Fast and Furious

1. Fast and Furious Indiana Primary Health Care Annual Conference Indianapolis, Indiana | May 4, 2015

2. SundayBusiness SUNDAY, JUNE 1, 2014 “A company must stay the course even in times of upheaval while constantly improving and extending its distinctive position.” Michael Porter “The only way that market leaders like Harvard Business School can survive “disruptive innovation” is by disrupting their existing business themselves.” Clayton Christensen B-School, Disrupted In moving into online education, Harvard discovered that it wasn’t so easy to practice what it teaches. MINH UONG/THE NEW YORK TIMES __________________________ By JERRY USEEM If any institution is equipped to handle questions of strategy, it is Harvard Busi-ness School, whose professors have coined so much of the strategic lexicon used in classrooms and boardrooms that it’s hard to discuss the topic without recourse to their concepts: Competitive advantage. Disruptive innovation. The value chain. But when its dean, NitinNohria, faced the school’s biggest strategic decision since 1924 — the year it planned its campus and adopted the case-study method as its pedagogical cornerstone — he ran into an issue. Those professors, and those con-cepts, disagreed. The question: Should Harvard Business School enter the business of online educa-tion, and, if so, how? Universities across the country are wrestling with the same question — call it the educator’s quandary — of whether to plunge into the rapidly growing realm of online teaching, at the risk of devaluing the on-campus education for which students pay tens of thousands of dollars, or to stand pat at the risk of being left behind. At Harvard Business School, the pros and cons of the argument were personified by two of its most famous faculty mem-bers. For Michael Porter, widely consid-ered the father of modern business strat-egy, the answer is yes — create online courses, but not in a way that undermines the school’s existing strategy. “A company must stay the course,” Professor Porter has written, “even in times of upheaval, while constantly improving and extending its distinctive positioning.” For Clayton Christensen, whose 1997 book, “The Innovator’s Dilemma,” pro-pelled him to academic stardom, the only way that market leaders like Harvard CONTINUED ON PAGE 4

3. 1 The Disruptive Proposition for Healthcare Begins with a Fast-Changing Revenue Model

4. The Driving Force Behind the Change to America’s Healthcare System The Dominant Role of Healthcare Spending (CBO’s Long-Term Budget Projection) Source: Congressional Budget Office: Extended Alternative Fiscal Scenario. Extrapolated by Committee for a Responsible Federal Budget, as illustrated in Blinder, A.S.: After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. New York: The Penguin Press, 2013.

5. The Numbers Send a Clear and Present Message “The implication for budgeteers is clear: If we can somehow solve the health care cost problem, we will also solve the long-run deficit problem. But if we can’t control health care costs, the long-run deficit problem is insoluble.” Alan S. Blinder Source: Blinder, A.S.: After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. New York: The Penguin Press, 2013.

7. 2 Disruption Forces a Change to the Business Model

8. Fee-for-Service Model Hospitals Doctors Patients

9. Fee-for-Value Model Employers Patients Medicare and Medicaid Select Contract(?) Who Is This? Healthcare Company Content of Care • Commodity • Make vs. buy • Low-cost provider • Contract to specifications Hospital Doctors Outpatient Services Continuum of Care

10. 3 Disruption Creates Fertile Ground for New and Capable Competitors

11. The Entry of New, Well-Funded, and Highly Capable Competitors Disruptive Contextual Change Encourages the Entry and Aggressive Expansion of A-traditional Competitors • Diagnosing and following chronic care patients in Walgreens clinics • Theranos™ Wellness Centers at Walgreens stores • JV with WebMD • JV with MDLIVE • 90 million members of the Balance Rewards Loyalty Program

12. 4 Disruption Is Moving Healthcare from a Wholesale Good to a Retail Good

13. Healthcare as a Retail Good • New points of competition • Brand • Access • Convenience • Customer satisfaction • IT connectivity • Consistent quality • “Service” • Price Takes legacy providers out of their “comfort zone”

14. The Disruptive Progression Web/ Mobile Centric Ambulatory Centric • Implications for: • Value creation • Delivery capacity • Customer connectivity • Human resource requirements • IT sophistication Inpatient Centric Current strategic positioning Cost per Unitof Service High Low

15. The Dilemma for Legacy Providers • Why didn’t Blockbuster become Netflix? • Why didn’t Borders become Amazon? • The hospital is your store. Are you so “store-centric” that you cannot disrupt your own business model?

16. Critical Current Strategic Questions • Do you see Walgreens and CVS as real competition or operating in some parallel healthcare universe? • Do you see a quality gap between the care provided at Walgreens and CVS and the care provided through your delivery system? If so, do you think that the consumer perceives this gap as well? • What percentage of total revenue is your organization currently deriving from fee-for-value contracts? • In order to navigate the reform agenda and reposition your organization for a fee-for-value environment, how fast do you need to move strategically? Are you moving fast enough at the current time?

17. The Challenge of Size and Legacy IBM Lessons The Healthcare Challenge • Revenue reduction for 10 consecutive quarters • Core business: services software, hardware, sluggish to down • Rapid move to cloud computing – $2 billion acquisition • Demand for mobile and social tools in the workplace • New and nimble competitors such as Amazon and Google • The inpatient core, no growth, old declining business model • Outpatient services reside in the related core; some growth, but significant, very capable competition such as Walgreens, CVS, Walmart • The disruptive margin – internet-driven, a-traditional, off-premises care, Silicon Valley-style competition; can expect major attack on the “related core”

18. The Macro Business Principles of Uber • A new level of access and convenience • Attacks traditional regulation • Defines an entirely different “quality” experience • Customer is included in the evaluation of the experience in “real time” Can Healthcare Be Uberized?

19. About the Speaker Kenneth Kaufman Chair and Managing Director Kaufman, Hall & Associates, LLC 5202 Old Orchard Road, Suite N700 Skokie, Illinois 60077 847.441.8780, ext. 102 kkaufman@kaufmanhall.com Kenneth Kaufman is Chair and Managing Director of Kaufman Hall – a management consulting firm that provides advisory services and software to hospitals and health systems nationwide. Since 1976, Mr. Kaufman has provided healthcare organizations with expert counsel and guidance in areas including strategy, finance, financial and capital planning, and mergers, acquisitions, and partnerships. Clients include organizations of all types and sizes – community hospitals and health systems, academic medical centers, and regional or national health systems. Recognized as a leading authority and committed to industry education, Mr. Kaufman has given more than 400 presentations at meetings such as those organized by the American College of Healthcare Executives (“ACHE”), American Hospital Association, Healthcare Financial Management Association, The Governance Institute (“TGI”), and others. Mr. Kaufman has authored or coauthored six books, most recently authoring Focus on Finance, published by TGI, and Best Practice Financial Management, 3rd Edition, published by ACHE. In addition, he’s often quoted and his articles regularly appear in major healthcare publications. Mr. Kaufman has an M.B.A. with a concentration in Hospital Administration from the University of Chicago Graduate School of Business.