Not-for-profit hospitals and health systems rely on three interdependent functions to contribute to the financial resilience of the organization: namely, the ability to withstand adverse changes to these core functions and continue to provide services to the community (Figure above).
The Operating Function:
The Operating Function manages the portfolio of clinical services and strategic initiatives that define the charitable mission of the organization. Clinical services generate patient revenue, and if that revenue creates a positive margin (i.e., exceeds expenses), that excess is invested back into the health system. Operating margins are, on average, very low in not-for-profit healthcare. For example, for the not-for-profit hospitals and health systems rated by Moody’s Investors Service, median operating margins from 2017–2021 ranged between 2.1% and 2.9%. These rated organizations represent only a few hundred of the thousands of hospitals and health systems in the country and are among the most financially healthy. A 2018 study of a wider group of more than 2,800 hospitals found an average clinical operating margin of -2.7%.
The Finance Function:
Because the positive margins generated by the Operating Function are rarely enough to support the intensive capital needs of maintaining and improving acute-care facilities, care delivery models, and technology, not-for-profit health systems rely on the Finance Function for internal and external capital formation. The Finance Function builds cash reserves and secures external financing
(e.g., bond proceeds, bank lines of credit) to support the capital spending needs of the organization. The cash reserves maintained by the Finance Function also help the organization meet daily expenses at times when expenses exceed revenues.
The Investment Function:
Not-for-profit hospitals and health systems will also endeavor to invest some of their cash reserves to generate returns that, first, act as an additional hedge against potential risks that could disrupt operations or cash flow, and second, pursue independent returns. Any independent returns generated serve as an important supplement to revenues generated through the Operating Function.
The three functions described above are common to all not-for-profit organizations. The main differences are mostly within the Operating Function. In higher education, for example, tuition revenue takes the place of clinical revenue. While higher education also maintains enterprise risk, the Operating Function for colleges and universities is less vulnerable to volume swings as enrollment is typically steady and predictable. Likewise, higher education is less labor intensive than healthcare.
Financial reserves include all liquid cash resources and unrestricted investments held in the Finance and Investment Functions. These reserves are equivalent to the emergency funds individuals are encouraged to maintain to help them meet living expenses for six to twelve months in case of a job loss or other disruption to income.
Absolute reserve levels are important, as discussed above, but they must also be viewed relative to a hospital’s daily operating expenses. A common
metric used to describe these reserves is Days Cash on Hand. If an organization has 250 Days Cash on Hand, that means that it would be able to meet its operating expenses for 250 days if revenue was suddenly shut off. The size of Days Cash on Hand will be proportionate to the size of the hospital and health system. Some of the largest not-for-profit health systems have annual operating expenses approaching $30 billion annually: meeting those expenses for 250 days would require Days Cash on Hand of more than $20 billion.
The shutdown that occurred in the early days of the pandemic (March through May 2020) is an example of a time when cash flow nearly shut off for most hospitals (except for emergency care). Reserves, measured in absolute and relative terms such as Days Cash on Hand, allowed hospitals that were nearly empty to maintain staffing and operations throughout the period. Other hospitals that were inundated with patients during the initial surge were able to fund increased staffing and personal protective equipment costs through their reserves. Other examples of how reserves provide a buffer
against unexpected events include natural disasters such as hurricanes, tornadoes, deep freezes, and wildfires, which can require the temporary shutdown of operations; cyberattacks, which can halt a hospital’s ability to provide services; a defunct payer that is unable to reimburse hospitals for care already provided; or an escalation in labor costs as experienced by many during 2022.
Without the reserves to pay for contract labor or premium pay, many hospitals would have undoubtedly had to close or limit services to their community.
KEY TAKEAWAYS
Financial reserves are created through the interdependent relationship of operating, finance, and investment functions in not-for-profit health systems.
These reserves build financial resilience: the ability to withstand adverse changes to core functions and continue to provide services to the community.
Financial reserves play an important role in supplementing any shortfalls in revenue or capital formation in one or more of these three functions.
Financial reserves are equivalent to individual emergency funds—both are intended to cover expenses if income or revenue flows are significantly disrupted.
A common metric used to describe financial reserves is Days Cash on Hand: an organization’s combined liquid, unrestricted cash resources and investments, measured by how many days these reserves could cover operating expenses if cash flows were suddenly shut off.
Financial reserves, measured in absolute and relative terms such as Days Cash on Hand, allowed hospitals that were nearly empty during the early days of the pandemic to maintain staffing and operations throughout the period. Other hospitals that were inundated with patients during the initial surge were able to fund increased staffing and personal protective equipment costs through their reserves.
A Comparison: Financial Reserves and Higher Education Not-for-Profits
Not-for-profit hospitals and health systems are not alone in their reliance on financial reserves; most not-for-profit organizations carry reserves that enable them to maintain operations and make needed investments even in times of weaker operating performance. Higher education is probably most comparable to healthcare, with significant overlaps between the two sectors. Moody’s Investors Service, one of the three major rating agencies, notes that 16% of its rated higher education institutions have affiliated academic medical centers (AMCs), and revenue from patient care at these AMCs contributes to 28% of the overall revenues for the higher education sector.
The magnitude of Days Cash on Hand levels varies by industry; financial reserves maintained by private not-for-profit higher education
institutions, for example, are significantly greater than those maintained by not-for-profit hospitals and health systems. For comprehensive private universities across all rating categories, Moody’s reports median Days Cash on Hand in 2021 of 498 days for assets that could be liquidated within a year. This compares with a median 265 Days Cash on Hand in 2021 across all freestanding hospitals, single-state, and multi-state healthcare systems rated by Moody’s.
Financial reserves are a critical measure of financial health across both healthcare and higher education. They help ensure that not-for-profit colleges, universities, hospitals, and health systems can continue to fulfill their vital societal functions when operations are disrupted, or when they are experiencing a period of sustained financial distress.
American Hospitals is the fourth in a series of documentaries produced by the Unfinished Business Foundation, founded by Richard Master, CEO of MCS Industries Inc., who took a deep dive into the economics of the U.S. health-care system after his company was hit year after year with double-digit health insurance rate increases.
Master teamed up with filmmaker Vincent Mondillo to produce Fix It: Healthcare at the Tipping Point; Big Pharma: Market Failure; Big Money Agenda: Democracy on the Brink, and now, American Hospitals.
A provocative look at the cost and inequities of American Hospitals, often more motivated by money and power than in providing for the health needs of individuals and the communities they were founded to serve. From the filmmakers behind the hit documentaries Fix It: Healthcare at the Tipping Point, Big Money Agenda, and Big Pharma.
Learn more and find out where to see the latest film at fixithealthcare.com/events
After 18 years as CEO in Kaiser Permanente, I set my sights on improving the heatlh of the nation, hoping to find a way to achieve the same quality, technology and affordability our medical group delivered to 5 million patients on both coasts.
That quest launched the Fixing Healthcare podcast in 2018, and it inspired interviews with dozens of leaders, thinkers and doers, both in and around medicine. These experts shared innovative ideas and proven solutions for achieving (a) superior quality, (b) improved patient access, (c) lower overall costs, and (d) greater patient and clinician satisfaction.
Which of the hundreds of ideas presented remain most promising?
Why, after five years and so many excellent solutions, has our nation experienced such limited improvements in healthcare?
And finally, how will these great ideas become reality?
To answer the first question, I offer 15 of the best Fixing Healthcare recommendations so far. Some quotes have been modified for clarity with links to all original episodes (and transcripts) included.
Fixing the business of medicine
1. Malcolm Gladwell, journalist and five-time bestselling author: “In other professions, when people break rules and bring greater economic efficiency or value, we reward them. In medicine, we need to demonstrate a consistent pattern of rewarding the person who does things better.”
2. Richard Pollack, CEO of the American Hospital Association (AHA): “I hope in 10 years we have more integrated delivery systems providing care, not bouncing people around from one unconnected facility to the next. I would hope that we’re in a position where there’s a real focus on ensuring that people get care in a very convenient way.”
Eliminating burnout
3. Zubin Damania, aka ZDoggMD, hospitalist and healthcare satirist: “In the culture of medicine, specialists view primary care as the weak medical students, the people who couldn’t get the board scores or rotation honors to become a specialist. Because why would you do primary care? It’s miserable. You don’t get paid enough. It’s drudgery. We must change these perceptions.”
4. Devi Shetty, India’s leading heart surgeon and founder of Narayana Health: “When you strive to work for a purpose, which is not about profiting yourself, the purpose of our action is to help society, mankind on a large scale. When that happens, cosmic forces ensure that all the required components come in place and your dream becomes a reality.”
5. Jonathan Fisher, cardiologist and clinician advocate: “The problem we’re facing in healthcare is that clinicians are all siloed. We may be siloed in our own institution thinking that we’re doing it best. We may be siloed in our own specialty thinking that we’re better than others. All of these divides need to be bridged. We need to begin the bridging.”
Making medicine equitable
6. Jen Gunter, women’s health advocate and “the internet’s OB-GYN”: “Women are not listened to by doctors in the way that men are. They have a harder time navigating the system because of that. Many times, they’re told their pain isn’t that serious or their bleeding isn’t that heavy. We must do better at teaching women’s health in medicine.”
7. Amanda Calhoun, activist, researcher and anti-racism educator: “A 2015 survey showed that white residents and medical students still thought Black people feel less pain, which is wild to me because Black is a race. It’s not biological. This is actually an historical belief that persists. One of the biggest things we can do as the medical system is work on rebuilding trust with the Black community.”
Addressing social determinants of health
8. Don Berwick, former CMS administrator and head of 100,000 Lives campaign: “We know where the money should go if we really want to be a healthy nation: early childhood development, workplaces that thrive, support to the lonely, to elders, to community infrastructures like food security and transportation security and housing security, to anti-racism and criminal-justice reform. But we starve the infrastructures that could produce health to support the massive architecture of intervention.”
9. David T. Feinberg, chairman of Oracle Health: “Twenty percent of whether we live or die, whether we have life in our years and years in our life, is based on going to good doctors and good hospitals. We should put the majority of effort on the stuff that really impacts your health: your genetic code, your zip code, your social environment, your access to clean food, your access to transportation, how much loneliness you have or don’t have.”
Empowering patients
10. Elisabeth Rosenthal, physician, author and editor-in-chief of KHN: “To patients, I say write about your surprise medical bills. Write to a journalist, write to your local newspaper. Hospitals today are very sensitive about their reputations and they do not want to be shamed by some of these charges.”
11. Gordon Chen, ChenMed CMO: “If you think about what leadership really is, it’s influence. Nothing more, nothing less. And the only way to achieve better health in patients is to get them to change their behaviors in a positive way. That behavior change takes influence. It requires primary care physicians to build relationship and earn trust with patients. That is how both doctors and patients can drive better health outcomes.”
Utilizing technology
12. Vinod Khosla, entrepreneur, investor, technologist: “The most expensive part of the U.S. healthcare system is expertise, and expertise can relatively be tamed with technology and AI. We can capture some of that expertise, so each oncologist can do 10 times more patient care than they would on their own without that help.”
13. Rod Rohrich, influential plastic surgeon and social media proponent: “Doctors, use social media to empower your audience, to educate them, and not to overwhelm them. If you approach social media by educating patients about their own health, how they can be better, how can they do things better, how they can find doctors better, that’s a good thing.”
Rethinking medical education
14. Marty Makary, surgeon and public policy researcher: “I would get rid of all the useless sh*t we teach our medical students and residents and fellows. In the 16 years of education that I went through, I learned stuff that has nothing to do with patient care, stuff that nobody needs to memorize.”
15. Eric Topol, cardiologist, scientist and AI expert: “It’s pretty embarrassing. If you go across 150 medical schools, not one has AI as a core curriculum. Patients will get well versed in AI. It’s important that physicians stay ahead, as well.”
Great ideas, but little progress
Since 2018, our nation has spent $20 trillion on medical care, navigated the largest global pandemic in a century and developed an effective mRNA vaccine, nearly from scratch. And yet, despite all this spending and scientific innovation, American medicine has lost ground.
American life expectancy has dropped while maternal mortality rates have worsened. Clinician burnout has accelerated amid a growing shortage of primary care and emergency medicine physicians. And compared to 12 of its wealthiest global peers, the United States spends nearly twice as much per person on medical care, but ranks last in clinical outcomes.
Guests on Fixing Healthcare generally agree on the causes of stagnating national progress.
Healthcare system giants, including those in the drug, insurance and hospital industries, find it easier to drive up prices than to prevent disease or make care-delivery more efficient. Over the past decade, they’ve formed a conglomerate of monopolies that prosper from the existing rules, leaving them little incentive to innovate on behalf of patients. And in this era of deep partisan divide, meaningful healthcare reforms have not (and won’t) come from Congress.
Then who will lead the way?
Industry change never happens because it should. It happens when demand and opportunity collide, creating space for new entrants and outsiders to push past the established incumbents. In healthcare, I see two possibilities:
1. Providers will rally and reform healthcare
Doctors and hospitals are struggling. They’re struggling with declining morale and decreasing revenue. Clinicians are exiting the profession and hospitals are shuttering their doors. As the pain intensifies, medical group leaders may be the ones who decide to begin the process of change.
The first step would be to demand payment reform.
Today’s reimbursement model, fee-for-service, pays doctors and hospitals based on the quantity of care they provide—not the quality of care. This methodology pushes physicians to see more patients, spend less time with them, and perform ever-more administrative (billing) tasks. Physicians liken it to being in a hamster wheel: running faster and faster just to stay in place.
Instead, providers of care could be paid by insurers, the government and self-funded businesses directly, through a model called “capitation.” With capitation, groups of providers receive a fixed amount of money per year. That sum depends on the number of enrollees they care for and the amount of care those individuals are expected to need based on their age and underlying diseases.
This model puts most of the financial risk on providers, encouraging them to deliver high-quality, effective medical care. With capitation, doctors and hospitals have strong financial incentives to prevent illnesses through timely and recommended preventive screenings and a focus on lifestyle-medicine (which includes diet, exercise and stress reduction). They’re rewarded for managing patients’ health and helping them avoid costly complications from chronic diseases, such as heart attacks, strokes and cancer.
Capitation encourages doctors from all specialties to collaborate and work together on behalf of patients, thus reducing the isolation physicians experience while ensuring fewer patients fall through the cracks of our dysfunctional healthcare system. The payment methodology aligns the needs of patients with the interests of providers, which has the power to restore the sense of mission and purpose medicine has lost.
Capitation at the delivery-system level eliminates the need for prior authorization from insurers (a key cause of clinician burnout) and elevates the esteem accorded to primary care doctors (who focus on disease prevention and care coordination). And because the financial benefits are tied to better health outcomes, the capitated model rewards clinicians who eliminate racial and gender disparities in medical care and organizations that take steps to address the social determinants of health.
2. Major retailers will take over
If clinicians don’t lead the way, corporate behemoths like Amazon, CVS and Walmart will disrupt the healthcare system as we know it. These retailers are acquiring the insurance, pharmacy and direct-patient-care pieces needed to squeeze out the incumbents and take over American healthcare.
Each is investing in new ways to empower patients, provide in-home care and radically improve access to both in-person and virtual medicine. Once generative AI solutions like ChatGPT gain enough computing power and users, tech-savvy retailers will apply this tool to monitor patients, enable healthier lifestyles and improve the quality of medical care compared to today.
When Fixing Healthcare debuted five years ago, none of the show’s guests could have foreseen a pandemic that left more than a million dead. But, had our nation embraced their ideas from the outset, many of those lives would have been saved. The pandemic rocked an already unstable and underperforming healthcare system. Our nation’s failure to prevent and control chronic disease resulted in hundreds of thousands of unnecessary deaths from Covid-19. Outdated information technology systems, medical errors and disparities in care caused hundreds of thousands more. As a nation, we could have done much better.
With the cracks in the system widening and the foundation eroding, disruption in healthcare is inevitable. What remains to be seen is whether it will come from inside or outside the U.S. healthcare system.
At a recent meeting of physician leaders, we sat next to the head of the health system’s bariatric surgery program. Given the recent and rapid uptake of GLP-1 inhibitors like Ozempic and Wegovy, we asked how he thought these drugs, which can generate dramatic weight loss, would affect his practice.
He chuckled, “they’re really good drugs…they could put me out of business!
It’s too early to say if they’ll be effective over a lifetime, but there’s no doubt they’re going to have a huge impact on our work.” It got us thinking about the other reverberations this class of drugs could have on care needs, if a majority of obese Americans had access to them.
Some effects are obvious.
We could see significant declines in treatment needs for chronic diseases like obesity and heart failure, for which obesity is a strong risk factor. Given that obese patients are much more likely to need joint replacement surgery, we could see a big hit to that demand—although some patients who are poor candidates for surgery because of weight-related complications could become eligible.
Even longer-term, if American’s aren’t dying of chronic disease, we’ll still die of something, so expect diseases of advanced age, like Alzheimer’s and many cancers, to increase. Other pharmaceutical innovations, like the growth of immunotherapy and more targeted cancer treatments, also have the potential to radically alter how disease is managed.
We may be at the beginning of another wave of disruptive medical innovation on the order of the introduction of statins in the 1990s, which combined with minimally invasive catheterization, slashed the need for bypass surgery.
Given their sky-high prices, it’s too soon to tell how quickly the use of these new obesity drugs will grow, but innovations like these will serve to pull more care out of hospitals and into less invasive outpatient medical management.
Editor’s Note: This is Part 2 of a multi-part series on healthcare revolution. This article builds on Part 1, which you can read here.
Based on a 23-year career as a solo-practicing rheumatologist, internist and geriatrician, followed by 18 years as president and CEO of a 715-bed, two-hospital healthcare system, I recently shared thoughts about the current stressed healthcare system including profit margin squeeze, patient’s needs and suggested options of subdividing care into acute, urgent, and elective facilities. The bottom-line quote from the Mayo Brothers, “The Patient’s Needs Come First,” is my declaration to use prevention as the way to focus our attention to those we serve.
Recognizing and Addressing the Challenge
Patients’ healthy life expectancy should be the focus of the healthcare industry, communities, employers and governments. People live longer, happier and healthier lives when productivity improves and costs decrease.
The U.S. life expectancy at birth is at the lowest level since 1996. The 0.9-year drop in life expectancy in 2021 and the 1.8-year drop in 2020 were the biggest two-year declines in life expectancy since 1921-1923. The current decline — 77.0 to 76.1 years — demands a change, whether welcome or not. [1]
Our nation’s metrics are embarrassing compared to other countries. Consider just one. “Average life expectancy in Costa Rica has steadily increased from 55 years in 1950 to 81 years today — far outpacing the U.S. Even more notable: the country has achieved this success while spending far less than the U.S. as a share of income which is already lower than ours.” [2] This Central American country is about the size of West Virginia and has a vast and sparsely populated terrain in addition to a few cities. Older adults, even in rural areas in Costa Rica, do well compared to our nation. Opportunities abound to learn from others. [3]
Physicians, Non-Physician Caregivers and Community Responses
Incumbents never welcome disruption. Currently, volume drives the U.S. health payment system. Profitability is proportional to the number of sick-care encounters. The more visits to a physician or hospital parallels greater demand for pharmaceuticals and devices/implants. Higher volume translates into increased insurance premiums the following year, of which the insurance company receives a percentage.
Prevention is not top of mind and redirecting patients to focused factories would be anathema for local hospitals and physicians — both groups are volume dependent.
Offloading outpatient care to lower-cost caregivers — Walmart, CVS, Walgreens, and others — cuts into the work and profit of primary care physicians in independent and health-system-owned group practices. The same with telemedicine. Nurse practitioners and physician assistants, under the supervision of a physician, can bill Medicare at 85% of a physician’s fee with modest restrictions. This positions them to both help and compete with primary care physicians. [4] New entrants — companies and non-physician caregivers — will lower overall costs. That’s a good thing unless you are the traditional medical office or primary care physician being replaced.
Communities have pride in their local healthcare system, especially since it is typically the largest or second largest employer in town. Rethinking where to find urgent or elective care that would require some travel would be a complete mindset change, like the change in shopping after big box stores and online shopping matured. Some communities with abundant resources may support under-utilized healthcare (and retail) facilities but keeping afloat without adequate volume is challenging.
Conditions change and with the importance of health and well-being, patients’ mindsets can evolve to include some travel for urgent and elective care. For its 1.1 million employees, Walmart and other large national employers instituted a Centers of Excellence Program that directs patients with non-acute episodic needs to health institutions that treat them cost-effectively with positive outcomes.
Patients and a companion have 100% of the cost for surgery plus travel expenses for certain spine, cardiac, organ transplants, hip/knee replacements, weight loss surgery and fertility. Walmart also offers a record review for cancer care at a handful of selected healthcare systems across the nation. [5] Since cancer care requires both an accurate diagnosis and usually prolonged treatment, the selected health system develop protocols for a patient that are implemented conveniently for the sufferer.
Rural healthcare is already struggling financially and faces greater threat. Small rural hospitals are failing. Addressing the three levels of medical need with a centralized system might serve patients better than every community trying to be everything to everyone.
Cities with duplicative and redundant services could provide better centralized care more efficiently for a wider geographic area. Changing the “pride in ownership” will require more pain, namely financial pressure, but the reward for patients will be better objective outcomes. Coopetition will facilitate the transformation.
Something has got to give. With increased transparency, patients have never been better informed, and they are already seeking specialized care with better outcomes. Transportation and virtual audio/visual communication is easier than ever before, accelerating change for complex patients.
Healthcare System Evolution
In my opinion, the local hospital of the future will be an ED, OR and ICU with a birthing center attached. A regional medical center will be within driving distance for urgent and elective care. Highly specialized national centers will serve as focus factories for sophisticated medical and surgical care, each serving patients from larger geographic areas, even from across the nation. Cancer surgery, joint replacements, open heart surgery, and other major non-emergency care and surgery at these focus factories will deliver higher quality more efficiently. As noted in Part 1, outcomes are objectively better at institutions focused on a limited number of conditions. [6]
Although this plan might sound exotic, other nations around the world already benefit with specialized, nonredundant hospitals. [7] And global competition is real. The U.S. won’t dominate high-end specialty care like it did in the 1900s. By the end of this century it will be a tripolar world shared between the U.S., China and India. Redistributing resources in America from less efficient healthcare to education, infrastructure, environment, and other worthwhile endeavors will help everyone. [8]
Outpatient care will continue the migration to virtual. Online shopping initially seemed exotic, but now packages arrive daily delivered to homes by a fleet of small vans. And as much as one pines for the old days with a personal intimate relationship with a caregiver, the power of quick access to accurate care will overcome nostalgia. Dr. Marcus Welby will be a distant memory. Consider the profound change from working five days a week in a physical office to the current geographically agnostic 24/7 virtual business community. Formerly successful commercial real estate owners are repurposing their now half-empty buildings.
When will the economics mandate a change? With a slower evolution, the existing systems have a chance to accommodate. A rapid and severe economic downturn is more likely to stimulate a quicker move. Costs matter, particularly as resources become more limited.
Medically self-insured employers like Walmart are already leading the way. Change is happening with younger patients sorting themselves out by going to walk-in clinics in big box chain stores and older folks seeking specialized care from major national systems. As outcomes improve and receive wider recognition, these positive changes will accelerate, creating a “flywheel effect.”
The End Game
Like it or not, sooner or later as a patient or provider we will transform. Understanding the need to change along with better outcomes for patients, who everyone is trying to serve, should improve provider satisfaction.
Subsequently, costs will drop, productivity will increase, and precious resources redirect to preventing illness and improving quality of life. Helping everyone live a longer, happier, and healthier life is an achievable goal. Healthcare systems can and should lead the transformation.
I have been both a frontline officer and a staff officer at a health system. I started a solo practice in 1977 and cared for my rheumatology, internal medicine and geriatrics patients in inpatient and outpatient settings. After 23 years in my solo practice, I served 18 years as President and CEO of a profitable, CMS 5-star, 715-bed, two-hospital healthcare system.
From 2015 to 2020, our health system team added 0.6 years of healthy life expectancy for 400,000 folks across the socioeconomic spectrum. We simultaneously decreased healthcare costs 54% for 6,000 colleagues and family members. With our mentoring, four other large, self-insured organizations enjoyed similar measurable results. We wanted to put our healthcare system out of business. Who wants to spend a night in a hospital?
During the frontline part of my career, I had the privilege of “Being in the Room Where It Happens,” be it the examination room at the start of a patient encounter, or at the end of life providing comfort and consoling family. Subsequently, I sat at the head of the table, responsible for most of the hospital care in Southwest Florida. [1]
Many folks commenting on healthcare have never touched a patient nor led a large system. Outside consultants, no matter how competent, have vicarious experience that creates a different perspective.
At this point in my career, I have the luxury of promoting what I believe is in the best interests of patients — prevention and quality outcomes. Keeping folks healthy and changing the healthcare industry’s focus from a “repair shop” mentality to a “prevention program” will save the industry and country from bankruptcy. Avoiding well-meaning but inadvertent suboptimal care by restructuring healthcare delivery avoids misery and saves lives.
RESPONDING TO AN ATTACK
Preemptive reinvention is much wiser than responding to an attack. Unfortunately, few industries embrace prevention. The entire healthcare industry, including health systems, physicians, non-physician caregivers, device manufacturers, pharmaceutical firms, and medical insurers, is stressed because most are experiencing serious profit margin squeeze. Simultaneously the public has ongoing concerns about healthcare costs. While some medical insurance companies enjoyed lavish profits during COVID, most of the industry suffered. Examples abound, and Paul Keckley, considered a dean among long-time observers of the medical field, recently highlighted some striking year-end observations for 2022. [2]
Recent Siege Examples
Transparency is generally good but can and has led to tarnishing the noble profession of caring for others. Namely, once a sector starts bleeding, others come along, exacerbating the exsanguination. Current literature is full of unflattering public articles that seem to self-perpetuate, and I’ve highlighted standout samples below.
The Federal Government is the largest spender in the healthcare industry and therefore the most influential. Not surprisingly, congressional lobbying was intense during the last two weeks of 2022 in a partially successful effort to ameliorate spending cuts for Medicare payments for physicians and hospitals. Lobbying spend by Big Pharma, Blue Cross/Blue Shield, American Hospital Association, and American Medical Association are all in the top ten spenders again. [3, 4, 5] These organizations aren’t lobbying for prevention, they’re lobbying to keep the status quo.
Concern about consistent quality should always be top of mind. “Diagnostic Errors in the Emergency Department: A Systematic Review,” shared by the Agency for Healthcare Research and Quality, compiled 279 studies showing a nearly 6% error rate for the 130 million people who visit an ED yearly. Stroke, heart attack, aortic aneurysm, spinal cord injury, and venous thromboembolism were the most common harms. The defense of diagnostic errors in emergency situations is deemed of secondary importance to stabilizing the patient for subsequent diagnosing. Keeping patients alive trumps everything. Commonly, patient ED presentations are not clear-cut with both false positive and negative findings. Retrospectively, what was obscure can become obvious. [6, 7]
Spending mirrors motivations. The Wall Street Journal article “Many Hospitals Get Big Drug Discounts. That Doesn’t Mean Markdowns for Patients” lays out how the savings from a decades-old federal program that offers big drug discounts to hospitals generally stay with the hospitals. Hospitals can chose to sell the prescriptions to patients and their insurers for much more than the discounted price. Originally the legislation was designed for resource-challenged communities, but now some hospitals in these programs are profiting from wealthy folks paying normal prices and the hospitals keeping the difference. [8]
“Hundreds of Hospitals Sue Patients or Threaten Their Credit, a KHN Investigation Finds. Does Yours?” Medical debt is a large and growing problem for both patients and providers. Healthcare systems employ collection agencies that typically assess and screen a patient’s ability to pay. If the credit agency determines a patient has resources and has avoided paying his/her debt, the health system send those bills to a collection agency. Most often legitimately impoverished folks are left alone, but about two-thirds of patients who could pay but lack adequate medical insurance face lawsuits and other legal actions attempting to collect payment including garnishing wages or placing liens on property. [9]
“Hospital Monopolies Are Destroying Health Care Value,” written by Rep. Victoria Spartz (R-Ind.) in The Hill, includes a statement attributed to Adam Smith’s The Wealth of Nations, “that the law which facilitates consolidation ends in a conspiracy against the public to raise prices.” The country has seen over 1,500 hospital mergers in the past twenty years — an example of horizontal consolidation. Hospitals also consolidate vertically by acquiring physician practices. As of January 2022, 74 percent of physicians work directly for hospitals, healthcare systems, other physicians, or corporate entities, causing not only the loss of independent physicians but also tighter control of pricing and financial issues. [10] The healthcare industry is an attractive target to examine. Everyone has had meaningful healthcare experiences, many have had expensive and impactful experiences. Although patients do not typically understand the complexity of providing a diagnosis, treatment, and prognosis, the care receiver may compare the experience to less-complex interactions outside healthcare that are customer centric and more satisfying.
PROFIT-MARGIN SQUEEZE
Both nonprofit and for-profit hospitals must publish financial statements. Three major bond rating agencies (Fitch Ratings, Moody’s Investors Service, and S & P Global Ratings) and other respected observers like KaufmanHall, collate, review, and analyze this publicly available information and rate health systems’ financial stability.
One measure of healthcare system’s financial strength is operating margin, the amount of profit or loss from caring for patients. In January of 2023 the median, or middle value, of hospital operating margin index was -1.0%, which is an improvement from January 2022 but still lags 2021 and 2020.
Erik Swanson, SVP at KaufmanHall, says 2022,
“Is shaping up to be one of the worst financial years on record for hospitals. Expense pressures — particularly with the cost of labor — outpaced revenues and drove poor performance. While emergency department visits and operating room minutes increased slightly, hospitals struggled to discharge patients due to internal staffing shortages and shortages at post-acute facilities,” [11]
Another force exacerbating health system finance is the competent, if relatively new retailers (CVS, Walmart, Walgreens, and others) that provide routine outpatient care affordably. Ninety percent of Americans live within ten miles of a Walmart and 50% visit weekly. CVS and Walgreens enjoy similar penetration. Profit-margin squeeze, combined with new convenient options to obtain routine care locally, will continue disrupting legacy healthcare systems.
Providers generate profits when patients access care. Additionally, “easy” profitable outpatient care can and has switched to telemedicine. Kaiser-Permanente (KP), even before the pandemic, provided about 50% of the system’s care through virtual visits. Insurance companies profit when services are provided efficiently or when members don’t use services. KP has the enviable position of being both the provider and payor for their members. The balance between KP’s insurance company and provider company favors efficient use of limited resources. Since COVID, 80% of all KP’s visits are virtual, a fact that decreases overhead, resulting in improved profit margins. [12]
On the other hand, KP does feel the profit-margin squeeze because labor costs have risen. To avoid a nurse labor strike, KP gave 21,000 nurses and nurse practitioners a 22.5% raise over four years. KP’s most recent quarter reported a net loss of $1.5B, possibly due to increased overhead. [13]
The public, governmental agencies, and some healthcare leaders are searching for a more efficient system with better outcomes
at a lower cost. Our nation cannot continue to spend the most money of any developed nation and have the worst outcomes. In a globally competitive world, limited resources must go to effective healthcare, balanced with education, infrastructure, the environment, and other societal needs. A new healthcare model could satisfy all these desires and needs.
Even iconic giants are starting to feel the pain of recent annual losses in the billions. Ascension Health, Cleveland Clinic, Jefferson Health, Massachusetts General Hospital, ProMedica, Providence, UPMC, and many others have gone from stable and sustainable to stressed and uncertain. Mayo Clinic had been a notable exception, but recently even this esteemed system’s profit dropped by more than 50% in 2022 with higher wage and supply costs up, according to this Modern Healthcare summary. [14]
The alarming point is even the big multigenerational health system leaders who believed they had fortress balance sheets are struggling. Those systems with decades of financial success and esteemed reputations are in jeopardy. Changing leadership doesn’t change the new environment.
Nonprofit healthcare systems’ income typically comes from three sources — operations, namely caring for patients in ways that are now evolving as noted above; investments, which are inherently risky evidence by this past year’s record losses; and philanthropy, which remains fickle particularly when other investment returns disappoint potential donors. For-profit healthcare systems don’t have the luxury of philanthropic support but typically are more efficient with scale and scope.
The most stable and predictable source of revenue in the past was from patient care. As the healthcare industry’s cost to society continues to increase above 20% of the GDP, most medically self-insured employers and other payors will search for efficiencies. Like it or not, persistently negative profit margins will transform healthcare.
Demand for nurses, physicians, and support folks is increasing, with many shortages looming near term. Labor costs and burnout have become pressing stresses, but more efficient delivery of care and better tools can ameliorate the stress somewhat. If structural process and technology tools can improve productivity per employee, the long-term supply of clinicians may keep up. Additionally, a decreased demand for care resulting from an effective prevention strategy also could help.
Most other successful industries work hard to produce products or services with fewer people. Remember what the industrial revolution did for America by increasing the productivity of each person in the early 1900s. Thereafter, manufacturing needed fewer employees.
PATIENTS’ NEEDS AND DESIRES
Patients want to live a long, happy and healthy life. The best way to do this is to avoid illness, which patients can do with prevention because 80% of disease is self-inflicted. When prevention fails, or the 20% of unstoppable episodic illness kicks in, patients should seek the best care.
The choice of the “best care” should not necessarily rest just on convenience but rather objective outcomes. Closest to home may be important for take-out food, but not healthcare.
Care typically can be divided into three categories — acute, urgent, and elective. Common examples of acute care include childbirth, heart attack, stroke, major trauma, overdoses, ruptured major blood vessel, and similar immediate, life-threatening conditions. Urgent intervention examples include an acute abdomen, gall bladder inflammation, appendicitis, severe undiagnosed pain and other conditions that typically have positive outcomes even with a modest delay of a few hours.
Most every other condition can be cared for in an appropriate timeframe that allows for a car trip of a few hours. These illnesses can range in severity from benign that typically resolve on their own to serious, which are life-threatening if left undiagnosed and untreated. Musculoskeletal aches are benign while cancer is life-threatening if not identified and treated.
Getting the right diagnosis and treatment for both benign and malignant conditions is crucial but we’re not even near perfect for either. That’s unsettling.
In a 2017 study,
“Mayo Clinic reports that as many as 88 percent of those patients [who travel to Mayo] go home [after getting a second opinion] with a new or refined diagnosis — changing their care plan and potentially their lives. Conversely, only 12 percent receive confirmation that the original diagnosis was complete and correct. In 21 percent of the cases, the diagnosis was completely changed; and 66 percent of patients received a refined or redefined diagnosis. There were no significant differences between provider types [physician and non-physician caregivers].” [15]
The frequency of significant mis- or refined-diagnosis and treatment should send chills up your spine. With healthcare we are not talking about trivial concerns like a bad meal at a restaurant, we are discussing life-threatening risks. Making an initial, correct first decision has a tremendous influence on your outcome.
Sleeping in your own bed is nice but secondary to obtaining the best outcome possible, even if car or plane travel are necessary. For urgent and elective diagnosis/treatment, travel may be a
good option. Acute illness usually doesn’t permit a few hours of grace, although a surprising number of stroke and heart attack victims delay treatment through denial or overnight timing. But even most of these delayed, recognized illnesses usually survive. And urgent and elective care gives the patient the luxury of some time to get to a location that delivers proven, objective outcomes, not necessarily the one closest to home.
Measuring quality in healthcare has traditionally been difficult for the average patient. Roadside billboards, commercials, displays at major sporting events, fancy logos, name changes and image building campaigns do not relate to quality. Confusingly, some heavily advertised metrics rely on a combination of subjective reputational and lagging objective measures. Most consumers don’t know enough about the sources of information to understand which ratings are meaningful to outcomes.
Arguably, hospital quality star ratings created by the Centers for Medicare and Medicaid Services (CMS) are the best information for potential patients to rate hospital mortality, safety, readmission, patient experience, and timely/effective care. These five categories combine 47 of the more than 100 measures CMS publicly reports. [16]
A 2017 JAMA article by lead author Dr. Ashish Jha said:
“Found that a higher CMS star rating was associated with lower patient mortality and readmissions. It is reassuring that patients can use the star ratings in guiding their health care seeking decisions given that hospitals with more stars not only offer a better experience of care, but also have lower mortality and readmissions.”
The study included only Medicare patients who typically are over 65, and the differences were most apparent at the extremes, nevertheless,
“These findings should be encouraging for policymakers and consumers; choosing 5-star hospitals does not seem to lead to worse outcomes and in fact may be driving patients to better institutions.” [17]
Developing more 5-star hospitals is not only better and safer for patients but also will save resources by avoiding expensive complications and suffering.
As a patient, doing your homework before you have an urgent or elective need can change your outcome for the better. Driving a
couple of hours to a CMS 5-star hospital or flying to a specialty hospital for an elective procedure could make a difference.
Business case studies have noted that hospitals with a focus on a specific condition deliver improved outcomes while becoming more efficient. [18] Similarly, specialty surgical areas within general hospitals have also been effective in improving quality while reducing costs. Mayo Clinic demonstrated this with its cardiac surgery department. [19] A similar example is Shouldice Hospital near Toronto, a focused factory specializing in hernia repairs. In the last 75 years, the Shouldice team has completed four hundred thousand hernia repairs, mostly performed under local anesthesia with the patient walking to and from the operating room. [20] [21]
THE BOTTOM LINE
The Mayo Brother’s quote, “The patient’s needs come first,” is more relevant today than when first articulated over a century ago. Driving treatment into distinct categories of acute, urgent, and elective, with subsequent directing care to the appropriate facilities, improves the entire care process for the patient. The saved resources can fund prevention and decrease the need for future care. The healthcare industry’s focus has been on sickness,
not prevention. The virtuous cycle’s flywheel effect of distinct categories for care and embracing prevention of illness will decrease misery and lower the percentage of GDP devoted to healthcare.
Editor’s note: This is a multi-part series on reinventing the healthcare industry. Part 2 addresses physicians, non-physician caregivers, and communities’ responses to the coming transformation.
In healthcare, as in life, people devote a lot of time and attention to the way things should be. They’d be better off focusing on what actually could be.
As an example, 57% to 70% of American voters believe our nation “should” adopt a single-payer healthcare system like Medicare For All. Likewise, public health advocates insist that more of the nation’s $4 trillion healthcare budget “should” be spent on combating the social determinants of health: things like housing insecurity, low-wage jobs and other socioeconomic stresses. Neither of these ideas will happen, nor will dozens of positive healthcare solutions that “should” happen.
When the things that should happen don’t, there’s always a reason. In healthcare, the biggest roadblock to change is what I call the conglomerate of monopolies, which includes hospitals, drug companies, private-equity-staked physicians and commercial health insurers. These powerful entities exert monopolistic control over the delivery and financing of the country’s medical care. And they remain fiercely opposed to any change in healthcare that would limit their influence or income.
This article concludes my five-part series on medical monopolies with an explanation of why (a) “should” won’t happen in healthcare but (b) industrywide disruption will.
Why government won’t lead the way
With the U.S. Senate split 51-49 and with virtually no chance of either party securing the 60 votes needed to avoid a filibuster, Congress will, at most, tinker with the medical system. That means no Medicare For All and no radical redistribution of healthcare funds.
Even if elected officials started down the path of major reform, healthcare’s incumbents would lobby, threaten to withhold campaign contributions (which have exceeded $700 million annually for the past three years) and swat down any legislative effort that might harm their interests.
In American politics, money talks. That won’t change soon, even if voters believe it should.
American employers won’t lead, either
Private payers wield significant power and influence of their own. In fact, the Fortune 500 represents two-thirds of the U.S. GDP, generating more than $16 trillion in revenue. And they provide health insurance to more than half the American population.
With all that clout, you’d think business executives would demand more from healthcare’s conglomerate of monopolies. You might assume they’d want to push back against the prevailing “fee for service” payment model, replacing it with a form of reimbursement that rewards doctors and hospitals for the quality (not quantity) of care they provide. You’d think they would insist that employees get their care through technologically advanced, multispecialty medical groups, which deliver superior outcomes when compared to solo physician practices.
Instead, companies take a more passive position. In fact, employers are willing to shoulder 5% to 6% increases in insurance premiums each year (double their average rate of revenue growth) without putting up much or any resistance.
One reason they tolerate hefty rate hikes—rather than battling insurers, hospitals and doctors— involves a surprising truth about insurance premiums. Business leaders have figured out how to transfer much of their added premium costs to employees in the form of high-deductible health plans. A high deductible plan forces the beneficiary to pay “first dollar” for their medical care, which significantly reduces the premium cost paid by the employer.
Businesses also realize that high deductibles will only financially burden employees who experience an unexpected, catastrophic illness or accident. Meaning, most workers won’t feel the sting in a typical year. As for employees with ongoing, expensive medical problems, employers typically don’t mind watching them walk out the door over high out-of-pocket costs. Their departures only reduce the company’s medical spend in future years.
Finally, businesses know that employee medical costs are tax deductible, which cushions the impact of premium increases. So, what starts as a 6% annual increase ends up costing employees 3%, the government 1% and businesses only 2%. In today’s strong labor market, which boasts the lowest unemployment rate in 54 years, businesses are reluctant to demand changes from healthcare’s biggest players—regardless of whether they should.
Leading the healthcare transformation
If there were a job opening for “Leader of the American Healthcare Revolution,” the applicant pool would be shallow.
Elected officials would shy away, fearing the loss of campaign contributions. Businesses and top executives would pass on the opportunity, preferring to shift insurance costs to employees and the government. Patients would feel overwhelmed by the task and the power of the incumbents. Doctors, nurses and hospitals—despite their frustrations with the current system—would want to take small steps, fearful of the conglomerate of monopolies and the risks of disruptive change.
To revolutionize American medicine, a leader must possess three characteristics:
Sufficient size and financial reserves to disrupt the entire industry (not just a small piece of it).
Presence across the country to leverage economies of scale.
Willingness to accept the risks of radical change in exchange for the potential to generate massive profits.
Whoever leads the way won’t make these investments because it “should happen.” They will take the chance because the upside is dramatically better than sitting on the sidelines.
The likely winner: American retailers
Amazon, CVS, Walmart and other retail giants are the only entities that fit the revolutionary criteria above. In healthcare’s game of monopoly, they’re the ones willing to take high-stakes risks and capable of disrupting the industry.
For years, these retailers have been acquiring the necessary game pieces (including pharmacy services, health-insurance capabilities and innovative care-delivery organizations) to someday take over American healthcare.
CVS Health owns health insurer Aetna. It bought value-based care company Signify Health for $8 billion, along with national primary care provider OakStreet Health for $10.6 billion. Walmart recently entered into a 10-year partnership with the nation’s largest insurance company, UnitedHealth, gaining access to its 60,000 employed physicians. Walmart then acquired LHC, a massive home-health provider. Finally, Amazon recently purchased primary-care provider One Medical for $3.9 billion and maintains close ties with nearly all of the country’s self-funded businesses.
Harvard business professor Clay Christensen noted that disruptive change almost always comes from outsiders. That’s because incumbents cling to overly expensive and inefficient systems. The same holds true in American healthcare.
The retail giants can see that healthcare is exorbitantly priced, uncoordinated, inconvenient and technologically devoid. And they recognize the hundreds of billions of dollars of revenue and they could earn by offering a consumer-focused, highly efficient alternative.
How will the transformation happen?
Initially, I believe the retail giants will take a two-pronged approach. They’ll (a) continue to promote fee-for-service medical services through their pharmacies and retail clinics (in-store and virtual) while (b) embracing every opportunity to grow their market share in Medicare Advantage, the capitated option for people over age 65.
And within Medicare Advantage, they’ll look for ways to leverage sophisticated IT systems and economies of scale, thus providing care that is better coordinated, technologically supported and lower cost than what’s available now.
Rather than including all community doctors in their network, they’ll rely on their own clinicians, augmented by a limited cohort of the highest-performing medical groups in the area. And rather than including every hospital as an inpatient option, they’ll contract with highly respected centers of excellence for procedures like heart surgery, neurosurgery, total-joint replacement and transplants, trading high volume for low prices.
Over time, they’ll reach out to self-funded businesses to offer proven, superior clinical outcomes, plus guaranteed, lower total costs. Then they’ll make a capitated model their preferred insurance plan for all companies and individuals. Along the way, they’ll apply consumer-driven medical technologies, including next generations of ChatGPT, to empower patients, provide continuous care for people with chronic diseases and ensure the medical care provided is safe and most efficacious.
Tommy Lasorda, the long-time manager of the Los Angeles Dodgers, once remarked, “There are three types of people. Those who watch what happens, those that make it happen and those who wonder what just happened.”
Lasorda’s quip describes healthcare today. The incumbents are watching closely but failing to see the big picture as retailer acquire medical groups and home health capabilities. The retail giants are making big moves, assembling the pieces needed to completely transform American medicine as we think of it today. Finally, tens of thousands of clinicians and thousands of hospital administrators are either ignoring or underestimating the retail giants. And, when they get left behind, they’ll wonder: What just happened?
The conglomerate of monopolies rule medicine today. Amazon, CVS and Walmart believe they should rule. And if I had to bet on who will win, I’d put my money on the retail giants.
On Tuesday, Amazon unveiled its latest healthcare offering, RxPass, which will deliver generic prescription drugs to Prime members who pay an additional flat $5 monthly surcharge. The service, which currently covers 53 medications for common conditions, requires consumers to pay out-of-pocket rather than through insurance, but does not limit the number of drugs a subscriber can receive for the flat monthly fee.
RxPass is not yet able to ship medications to eight states, including (notably) California, Texas, and Pennsylvania.
The Gist:Paying $60 a year to avoid the hassle of going to a pharmacy or dealing with another mail-order delivery program will be a very attractive offer for many of the 168M US-based Amazon Prime subscribers, as much for the convenience as for the potential cost savings.
But the concept isn’t novel. Case in point: Walmart continues to offer its $4 generic drug program, launched in 2006. Given that the average Prime member is 37 years old, Amazon’s flat-fee service offering will target a younger demographic with fewer medication needs—and complement the service offered by PillPack, acquired in 2018, which is built for older customers on multiple medications. An evolutionary, not revolutionary, step in Amazon’s ongoing moves into healthcare.
Budget retailer Dollar General announced this week that it’s partnering with mobile medical service provider DocGo to deliver routine primary care in mobile clinics outside three stores near its Goodlettsville, TN headquarters.
The mobile clinics will accept public and select commercial insurance plans, as well as offer services for a flat fee. It’s the latest step in Dollar General’s tentative exploration of healthcare, which includes a partnership with Babylon Health to offer telehealth visits in several Missouri stores, and the DG Wellbeing initiative, which has placed basic health and wellness products in roughly 3,200 of its 19,000 stores nationwide.
The Gist: With an unmatched footprint in rural areas (an estimated 75 percent of the US population lives within five miles of one of its stores) Dollar General has the capacity to transform rural healthcare access.
Rather going head-to-head with other national retailers who are quickly expanding into healthcare delivery, Dollar General has so far taken a measured approach, aiming to develop workable services that improve rural healthcare access at the margins.
Since it hired a chief medical officer in 2021, it has dabbled in small care delivery pilots like this one, but one of these pilots will need to succeed at scale for Dollar General to enter the ranks of serious retail disruptors.
Healthcare leaders now need to strike a delicate balance that requires managing financial and growth metrics, increasing the speed of transformation, and building the health systems of tomorrow. So how do we redefine compensation models to reward all these behaviors?
Executive compensation might not spring to mind as a key driver of healthcare transformation, nor does it seem naturally connected to critical issues such as health equity, patient safety, or quality of care – just a few of the areas where significant changes can be made to transform healthcare. But, in fact, executives leading not-for-profit health systems today are tasked with delivering measurable results that improve the health status of their patients and their communities. And to ensure that these new performance metrics are met, we must change how we think about —and deliver—compensation.
Defining a new model
While executive compensation has always been tied to specific objectives, they have historically leaned heavily toward financial performance, volume and margins, with a modest portion of compensation aligned to quality of care and patient outcomes. But transformative approaches such as population health, value-based care, patient wellness and health outcomes are shifting the mark.
Healthcare leaders now need to strike a delicate balance that requires managing financial and growth metrics, increasing the speed of transformation, and building the health systems of tomorrow. So how do we redefine compensation models to reward all these behaviors?
Some might say that the answer lies in adjusting incentive plans. While incentive plans across health care have not changed significantly in the past decade, the sophistication of the plans has changed, reflecting greater attention to delivering a better patient experience. But delivering better experiences does not imply that health systems have transformed from the top down. In my mind, adjusting incentive plans only solves part of the problem.
If we want true health care transformation—and we should, in order to best serve patients and communities—health systems need to re-evaluate the outcomes for each stakeholder and create incentives to evolve leadership as a whole. We need to rethink executive compensation models to align with value-based care, patient experience, and the resulting outcomes, along with traditional performance measurements.
Leading through lingering disruption
But rethinking executive compensation models won’t be an easy task, especially given the external challenges and changes thrust upon the health care system over the last few years.
As with nearly every other aspect of health care, pay for performance was disrupted during the pandemic. Demand for health services changed dramatically, labor and attrition issues intensified, and supply chain problems and operational costs increased. These new pressures required executives to manage through long periods of uncertainty where meeting operational pay-for-performance goals was nearly impossible. Fast-forward to today, the executive talent market remains extraordinarily competitive. Demand outpaces supply due to higher-than-typical retirements, effects of the great resignation, the need for new skill sets and overall burnout.
As a result, there has been upward pressure on compensation to address and fulfill unexpected but immediate needs such as rewarding executives for managing in a unique and challenging performance environment, increasing efforts to recruit and retain, and recognizing leaders for their hard-won accomplishments.
Considerations and changes
When considering adjusting models for 2023 and beyond, CEOs and compensation committees need to take these pressures and disruptions into account. They should look closely at their own compensation data from the past two years – not as a lighthouse for future compensation, but as data that may need to be set aside due to the volume of performance goals and achievements that were up-ended by the pandemic. When relying on external industry data, the same rules apply; smaller data sets or those that don’t account for the past two years may be misleading, so review carefully before using limited data sets to inform adjusted models.
Just as important, CEOs and compensation committees should consider new performance measurements tied to both financial and quality or value-based transformation metrics. We don’t need to eliminate traditional financial and operational goals because viability is still a business mandate. But how can we articulate compensation-driven KPIs for stewardship of patient and community health, improved outcomes and reduced cost of care? Too many measures are akin to having no measures at all.
The compensation mix should take into account a more focused approach to long-term measures. The old paradigm of 12-month incentive cycles is not enough to address the time required to truly transform health care. Another consideration should be performance-based funding of deferred compensation based on achieving transformation goals, and greater use of retention programs to support the maintenance of a stable executive team during the transformation period. Covid-19 proved how crisis can be an accelerator for change. True transformation should blend the skills gained from crisis management with planful, thoughtful and intentional change.
In addition, some metrics may need to incorporate a discretionary component, considering ongoing disruption within the workforce, supply chain limitations, and energy, equipment and labor cost increases. More organizations are also including health equity, DE&I, and ESG goals in incentive programs to tighten alignment with mission-critical board-mandated goals.
Transformative change
There are four elements that are vital in the journey to transform health care from “heads in beds” to the public-service-oriented organizations that they were meant to be—and can be again. With mounting pressure from patients, communities, and payers to boards and employees, CEOs and compensation committees must become key drivers of change, setting the right goals and incentives from the top down.
Affordability: can patients afford the care they need?
Quality: is the care being delivered of the utmost quality?
Usability: how can we reduce hurdles to undertaking the care plan?
Access: are all community members able to access needed care?
Solving for each of these elements is one of the biggest challenges we face, and as we begin to emerge from the disruption of the pandemic, leaders will be watched closely to ensure that they deliver—and can clearly show the path to delivery.
Ideally, end achievements would include patients spending less to achieve better health; payers controlling costs and reducing risk; providers realizing efficiencies and greater patient satisfaction; and alignment of medical supplier pricing to patient outcomes. And when you zoom out to reveal the bigger picture, all of these pieces come together to achieve healthier populations and lower overall health care costs, while still meeting the financial goals of the organization.
We’re asking a lot of already-overburdened health care executives. Stakeholders must prove that we value leaders with the right mindset and skillset in order to attract executives who can shepherd organizations through the transformation journey. This requires a setting where there is supportive leadership, a compelling mission and opportunity for personal growth and development. It will not be easy, but without rethinking how we design compensation models from the top down, it will be unnecessarily challenging.
HENRY KOTULA 