Challenging the Status Quo: Blue Ocean Health
How Aurora Health Care Got the Competition to Work for Them
By The Blue Ocean Strategy Team
Healthcare markets today are turning into red oceans. Costs of care continue to rise. Yet the overall quality of care often does not improve – and even drops in some cases. What’s the way out?
The Aurora St Luke’s Medical Center, a leading medical institution and part of Aurora Health Care, the largest integrated healthcare system in Wisconsin, USA sees blue ocean strategy, created by W. Chan Kim and Renée Mauborgne, as the way out. By applying a blue ocean approach they value-innovated their Transcatheter Aortic Valve Replacement (TAVR) program. The results? A leap in value for the patients, a 40% decrease in staffing costs and a spectacular 350% raise in contribution margin. It’s a win-win all around.
Here Mr. Bradley Kruger, Vice President of Operations of the Center, shares the details of the Milwaukee-based organization’s blue ocean initiatives with the Blue Ocean Strategy Team. It’s a fascinating read.
The Blue Ocean Strategy Team: Tell us a bit more about your industry and the key challenges you face.
Bradley Kruger: The healthcare industry is highly competitive. Historically systems have competed head-on against each other in order to gain market share and grow volume. In the meantime, in America there is also a shift from a fee-for-service model (FFS) to a value-based purchasing model (VBP), where reimbursement is based on quality of care. It can be the quality for a certain disease-stage care, quality for a certain episode of care, or quality over a longer term. For example, within 30 days of discharge from the hospital, for certain disease states the hospital won’t get paid if the patient is readmitted. At Aurora St Luke’s Medical Center, we are roughly 80% FFS and 20% VBP now. But it looks like we will be in the 65%FFS/35%VBP in the near future.
It is imperative for us to deliver high-quality care and get ready for a world increasingly based on VBP. At the same time, however, we need to keep our business running and profitable under volume driven care today. This means we will have to continue generating volume while reducing costs. But with the traditional competitive approach, it was hard to reconcile these two ends.
How did Blue Ocean Strategy help you address and overcome these challenges?
Bradley Kruger: Blue ocean strategy gave us a whole new perspective for thinking about healthcare and our business practice. As Vice President of Operations, I oversee Cardiac Services, Transplant, Pulmonology, Radiology, Neurology and Global & Executive health at Aurora. Traditionally, in our strategy meetings we spent a lot of time talking about the competition, analyzing their trends, numbers, and drilling down into the procedural details of their volumes. Our goal was to beat the competition and grow by taking their market share. And very often, we cut costs at the expense of value, or improved value at increased costs.
Blue ocean strategy inspired me to ask, instead of competing with others in the industry, what if we could be setting the pace, creating new demand and profiting from lucrative new markets? Instead of choosing between lowering costs and improving value and quality, could we achieve differentiated value at lower cost? And I realized that to do so we needed to apply blue ocean strategy.
Can you give us an example of how you applied blue ocean strategy to your business practice?
Bradley Kruger: Take our TAVR program, or Transcatheter Aortic Valve Replacement (TAVR), which concerns a specific procedure in aortic treatment. Nowadays instead of performing open-heart surgery to replace a heart valve, there is a procedure to put a new valve in a capsule that goes through the femoral artery in your leg and into your heart valve.
This procedure is critical for people judged to be high-risk or too sick for open heart surgery, but the device for performing this procedure costs more than $30,000 while surgical valves average between $4000 and $7000. Most hospitals lose money on this procedure, as the reimbursement rate is often lower than the cost. Yet, they continue to offer this procedure to retain patients, as these patients will normally need associated care both in the short run and the long term. More importantly, they see offering this procedure as critical to keeping their competitive edge and not being absorbed by other institutions. In other words, many institutions see TAVR as a necessary but expensive investment to stay competitive. The already high cost structure of the procedure leaves them no incentive to improve the care model of the procedure itself.
A blue ocean perspective led us to take a different approach and explore how we could drastically improve the care model so as to provide better value to patients at lower cost.
To this end the physicians and administration at Aurora St. Luke’s partnered with GE Healthcare and the device company Medtronic to redesign the care model. In a nutshell, we redesigned the room structure and technology in such a way as to deliver the care faster and with greater precision to patients, thereby greatly reducing the risk for patients associated with a long waiting period or a second-time operation. In the meantime, the redesigned model also significantly lowered our cost.
You seem to have value innovated the TAVR program. How did you create a new market space with this program?
Bradley Kruger: Traditionally, the TAVR procedure was offered primarily to patients within our system, i.e. patients of doctors, hospitals and clinics associated with Aurora Healthcare. Now with our ability to perform the procedure with unmatched quality at much lower cost, we talked to our competitors: send your patients over for this procedure, we will do it and then send your patients back.
Obviously patients benefit from this arrangement. The competing systems also benefit: while their patients get the needed treatment, they won’t lose them, nor do they have to spend millions of dollars at a loss just for keeping their practice competitive. Actually, they can save up to 9 to 10 million dollars by doing so. So it’s a win all around, which cuts to the heart of blue ocean strategy, and really excites us.
“It’s a win all around, which cuts to the heart of #blueoceanstrategy, and really excites us.”Click to tweet
What are the key lessons Aurora learned from applying blue ocean strategy?
Bradley Kruger: Blue ocean strategy truly helped us think very differently about care in the community, cost and partnerships with industry, insurance companies and competitors. It helped us see that in this new era of healthcare, if we are going to be successful in our mission to help people live well, everyone must work together to focus efforts and resources on patients. This occurs only through increased levels of trust and a focus on creating win-win scenarios.
Blue ocean strategy enabled us to achieve growth by creating a new market based on sharply increased value at lower cost for patients and a non-competitive relationship with our traditional competitors.
Want to learn more? Read the full version of the interview here.
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