How Can Health Systems Harness the Value of Incumbency & Disruption?

It’s no secret that health systems today face a variety of challenges. From supply-chain issues to staffing shortages, physician misalignment to payment-model imbalance, these challenges range from unique to widespread, sudden to long-simmering.

Underlying these complex problems is a fundamental tension between the advantages of incumbency and the constant evolution of the physician and healthcare landscapes. However, I believe innovative health systems — with the help of a partner — can catapult themselves forward by applying the principles of “strategic incumbency.”

The Value & Responsibility of Incumbency

Although economists generally use “incumbent” to describe long-standing, Fortune 500 industry titans such as IBM and Cigna, it’s useful to think of health systems as such. These centers of healing are pillars of the communities they serve and integral to the local economy. Hospitals and health systems are the largest employers in 17 states. Analysts estimate that the healthcare sector, already the nation’s number-one employer, will continue to grow due to an aging population. This role extends beyond the four walls of the hospital through health systems’ affiliation with physicians in the community.

With this stature comes responsibility, respect, loyalty, and trust. In a word: reputation. Health systems can leverage their reputation, influence, and diverse service lines to outperform competitors. As researchers from Kaufman Hall noted: “[Health systems] have an established brand, broad physician relationships, care coordination infrastructures (including EHRs), and the ability to care for comorbidities that more specialized partners are not equipped to handle.”

However, flexibility is also essential. This adaptability is the difference between “leveraging” a health system’s reputation and “relying solely on” their reputation. Established health systems should shun rigidity to remain viable, fulfill their obligations to patients, and outmaneuver smaller, younger, nimbler organizations. This balance between a health system’s hard-earned reputation and the willingness to adapt calls to mind the idea of “strategic incumbency.”

Defining “Strategic Incumbency”

In a thought-provoking article published by the Harvard Business Review, authors Thomas W. Malnight and Ivy Buche defined “strategic incumbency” as “an established firm’s ability to dynamically convert age, size, and tradition into the key advantages of market power, trusted relationships, and deep insights. That conversion, when managed well, allows incumbents to reinvent themselves, their strategies, and their business models and create new opportunities and ward off upstarts.”

Two facets of strategic incumbency are harnessing complexity and maintaining a long-term focus. These principles are especially relevant to healthcare given our industry’s necessity, scale, and intricacy. While there exists to some degree a fundamental uncertainty about the future of healthcare, health systems will undoubtedly remain an integral part. Therefore, savvy health systems should seek opportunities to act as strategic incumbents in order to gain an advantageous position as the future of healthcare unfolds. To concretize the somewhat abstract principles of strategic incumbency, let’s explore a challenge familiar to many health systems: alignment with employed community physicians.

Harness Complexity by Surveying the Shifting Physician Landscape

Health systems frequently employ and align with local doctors to secure referrals. However, as Frank Letherby, CEO of Community Health Services at Health First Inc., noted: “Employment does not equal alignment.” There are multiple causes of misalignment, from suboptimal governance to inadequate technology. Perhaps the main cause is a health system’s failure to account for and adapt to the shifting physician landscape. In order to harness complexity, it’s critical to start by accurately pinpointing and naming the complex forces and factors at play.

Aligning with community physicians is not a one-and-done operation. Rather, proper alignment is a process of continual realignment. Health systems must constantly adjust to accommodate the ever-changing dynamics of the healthcare ecosystem. Currently, two forces are significantly reshaping the physician landscape: independence and choice.

Independent physicians are rebounding strongly post-pandemic. While the pandemic threatened operations — leading many physicians to shutter their practice or enter into employment — research shows that many independent providers now “feel stronger, resilient, and positive about the future of their practice and the industry.” As Privia Health CEO Shawn Morris predicted, this optimism could lead physicians “to leave employment and start their own practice.”

Furthermore, independent physicians today have more partnership alternatives available to them than ever before. According to the Advisory Board: “Physicians no longer face the binary choice of independent shareholder or hospital employee.” This diverse array of options endows physicians with greater leverage in discussions regarding health-system employment. Just as the Great Resignation has given employees increased bargaining power, independent physicians too can afford to be highly selective. Experts have identified several criteria that physicians are looking for in potential partners:

• Easy to work with yet strategic
• Flexible and non-exclusive
• Oriented to value-based care

 
Health systems seeking to fortify their employment of and alignment with community physicians must address these various factors. In doing so, these health systems differentiate themselves, appealing to today’s physicians and reaping the rewards afforded to strategic incumbents. Attracting, retaining, and engaging physicians can help fortify employment models, in turn allowing for long-term growth.

Self-Disrupting to Achieve Long-Term Success

In reaction to this disruption of employment models — and to the industry at large — health systems sometimes assume a defensive posture. As Malnight and Buche observed, this resistance is due to the fact that addressing the “causes of inertia” may “involve dismantling the very structures they have meticulously put in place.” This dissonance reveals a paradox of growth: Long-term security and success often require short-term sacrifice.

 
This dissonance is deeply rooted in human nature. We are instinctively predisposed toward the present moment, dedicating our attention to immediate concerns at the expense of far-off (albeit serious) issues. Similarly, we tend to favor the imperfect yet familiar status quo over the unknown — yet potentially improved — future. To counteract these biases, we have to adopt the long-term perspective of the strategic incumbent.

From this vantage, we see that healthcare is undergoing a volume-to-value transition. Although our current fee-for-service model may never wholly disappear, the degree to which it dominates payments is simply unsustainable. This shift has massive implications for health systems and their employed physicians. A recent study of employed physicians found that volume-based payments far exceeded quality-based payments. As Rachel O. Reid, the study’s lead author, observed: “The payment systems that are most often in place are designed to maximize health system revenue by incentivizing providers within the system to deliver more services.”

Health systems’ current employment arrangements, which effectively subsidize physician salaries to secure referrals for procedures, are built for fee-for-service models and are incompatible with the value-based future. This incompatibility can create contradictory incentives when progressing from volume to value.

Bridging this gap inherently entails disruption. However, health systems can act as strategic incumbents by embracing and proactively initiating this disruption. Health system leaders should actively pursue, rather than passively resist, the shift to value-based care. After all, what we resist persists, to paraphrase the psychologist Carl Jung. Through constructive self-disruption, health systems get ahead of the curve, thereby mitigating the damage of external disruption.

Partnering for Intelligent & Innovative Self-Disruption

Health systems do not need to engage in self-imposed disruption alone. Seeking a strategic partner, one with complementary capabilities and expertise, can help health systems control and avoid the negative effects of disruption. According to Kaufman Hall, health systems seeking a strategic partner should ask the following questions:

• What is our core business?
• For what services is there strong consumer need or demand?
• Are there potential partners who can provide these services better than we can?
• What do we offer to potential partners?
• What degree of control do we need or want in the partnership?
• What is the optimal structure for the partnership (e.g., ownership, branding, financial commitment, governance, clinical decision-making)?

 
These questions can help leaders identify which potential partner has the right alignment — clinically, culturally, and financially — to solve their health system’s unique challenges. Since these partnerships benefit from a long-term arrangement, this holistic alignment is vital. Beyond alignment, a partner should also possess a deep knowledge of physicians, their processes and incentives, fears and dreams. This understanding helps foster the engagement, buy-in, and trust needed to navigate and manage change. As I noted in a podcast with Sg2, this trust reassures physicians that “their willingness to allow us to spend the time with them is going to pay off when we get into the work of new models.”

When evaluating organizations with which to form a partnership, think outside the box and consider unorthodox groups, even would-be competitors. This mixture of cooperation and competition — deemed “coopetition” by the Advisory Board — can advance both parties’ progress toward a common goal. This open-minded yet precise approach enables health systems to leverage existing strengths while expanding capabilities. By utilizing this approach, leaders can achieve the balance needed to catalyze change and elevate health systems to the realm of strategic incumbency.

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