A Rating Agency Perspective

A senior analyst at A.M. Best Company, Joe Zazzera, recently prescribed four "return-to-basics" strategies for hospitals and healthcare systems to minimize risk in the current environment: (1) take a hard look at your market and reevaluate your strategic alternatives, (2) link your plan to your capital budget, (3) include making a profit in your mission statement, (4) develop clear communication with stakeholders including, of course, the rating agencies. The simplicity of this prescription belies its difficulties. Let's start with the first one.

Every strategic planning process starts with an environmental assessment. They summarize the demographics of the market, project demographic changes, review the competition, consider the regulatory climate, etc. Most include a capabilities assessment purporting to be an objective look at internal resources and an evaluation of their sufficiency to the tasks at hand. The environmental assessment may be only a few pages, but most that I have seen would fill volumes with charts and tables included.

With all this work, what could go wrong? Three things, starting with incomplete or inaccurate data. What do I really learn if I'm told that the demographics in my primary service area is expected to grow 0.7% in the next few years or that this population is aging? At best, these are just bits of information in an environmental assessment that will always be incomplete due to lack of availability and timeliness of accurate data; at worst, it leads to projections that growth will occur in Medicare patients simply because there's going to be more of them around. Every bit of information gathered should lead to more questions. In this case, what is the growth pattern by meaningful age groupings, in what zipcodes do they live, what is their employment and insurance coverage profile, what are the residency turnover numbers, will the school systems attract younger people to your primary service area, what is the economic development plans for the area, etc.? You get the idea. The more questions you ask, the more variables there are to consider, and the more complex the real environment reveals itself to be. Incomplete assessments lead to kneejerk responses. More complete assessment should lead to better and perhaps more nuanced responses; but that is no assurance they will be the right ones.

The second thing that can go wrong is misinterpretation of the data. We know that people look at the same information and draw completely different conclusions all the time. That is easiest to see in the self-assessment component of the plan. Recent research has suggested that employee assessments do far more harm than good. It is impossible to remove bias from them. The relationship between evaluator and evaluatee colors even the best of intentions at objectivity. Whether its the CEO or some other C-suite executive writing the plan, bias inevitably leads to over and under assesments of true capabilities.

And the third? These assessments are done at a point in time. Omniscience once, were it achievable, is not enough. You need it everyday so you can measure the impact of your actions on others and others' actions on your plan. Unfortunately, there is always lead times between plan and plan implementation, and they are often quite long. A lot of trucks can drive through that gap, particularly where construction or fundamental relational changes are required. In the press of day-to-day operational management, how many teams address the impact of environmental change on strategies in any systematic and routine way? Do rating agencies really expect omniscience today and every day? Perhaps they do.

Complexity Creeps Up On You

Joseph Tainter, author of "The Collapse of Complex Societies," was recently quoted in the New York Times as saying, "Complexity creeps up on you." Drawing from his research of ancient civilizations, including the Roman Empire, Tainter concludes that leaders generally make reasonable decisions based on the facts known to them at the time. However, it is simply not possible to predict how actions today will play out in complex environments. There are simply too many variables. As the effects of actions cascade through multiple layers of human and environmental systems, what seemed unthinkable yesterday becomes the new reality today.

Which gets me to our healthcare system. The Healthcare Reform Bill may well be the straw that finally breaks a system that is alrady near collapse from its own complexity. A more complex system is hard to imagine. Doctors, patients, hospitals, specialty providers, nursing homes, home health and hospice, insurance companies, Medicare, state-run Medicaid, regulatory agencies, patient advocacy organizations, legislators, medical malpractice insurers, media organizations, special interest groups, pharma companies, medical device and equipment manufacturers, and more, all interact in a complex system threatened by out-of-control cost increases and demands for higher quality and transparency. Accountable care organizations may well be the answer to at least some of the current problems, but their impact on this complex system cannot be foreseen by mortal man.

One thing is clear. Participants in this system cannot assume any future based on trend lines drawn from the past. Every assumption needs to be challenged and business models need to be rebuilt from the ground up. In other words, we should all be feeling we're not in Kansas anymore.