Health care organizations face incredibly complex problems, including regulatory pressures, dropping revenue from public and private payers, and consumer demands for greater convenience, transparency and connectivity. These stressors are heightened by the current political uncertainty around health care reforms.
In these rapidly changing times, traditional fixed-price, transactional relationships between health care providers and vendors are of little value. When providers buy a discrete product or service, they do so with the intent of integrating it into their strategy, assigning it a specific role in achieving their goals. But if the market shifts, if regulations change, if their strategy runs into roadblocks, they are left with what they bought.
As a result, many organizations have turned to risk-sharing or risk-balanced relationships in which both sides — health care providers and vendors — take on specific accountabilities. In risk sharing, there are always two sides: the underlying assumption is that “you will be responsible for a, b and c” and “I will be responsible for x, y and z.”
In an environment as interdependent and complex as health care, someone is always left holding the bag if the original strategic assumptions do not prove out in the long run. Even with so-called risk sharing, most or all of the risk of achieving the goal falls on provider organizations. If they can’t effectively connect what they purchased — products, services or consulting — to the action they are trying to drive, they are often left to figure it out on their own.
Outcomes-aligned relationships represent the next order of value creation beyond fixed-price and risk-sharing models. In an outcomes relationship, the goals of the health system and the vendor are integrated and jointly aligned so success is defined by achieving the ultimate goal together. The partnership aspect enables true risk-sharing, in that the vendor aligns with the provider to deliver financial, quality and patient experience metrics that are mutually agreed upon. Sustainability and the need to pivot together over time based on market, environmental, and regulatory changes that impact strategy are bedrock components of these relationships.
In risk sharing, each side wins (or loses) based on a specific set of criteria. In outcomes alignment, the relationship is designed around value creation for the provider organization and the vendor. The two organizations are coresourced and cogoverned in a relationship structure that ensures both have skin in the game and both are rewarded for meeting goals.
Why is this approach so relevant now? The rapid transformations in health care are unprecedented. Ten or 15 years ago, it was different. A provider organization could define two-year objectives, and at the end of that period, if it succeeded, the outcomes typically would still be relevant. Today the environment is highly unstable, from political uncertainty to the emergence of disruptive technologies. Defining a path today to achieve goals two or five or seven years from now requires a strategy that can flex to accommodate or adapt to conditions that may not even exist today. For that reason, the path has to be comanaged and codependent.
What are the differentiating characteristics of an outcomes-based relationship?
It focuses on long-term sustainability. Risk sharing tends to be defined around specific components over short periods of time. Outcomes-based agreements are typically seven years or longer.
It is aligned around macro-metrics. The agreement incentivizes both parties to promote value. Outcomes are aligned to macro-level metrics that are reflected in the provider’s bottom line — operational savings and patient volume, for example — rather than micro-level measures that can mask the overall impact and/or sustainability of the initiatives.
Relational governance creates one team. Traditional governance, in which the provider unilaterally defines success or failure, is replaced with relational governance in an outcomes-based partnership. Leaders from both organizations work as a team: discussing their joint capabilities; aligning around intent, accountability and the appropriate business model; and replacing the traditional supply chain process with a roll-up-your-sleeves-together approach. Both organizations succeed together or fail together.
Evolution is the only constant. Focused on outcomes that must be accomplished and sustained over many years, this relationship requires ongoing strategic and resource adjustments as conditions change. This is often not the case with risk-sharing arrangements, in which deliverables are more narrowly defined and sustainability can be measured in months. In our experience, many health leaders have been disappointed by such agreements, feeling they were left with a playbook that no longer worked in a fundamentally changed environment.
Experimentation and innovation are encouraged. When health systems and vendors are aligned around outcomes rather than married to defined deliverables, innovative thinking and new approaches are encouraged. The organizations are open to leveraging breakthrough technologies and services — that may not even have existed when an agreement was signed — in the pursuit of desired outcomes.
What should health care leaders look for in a transformational partner? Here are three factors every executive should evaluate before considering a partnership:
- It is critical to pick an organization that aligns across values and culture. This may seem obvious, but it is often overlooked in the traditional buying process. When purchases were focused solely on the acquisition of a technology, software or service, it was less important to evaluate the way a vendor works culturally and the values it has instilled in its people. In outcomes relationships, this will become a critical enabler for success or a crippling challenge if the two organizations are misaligned.
- It’s no longer about buying a product or a service for a particular point of care; it’s about finding a partner who shares the provider organization’s vision for the enterprise and offers broad-ranging technology, expertise and resources to help it determine the right solution to its health care challenges. Mutual trust is critical. Questions will arise around thorny issues such as data, metrics, financials and process monitoring. Both parties have to invest time and effort to make the partnership work.
- Leaders need vendors who are willing to commit to new business models that share the risks providers today have to face alone. The health care environment is changing so rapidly that what an organization buys today may be irrelevant in 18 months unless the vendor is helping it prepare for market trends, coming legislation and other vectors of change. Outcomes alignment is about delivering value to organizations in ways that will be unique to their environment, market, payer mix and strategy. Partnership-minded vendors don’t just deliver product, they activate outcomes.
Helen Stewart is managing principal of GE Healthcare Partners.