Category Archives: Differentiation

Cain Bros House Calls Kickstarting Innovation (Part 2)

Posted on by • Posted in Differentiation, Disruption, Disruptive Technology, Health System, Hospital, Hospital Industry, Innovation, Innovative Care Models, Payvider, Private Equity, Restructure, Return on Investment, Strategic Advantage, Strategic Alignment, Strategic Change, Strategic Leadership, Strategic Resource Allocation, Strategy and Transformation, Strategy Sustainable Long Term • Leave a comment
Cain Bros House Calls Kickstarting Innovation (Part 2)

This is Part 2 of a series by Cain Brothers about the first-ever collaboration conference between health systems and private equity (PE) investment firms. Part 1 of this series addressed the conference’s who, what and where. This commentary will focus on the why. We will explore the underlying forces uniting health systems with private equity during this period of unprecedented industry disruption.

Why Health Systems and PE Need Each Other

On June 13 and 14, 2023, Cain Brothers hosted the first-ever collaboration conference between health systems and private equity (PE) investment firms. Timing, market dynamics and opportunity aligned. The conference was an over-the-moon success. Along with its sponsors, Cain Brothers will seek to expand the conference and align initiatives through the coming years.

Why Now? Healthcare is Stuck and Needs Solutions

As a society, the U.S. is spending ever-higher amounts of money while its population is getting sicker. A maldistribution of facilities and practitioners creates inequitable access to healthcare services in lower-income communities with the highest levels of chronic disease.

New competitors and business models along with unfavorable macro forces, including high inflation, aging demographics and deteriorating payer mixes, are fundamentally challenging health systems’ status quo business practices.

Over the last 50 years, healthcare funding has shifted dramatically away from individuals and toward commercial and governmental payers. In 1970, individual out-of-pocket spending represented 36.5% of total healthcare spending. Today, it is just over 10%.

Governments, particularly the federal government, have become healthcare’s largest payers, funding over 40% of healthcare’s projected $4.7 trillion expenditure in 2023. Individual patients often get lost in the massive payment shuffle between payers and providers.

Meanwhile, governments’ pockets are emptying. As a percentage of GDP, U.S. government debt obligations have grown from 55% in 2001 to 124% currently. With rising interest rates and the commensurate increase in debt service costs, as well as an aging population, there is little to suggest that new funding sources will emerge to fund expansive healthcare expenditures. Scarcity reigns where resources for healthcare providers were once plentiful.

As a consequence, the healthcare industry is entering a period of more fundamental economic limitations. Delaying transformation and expecting society to fund ongoing excess expenditure is not a sustainable long-term strategy. Current economic realities are forcing a dramatic reallocation of resources within the healthcare industry.

The healthcare industry will need to do more with less. Pleading poverty will fall on deaf ears. There will be winners and losers. The nation’s acute care footprint will shrink. For these reasons, health systems are experiencing unprecedented levels of financial distress. Indeed, parts of the system appear on the verge of collapse, particularly in medically underserved rural and urban communities.

More of the same approaches will yield more of the same dismal results. Waking up to this existential challenge, enlightened health systems have become more open to new business models and collaborative partnerships.

Necessity Stimulates Innovation

Two disruptive and value-based business models are on the verge of achieving critical mass. They are risk-bearing “payvider” companies (e.g. Kaiser, Oak Street Health and others) and consumer-friendly, digital-savvy delivery platforms (e.g. OneMedical and innumerable point-solution companies).

Value-based care providers and their investors have the scars and bruises to show for challenging entrenched business practices reliant on fee-for-service (FFS) business models and administrative services only (ASO) contracting. Incumbents have protected their privileged market position well through market leverage and outsized political influence.

Despite market resistance, “payvider” and digital platform companies are emerging from the proverbial “innovators’ chasm.” More early adopters, including those health systems attending the Nashville conference, are embracing value-creating business models. The chart below illustrates the well-trodden path innovation takes to achieve market penetration.

Ironically, during this period of industry disruption, health systems understand they need to deliver greater value to customers to maintain market relevance. It will require great execution and overcoming legacy practices to develop business platforms that incorporate the following value-creating capabilities:

  • Decentralized care delivery (to make care more accessible and lower cost).
  • Root-cause treatment of chronic conditions.
  • Integrated physical and mental healthcare services.
  • Consistent, high-quality consumer experience.
  • Coordinated service delivery.
  • Standardized protocols that improve care quality and outcomes.
  • A truly patient/customer-centric operating orientation.

It’s not what to do, it’s how to get it done that creates the vexing conundrum. Solutions require collaboration. Platform business models replete with strategic partnerships are emerging. Paraphrasing an African proverb, it’s going to take a village to fix healthcare. That’s why the moment for health systems and PE firms to collaborate is now.

PE to the Rescue?

Private equity has become the dominant investment channel for business growth across industries and nations. According to a recent McKinsey report, PE has more than $11.7 trillion in assets under management globally. This is a massive number that has grown steadily. PE changes markets. It turbocharges productivity. It is a relentless force for value creation.

By investing in a wide spectrum of asset classes, private equity has become a vital source of investment returns for pensions, endowments, sovereign wealth funds and insurance companies. Healthcare, given its size and inefficiencies, is a target-rich environment for PE investment and returns. This explains the PE’s growing interest in working with health systems to develop mutually beneficial, value-creating healthcare enterprises.

Despite reports to the contrary, PE firms must invest for the long term. Unlike the stock market, where investors can buy and sell a stock within a matter of seconds, PE firms do not have that luxury. To generate a return, they must acquire and grow businesses over a period of years to create suitable exit strategies.

Money talks. By definition, all buyers of new companies value their purchase more than the capital required for the acquisition. In making purchase decisions, buyers evaluate businesses’ past performance. They also assess how the new business will perform under their stewardship. PE or PE-backed acquirers also consider which future buyers will be most likely acquire the company after a five-plus year development period.

PE’s investment approach can align well with health systems looking to create sustainable long-term businesses tied to their brands and market positioning. PE firms buy and build companies that attract customers, employees and capital over the long term, far beyond their typical five- to seven-year ownership period. Health systems that partner with PE firms to develop companies are the logical acquirers of those companies if they succeed in the marketplace. In this way, a rising valuation creates value for both health systems and their PE partners.

It is important to note that not all PE are created the same. Like health systems, PE firms differ in size, market orientation, investment theses, experience and partner expectations. Given this inherent diversity, it takes time, effort and a shared commitment to value creation for health systems and PE firms to determine whether to become strategic partners. Not all of these partnerships will succeed, but some will succeed spectacularly.

For health system-PE partnerships to work, the principals must align on strategic objectives, governance, performance targets and reporting guidelines. Trust, honest communication and clear expectations are the key ingredients that enable these partnerships to overcome short-term hurdles on the road to long-term success.

Conclusion: Time to Slay Healthcare’s Dragons

Market corrections are hard. As a nation, the U.S. has invested too heavily in hospital-centric, disease-centric, volume-centric healthcare delivery. The result is a fragmented, high-cost system that fails both consumers and caregivers. The marketplace is working to reallocate resources away from failing business practices and into value-creating enterprises that deliver better care outcomes at lower costs with much less friction.

Progressive health systems and PE firms share the goal of creating better healthcare for more Americans. Cain Brothers is committed to advancing collaboration between health systems and PE-backed companies. In addition to the Nashville conference, the firm has combined its historically separate corporate and non-profit coverage groups to foster idea exchange, expand sector understanding and deliver higher value to clients.

The ability to connect and collaborate effectively with private equity to advance business models will differentiate winning health systems. In a consolidating industry, this differentiation is a prerequisite for sustaining competitiveness. It’s adapt or die time. Health systems that proactively embrace transformation will control their future destiny. Those that fail to do so will lose market relevance.

The future of healthcare is not a zero-sum equation. Markets evolve by creating more complex win-win arrangements that create value for customers. No industry requires restructuring more than healthcare. As a nation and an industry, we have the capacity to fix America’s broken healthcare system. The real question is whether we have the collective will, creativity and resourcefulness to power the transformation. We believe the answer to that question is yes.

Paraphrasing Rev. Theodore Parker, the economic arc of the marketplace is long but it bends toward value. Together, health systems and PE firms can power value-creation and transformation more effectively than either sector can do independently. Each needs the other to succeed. Slaying healthcare’s dragons will not be easy but it is doable. It’s going to take a village to fix healthcare.

“Culture Eats Strategy for Breakfast” But Probably Not Right Now

Posted on by • Posted in Board, Culture, Differentiation, Growth, Growth Strategy, Key Metrics, Key Performance Indicators, Leadership, Leadership Culture, Leadership Vision, Strategic Relevance, Strategic Workstreams, Strategy, Transformation, Transformation Strategy • Leave a comment

https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/current-management-issues-healthcare-c-suite?mkt_tok=NjU0LUNOWS0yMjQAAAGN5bowgtV1D72jA8pbxTCk4NjIzNuu9fxXT5eRT0vb8A3oKGzQB_5C2mtXCgYRufhJVxSpI0VqOQ6lwqJvDhs6pzxAVL1Xsoxc5EfcQUJr7Bhu

2022 and 2023 have been particularly difficult operating years for hospital providers. The financial challenges stand out but as we concluded in the August 7, 2023, blog, strategic planning and vision issues may be more compelling over the long term.

We previously identified two strategic issues that need to be reckoned with:

  1. Strategic Relevance. Has everything changed organizationally post-Covid or does it just feel that way? If your strategy still seems dynamic and relevant, how do you capitalize on that? If your strategy feels entirely lost, how do you recapture organizational excitement and enthusiasm?
  2. Vision. How important is organizational vision right now? You know the old saying, “a camel is a horse designed by a committee.” And many vision statements wind up looking more like that camel than like that desired horse. But be that as it may: Covid has been so disruptive to the organizational momentum of hospitals that finding a relevant and executable vision should be top of mind right now.

Given circumstances, one obvious conclusion is that any strategic exercise undertaken in the current moment needs to be well accomplished. Executive teams, clinicians, and Boards are simply too distracted or too tired to spend time on planning processes that are not well thought out and highly directed. This immediate observation next demands a discussion that outlines post-Covid strategic principles, definitions, and the creation of a vision that relates immediately to actionable strategy. It would be an understatement to note that for hospitals there is no “strategic time” to waste.

Start the post-Covid planning process with four very clear strategic definitions:

  1. Vision: A time-bounded view of the future destination of your business.
  2. Strategic Workstreams: The ways you devise to achieve the strategic vision.
  3. Goals: Goals are the lag outcomes that you seek to achieve for your customers.
  4. Metrics: Metrics measure the progress toward the goals.

Working from these definitions then allows you to move toward an organizationally appropriate vision and an actionable strategy that efficiently supports that vision as follows:

  1. The vision should drive growth. Many hospital organizations have stopped growing organically. No growth is harmful financially, clinically, intellectually, and creatively.
  2. The vision should differentiate the business from that of competitors. Everybody and everything competes with hospitals these days: other hospitals, pharmacy companies, insurers, private equity. It has no end.
  3. The vision should endeavor to solve a basic customer problem or problems. The problem list is pretty apparent. The list of helpful solutions has been harder to come by.
  4. The vision should be either incremental or transformational. In all candor, most hospitals’ post-Covid vision is going to be incremental. It takes considerable financial and capital capacity to move toward a transformational vision. That kind of capacity is available at only a small minority of hospitals nationwide.
  5. Recognize that a transformational vision will require active management of culture and stakeholders. If you pivot to a transformational vision, you are likely to upset certain stakeholders and your existing culture may need to also adjust to the transformation.
  6. Be prepared to modify or improve upon the vision, workstreams, and/or goals as you get ongoing feedback during the planning and execution process. Under any circumstances you need to be open to learning all along the way. For this to happen, your organization needs to be a listening organization and a learning organization. Not all hospitals and health systems are.

Does all this sound hard? It should sound hard because it is hard. Leading the hospital back to financial stability while finding a relevant post-Covid vison that proves to be competitive and, at the same time, energizes your team to find renewed purpose in your hospital’s work; that is unforgivably hard.

As Piet Hein, the Danish mathematician, profoundly said, “Problems worthy of attack prove their worth by fighting back.” And fighting back is the hospital job of the moment.

Note: “Culture eats strategy for breakfast” is a quote attributed to management consultant and writer Peter Drucker.

Healthcare Industry Consolidation Raises New Workforce Challenges

Posted on by • Posted in Best Practices, Contingent Workforce, Differentiation, Economies of Scale, Expert Workforce Partners, Health System, Hospital, Interim CEO, Interim CFO, Interim Executives, Interim Resources, Market Consolidation, Mission, Population Health, Proactive, Quality of Care, Reactive, Recruiting, Standardization, Talent Imperative, Talent Management, Workforce Shortages, Workforce Solutions • Leave a comment

https://www.amnhealthcare.com/healthcare-industry-consolidation-raises-new-workforce-challenges/?utm_source=email&utm_medium=pardot&utm_campaign=story-3

Image result for hospital consolidation

When health systems consolidate, one of the major challenges they face is integrating, managing, and optimizing their much larger workforce. The newly integrated workforce must deliver on the value promised by the consolidated enterprise, which is why healthcare industry consolidations need the most advanced workforce solutions available.

The mission of every sector in the consolidation — whether it’s in enhancing the patient experience, improving care quality, realizing economies of scale, expediting the shift from volume- to value-based care, implementing new population health strategies, improving revenue cycle management, or launching new technology — is dependent on the effectiveness of its workforce.

Most healthcare organizations already face workforce problems in the form of shortages of nurses, physicians, technicians and technologists, coders, leaders, and others. Consolidation doesn’t relieve shortage problems, because most organizations’ workforces are already stretched very thin. The paramount challenge may be that the new organization must integrate workforces that have entrenched and often widely different quality standards, procedures, training, values, and cultures. Consistency across the newly consolidated organization must be attained through standardization and adoption of best practices.

Consolidation is producing sophisticated regional enterprises of vertical services and facilities stretching across multiple states, including some emerging as Fortune 500 companies. Solutions to workforce challenges need to become more sophisticated to match this growing organizational complexity. A continuum of effective workforce innovations, many of which have been in use in other industries, are now available in the healthcare industry, though they have been largely untapped until recently.

The talent imperative in healthcare can be effectively addressed through these innovations. Comprehensive managed services programs that optimize the contingent workforce are becoming mainstream. Radical new credentialing innovations can be leveraged to improve time-to-revenue and productivity for physicians and other clinicians. Predictive labor analytics can accurately forecast patient volume months in advance and then match scheduling and staffing practices to the forecasts. Workforce solutions also are available to help find the best talent for leadership roles, which are critically important to guide an industry undergoing fundamental change to revenue based on value instead of volume. The vital realm of health information management is another area where workforce solutions can raise performance in quality, efficiency, and revenue generation.

However, when it comes to workforce solutions, many healthcare organizations remain in a reactive mode, with managers scrambling to fill holes in staffing needs on a daily basis. And many still rely on inadequate paper-based and other outdated systems to manage workforce challenges. Such practices do not fulfill the needs of the sophisticated healthcare organizations emerging from the wave of consolidations. Modern healthcare workforce solutions are needed, but many healthcare organizations don’t have the resources, capacity, or bandwidth to develop and operate these solutions on their own. Or, they are unaware that advanced, technology-enabled workforce solutions are available.

The bright spot is that new entities emerging from consolidations can often leverage combined resources to invest in advanced workforce solutions that will ensure that their enterprise-wide workforce is optimized and performing at its highest level.

Expert workforce partners who are entirely focused on solving healthcare workforce problems hold the key. Such partners are found outside the walls of hospitals and healthcare systems, and the best ones can quickly integrate with patient-care organizations to customize solutions. Since the healthcare workforce is the greatest differentiator in the success of a healthcare enterprise, the services of an expert workforce solutions partner are critical during and after consolidation.