UPMC CFO Edward Karlovich advises peers to ‘look beyond the challenges of today’

David B. Yoffie Quote: “The first rule demands that CEOs and entrepreneurs look  beyond the immediate

Edward Karlovich serves as the executive vice president and CFO for UPMC, a $23 billion provider and insurer based in Pittsburgh. 

Since joining UPMC in 1990, Mr. Karlovich has served in several financial leadership roles. Most recently, he was vice president, CFO and chief of staff for UPMC’s Health Services Division. He became CFO of the entire integrated system with 40 hospitals in October 2020, after serving on an interim basis for about a year. 

Here, Mr. Karlovich shares with Becker’s the skills he thinks CFOs need to succeed today, some key capital projects in the works at UPMC and his organization’s top financial priorities. 

Editor’s note: Responses were lightly edited for length and clarity. 

Question: What is the most pressing issue facing hospital CFOs due to COVID-19?

Edward Karlovich: I would say the most pressing issue for me is disruption. COVID-19 has done many things to disrupt the way we think about our organization and business. Some disruptions we faced in the last year include staffing and supply chain challenges. UPMC did a great job weathering through the supply disruptions and labor challenges. We always had adequate personal protective equipment for our folks here. We also really made a conscientious decision last year to keep our workforce intact; we didn’t lay off workers, and we took care of people who needed time off because of COVID-19. We also made sure employees knew they had the support of our executive leadership team. In summary, COVID-19 has created a disruption, and we must think about how things are different now coming out of the disruption. 

Q: What are some things you are doing to work through the change/disruption?

EK: From an organizational perspective, we embarked on what we call the “UPMC experience” a few years ago. We looked at the way we are doing things to understand the experience of our employees and patients. This prepared us to be more creative in our thinking as to how we address challenges and disruption. We also learned through this the importance of interdependencies. Our business, both provider and insurance side, discussed a need to tackle the disruptions in an integrated way and discussed a need to communicate changes effectively. This year, we provided about 40 news conferences to get the standard message out across all of our regions. We also have a 90,000-plus employee organization which allows you to move around resources to deal with some challenges and disruptions. 

Q: What are UPMC’s top financial priorities for 2022?

EK: From a financial perspective, we want to maintain a positive margin to support our capital investments and employees. To do this, we are focused on a few things. First, supporting our operating employees to ensure they can perform to the best of their ability. They are the ones who make the difference each and every day. Second, we want to make sure we, as a finance team, can provide the things that the organization needs to be successful. This includes, but is not limited to, making sure supply chain folks can get all needed supplies and ensuring we have the cash collections needed to fund our organization. Another priority is making sure we provide the advice and guidance needed to invest our dollars effectively so we can prepare for the next challenge.

Q: What are a few key capital projects UPMC has in the works?

EK: UPMC is a premier provider in our community, and we operate a number of specialty hospitals in the area. We are the primary pediatric, psychiatric, women’s health and oncology provider in the region. Over the past couple of years, we’ve embarked on a journey to provide new facilities in western Pennsylvania for these major programs. We are also investing heavily in a vision and rehabilitation institute, which is a $500 million project that will put our clinicians, researchers and other providers together to drive breakthroughs in vision care and rehabilitation.  

We also are going to embark on a new tower for UPMC Presbyterian Oakland Campus [in Pittsburgh]. It is going to be the largest capital project we’ve embarked on since I’ve been here. This project will be more than $1 billion and is so important to the community. 

The third thing we are looking at is enhancing our oncology services and product at UPMC Shadyside [in Pittsburgh]. What we’ve recognized is that we are the provider and insurer of choice in western Pennsylvania, and we have to invest in this community for the next 50 to 100 years. 

Q: What skills are essential for hospital and health system CFOs to thrive in today’s healthcare landscape?

EK: The technical skills are given as CFO. To get in that leadership position, you have to be able to perform the necessary tasks. However, to make your organization better, I could boil it down to four things. First, you have to be a partner to your other senior leaders. Finance doesn’t exist in a vacuum. You have to be in the room with those folks, helping them manage and drive the business. The second thing is flexibility. If you think about what we experienced as an industry over the last two years, if you weren’t flexible, you were going to be seriously challenged.  Flexibility is such an important attribute because the pace of change is going to accelerate in our industry. Third, I’d say talent recognition is a key skill. It is important to be able to find talent as well as mentor and develop them as employees who can provide a great service to the organization. Fourth, you have to embody integrity. There is no doubt in my mind that integrity is a core value that is essential to everything you do as a finance leader. You have to maintain your integrity at all times. Those are essential skills. If you’re going to be a successful CFO now, you have to have those skills outside of the technical.

Q: What is one piece of advice you would offer to another healthcare CFO, and why?

EK: I’d say, look beyond the challenges of today. It’s not just about what you can actually see and envision in front of you. Try to look at the implications that are not necessarily top of mind. What the future holds is uncertain for all of us in healthcare now. You need to be thinking about what things might be coming down the road that will change our business and commitment to our communities dramatically. Try to brainstorm around that. Trying to think forward and speculate about what might happen is very valuable.

Three Alarming Facts That Pose Challenging Realities

Three Alarming Facts That Pose Challenging Realities

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Here are three insightful and thought-provoking facts that most
people aren’t aware of and the potential implications of these
statistics / trends on healthcare stakeholders.


Fact 1: The third leading cause of death in the U.S. is due to medical error
According to a study by Johns Hopkins, more than 250,000 people in the United States
die every year because of medical mistakes, making it the third leading cause of death
after heart disease and cancer. Some studies show the death rate as high as 440,000
deaths per year. To put that in perspective, approximately 350,000 people died from
COVID-19 in 2020, which, similar to medical error, was no fault of their own. A medical
error death “is caused by inadequately skilled staff, error in judgment or care, a system
defect, or a preventable adverse effect. This includes computer breakdowns, mix-ups
with the doses or types of medications administered to patients and surgical
complications that go undiagnosed.”


Fact 2: Medicare’s trustees report that the Part A trust fund will be insolvent by
2024

Medicare – Part A, which pays for hospital bills, is funded mainly through the payroll
taxes. According to the report, without changes to expected spending or trust fund
revenue, the fund will run dry in 2024 and have sufficient funds only to meet 90% of its
obligations. This is the second time insolvency has been predicted within five years.
Without any changes the shortfall would have to be covered by one or more of the
following potential options: (i) add new revenue, which equates to increasing the payroll
tax rate, (ii) raise the share of costs shouldered by enrollees, (iii) cut benefits, or (iv)
reduce payments to healthcare providers.


Fact 3: The last decade was the lowest population growth rate ever recorded
U.S. Population Growth for Decades
The U.S. population growth of 6.6% between 2010 and 2020 is lower than in any previous decade, including the Great
Depression years of the 1930s. It is also roughly half the growth rate of the 1990s, a time of rising immigration and
millennial-generation births.


The 2010s decade was one of fewer births, more deaths, and uneven immigration, but the primary cause of this dramatic decline is highly related to falling U.S. fertility rates.


The U.S. fertility rate has been falling steadily and as of recently stood at 1.7 births per woman (ratio of number of births in a year to total population of women between the ages of 15 and 50), the lowest level on record. Some experts hope that the decline is “temporary” and that Millennials are postponing family formation as they are burdened with debt and struggle with launching careers and establishing households. However, there is no clear sign of an any uptick, and, to make matters worse, net immigration has also declined since 2008.


The data is clear that the aging of America is inevitable, and the prospects for higher fertility rates look dim. Even if the
fertility rate were to surge today, it would not have an appreciable effect on the ratio of workers to retirees or the growth rate in employment for another twenty to twenty-five years (the time it takes to turn an infant into a fully productive adult).


Conclusion
What does the third leading cause of death in the U.S., Medicare Part A near-term insolvency projections, and declining population growth have in common? All of these alarming realities can be solved through value-based care. Value-based care is an alternative system for how providers are rewarded for care and incentivizes the quality of care they give to people, rather than the volume of services. Another way to put it, providers and health systems will not be paid for medical error deaths and instead be rewarded for quality of patient care and outcomes. Because of this alternative payment system, healthcare stakeholders will be forced to invest in technology, tools, and resources so that healthcare providers and workers can make better quality decisions. Technology will help alleviate staff shortages, improve medical treatment accuracies, increase productivity, and enable organizations to do more with less.


The alarming medical error rate is proof that our traditional healthcare system and payment models are flawed, and that the need to move into a value-based care world is a must. Imagine if the third leading cause of death in the U.S. were caused by commercial airline pilot errors. The industry would crumble overnight. The healthcare sector and our standards for care should be no different.


To add fuel to the fire, we have an impending insolvency issue with Medicare Part A funding combined with population growth trends that will result in a much wider gap between the working and an aging population in need of care. The working population decline will also have a downstream impact of less working providers / medical staff to take care of patients, as well as fewer contributing taxpayers. These trends, if left as is, will guarantee a very imbalanced, underfunded and extremely lopsided healthcare ecosystem.


Healthcare stakeholders need to think about reorienting provider compensation to encourage value over volume, invest in much needed tools, such as strong data analytics and reporting, so that the right decisions and diagnoses are made at the right time. Lastly, we need to shift care away from costly and error-prone hospitals and create innovative care models that deliver better care in a cost-effective manner. In essence, we need to do more with less. The aging and demographic shift of America is inevitable; however, the fiscal, economic, and potential healthcare catastrophe is not if we prepare, adapt, and transition to a value-based care world today