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Health care providers are operating in an extended period of upheaval, driven by health care reform and disruptive underlying market trends. The transformation continues in the year ahead.

Implementing the Affordable Care Act remains at the top of the agenda for health care industry executives in 2014. Mitch Morris, M.D., vice chairman and U.S. Health Care Provider leader, Deloitte Consulting LLP, weighs in on implications for providers, as well as cost management strategies and innovation opportunities in such areas as data analytics and new physician incentive models.

What is the biggest challenge facing the provider sector in the coming year?

Morris: Pick up any newspaper to see the biggest challenge facing the health care provider sector: implementing the Affordable Care Act (ACA) with all of its legislative- and market-driven implications.

For starters, providers will be under tremendous pressure to cut costs due to lower reimbursement rates and increased patient volumes resulting from health insurance exchanges and expanding Medicaid rolls. Some health systems have stated their intent to reduce costs by as much as 20 to 30 percent overall. Instituting change of this magnitude represents a huge cultural shift, and will take years to accomplish. As part of the effort, providers can use new transparency requirements to help consumers and health plans really understand costs, quality outcomes, and value.

Additionally, the days of stand-alone hospitals are numbered—many are already under considerable stress. Providers are increasingly turning to horizontal integration (hospital-hospital acquisitions) to gain much needed scale. These new, larger entities are in a better position to collaborate, prioritize programs, increase purchasing power, consolidate services, and cut costs.

We also are seeing more vertical integration. Hospitals are becoming true health systems; they are buying physician practices, ambulatory centers, diagnostic centers, home care services, and durable medical equipment and wellness companies. This integration is being driven, in part, by providers’ need to prepare for new payment systems such as accountable care organizations (ACOs). Under the ACO model (also known as population health management), health systems are being paid for the value they create for their patients rather than for the volume of services they provide. To be successful as a health system, they need to manage risks and control costs along the entire care continuum. In a trend to watch in 2014, some providers are even forming alliances with health plans or creating their own plans.

Providers also are scrutinizing their current cost structures—telecommunications contracts, real estate portfolio, shared services, staffing, and the like—and deciding which functions to provide internally and which to outsource. And they are looking at clinical efficiency and effectiveness as a means of reducing costs and preparing for mandated reporting on quality. In short, they are using multiple avenues of attack to move the needle on costs.

What trends might disrupt “business as usual” in 2014?

In 2014 we will start to get a clearer picture of how quickly health insurance exchanges take off, what types of plans people choose, and how many people will be added to Medicaid rolls. Hospitals may be facing a significant increase in volume from new patients, most of whom will be covered by plans that reimburse at lower rates. In short, there could be many more patients in the system—and hospitals could lose money on most of them. Adding to the uncertainty, increased transparency into provider cost and quality could prompt consumers to favor certain hospitals while avoiding others, resulting in a redistribution of care.

What are some steps providers can take to foster innovation and/or growth?

Innovation in health care can take many forms. From the perspective of scientific and medical innovation, the industry is constantly reinventing itself. Many developments cross life sciences and care delivery; for example, we have made great progress in understanding the human genome and tailoring treatments to individuals. In addition, some exciting medical advancements are taking place at the intersection of information technology and medical technology, such as using 3D printing to help prepare tissues for transplants. Change will be rapid, continuous, and in some areas, disruptive to established care models.

The use of IT and big data to gain new insights will continue in 2014. Providers can leverage information gathered from a variety of sources to assess the clinical value of specific treatments and determine ways to improve them. Some models even allow us to get answers to questions we haven’t even known to ask.

Another type of innovation is taking place, albeit slowly, in the adoption of new physician incentive models to support the health care industry’s transformation in focus from volume (number of patients and procedures) to value (good clinical outcomes and responsible, happy, healthy patients). Which incentives motivate physicians to provide value without waste and inefficiency? Innovation in this area—in incentives, business models, and use of analytics—will be critical as health systems make this transition.