In 63 days, Americans will know the composition of the 119th Congress and the new occupants of the White House and 11 Governor’s mansions. We’ll learn results of referenda in 10 states about abortion rights (AZ, CO, FL, MD, MO, MT, NE, NV, NY, SD) and see how insurance coverage for infertility (IVF therapy) fares as Californians vote on SB 729. But what we will not learn is the future of the U.S. health system at a critical time of uncertainty.
In 6 years, every baby boomer will be 65 years of age or older. In the next 20 years, the senior population will be 22% of the population–up from 18% today. That’s over 83 million who’ll hit the health system vis a vis Medicare while it is still digesting the tsunami of obesity, a scarcity of workers and unprecedented discontent:
The majority of voters is dissatisfied with the status quo. 69% think the system is fundamentally flawed and in need of major change vs. 7% who think otherwise. 60% believe it puts its profits above patient care vs. 13% who disagree.
Employers are fed up: Facing projected cost increases of 9% for employee coverage in 2025, they now reject industry claims of austerity when earnings reports and executive compensation indicate otherwise. They’re poised to push back harder than ever.
Congress is increasingly antagonistic: A bipartisan coalition in Congress is pushing populist reforms unwelcome by many industry insiders i.e. price transparency for hospitals, price controls for prescription drugs, limits on private equity ownership, constraint on hospital, insurer and physician consolidation, restrictions on tax exemptions of NFP hospitals, site neutral payment policies and many more.
Fanning these flames, media characterizations of targeted healthcare companies as price gouging villains led by highly-paid CEOs is mounting: last week, it was Acadia Health’s turn courtesy of the New York Times’ investigators.
Navigating uncertainty is tough for industries like healthcare where demand s growing, technologies are disrupting how and where services are provided and by whom, and pricing and affordability are hot button issues. And it’s too big to hide: at $5.049 trillion, it represents 17.6% of the U.S. GDP today increasing to 19.7% by 2032. Growing concern about national debt puts healthcare in the crosshairs of policymaker attention:
Per the Committee for a Responsible Federal Budget: “In the latest Congressional Budget Office (CBO) baseline, nominal spending is projected to grow from $6.8 trillion in Fiscal Year (FY) 2024 to $10.3 trillion in 2034. About 87% of this increase is due to three parts of the federal budget: Social Security, federal health care programs, and interest payments on the debt.”
In response, Boards in many healthcare organizations are hearing about the imperative for “transformational change” to embrace artificial intelligence, whole person health, digitization and more. They’re also learning about ways to cut their operating costs and squeeze out operating margins. Bold, long-term strategy is talked about, but most default to less risky, short-term strategies compatible with current operating plans and their leaders’ compensation packages. Thus, “transformational change” takes a back seat to survival or pragmatism for most.
For Boards of U.S. healthcare organizations, the imperative for transformational change is urgent: the future of the U.S. system is not a repeat of its past. But most Boards fail to analyze the future and construct future-state scenarios systematically. Lessons from other industries are instructive.
Transformational change in mission critical industries occurs over a span of 20-25 years. It starts with discontent with the status quo, then technologies and data that affirm plausible alternatives and private capital that fund scalable alternatives. It’s not overnight.
Transformational change is not paralyzed by regulatory hurdles. Transformers seek forgiveness, not permission while working to change the regulatory landscape. Advocacy is a critical function in transformer organizations.
Transformation is welcomed by consumers. Recognition of improved value by end-users—individual consumers—is what institutionalizes transformational success. Transformed industries define success in terms of the specific, transparent and understandable results of their work.
Per McKinsey, only one in 8 organizations is successful in fully implementing transformational change completely but the reward is significant: transformers outperform their competition three-to-one on measures of growth and effectiveness.
I am heading to Colorado Springs this weekend for the Governance Institute. There, I will offer Board leaders four basic questions.
Is the future of the U.S. health system a repeat of the past or something else?
How will its structure, roles and responsibilities change?
How will affordability, quality, innovation and value be defined and validated?
How will it be funded?
Answers to these require thoughtful discussion. They require independent judgement. They require insight from organizations outside healthcare whose experiences are instructive. They require fresh thinking.
Until and unless healthcare leaders recognize the imperative for transformational change, the system will calcify its victim-mindset and each sector will fend for itself with diminishing results. No sector—hospitals, insurers, drug companies, physicians—has all the answers and every sector faces enormous headwinds. Perhaps it’s time for a cross-sector coalition to step up with transformational change as the goal and the public’s well-being the moral compass.
PS: Last week, I caught up with Drs. Steve and Pat Gabbe in Columbus, Ohio. Having served alongside them at Vanderbilt and now as an observer of their work at Ohio State, I am reminded of the goodness and integrity of those in healthcare who devote their lives to meaningful, worthwhile work. Steve “burns with a clear blue flame” as a clinician, mentor and educator. Pat is the curator of a program, Moms2B, that seeks to alleviate Black-White disparities in infant mortality and maternal child health in Ohio. They’re great people who see purpose in their calling; they’re what make this industry worth fixing!
In last month’s blog, we discussed the importance of financial planning, both for internal audiences—including the leadership team and the board of trustees—and for external audiences—including prospective students and their families, rating agencies, alumni and other stakeholders. This month, in the first of a series of blogs focused on key finance-related issues, we’re turning our attention to a broader and deeper internal audience, asking the question, “What is your institution’s financial literacy?”
The terms described in this blog will be very familiar to members of college and university finance teams and to many institutional leaders as well.
The point is that these terms should be familiar to as many individuals as possible throughout the institution: they form the foundation of a basic financial literacy that every college and university should foster across its faculty and staff.
What is financial literacy?
Financial literacy is the ability to understand where an institution stands at any given time with respect to key elements of its balance sheet and income statement. To state it simply, financial literacy means an understanding of the vital signs that describe the financial health of the institution. In medicine, the basic vital signs are body temperature, pulse rate, respiration rate, and blood pressure. In finance, the vital signs include measures of unrestricted cash, revenue, expenses, debt, and risk.
In medicine, there are professionals whose job is to dig deeper if any of the body’s vital signs are deteriorating. Similarly in finance, it is the job of the CFO and finance team to monitor the vital signs of the institution’s financial health and to seek causes and solutions of current troubles or to use changes in the vital signs to address potential future issues. For most of us—in medicine or finance—the goal should be a basic understanding of what the vital signs measure and whether they point to good health.
There are some key considerations for each financial vital sign:
Unrestricted Cash. The critical question related to unrestricted cash (also termed liquidity) is whether the institution has enough accessible liquidity to meet its daily expenses if its cash flow was unexpectedly interrupted. Days cash on hand is a balance sheet metric that is typically used to assess this issue: days cash on hand literally measures how long unrestricted cash reserves could cover the institution’s operating costs if its cash flow suddenly stopped.
The emphasis on “accessible liquidity” is an important element of this financial vital sign: it speaks to the ability to distinguish between institutional wealth versus liquidity. In higher education, an endowment can be an important source of the institution’s wealth, but many of the funds within an endowment cannot be easily accessed—they are, by and large, not liquid funds or are highly restricted as to their use. Readily available, unrestricted cash reserves are what an institution must rely on to meet its day-to-day expenses should cash flow be interrupted or reduced.
Revenue. Because an institution needs to maintain or grow its cash reserves and allocate them sparingly, the amount of revenue coming in—from tuition and fees and from other sources of additional income (see below)—is also an important vital sign. An institution should obviously be taking in enough revenue to cover its expenses without drawing on its cash reserves.
Additionally, however, given continued growth in expenses, revenue growth (through enrollment growth, student mix, and/or program mix) is a significant measure of ongoing vitality.
Financial health is also enhanced if an institution does not rely too heavily on a single revenue source. For schools with an endowment, for example, the amount of income the endowment can generate to support operations is an important source of additional income. More generally, additional income can come from such auxiliary revenue sources as residential fees, fundraising, special events, concessions, and a host of other sources. These additional revenue sources, while potentially small on an individual basis, can be material on a cumulative basis.
Expenses. How much does it cost to produce the education that a college or university provides to its students? If that cost is approaching—or worse, surpassing—the net tuition revenue and additional income that the institution brings in, what is being done—or could be done—to reduce those costs? Expenses are perhaps most similar to body temperature in medical vital signs; if they get too high, they must be brought down before the health of the institution begins to decline. And the measure of expenses should be viewed overall for the institution as well as on a per student basis to communicate the “value” of different student types to the organization.
Debt. Debt is an essential component of the funding of significant capital projects that colleges and universities must undertake to maintain updated and competitive facilities. Just as most people need to take out a mortgage to afford a home purchase—spreading the cost of the home over a multiyear payment period—so too do institutions often need debt to finance large capital expenditures. But the amount of debt (also termed “leverage”) can also be an indicator of the institution’s financial health. That health begins to decline if the amount of debt relative to an institution’s assets or annual income grows too large, or if the amount required to pay for the debt (i.e., to meet the scheduled principal and interest payments—the debt service) puts too much of a burden on the cash flow generated from the institution’s day-to-day operations. If the debt service becomes too high relative to cash flow, the institution may face onerous legal requirements, or even default, which may severely constrain its ability to provide the range of programs desired and expected by its student population.
Risk. Risk is an indicator that identifies potential weaknesses in any of the preceding indicators that could jeopardize the institution’s financial health. For basic financial literacy, only the most significant risks need to be identified: over-reliance on tuition revenue in a market with declining enrollments, for example, or over-reliance on endowment income in the event of market instability. Once an institution consistently measures its risks, it can begin to determine what level of risk is appropriate and address strategies to manage that risk.
Why does financial literacy matter?
Promoting financial literacy throughout an institution cultivates a common understanding of financial health that provides context for leadership’s decisions and a common language to address issues. If tuition revenue is declining, for example, financially literate faculty members should better understand the need to prioritize academic programs that not only meet the academic needs of their students, but also can draw more students or produce healthier margins. If cost-cutting measures are required to reduce expenses, financially literate staff should understand the genesis of the need for reductions and why the institution cannot simply draw on its endowment to close the gap. Furthermore, acknowledging and describing the most significant risks an institution faces using a common language makes clear the need for action if one or more of those risks begins to materialize.
Financial literacy is also an important tool for cultivating the next generation of faculty leaders. When faculty members rise to leadership positions, it is essential that they understand that academic growth and strategic initiatives cannot succeed without sufficient resources to support them, or if they cannot generate the revenue needed to cover—or exceed—their costs.
By promoting financial literacy across the institution, the institution can help ensure that future leaders are acquiring the foundation needed for them to grow into informed decision-makers who understand the need to maintain the institution’s financial health.
What a wild end to the year it was for Sam Altman, CEO of OpenAI.
In the span of five white-knuckle days in November, the head of Silicon Valley’s most advanced generative AI company was fired by his board of directors, replaced by not one but two different candidates, hired to lead Microsoft’s AI-research efforts and, finally, rehired back into his CEO position at OpenAI with a new board.
A couple weeks later, TIME selected him “CEO of the Year.” Altman’s saga is more than a tale of tech-industry intrigue. His story provides three valuable lessons for not only aspiring and current healthcare leaders, but also everyone who works with and depends on them.
1. Agree On The Goal, Define It, Then Pursue It Tirelessly
OpenAI’s governance structure presented a unique case: a not-for-profit board, whose stated mission was to protect humanity, found itself overseeing an enterprise valued at more than $80 billion. Predictably, this setup invited conflict, as the company’s humanitarian mission began to clash with the commercial realities of a lucrative, for-profit entity.
But there’s little evidence the bruhaha resulted from Altman’s financial interests. According to IRS filings, the CEO’s salary was only $58,333 at the time of his firing, and he reportedly owns no stock.
While Altman clearly knows the company needs to raise money to fund the creation of ever-more-powerful AI tools, his primary goal doesn’t appear to revolve around maximizing shareholder value or his own wealth.
In fact, I believe Altman and the now-disbanded board shared a common mission: to save humanity. The problem was that the parties were 180 degrees apart when it came to defining how exactly to protect humanity.
Altman’s path to saving humanity involved racing forward as fast as possible. As CEO, he understands generative AI’s potential to radically enhance productivity and alleviate threats like world hunger and climate change.
By contrast, the board feared that breakneck AI development could spiral out of control, posing a threat to human existence. Rather than perceiving AGI (artificial general intelligence) as a savior, much of the board worried that a self-learning system might harm humanity.
This dichotomy pitted a CEO intent on changing the world against a board intent to progress at a cautious, incremental pace.
For Healthcare Leaders: Like OpenAI, American healthcare leaders share a common goal. Be they doctors, insurers or government health agencies, all tout the importance of “value-based care” (VBC), which in general terms, constitutes a financial and care-delivery model based on paying healthcare professionals for the quality of clinical outcomes they achieve rather than the quantity of services they provide. But despite agreeing on the target, leaders differ on what it means and how best to accomplish it. Some think of VBC as “pay for performance,” whereby doctors are paid small incentives based on metrics around prevention and patient satisfaction. These programs fail because clinicians ignore the metrics without incentives and total health suffers.
Other leaders believe VBC means paying insurers a set, annual, upfront fee to provide healthcare to a population of patients. This, too, fails since the insurers turn around and pay doctors and hospitals on a fee-for-service basis, and implement restrictive prior authorization requirements to keep costs down.
Instead of making minor financial tweaks that keep falling short of the goal, leaders who want to transform American medicine must play to win. This will require them to move quickly and completely away from fee-for-service payments (which rewards volume of care) to capitation at the delivery-system level (rewarding superior results by prepaying doctors and hospitals directly without insurers playing the part of middlemen).
Like OpenAI’s former board members, today’s healthcare leaders are playing “not to lose.” They avoid making big changes because they fear the backlash of risk-averse providers. But anything less than all in won’t make a dent given the magnitude of problems. To be effective, leaders must make hard decisions, accept the risks and be confident that once the changes are in place, no one will want to go back to the old ways of doing things.
2. Hire Visionary Leaders Who Inspire Boldly
Many tech-industry commentators have drawn comparisons between Altman and Steve Jobs. Both leaders possess(ed) the rare ability to foresee a better future and turn their visions into reality. And both demonstrate(d) passion for exceeding people’s wants and expectations—not for their own benefit but because they believe in a greater mission and purpose.
Altman and Jobs are what I call visionary leaders, who push their organizations and people to accomplish remarkable outcomes few could’ve believed possible. These types of leaders always challenge conservative boards.
When the OpenAI board realized it’s hard to constrain a CEO like Sam Altman, they fired him.
On day one of that decision, the board might have assumed their action would protect humanity and, therefore, earn the approval of OpenAI’s employees. But the story took a sharp turn when nearly all the company’s 770 workers signed a letter to the board in support of Altman, threatening to quit unless (a) their visionary leader was brought back immediately and (b) the board resigned.
Five days after the battle began, the board was facing a rebellion and had little choice but to back down.
For Healthcare Leaders: The American healthcare system is struggling. Half of Americans say they can’t afford their out-of-pocket expenses, which max out at $16,000 for an insured family. American health is languishing with average life expectancy virtually unchanged since the start of this century. Maternal and infant mortality rates in the U.S. are double what they are in other wealthy nations. And inside medicine, burnout runs rampant. Last year, 71,000 physicians left the profession.
Visionary leadership, often sidelined in favor of the status quo, is crucial for transformative change. In healthcare, boards typically prioritize hiring CEOs with the ability to consolidate market control and achieve positive financial results rather than the ability to drive excellence in clinical outcomes. The consequence for both the providers and recipients of care proves painful.
Like OpenAI’s employees, healthcare professionals want leaders who are genuine, who have the courage to abandon bureaucratic safety in favor of innovative solutions, and who can ignite their passion for medicine. For a growing number of clinicians, the practice of medicine has become a job, not a mission. Without that spark, the future of medicine will remain bleak.
3. Embrace Transformative Technology
OpenAI’s board simultaneously promoted and feared ChatGPT’s potential. In this era of advanced technology, the dilemma of embracing versus restraining innovation is increasingly common.
The board could have shut down OpenAI or done everything in its power to advance the AI. It couldn’t, however, do both. When organizations in highly competitive industries try to strike a safe “balance,” choosing the less-contentious middle ground, they almost always fail to accomplish their goals.
For Healthcare Leaders: Despite being data-driven scientists, healthcare professionals often hesitate to embrace information technologies. Having been burned by tools like electronic healthcare records, which were designed to maximize revenue and not to facilitate medical care, their skepticism is understandable.
But generative AI is different because it has the potential to simultaneously increase quality, accessibility and affordability. This is where technology and skilled leadership must combine forces. It’s not enough for leaders to embrace generative AI. They must also inspire clinicians to apply it in ways that promote collaboration and achieve day-to-day operational efficiency and effectiveness. Without both, any other operational improvements will be incremental and clinical advances minimal at best.
If the boards of directors and other similar decision-making bodies in healthcare want their organizations to lead the process of change, they’ll need to select and support leaders with the vision, courage, and skill to take radical and risky leaps forward. If not, as OpenAI’s narrative demonstrates, they and their organizations will become insignificant and be left behind.
Health systems are recovering from the worst financial year in recent history. We surveyed strategic planners to find out their top priorities for 2024 and where they are focusing their energy to achieve growth and sustainability. Read on to explore the top six findings from this year’s survey.
Research questions
With this survey, we sought the answers to five key questions:
How do health system margins, volumes, capital spending, and FTEs compare to 2022 levels?
How will rebounding demand impact financial performance?
How will strategic priorities change in 2024?
How will capital spending priorities change next year?
Bigger is Better for Financial Recovery
What did we find?
Hospitals are beginning to recover from the lowest financial points of 2022, where they experienced persistently negative operating margins. In 2023, the majority of respondents to our survey expected positive changes in operating margins, total margins, and capital spending. However, less than half of the sample expected increases in full-time employee (FTE) count. Even as many organizations reported progress in 2023, challenges to workforce recovery persisted.
40%
Of respondents are experiencing margins below 2022 levels
Importantly, the sample was relatively split between those who are improving financial performance and those who aren’t. While 53% of respondents projected a positive change to operating margins in 2023, 40% expected negative changes to margin.
One exception to this split is large health systems. Large health systems projected above-average recovery of FTE counts, volume, and operating margins. This will give them a higher-than-average capital spending budget.
Why does this matter?
These findings echo an industry-wide consensus on improved financial performance in 2023. However, zooming in on the data revealed that the rising tide isn’t lifting all boats. Unequal financial recovery, especially between large and small health systems, can impact the balance of independent, community, and smaller providers in a market in a few ways. Big organizations can get bigger by leveraging their financial position to acquire less resourced health systems, hospitals, or provider groups. This can be a lifeline for some providers if the larger organization has the resources to keep services running. But it can be a critical threat to other providers that cannot keep up with the increasing scale of competitors.
Variation in financial performance can also exacerbate existing inequities by widening gaps in access. A key stakeholder here is rural providers. Rural providers are particularly vulnerable to financial pressures and have faced higher rates of closure than urban hospitals. Closures and consolidation among these providers will widen healthcare deserts. Closures also have the potential to alter payer and case mix (and pressure capacity) at nearby hospitals.
Volumes are decoupled from margins
What did we find?
Positive changes to FTE counts, reduced contract labor costs, and returning demand led the majority of respondents in our survey to project organizational-wide volume growth in 2023. However, a significant portion of the sample is not successfully translating volume growth to margin recovery.
44%
Of respondents who project volume increases also predict declining margins
On one hand, 84% of our sample expected to achieve volume growth in 2023. And 38% of respondents expected 2023 volume to exceed 2022 volume by over 5%. But only 53% of respondents expected their 2023 operating margins to grow — and most of those expected that the growth would be under 5%. Over 40% of respondents that reported increases in volume simultaneously projected declining margins.
Why does this matter?
Health systems struggled to generate sufficient revenue during the pandemic because of reduced demand for profitable elective procedures. It is troubling that despite significant projected returns to inpatient and outpatient volumes, these volumes are failing to pull their weight in margin contribution. This is happening in the backdrop of continued outpatient migration that is placing downward pressure on profitable inpatient volumes.
There are a variety of factors contributing to this phenomenon. Significant inflationary pressures on supplies and drugs have driven up the cost of providing care. Delays in patient discharge to post-acute settings further exacerbate this issue, despite shrinking contract labor costs. Reimbursements have not yet caught up to these costs, and several systems report facing increased denials and delays in reimbursement for care. However, there are also internal factors to consider. Strategists from our study believe there are outsized opportunities to make improvements in clinical operational efficiency — especially in care variation reduction, operating room scheduling, and inpatient management for complex patients.
Strategists look to technology to stretch capital budgets
What did we find?
Capital budgets will improve in 2024, albeit modestly. Sixty-three percent of respondents expect to increase expenditures, but only a quarter anticipate an increase of 6% or more. With smaller budget increases, only some priorities will get funded, and strategists will have to pick and choose.
Respondents were consistent on their top priority. Investments in IT and digital health remained the number one priority in both 2022 and 2023. Other priorities shifted. Spending on areas core to operations, like facility maintenance and medical equipment, increased in importance. Interest in funding for new ambulatory facilities saw the biggest change, falling down two places.
Why does this matter?
Capital budgets for health systems may be increasing, but not enough. With the high cost of borrowing and continued uncertainty, health systems still face a constrained environment. Strategists are looking to get the biggest bang for their buck. Technology investments are a way to do that. Digital solutions promise high impact without the expense or risk of other moves, like building new facilities, which is why strategists continue to prioritize spending on technology.
The value proposition of investing in technology has changed with recent advances in artificial intelligence (AI), and our respondents expressed a high level of interest in AI solutions. New applications of AI in healthcare offer greater efficiencies across workforce, clinical and administrative operations, and patient engagement — all areas of key concern for any health system today.
Building is reserved for those with the largest budgets
What did we find?
Another way to stretch capital budgets is investing in facility improvements rather than new buildings. This allows health systems to minimize investment size and risk. Our survey found that, in general, strategists are prioritizing capital spending on repairs and renovation while deprioritizing building new ambulatory facilities.
When the responses to our survey are broken out by organization type, a different story emerges. The largest health systems are spending in ways other systems are not. Systems with six or more hospitals are increasing their overall capital expenditures and are planning to invest in new facilities. In contrast, other systems are not increasing their overall budgets and decreasing investments in new facilities.
AMCs are the only exception. While they are decreasing their overall budget, they are increasing their spending on new inpatient facilities.
Why does this matter?
Health systems seek to attract patients with new facilities — but only the biggest systems can invest in building outpatient and inpatient facilities. The high ranking of repairs in overall capital expenditure priorities suggests that all systems are trying to compete by maintaining or improving their current facilities. Will renovations be enough in the face of expanded building from better financed systems? The urgency to respond to the pandemic-accelerated outpatient shift means that building decisions made today, especially in outpatient facilities, could affect competition for years to come. And our survey responses suggest that only the largest health system will get the important first-mover advantage in this space.
AMCs are taking a different tack in the face of tight budgets and increased competition. Instead of trying to compete across the board, AMCs are marshaling resources for redeployment toward inpatient facilities. This aligns with their core identity as a higher acuity and specialty care providers.
Partnerships and affiliations offer potential solutions for health systems that lack the resources for building new facilities. Health systems use partnerships to trade volumes based on complexity. Partnerships can help some health systems to protect local volumes while still offering appropriate acute care at their partner organization. In addition, partnerships help health systems capture more of the patient journey through shared referrals. In both of these cases, partnerships or affiliations mitigate the need to build new inpatient or outpatient facilities to keep patients.
Eighty percent of respondents to our survey continued to lose patient volumes in 2023. Despite this threat to traditional revenue, health systems are turning from revenue diversification practices. Respondents were less likely to operate an innovation center or invest in early-stage companies in 2023. Strategists also reported notably less participation in downside risk arrangements, with a 27% decline from 2022 to 2023.
Why does this matter?
The retreat from revenue diversification and risk arrangements suggests that health systems have little appetite for financial uncertainty. Health systems are focusing on financial stabilization in the short term and forgoing practices that could benefit them, and their patients, in the long term.
Strategists should be cautious of this approach. Retrenchment on innovation and value-based care will hold health systems back as they confront ongoing disruption. New models of care, patient engagement, and payment will be necessary to stabilize operations and finances. Turning from these programs to save money now risks costing health systems in the future.
Market intelligence and strategic planning are essential for health systems as they navigate these decisions. Holding back on initiatives or pursuing them in resource-constrained environments is easier when you have a clear course for the future and can limit reactionary cuts.
Advisory Board’s long-standing research on developing strategy suggests five principles for focused strategy development:
Strategic plans should confront complexity. Sift through potential future market disruptions and opportunities to establish a handful of governing market assumptions to guide strategy.
Ground strategy development in answers to a handful of questions regarding future competitive advantage. Ask yourself: What will it take to become the provider of choice?
Communicate overarching strategy with a clear, coherent statement that communicates your overall health system identity.
A strategic vision should be supported by a limited number of directly relevant priorities. Resist the temptation to fill out “pro forma” strategic plan.
Pair strategic priorities with detailed execution plans, including initiative roadmaps and clear lines of accountability.
Strategists align on a strategic vision to go back to basics
What did we find?
Despite uneven recovery, health systems widely agree on which strategic initiatives they will focus more on, and which they will focus less on. Health system leaders are focusing their attention on core operations — margins, quality, and workforce — the basics of system success. They aim to achieve this mandate in three ways. First, through improving efficiency in care delivery and supply chain. Second, by transforming key elements of the care delivery system. And lastly, through leveraging technology and the virtual environment to expand job flexibility and reduce administrative burden.
Health systems in our survey are least likely to take drastic steps like cutting pay or expensive steps like making acquisitions. But they’re also not looking to downsize; divesting and merging is off the table for most organizations going into 2024.
Why does this matter?
The strategic priorities healthcare leaders are working toward are necessary but certainly not easy. These priorities reflect the key challenges for a health system — margins, quality, and workforce. Luckily, most of strategists’ top priorities hold promise for addressing all three areas.
This triple mandate of improving margins, quality, and workforce seems simple in theory but is hard to get right in practice. Integrating all three core dimensions into the rollout of a strategic initiative will amplify that initiative’s success. But, neglecting one dimension can diminish returns. For example, focusing on operational efficiency to increase margins is important, but it’ll be even more effective if efforts also seek to improve quality. It may be less effective if you fail to consider clinicians’ workflow.
Health systems that can return to the basics, and master them, are setting a strong foundation for future growth. This growth will be much more difficult to attain without getting your house in order first.
Vendors and other health system partners should understand that systems are looking to ace the basics, not reinvent the wheel. Vendors should ensure their products have a clear and provable return on investment and can map to health systems’ strategic priorities. Some key solutions health systems will be looking for to meet these priorities are enhanced, easy-to-follow data tools for clinical operations, supply chain and logistics, and quality. Health systems will also be interested in tools that easily integrate into provider workflow, like SDOH screening and resources or ambient listening scribes.
Going back to basics
Craft your strategy
1. Rebuild your workforce.
One important link to recovery of volume is FTE count. Systems that expect positive changes in FTEs overwhelmingly project positive changes in volume. But, on average, less than half of systems expected FTE growth in 2023. Meanwhile, high turnover, churn, and early retirement has contributed to poor care team communication and a growing experience-complexity gap. Prioritize rebuilding your workforce with these steps:
Recover: Ensure staff recover from pandemic-era experiences by investing in workforce well-being. Audit existing wellness initiatives to maximize programs that work well, and rethink those that aren’t heavily utilized.
Recruit: Compete by addressing what the next generation of clinicians want from employment: autonomy, flexibility, benefits, and diversity, equity, and inclusion (DEI). Keep up to date with workforce trends for key roles such as advance practice providers, nurses, and physicians in your market to avoid blind spots.
Retain: Support young and entry-level staff early and often while ensuring tenured staff feel valued and are given priority access to new workforce arrangements like hybrid and gig work. Utilize virtual inpatient nurses and virtual hubs to maintain experienced staff who may otherwise retire. Prioritize technologies that reduce the burden on staff, rather than creating another box to check, like ambient listening or asynchronous questionnaires.
2. Become the provider of choice with patient-centric care.
Becoming the provider of choice is crucial not only for returning to financial stability, but also for sustained growth. To become the provider of choice in 2024, systems must address faltering consumer perspectives with a patient-centric approach. Keep in mind that our first set of recommendations around workforce recovery are precursors to improving patient-centered care. Here are two key areas to focus on:
Front door: Ensure a multimodal front door strategy. This could be accomplished through partnership or ownership but should include assets like urgent care/extended hour appointments, community education and engagement, and a good digital experience.
Social determinants of health: A key aspect of patient-centered care is addressing the social needs of patients. Our survey found that addressing SDOH was the second highest strategic priority in 2023. Set up a plan to integrate SDOH screenings early on in patient contact. Then, work with local organizations and/or build out key services within your system to address social needs that appear most frequently in your population. Finally, your workforce DEI strategy should focus on diversity in clinical and leadership staff, as well as teaching clinicians how to practice with cultural humility.
3. Recouple volume and margins.
The increasingly decoupled relationship between volume and margins should be a concern for all strategists. There are three parts to improving volume related margins: increasing volume for high-revenue procedures, managing costs, and improving clinical operational efficiency.
Revenue growth: Craft a response to out-of-market travel for surgery. In many markets, the pool of lucrative inpatient surgical volumes is shrinking. Health systems are looking to new markets to attract patients who are willing to travel for greater access and quality. Read our findings to learn more about what you need to attract and/or defend patient volumes from out-of-market travel.
Cost reduction: Although there are many paths health systems can take to manage costs, focusing on tactics which are the most likely to result in fast returns and higher, more sustainable savings, will be key. Some tactics health systems can deploy include preventing unnecessary surgical supply waste, making employees accountable for their health costs, and reinforcing nurse-led sepsis protocols.
Clinical operational efficiency: The number one strategic priority in 2023, according to our survey, was clinical operational efficiency, no doubt in response to faltering margins. Within this area, the top place for improvement was care variation reduction (CVR). Ensure you’re making the most out of CVR efforts by effectively prioritizing where to spend your time. Improve operational efficiency outside of CVR by improving OR efficiency and developing protocols for complex inpatient management.
As 2023 comes to an end and prognostics for 2024 pepper Inboxes, high anxiety is understandable. The near-term environment for hospitals, especially public hospitals and not-for-profit health systems, is tepid at best: despite the November uptick in operating margins to 2% (Fitch, Syntellis), the future for hospitals is uncertain and it’s due to more than payer reimbursement, labor costs and regulatory changes.
Putting lipstick on the pig serves no useful purpose:
though state hospital associations, AHA, FAH, AEH and others have been effective in fending off unwelcome threats ranging from 340B cuts, site neutral payments and others at least temporarily, the welcoming environment for hospitals in the throes of the pandemic has been replaced by animosity and distrust.
The majority of the population believes U.S. the health system is heading in the wrong direction and think hospitals are complicit (See Polling data from Gallup and Keckley Poll below). They believe the system puts its profit above patient care and welcome greater transparency about prices and business practices. In states like Colorado (hospital expenditure report), Minnesota (billing and collection), and Oregon (nurse staffing levels), new regulations feed the public’s appetite for hospital accountability alongside bipartisan Congressional efforts to limit tax exemptions and funding for hospitals.
It’s a tsunami hospital boards must address if they are to carry out their fiduciary responsibilities:
Set Direction: The organization’s long-term strategy in the context of its vision, mission and values.
Secure Capital: The amount and sourcing of capital necessary to execute the strategy.
Hire a Competent CEO and Give Direction: Boards set direction; CEOs execute.
Regretfully, near-term pressures on hospitals have compromised long-term strategic planning in which the Board play’s the central role. But most hospital boards lack adequate preparedness to independently assess the long-term future for their organization i.e. analysis of trends and assumptions that cumulatively reshape markets, define opportunities and frame possible destinations for hospitals drawn from 5 zones of surveillance:
Clinical innovations.
Technology capabilities.
Capital Market Access and Deployment.
Regulatory Policy Changes.
Consumer Values, Preferences and Actions.
In reality, the near-term issues i.e. labor and supply chain costs, insurer reimbursement, workforce burnout et al—dominate board meetings; long-range strategic planning is relegated to an annual retreat where the management team and often a consultant present a recommendation for approval. But in many organizations, the long-term strategic plans (LTSPs) fall short:
Most LTSPs offer an incomplete assessment of clinical innovations and technologies that fundamentally alter how health services will be provided, where and by whom.
Most LTSPs are based on an acute-centric view of “the future” and lack input about other sectors and industries where the healthcare market is relevant and alternative approaches are executed.
Most LTSPs are aspirational and short on pragmatism. Risks are underestimated and strengths over-estimated.
Most LTSPs are designed to affirm the preferences of the hospital CEO without the benefit of independent, studied review and discussion with the board.
Most LTSPs don’t consider all relevant ‘future state’ options despite the Board’s fiduciary obligation to assure they do.
Most rely on data that’s inadequate/incomplete/misleading, especially in assessing how and chare capital markets are accessing and deploying capital in healthcare services.
Most LTSPs are not used as milestones for monitoring performance nor are underlying assumptions upon which LRSPs are based revisited.
My take:
The Board’s role in Long-Range Strategic Planning is, in many ways, it’s most important. It is the basis for deciding the capital requirements necessary to its implementation and the basis for hiring, keeping and compensating the CEO. But in most hospitals, the board’s desire to engage more directly around long-term strategy for the organization is not addressed. Understandable…
Boards are getting more media attention these days, and it’s usually in an unflattering context. Disclosures of Board malperformance in high profile healthcare organizations like Theranos, Purdue and others has been notable. Protocols for responding among Board members in investor-owned organizations is a priority, but less-so in many not-for-profit settings including hospitals often caught by surprise by media.
And Board members are asking for their organizations to engage them in more in strategy development. In the latest National Association of Corporate Directors’ survey, 81% of directors cited “oversight of strategic execution” and 80% “oversight of strategy development” as their top concerns from a list of 13 options. Hospital boards are no exception: they want to be engaged and cringe when treated as rubber stamps.
Hospital boards intuitively understand that surviving/thriving in 2024 is important but no guarantee of long-term stability given sobering realities with long-term impact:
The core business of hospitals–inpatient, outpatient and emergency services—is subject to market constraints on its prices, consumer and employer expectations and non-traditional competition. Bricks, sticks and clicks strategies will be deployed in a regulatory environment that’s agnostic to an organization’s tax status and competition is based on value that’s measured and publicly comparable.
The usefulness of artificial intelligence will widen in healthcare services displacing traditional operating models, staffing and resource allocation priorities.
Big tech (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Meta (META), Tesla (TSLA) and Nvidia (NVDA)—collectively almost 60% of all S&P 500 gains in 2023—will play a direct and significant role in how the healthcare services industry responds to macro-opportunities and near-term pressures. They’re not outside looking in; they’re inside looking out.
Private capital will play a bigger role in the future of the system and in capitalizing hospital services. Expanded scale and wider scope will be enabled through partnerships with private capital and strategic partners requiring governance and leadership adaptation. And, the near-term hurdles facing PE—despite success in fund-raising—will redirect their bets in health services and expectations for profits.
State and federal regulatory policies and compliance risks will be more important to execution. Growth through consolidation will face bigger hurdles, transparency requirements in all aspects of operations will increase and business-as-usual discontinued.
The scale, scope and effectiveness of an organization’s primary and preventive health services will be foundational to competing: managing ‘covered lives’, reducing demand, integrating social determinants and behavioral health, enabling consumer self-care, leveraging AI and enabling affordability will be key platform ingredients that enable growth and sustainability.
Media attention to hospital business practices including the role Boards play in LRSPs will intensify.
Granted: the issues facing hospitals are reliably short-term: as Congress returns next week, for instance, funding for the FDA, Community Health Center Fund, Teaching Health Center Graduate Medical Education Program, National Health Services Corps and Veterans Health is not authorized and $16 billion in cuts to Medicaid disproportionate share payments remains unsettled, so the short-term matters.
But arguably, engaging the hospital board in longer term planning is equally important. It’s not a luxury.
Great systems are usually governed by great boards, who are made up of people who match the following 10 descriptions.
Great board members do more than comply with corporate governance structure and rules. Too often, board members have loose ties to one another, are passive to the wants and views of the CEO or are not as informed about the specifics of healthcare as they ought to be. We view all of these traits, and more, as signs that a board has lost its charge and is no longer effectively governing.
We consider the following 10 items as descriptors of a board member who has a strong pulse and adds value to a governing body.
1. The board member is active, engaged and passionate about being a board member. No board can afford to have disengaged members. Bylaws and attendance requirements are important, but simply complying with them does not necessarily equate to being an active, contributing and passionate trustee. Engaged board members show up to meetings, and they show up prepared. While members typically refrain from meddling in day-to-day operations, boards with high levels of trust and candor make a point to communicate with the CEO outside of scheduled board meetings. Quality of board engagement is an important contributing factor to board performance, and there is a correlation between board engagement and the ability to attract board members. Everything that follows is dependent on board engagement.
2. The board member has a point of view on what the organization must be great at, and the board member is vehement about it. Health systems cannot be all things to all people, although the opportunities to attempt this are ample. The best organizations are not static, but disciplined. Well-governed systems know the specialties they are great in, and they continue to double down on their strengths. Their boards are cognizant of where revenues come from and ensure resources are allocated accordingly.
3. The board member realizes that her top job is to ensure the system has great leadership in place. Leaders can fall short in all sorts of ways, some more visible and easily detectable than others. The active, engaged and vehement board does not easily accept disappointment. Boards have many steps at their disposal to manage a problem before firing a CEO or senior leader, but they should never function in a way where termination is unthinkable. Boards cause great damage when they tolerate mediocre performance or compromised values among people at the top of the organization.
4. The board member understands accountability for patient safety and quality of care rests firmly in the boardroom. It rests on board members to insist that they receive sufficient, timely information about patient safety and care quality from the CEO. It rests on board leadership to ensure members have access to expertise and resources to properly obtain, process and interpret this information. It is not a bad idea for quality expertise to be included in board members’ competency profiles and for boards to undergo training and continued education in quality and safety. This is especially relevant for board members who come from industries outside of healthcare. It rests on the board when care quality declines or when lapses in patient safety are unaddressed: It is unacceptable for a board to say it missed the memo on care outcomes or that it did not understand the information in front of it.
5. The board member is a watchdog on societal, governance and audit issues. Informed citizens make for strong board members. It is important to not only be plugged in and aware of the issues and challenges confronting the organization today, but to be aware of broader societal issues that could affect system strategy and performance tomorrow. This is not hypothetical thinking. The past year was a master class in how broader issues affected healthcare in acute and direct ways: systemic racism, a global supply chain and a churning labor market are just three. Good boards are made up of members who stay informed and are biased toward anticipatory thinking, in which they are eager to explore the ways in which issues larger than or outside of their industry may come to affect the organization they help govern.
6. The board member supports the leadership team, but also questions it and holds it accountable. Board members cannot be pushovers for leadership. Directors are nominated by existing board directors on the nominating committee, which often includes the CEO. As a result, trustees can empathize with the CEO of the organization on whose board they sit. Empathy does not equate to blind acceptance, but this is nonetheless a dynamic trustees should be aware of and work to keep in check. It is not unusual for board members to struggle when giving candid feedback to the CEO, for example. As a result, chief executives carry on and live in a bigger and bigger bubble.
It’s worth noting that the reverse can occur within boardrooms as well, in which board members disagree about strategy and seek a CEO they can easily influence. At the end of the day, being a pushover is not associated with strong leadership and should be avoided by both trustees and senior executives. Instead, trustees need to embrace constructive tension in the boardroom. Questions, challenges and disagreements that reach resolution can drive valuable dialogue and stronger outcomes.
7. The board member allows others to voice their thoughts. In many boardrooms, a small number of the participants do most of the talking while the majority stays relatively quiet. A powerful or well-connected member may dominate discussions. Ideally, boards embrace the middle in interpersonal communication, with trustees contributing not too much nor too little. Either goes against the board’s very reason for being.
8. The board member helps ensure the board as a whole reflects the racial, ethnic, gender, religious and socioeconomic diversity of the community served by the organization. This is important for a number of reasons, with health equity being principal. Trustees are stewards for the communities they serve. For hospitals and health systems to increase opportunities for everyone to be healthier — including those who face the greatest obstacles — they need visions, strategies and goals that begin at the top from individuals who have viewpoints from the community. Without these insights, the board simply can’t govern effectively. Additionally, research has consistently found that teams of people who have diversity in knowledge and perspectives — as well as in age, gender and race — can be more creative and better avoid groupthink.
9. The board member is accessible. Just as no board wants its CEO in a bubble, governing bodies must actively resist this risk. For a stretch of time, boards were less visible groups of people who would meet four to six times a year in a mahogany-paneled room to decide the future of an organization that employs tens of thousands and serves even more. This dynamic cannot hold in healthcare. Community members and employees should know — or be able to easily learn — who serves on their health system’s board. If stakeholders bring issues or concerns to a board member, the trustee should be prepared to respond and follow up. In 2021’s healthcare, board members cannot breathe rarified air.
10. The board member emulates the values of the health system. So often when people talk about the tone being set at the top, they have the CEO in mind. The board is just as responsible, if not more responsible, for this charge. What a board permits, it promotes. Board members that emulate system values are better positioned to collaborate with mutual respect, candor and trust. Board members whose values are mismatched or personal agendas are at cross-purposes with the good of the organization should be replaced.
HENRY KOTULA 