and administrators).

2) Services are to be brought as close to the patients as possible. This resulted in a systematic development of distributed services--for example, patient gurney rides were eliminated to the greatest extent possible.

3) Various care providers were "integrated" into teams to raise the service quality. If the team concept means that nursing administrators would sometimes have to supervise doctors in patient care units, then so be it.

A solid set of value-based principles is essential because it builds trust, which, in turn, lowers transaction costs, increases creative forces, and builds power into the integration process. Without trust, interrelationships are forced into mechanistic, tactical transactions. Only with trust can the networked organization truly become a streamlined and productive entity.

Services provided by cross-functional teams 

Unlike the functional specialization of the centralized command and control system that delivers care through transactional "silos" with cursory hand-offs between nurses and doctors, labs and hospitals, primary care physicians and specialists, the networked enterprise emphasizes cross-functional teamwork. In this way, essential processes, which cut across traditional boundaries of specialization, are better integrated, thereby creating greater value in the system. (see Figure 3)

Cross-functional teams provide an additional benefit--they enable the team to address root systemic causes of ill health and focus their energies on achieving wellness--important factors of success in a capitated delivery model.

At St. Vincent's, allied health workers, including nutritionists, physiotherapists, mental health professionals, and social workers join nurses and doctors at the patient bedside as full members of care teams. The charge nurse now works in a care team.

Support staff such as receptionists, file clerks, and records managers, are dispersed from their centralized and specialized department to the PCUs. As Sister Nolan explains: "We even put a pharmacist at the ward level--then the pharmacist becomes a key player in the health of the patient on an on-going basis, rather than a distant disburser of drugs."

With the shift to cross-functional teams comes a major change in the environment of the care centers (formerly called wards). Now, the St. Vincent's environment is more like a home. Sister Nolan relates:

"We are here for the patient, their family, and their loved ones. This takes the fear away from being in the hospital. The family and loved ones are enabled to focus on the recovery of the patient--they are no longer just considered "visitors." In many ways, our hospital looks more like a hotel. The family can even cook for the patient on site. This is what the patient wants-to feel like they are loved and at home."

Enabling architectures

Crucial to the effectiveness of the networked enterprise are a set of enabling systems architectures that give the health care teams a trusting and coordinated team environment, a set of broad job descriptions focused on high levels of team performance, and accurate, real-time information.

At St. Vincent's, job descriptions were consolidated and reduced from 500 to 13--an action that union leaders accepted because these jobs were slotted into the old wage agreements, and the union was involved in rewriting the new descriptions.

Union members did not see the changes as threats for several reasons. First, job security was protected by making staff cuts only through attrition. Secondly, the changes were initiated on a ward-by-ward basis, and those who most wanted changes volunteered to go first. With each new initiative, the [earnings of the predecessors were embraced by the next wave. Finally, the principle "people support what they help create" was fundamental to the process.

Antiquated information systems had also plagued St. Vincent's. The hospital had an inordinate number of non-integrated information systems; managers were not getting the data they needed to make clinical or administrative decisions in a timely fashion. The new system was designed to "wrap around the patient" to look at key issues, such as communications, medical technologies, and information. Clinical interviews, conducted to identify problems and support services, were clustered according to the types of patient needs. Cascade recognized a similar need, as Dr. Aeschliman notes:

"We knew the information system we were designing required a high capacity to flow data in real time throughout a community and measure changes. It needed to link us with the police--car wrecks, for example. It had to be more than just data. It needed to be solid, usable information that allowed us to make important medical judgements. Careful coordination is essential to link data flows with work flows and dollar flows." "

Initiating the change

Making a shift this dramatic is indeed a massive task and should not be engaged in without considerable thought, analysis, and planning. Throughout the process, it is essential to have extensive involvement of the staff in the effort. The best redesign of value chains comes from those who see failings every day. People support what they help create. In the words of Cascade's Dr. Aeschliman: "Doctors, in the end, are the ones who can substantially influence the outcomes--their buy-in is essential." And from Sister Nolan: "We felt we were part of creating the future. We felt so good about it."

Pilot projects are also an important element in making the change. St. Vincent's made extensive use of pilots to test the viability of proposed changes and to make them more palatable. Only 20 doctors (less than 10 percent of the medical staff) were asked to volunteer to develop the initial pilot trial runs to prove efficacy. At Cascade, doctors are required to put only their capitated patients through the new system--other fee-for-service patients can be billed through traditional systems, thus reducing the sense of risk during a time of great change.

The results

Are the results worth the effort? Is the networked enterprise more effective, efficient, or profitable? At St. Vincent's, costs have been slashed by $7 million (U.S.), the staff was cut by 600, and the number of beds was reduced by 11 percent, while throughput increased. Cascade is less than two years old, and the results are still being compiled. But early indications are very positive. It currently has 12,000 covered lives and is growing rapidly. Doctors have been flocking to the new system, and membership now exceeds 150. Investment by these doctors totals nearly $2 million after two equity offerings made during the last 18 months.

These networked enterprises demonstrate that it is possible to create health care organizations that are market-driven, medically-directed, patient-centered, strategically-focused, cross-functional, and inter-connected, while aligned on the same goals. "We have established a huge dynamic equilibrium, where every activity in the system is linked and defined by market pressure," concludes Dr. Aeschliman.

Figure 1: Characteristics of Networked Enterprises

1) Powerful Strategic Vision and Value Propositions that guide breakthroughs in performance. 2) Value Chain Redesign that eliminates non-value added work, out sources non-core process, and creates alliances for essential core processes. 3) System-Wide Rewards for teamwork, along with sharing of risks and rewards. 4) Shared Decision-Making which creates extraordinary value through enjoined and aligned control. 5) Flexible Structures to shift with changing needs without oppressive hierarchical structures. 6) Services Provided by Cross-Functional Teams addressing root systemic causes of ill health and aiming at wellness. 7) Enabling Architectures for information, organization, and human resources.

[Figures 2-3 ILLUSTRATION OMITTED]

Robert Porter Lynch is President of The Warrent Company in Providence, Rhode Island. He can be reached at 401/273-0100. Iain Somerville heads the Organization Strategy Practice of Andersen Consulting in New York City. He can be reached at 212/708-4246. The Warrent Company has served as consultant to Cascade Healthcare, and Andersen to St. Vincent's. The authors would like to acknowledge Peter Fuchs of Andersen Consulting, for his assistance.