In just 2020, deaths from gun violence cost the U.S. healthcare system $290 million, or about $6,400 per patient, according to a report from the Commonwealth Fund. These costs are mostly covered by Medicaid and other government insurance programs.
The U.S. healthcare system sees about 30,000 inpatient hospital stays and 50,000 emergency room visits due to gun violence each year, leading to more than $1 billion in initial medical costs, according to a new analysis.
The Commonwealth Fund published these results last week and relied on three data sources for its analysis: the 2019 Global Burden of Disease study, the Small Arms Survey and the U.S. Government Accountability Office.
Even after leaving the hospital, patients are faced with challenges. A year after a gun injury, medical spending rises about $2,495 per person per month. In addition, those who suffer firearm injuries are more likely to form mental health challenges and substance use disorders.
“The impact of gun violence reaches far beyond the hospital room,” the analysis states.
Firearm-related deaths are increasing, according to the Centers for Disease Control and Prevention. In 2021, almost 49,000 Americans died from firearms, compared to 45,000 in 2020.
Additional findings from the report include:
In 2019, the U.S. had a higher rate of firearm deaths than any other country. Its rate of firearm deaths was almost five times as much as France, the second-highest country.
Eight times more people in the U.S. died from firearm violence in 2019 compared to Canada, the second-highest country.
More people died from self-harm by firearm in the U.S. than any other country in 2019, more than three times higher than France and Switzerland.
More women were killed by guns in the U.S. than any other country in 2019.
In the U.S., there are 67 million more firearms than people. That difference is higher than the population of the United Kingdom, which has 66.2 million people.
In the U.S., 52% of people who are admitted to hospitals for firearm injuries are Black, 29% are White, 14% are Hispanic and 5% are another race or ethnicity. Black Americans account for 50% of firearm injury hospital costs, while White Americans account for 27%, Hispanic Americans account for 17% and other races or ethnicities account for 6%.
About 48% of firearm-related inpatient hospital stays are in the American South, while 20% are in the Midwest, 20% are in the West and 12% are in the Northeast. The South accounts for 44% of firearm injury hospital costs, while the West accounts for 26%, the Midwest accounts for 18% and the Northeast accounts for 11%.
One of the great things about my job is getting the opportunity to talk with healthcare CEOs around the country on a regular basis.
Lately, every CEO I talk with tells me how hard it is to run a healthcare organization in 2023.
These are people with long experience, people who over time have pushed the right buttons and pulled the right levers to make their organizations successful and to give their communities the care they need.
Hearing these recent comments from CEOs takes us back to the concept of “wicked problems,” which we’ve referred to in the past, and suggests that the current hospital operating environment is overwhelmed by wicked problems.
As a reminder, the wicked problem concept was developed in 1973 by social scientists Horst Rittel and Melvin Webber.
Unlike math problems, wicked problems have no single, correct solution. In fact, a solution that improves one aspect of a wicked problem usually makes another aspect of the problem worse.
Poverty is a common example of a wicked problem.
According to Rittel and Webber, all wicked problems have these five characteristics:
They are hard to define.
It’s hard to know when they are solved.
Potential solutions are not right or wrong, only better or worse.
There is no end to the number of solutions or approaches to a wicked problem.
There is no way to test the solution to a wicked problem—once implemented, solutions are not easily reversable, and those solutions affect many people in profound ways.
Healthcare is one of our nation’s critical wicked problems, and the broad and persistent effects of COVID have made that problem worse.
Like all wicked problems, the wicked problem of healthcare can be defined in many different ways and from many different perspectives.
If we were to frame the wicked problem of healthcare just in the context of hospitals and health systems coming off of their worst financial year in memory, it could look something like this:
Hospitals and health systems need to make a margin in order to carry out their “duty of care”—that is, their responsibility to improve health for communities, which increasingly include public health undertakings.
However, in 2022, more than half of hospitals in America had negative margins due largely to macroeconomic factors related to labor, inflation, utilization, and insufficient revenue growth.
The actions then needed to improve financial performance likely involve reducing labor costs and eliminating unprofitable services.
But these solutions in the hospital world are seen as another wicked problem, and actions taken to improve financial and clinical operations are often cautiously approached in order to protect the organization’s duty of care.
As you can see, the very actions to solve the wicked problem of provider healthcare may likely make aspects of the strategic problem worse.
Everyone reading this blog is dedicated to solving these and other wicked problems related to health and healthcare and the provision of sufficient care to the American community.
Solutions to healthcare’s wicked problems are never clear, and those solutions are not easily tested and eventually can affect many.
And in the wicked problem lexicon, once uncertain solutions have been implemented they are very hard to undo.
And healthcare’s many and varied dissatisfied stakeholders demand rapid solutions and then complain loudly when those solutions fall short, as any one solution inevitably will when the problem is as wicked as the current healthcare environment.
This is the new role of healthcare leaders: solvers of wicked problems.
Welcome to the “Lessons from the C-suite” series, featuring Advisory Board President Eric Larsen’s conversations with the most influential leaders in healthcare.
In this edition, Bill Gassen, President and CEO of Sanford Health and James Hereford, President and CEO of Fairview Health Services talk with Eric about the planned merger that will create the 11th largest health system in the United States that would span North Dakota, South Dakota, Iowa, and Minnesota.
The two CEOs describe the urgency and intent behind the merger, why not all disruptors are equally disruptive, and why it takes more than size to harness scale in healthcare.
Question: Bill and James, let’s jump right in. The two of you are architecting one of the most significant health system mergers of 2023 — a combination of Sanford Health and Fairview, which on its completion, will result in the 11th largest health system in the US. The discussions have attracted, understandably, a lot of interest and scrutiny not just in each of your communities, but nationally. Some may not be aware, but this is not the first time that Sanford and Fairview have considered coming together. Bill, let’s start with you – why is this time different?
Gassen: Eric, you’re right. This is not the only time our two organizations have considered the idea of merging. James and I, and our respective boards and organizations, have examined every element of the union and are confident that this is the right time to proceed. We have executed a Letter of Intent (LOI) and submitted an HSR filing that has been reviewed by the Federal Trade Commission (FTC). The parties provided substantial amounts of information to the FTC and the HSR process and it is now complete. There is an unwavering commitment from our respective leaders and our organizations to see this through.
It is a false choice for anyone to believe that James or I or anybody else has the benefit of sitting back and saying, well, maybe I’ll just maintain the world that I live in today. The healthcare status quo is gone. What is in front of us is taking the steps needed to ensure that we can continue to provide the best possible service for our patients, employees, and communities. Taking control over our destiny. We want to come together in a merger between our two organizations to put us in a position to fundamentally change and to be an agent for the modernization of the way care is delivered into the future. Our organizations exist only to serve patients, employees, and our communities. That is not up for debate. What we have in front of us is a decision to make that better for generations to come.
Hereford: I think Bill articulated that very well. Our purpose is to combine to improve and sustain our ability to offer world class healthcare. It is not simply a function of scale, you have to combine that with an intent to drive change, to improve value, and to innovate. And that’s a rare thing to have that intent. We have that intent today.
Avoiding the ‘Noah’s Ark’ problem
Q: Let’s go a bit deeper into the horizontal consolidation among health systems. This isn’t a new phenomenon — in fact, our $1.4 trillion hospital sector is already massively consolidated, with the top 100 systems controlling almost $900 billion in revenue. But with this degree of concentration, a lot of disillusionment: we just haven’t seen compelling or provable quality improvements, let alone the scale of cost reductions projected. Some of this might be what I call the “Noah’s Ark” problem—two of everything (two CEOs, two headquarters, two EHRs, etc.) … in other words, very little rationalization of back-office infrastructure or staffing.
I think about the proposed Sanford-Fairview merger differently. I might even characterize it as more a “vertical” merger, instead of “horizontal” — a combination of different and complementary capabilities instead of overlapping or competing ones — including Sanford’s proprietary health plan and virtual hospital investments, bringing Fairview’s specialty pharmacy and post-acute companies into the combination — for example. Am I thinking about this the right way?
Gassen: I think your characterization is right, Eric. We are different but very complementary organizations. We are contiguous as it relates to geography, but there is no overlap. We serve distinctly different populations in a similar part of the country. Roughly two-thirds of the patients who have been served today at Sanford Health come to us from a rural community. While most of those who Fairview serves come from much more densely populated urban communities. Both of those subsets of our population are experiencing similar challenges. There’s a need for financial sustainability, both on the provider side as well as on the patient side of the house.
When you think about our service mix, there are a number of complementary areas that make our union additive. Specialty and subspecialty expertise at Fairview coupled with a robust primary care backbone from Sanford plus our Virtual Care initiative and significant philanthropic investment will come together to create powerful healthcare solutions.
The fact that at Sanford alone we have $350 million solely dedicated to, and available for, scaling virtual care is amazing. And when you think about applying that investment to Sanford and Fairview, the opportunities are limitless. We’re going to be able to serve both our rural and urban communities, allowing us to truly transform the way in which healthcare is delivered and experienced in this part of the country.
And for those outside our orbit, they’ll say, “I want to partner with a combined Sanford Fairview” because that is much more attractive. And at the end of the day, partnering with us means that we’re all in a better position to transform the way in which we deliver care, how care is accessed, and how quality is improved. And do it in a financially sustainable way that allows us to deliver equitable care to more people in the upper Midwest.
Hereford: Here’s why scale matters: If you’re one hospital and you drive an innovation that requires a capital of investment of $1 million, that’s an expensive solution. But if you’ve got 100 hospitals, the size of that investment you made on a scale basis is much smaller. Therefore, your ability to drive the needed level of innovation is expanded significantly. To truly improve healthcare delivery, we must challenge ourselves to do things differently, but you have to have a certain level of scale to be able to do that.
Health system transformation must happen now
Q:I want to expand on the earlier point you made that the old health system status quo is forever gone. 2022, for health systems, was something of an Armageddon year — the worst on record with 11 out of 12 months with negative margins; supply chain costs up 17% versus pre-pandemic; health systems collectively spending an extra $125 billion on Labor last year compared to 2021. So not a great “state of the union” for acute-care centric health systems. How does this macroeconomic backdrop factor into your planning?
Hereford: Conceptually, cognitively, I would offer that hospital CEOs probably all know that the good old days are gone. But you don’t see organizations responding as if they’re gone. And we’re on the precipice of a significant cliff. The fundamental things that have defined healthcare and not-for-profit healthcare for decades have fundamentally shifted. We need to change in response.
We’re going to have 80,000 people when we combine. The challenge for us as leaders is going to be how do we shift the mindset and change the way we think about care delivery while maintaining essential services that persist with challenging economics. We are a high capital, low margin business that is critical to society.
Gassen: James, it’s as you and I talk about a lot. We don’t get the benefit of hitting pause, taking a year to revamp the industry because it’s 24 by 7 by 365. There are no breaks.
And while we’re doing that and while we are delivering essential services, the 45,000 incredible caregivers at Sanford and the 35,000 incredible caregivers at Fairview, collectively, are going to figure out how we evolve together as a unified organization to continue to elevate that critical work of patient care. And we don’t get reimbursed for a lot of those services. But those are essential services that people need.
If we want to be able to meet the needs of vulnerable patients and communities, we must face the increased pressure to lower costs and increase scale to drive positive margins. Those areas are few and far between in not-for-profit healthcare delivery. So, it necessitates that we continue to evolve and think differently about the work that we do driving down costs.
Larsen:And that’s increasingly becoming difficult — even for big players. I’ve been writing ruefully about the “billion-dollar club” — preeminent health systems like Ascension, MGB and Cleveland Clinic each posting more than a billion dollars in total losses (and even more in some cases, e.g., $4.5 billion for Kaiser). But Sanford, in contrast, is one of just a small handful of health systems that somehow managed to end 2022 in the black, with a $188 million operating income last year. Bill, any reflections on how you and the team did that?
Gassen: We count ourselves very, very blessed to be among the few who had the opportunity to experience positive margins in 2022. I would give first and foremost credit to an exceptionally talented team inside and outside the organization. They do a wonderful job of focusing their attention on that which matters most, which is patient care.
It’s also a very well-constructed organization from the ground up. We benefit coming into both the pandemic and then through the financial headwinds in 2022 with a well-diversified set of assets and geographies. On the acute side it’s largely contained across Iowa, South Dakota, and North Dakota.
In Minnesota, and across those above geographies, we have a great complement of assets across our provider sponsored health plan, hospitals, clinics, post-acute care, as well as our research enterprise, all of which, collectively, allowed us to do a better job than some of our peers at weathering that “economic storm” you mentioned earlier.
But, most importantly, it’s just the time that we’ve had to mature as an organization. And with that time, we’ve integrated more deeply as one singular operating company. Sanford Health is not a holding company. The decisions that we make, we make as one singular integrated system and that is a part of that special sauce that’s allowed us to be successful.
Everything that I’ve described has just given us a little bit of a head start and now it’s incumbent upon us to maximize that time.
The imagined and real disruption in healthcare
Q:Bill, you mentioned time is of the essence. And so far, we’ve mostly localized our discussion today talking about health system-specific competitive issues, which makes sense. But it also makes sense to lift up and survey the healthcare ecosystem outside of health systems and note the fact that even when Sanford and Fairview combine and represent $14 billion in revenue, it will still be comparatively tiny to some of the non-traditional players seeking to disrupt healthcare. We have trillion-dollar market cap companies like Amazon investing aggressively into the primary care, pharmacy, and home enablement spaces. We have Fortune 10 companies like UnitedHealth Group and CVS-Aetna vertically integrating and building out sophisticated ambulatory delivery systems. And we have retailers like Walmart and Best Buy transitioning into parts of the healthcare delivery chain as well. So, while Sanford-Fairview will be sizable by most conventional healthcare metrics, it has some pretty formidable competition. How do you assess the new competitive landscape emerging?
Hereford: So, I thought a lot about this because I do think it’s one of the most significant aspects of our industry right now. The opportunity for a CVS-Aetna is that they are proximate to a lot of people in the US. And there’s a lot of things that they could do for patients with a simple presentation of acute symptoms or for fairly simple chronic disease and stabilization. But that is not what drives the cost of health care in the US. It’s when people get very sick.
People receiving specialist care in hospitals are having complex procedures. They’re being treated for complex cancers. And we’re doing an amazing job of advancing the science and the technologies that we can apply to that. But that doesn’t happen in a drug store. That does not happen in a store front primary care office. That happens in organizations like ours. Our challenge is to create the same level of convenience, the same level of access, or partner in a smart way to achieve that.
Our job is to think about total cost of care within the context of delivering very complex care. That isn’t simply a function of primary care and that, I think, is our fundamental challenge. We can translate that into real total cost of care savings.
Gassen: For James and me, in our respective roles and responsibilities, this is our incredibly rewarding and incredibly difficult work. Because those other organizations aren’t required to provide care to everyone. They’re not required to provide free care. They’re not required to be able to provide services for which there is no margin. We don’t get to cherry pick.
It’s our responsibility to really be all things from a healthcare delivery perspective to all people, which means that we are always going to be challenged with how we do that in a financially sustainable way. I think it’s the beauty of where we find ourselves as an industry because out of that necessity comes that innovation that we’ve been talking about here because we can’t continue at current course and speed.
Larsen:When we start to talk about giants in healthcare we tend to index on their size and market cap and, as a result, we lump vertically integrating players and technology companies under the same umbrella. I think that’s a mistake. You have focused healthcare payers like CVS Aetna and UHG that are combining their underwriting business (and ownership of the premium dollar) with an ambulatory delivery network, with an emphasis on home and virtual care. To me that’s a very real and consequential development – and very different from what Big Tech is aspiring to do in our space.
Hereford: Eric, I agree.The world is so clearly changing and that is where the market and a number of very large healthcare organizations are betting. I do think that people who see the overall size of the healthcare marketplace and say “we want to be a part of that” but without any clear way of making sustainable margins.
Gassen: In contrast with the large public companies, as a not-profit health care system, it’s a fact of life that we operate on thin margins. But there are a lot of dollars floating around for other players in the healthcare ecosystem. Which to your point, is why people get enticed to enter into the healthcare space. Our goal with the transaction is to remain financially solid, with the resources needed to invest in our communities, while staying true to our non-profit mission.
Larsen:Your comments, Bill, underscore the power of being a ‘payvider’ in healthcare, which of course Sanford is. You’re in rarefied company — only a dozen or so health systems can claim this, and they have one thing in common — a very mature health plan function (average age of 44 years). So Intermountain, Geisinger, Kaiser, Sentara, Sanford and a small handful of others fit this bill. I presume a major part of the envisioned benefit of the merger is extending Sanford Health plan into Fairview. Can I get you both to comment on that?
Gassen: I certainly agree with you Eric about the importance of being a “payvider.” And of course, I’d also say there is a scale component to that, too. Today our health plan only has 220,000 covered lives. But it is a very valuable and strategic component of the larger Sanford Health system.
As we come together with Fairview into a combined system, we now have the opportunity to bring the Sanford Health plan and its additional options and opportunities for members to a much larger community. And one that’s backed by a combined system. It offers greater choices for the two million people across North Dakota, South Dakota, and Western Minnesota.
When we do that, it puts us in the best possible position to coordinate care that allows for the best outcomes, and as a consequence, also results in a better financial position for us. And so, when we think ahead to the opportunity to now apply the infrastructure that we’ve built to the greater Twin Cities market and beyond to bring that together with the care delivery assets and expertise of Fairview Health Services, we get really excited about the opportunities we unlock not just for the combined organization, but for importantly, for all the members within that community.
Healthcare’s technology paradox
Q:The above commentary on scaling out to wider geographies and connecting and transforming care brings me to the paradox of digital health. One of the only bright lights to come out of the pandemic was what I would characterize as a “Renaissance moment” in digital health — unprecedented funding ($72 billion globally in 2021 alone) fueling the creation of almost 13,000 digital startups, spanning new diagnostics, therapeutics, clinical/non-clinical workflow, care augmentation, you name it. And while we’re now seeing a rough contraction, with lots of companies starved for capital and struggling to sell into healthcare incumbents, we are going to see some winners and some transformational platforms emerge.
The question is, will healthcare incumbents like health systems be able to take advantage of this? The data are sobering — it takes an estimated 23 months for a health system to deploy a digital health technology (once it signs a contract). And while technology tends to be deflationary — lowers costs as it augments productivity — that just hasn’t happened in healthcare, as costs inexorably keep going up. How will the combined Sanford-Fairview tackle this? Who wants to go first?
Hereford: Let me start because I want to respond to something you said, Eric. You’re right, technology has been deflationary in other sectors but only since about 1995. In the 1990s many books in that period were asking “why are we investing all this money in technology across all sectors and we’re not seeing productivity improvements?”
But out of that question came reengineering — where companies started to reconfigure processes and workflows as opposed to just applying technologies. Only then did they see the deflationary benefits of greater efficiencies from technologies. So, I think that has a lot to do with how we’ve applied technology. We’ve had federal stimulus to apply technology, but it’s to apply technology for its own sake. Not to challenge how we use technology to make it easier to be a doctor or nurse. How do we use technology to make people more effective and therefore more efficient?
Gassen: I think that change, especially fundamental shifts, and changes to a business won’t happen until you absolutely have to. And that’s human nature.
The challenge ahead of us is to interrogate how we as an industry interact with our patients and ask, “How can we fundamentally tear that down to the studs and rebuild it better and fit for today?”
But I also want to be clear about why we’re here as a health system. Our reality is that there is a patient at the end of every single decision that we make. So, we must be extremely careful about how we look at processes and implement change. We know they’re rarely perfect, but oftentimes we do deliver the best outcome for the patient. Our job is to be able to make the right change without causing harm.
Larsen:Bill, we’ve made the argument together in past conversations that this same creation moment for digital health solutions beautifully aligns to address the conventional disadvantages of American rural medicine: insufficient infrastructure (hospitals, surgery centers, etc.) and a scarcity of clinicians and non-clinicians for the workforce. Digital health holds the promise to turn those deficits into advantages. And, you know, Sanford’s been a pioneer in launching a $350 million virtual hospital. Perhaps you can unpack this.
Gassen: I’d say our work here really has its origins in the unwavering belief that one zip code should not determine the level of care that a person receives. Every patient has the right to access world class care. So, it’s incumbent upon us, those of us who find ourselves in the privileged position to be in leadership in healthcare delivery organizations like Sanford and Fairview, to take the necessary steps to deploy the appropriate resources and to find the right partners to ensure that whether you’re living in the most rural parts of the heartland or an urban center, you get the best quality care possible.
We take great pride in the fact that our organization was built on the belief that we know many of our patients choose to live in rural America. Two-thirds of the patients today at Sanford Health, whom we have the privilege of serving, come to us from rural America.
It’s with that front and center, the Virtual Care initiative at Sanford Health is allowing us the opportunity to deliver world class care. It’s about making certain that through basically all facets of digital transformation, we leverage our resources to extend excellence in primary care, in specialty and subspecialty care, and offer those individuals access to that care close to home.
The vision for us is to ensure that those who choose to live in rural America are not forced to sacrifice access to high quality, dependable care. That’s at the core of both our beliefs and actions.
Larsen:And James, I think you’ve been one of the most progressive CEOs in the industry on thinking about capitalizing on digital health, innovation and partnering with capital allocators. And we talked about a few of them — leading VCs like Thrive or SignalFire who are partnering broadly with health systems — and finding ways to shorten the innovation cycle.
Hereford: It comes back to intent and purpose. Our job is to make sure that everybody can access high quality care and so the opportunity is to really think about the commonalities and leverage that across both rural America, urban communities, suburbs, exurbs, etc. The other thing that I think is often overlooked in your Cambrian explosion is the volume of scientific advancements over the last two decades.
I love the hypothetical of a medical student who learned everything about medicine in 1950 and how fast the volume of clinical knowledge would have doubled then. They would have had about 50 years before the knowledge base doubled. Today, an amazing medical student with the ambition to learn the entire body of clinical knowledge would have about seven months to see it doubled. That’s how fast medicine is advancing.
We built this industry based on highly specialized, incredibly smart, incredibly committed people who can master these topics. This volume of information on clinical care theory, the body of knowledge on clinical application, all layered on to how the business of care works is cognitive overload. We have got to give them better tools. We have got to help support them. I think we’re in a unique place to be able to really do something about it and create real solutions for people.
Gassen: Where we’re at right now necessitates that. And again, thinking a level deeper as it relates to rural America, the opportunity is so incredibly ripe because it’s necessary. The only way that we’re going to be able to scale to the level we need is to leverage and maximize technology. And so therein creates that opportunity and that necessity makes us a very fertile ground for organizations to come in and partner with us, to be able to extend those services.
The current deal’s state of play
Q:So, we started our conversation about the merger and went broad to talk about industry trends and the wider landscape. But I do want to circle back to a couple of the outstanding specifics of the merger. Sanford and Fairview are merging. What will the University of Minnesota’s relationship be with the merged organization?
Gassen: Both James and I firmly believe, and have articulated in our conversation with you today, the virtues of bringing Sanford Health and Fairview Health services together are absolutely essential to ensuring the delivery of world class healthcare in the upper Midwest. And we are committed to creating the right relationship with the University of Minnesota for it to pursue its mission.
Hereford: We’ve always said that we wanted the University to be part of what we’re building. And, the University of Minnesota has indicated their desire to purchase the academic assets of the system and we stand ready to engage with them to support that. If that is the path that they pursue and can get state funding to support, then we can work with them to determine the nature of the relationship between the new system and the University of Minnesota.
Larsen:And how about the other partners and players in the landscape? I’m thinking of the Minnesota Attorney General, the FTC, etc.
Gassen: We’ve engaged the elected officials across the states of North Dakota, South Dakota, and Minnesota, and we’ve continued to keep them apprised. We’ve also worked very closely with regulators and are happy to report that following its review, the Federal Trade Commission cleared the transaction and the HSR process is complete.
At this point in time, we are working closely with Attorney General Keith Ellison’s office in the state of Minnesota to ensure that he has sufficient information to complete his analysis under antitrust and charities laws to ensure that he’s continuing to protect the interests of all Minnesotans. We remain very engaged and look forward to the conclusion of that work.
The future focus of leadership
Q:Ok, I’d like to round out this conversation with a look to the future. Can you foreshadow your division of labor…where you will be converging and where will you be dividing and conquering as CEOs?
Hereford: One of the great positives of this deal and one of the great signals of the quality of the rationale here is that Bill and I went into this with the question: How do we set this up to be successful over the long term?
You may have noticed Bill and I are different ages. Bill has a lot more runway than I have, so it was not a difficult decision on my part to say “look, it’s important for me to help with the transition because it’s a big deal, right? And it’s not going to be over in a year.” But I can be that bridging function to help support the transition. This is a long-term play and Bill’s the person who’s going to be able to be in the seat to really see that through.
And given my interests I can take on the innovation that we’re talking about and how we make the membrane of this organization a little more permeable and a little bit more friendly to partners, while also being very demanding of partners in terms of the value they create, and we create within the system.
I’m really excited about the opportunity to do that. I do think the way that we have approached this is a very enlightened approach.
Gassen: Standing on the shoulders of James’ comments, one of the many aspects that makes this merger unique is the collegiality and foresight from our respective boards that see how incredibly valuable it is to be able to have co-CEOs working together, focusing first and foremost on ensuring that we’re bringing together the two organizations as one integrated, transformative healthcare delivery organization. I think James and I get up every morning with the goal of making sure that that happens every single day.
And it’s not just that James will work on the innovation piece because it brings him joy and energy but also, it’s where he has a deep level of experience and expertise. I get to focus more of my time and energy on the day-to-day of the two organizations coming together.
Together, James and I will be able to jointly balance the combination of the two organizations with day-to-day delivery and the transformative opportunities for us because of the unique nature of our backgrounds and expertise.
Hereford: And I think that’s a real advantage for the organization. I’m sure there are going be times when I’ll say “Bill, we’ve got to change. You’ve got to do this”. And he’s going to say “yeah, but I can’t do that. I can’t make that kind of change.”
But that’s the kind of dialogue that this structure sets up for us to hold that tension productively as opposed to responding to the tyranny of the urgent, which is ever present in a large health care delivery system. Transformation of care delivery systems will require the ability to manage those competing dynamics. I really appreciate both the structure but also how Bill is approaching this.
Gassen: I do think that what we just described here will prove to be one of the finer distinguishing factors that allows us to really be successful. Because you do oftentimes find yourself with a choice between A or B. And for us we get to choose C — “all of the above” — and go forward and do that.
On Tuesday, Milwaukee, WI-based Froedtert Health and Neenah, WI-based ThedaCare shared they have signed a letter of intent to form a $5B, 18-hospital system.
The merger would unite Froedtert’s southeast Wisconsin service area with ThedaCare’s northeast and central Wisconsin footprint, linking tertiary care patients in ThedaCare’s high-growth service areas in the Fox Valley to Froedtert’s Medical College of Wisconsin in Milwaukee. As the systems serve non-overlapping markets, the merger is not expected to receive challenge from federal regulators.
The Gist: These two systems have partnered previously, striking a joint venture last fall to build two health campuses with micro-hospitals, which likely served as the operational test case for merger plans already in the works.
The pace of consolidation has quickened in the Badger State, with Gundersen Health System and Bellin Health completing a merger last fall to form an 11-hospital system.
While interstate mega-mergers have defined recent health system M&A trends, these types of regional mergers, which bring together systems in adjacent but non-overlapping markets, could serve to bolster the combined system’s value proposition as a partner to employers and other healthcare entities in the state and beyond.
Using data from Kaufman Hall’s National Hospital Flash Report, as well as publicly available investor reports for some of the nation’s largest nonprofit health systems, the graphic above takes stock of the current state of health system margins.
The median US hospital has now maintained a negative operating margin for a full year. Some good news may be on the horizon, as the picture is slightly less gloomy than a year ago, with year-over-yearrevenues increasing seven points more than total expenses.
However, the external conditions suppressing operating margins aren’t expected to abate, and many large health systems are still struggling.
Among large national non-profits Ascension, CommonSpirit Health, Providence, and Trinity Health, operating income in FY 2022 decreased 180 percent on average, and investment returns fell by 150 percent on average, compared to the year prior.
While health systems’ drop in investment returns mirrors the overall stock market downturn, and is largely comprised of unrealized returns, systems may not be able to rely on investment income to make up for ongoing operating losses.
More than two years after Congress acted to shield patients from surprise medical bills, lawmakers are turning to another source of unexpected medical costs: the fees that hospitals tack on for services provided in clinics they own.
Why it matters:
As health systems push more care outside hospital walls, they’re charging extra “facility fees” for common services like blood tests, X-rays and, in some cases, even telehealth visits.
Critics say the practice drives up health care costs while padding hospital profits and incentivizing more consolidation. But hospitals argue the fees cover the cost of nurses, lab technicians, medical records and equipment — and that limiting them could reduce patient care.
But five states are currently considering laws to curb facility fees for certain services or strengthen existing laws, per the National Academy for State Health Policy, which has proposed model legislation.
Connecticut is updating a 2015 law that required notifications when facility fees were being charged by hospitals.
“Rising costs remain a barrier for far too many people and result in many people putting off care because they can’t afford it,” Deidre Gifford, executive director of the Connecticut Office of Health Strategy, said last month, when Democratic Gov. Ned Lamont proposed a package of reforms.
Colorado lawmakers are targeting the practice, despite mounting hospital resistance, Kaiser Health News reported.
And Texas legislators are weighing prohibitions on off-campus fees — a move the Texas Hospital Association brands “unprecedented and dangerous.”
Lawmakers in Indiana and Massachusetts are eyeing similar moves.
How it works:
Many health services can be provided in both hospital and outpatient settings. But some patients who visit an offsite clinic are billed as if they were treated in the hospital.
Some might receive a facility fee if they haven’t yet met their health plan deductible. Others could see the added cost reflected later in higher premiums and copays.
A 2020 Rand report found facility and related professional charges factored in employers and private insurers paying 224% of what Medicare would have paid for the same services at the same facilities.
Some business groups like the Employers’ Forum of Indiana are advocating for bans or moratoriums on the fees, citing the increased cost of offering competitive benefits.
The other side:
Hospitals maintain that facility fees are needed to cover essential infrastructure like electronic health record systems and other overhead costs. Some refer to them as “people fees,” saying they cover the expenses of nurses, lab technicians, pharmacists and other essential staff.
Texas hospitals are concerned about what they say is the broad definition of a facility fee in pending legislation in the state’s Senate, saying it could eliminate all hospital payments besides those that go to physicians.
“We need to quantify what problem we’re trying to solve,” said Cameron Duncan, vice president of advocacy at the Texas Hospital Association.
The group said the bill as originally filed would result in 69% of Texas hospitals closing their outpatient clinics.
The intrigue:
Insurers that negotiated covered costs with hospitals and health systems have remained largely quiet on the fees.
And the vagaries of hospital pricing means transparency requirements alone may not give patients warning about added fees.
“It’s not clear from data either that the fees are consistent, or that you could decipher that the fee is consistent for each type of procedure,” said Vicki Veltri, senior policy fellow at National Academy for State Health Policy and former leader of the Connecticut Office of Health Strategy.
The bottom line:
Patients increasingly get charged like they’re in a hospital even if they didn’t set foot in one as physicians’ offices are increasingly scooped up by massive health systems.
While those health systems tout access and efficiencies to drive down health care costs, facility fees are driving more lawmakers and regulators to do a reality check.
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.
The film “American Hospitals: Healing a Broken System” premiered in Washington, D.C., on March 29. This documentary exposes the inconvenient truths embedded within the U.S. healthcare system. Here is a dirty dozen of them:
Hospitals are largely unaccountable for poor clinical outcomes.
The cost of commercially insured care is multiples higher than the cost of government-insured care for identical procedures.
Customer service at hospitals is dreadful.
Frontline clinicians are overburdened and leaving the profession in droves.
Healthcare still operates the same way it has for the last one hundred years — delivering hierarchical, fragmented, hospital-centric, disease-centric, physician-centric “sick” care. Accordingly, healthcare business models optimize revenue generation and profitability rather than health outcomes. These factors explain, in part, why U.S. life expectancy has declined four of the five years and maternal deaths are higher today than a generation ago.
It’s hard to imagine that the devil itself could create a more inhumane, ineffective, costly and change-resistant system. Hospitals consume more and more societal resources to maintain an inadequate status quo. They’re a major part of America’s healthcare problem, certainly not its solution. Even so, hospitals have largely avoided scrutiny and the public’s wrath. Until now.
“American Hospitals” is now playing in theaters throughout the nation. It chronicles the pervasive and chronic dysfunction plaguing America’s hospitals. It portrays the devastating emotional, financial and physical toll that hospitals impose on both consumers and caregivers.
Despite its critical lens, “American Hospitals” is not a diatribe against hospitals. Its contributors include some of healthcare’s most prominent and respected industry leaders, including Donald Berwick, Elizabeth Rosenthal, Shannon Brownlee and Stephen Klasko. The film explores payment and regulatory reforms that would deliver higher-value care. It profiles Maryland’s all-payer system as an example of how constructive reforms can constrain healthcare spending and direct resources into more effective, community-based care.
The United States already spends more than enough on healthcare. It doesn’t need to spend more. It needs to spend more wisely. The system must downsize its acute and specialty care footprint and invest more in primary care, behavioral health, chronic disease management and health promotion. It’s really that simple.
My only critique of “American Hospitals” is many of its contributors expect too much from hospitals. They want them to simultaneously improve their care delivery and advance the health of their communities. This is wishful thinking. Health and healthcare are fundamentally different businesses. Rather than pivoting to population health, hospitals must focus all their efforts on delivering the right care at the right time, place and price.
If hospitals can deliver appropriate care more affordably, this will free up enormous resources for society to invest in health promotion and aligned social-care services. In this brave new world, right-sized hospitals deliver only necessary care within healthier, happier and more productive communities.
All Americans deserve access to affordable health insurance that covers necessary healthcare services without bankrupting them and/or the country. Let me restate the obvious. This requires less healthcare spending and more investments in health-creating activities. Less healthcare and more health is the type of transformative reform that the country could rally behind.
At issue is whether America’s hospitals will constructively participate in downsizing and reconfiguring the nation’s healthcare system. If they do so, they can reinvent themselves from the inside out and control their destinies.
Historically, hospitals have preferred to use their political and financial leverage to protect their privileged position rather than advance the nation’s well-being. Like Satan in Milton’s “Paradise Lost,” they have preferred to reign in hell rather than serve in heaven.
Pride comes before the fall. Woe to those hospitals that fight the nation’s natural evolution toward value-based care and healthier communities. They will experience a customer-led revolution from outside in and lose market relevance. Only by admitting and addressing their structural flaws can hospitals truly serve the American people.
On today’s episode of Gist Healthcare Daily, Kaufman Hall co-founder and Chair Ken Kaufman joins the podcast to discuss his recent blog that examines Ford Motor Company’s decision to stop producing internal-combustion sedans, and talk about whether there are parallels for health system leaders to ponder about whether their traditional strategies are beginning to age out.
HENRY KOTULA 