Thought of the Day – Response to Change
Category Archives: Leadership Transformation
Hospitals at a Crossroad: Reactive Navigation or Proactive Orchestration?
This is National Hospital week. It comes at a critical time for hospitals:
The U.S. economy is strong but growing numbers in the population face financial insecurity and economic despair. Increased out-of-pocket costs for food, fuel and housing (especially rent) have squeezed household budgets and contributed to increased medical debt—a problem in 41% of U.S. households today. Hospital bills are a factor.
The capital market for hospitals is tightening: interest rates for debt are increasing, private investments in healthcare services have slowed and valuations for key sectors—hospitals, home care, physician practices, et al—have dropped. It’s a buyer’s market for investors who hold record assets under management (AUM) but concerns about the harsh regulatory and competitive environment facing hospitals persist. Betting capital on hospitals is a tough call when other sectors appear less risky.
Utilization levels for hospital services have recovered from pandemic disruption and operating margins are above breakeven for more than half but medical inflation, insurer reimbursement, wage increases and Medicare payment cuts guarantee operating deficits for all. Complicating matters, regulators are keen to limit consolidation and force not-for-profits to justify their tax exemptions. Not a pretty picture.
And, despite all this, the public’s view of hospitals remains positive though tarnished by headlines like these about Steward Health’s bankruptcy filing last Monday:
- Who is Ralph de la Torre? The CEO of Steward Health Care with a $40 million yacht (msn.com)
- The Private-Equity Deal That Flattened a Hospital Chain and Its Landlord – WSJ
- One of the Biggest Hospital Failures in Decades Raises Concerns for Patient Care – WSJ
- Steward Health Care files for Chapter 11 bankruptcy | Healthcare Dive
- Steward plans sale of all hospitals, reports $9B in debt (beckershospitalreview.com)
- What Steward Health Care’s bankruptcy means for patient care | Modern Healthcare
- As Steward Ship Was Sinking, CEO Bought $40M Yacht | MedPage Today
- Steward files for bankruptcy: What physicians need to know (beckersphysicianleadership.com)
- Why is Healey saying everything at Steward hospitals will be OK? (bostonglobe.com)
- Bankrupt Steward Health puts its hospitals up for sale, discloses $9 bln in debt | Reuters
- Steward Health Care bankruptcies: Can they get that process right? (bostonglobe.com)
The public is inclined to hold hospitals in high regard, at least for the time being. When asked how much trust and confidence they have in key institutions to “to develop a plan for the U.S. health system that maximizes what it has done well and corrects its major flaws,” consumers prefer for solutions physicians and hospitals over others but over half still have reservations:
| A Great Deal | Some | Not Much/None | |
| Health Insurers | 18% | 43% | 39% |
| Hospitals | 27% | 52% | 21% |
| Physicians | 32% | 53% | 15% |
| Federal Government | 14% | 42% | 44% |
| Retail Health Org’s | 21% | 51% | 28% |
The American Hospital Association (AHA) is rightfully concerned that hospitals get fair treatment from regulators, adequate reimbursement from Medicare and Medicaid and protection against competitors that cherry-pick profits from the health system.
It can rightfully assert that declining operating margins in hospitals are symptoms of larger problems in the health system: flawed incentives, inadequate funding for preventive and primary care, the growing intensity of chronic diseases, medical inflation for wages, drugs, supplies and technologies, the dominance of ‘Big Insurance’ whose revenues have grown 12.1% annually since the pandemic and more. And it can correctly prove that annual hospital spending has slowed since the pandemic from 6.2% (2019) to 2.2% (2022) in stark contrast to prescription drugs (up from 4% to 8.4% and insurance costs (from -5.4% to +8.5%). Nonetheless, hospital costs, prices and spending are concerns to economists, regulators and elected officials.
National health spending data illustrate the conundrum for hospitals: relative to the overall CPI, healthcare prices and spending—especially outpatient hospital services– are increasing faster than prices and spending in other sectors and it’s getting attention: that’s problematic for hospitals at a time when 5 committees in Congress and 3 Cabinet level departments have their sights set on regulatory changes that are unwelcome to most hospitals.
My take:
The U.S. market for healthcare spending is growing—exceeding 5% per year through the next decade. With annual inflation targeted to 2.0% by the Fed and the GDP expected to grow 3.5-4.0% annually in the same period, something’s gotta’ give. Hospitals represent 30.4% of overall spending today (virtually unchanged for the past 5 years) and above 50% of total spending when their employed physicians and outside activities are included, so it’s obvious they’ll draw attention.
Today, however, most are consumed by near-term concerns– reimbursement issues with insurers, workforce adequacy and discontent, government mandates– and few have the luxury to look 10-20 years ahead.
I believe hospitals should play a vital role in orchestrating the health system’s future and the role they’ll play in it. Some will be specialty hubs. Some will operate without beds. Some will be regional. Some will close. And all will face increased demands from regulators, community leaders and consumers for affordable, convenient and effective whole-person care.
For most hospitals, a decision to invest and behave as if the future is a repeat of the past is a calculated risk. Others with less stake in community health and wellbeing and greater access to capital will seize this opportunity and, in the process, disable hospitals might play in the process.
Near-term reactive navigation vs. long-term proactive orchestration–that’s the crossroad in front of hospitals today. Hopefully, during National Hospital Week, it will get the attention it needs in every hospital board room and C suite.
PS: Last week, I wrote about the inclination of the 18 million college kids to protest against the healthcare status quo (“Is the Health System the Next Target for Campus Unrest?” The Keckley Report May 6, 2024 www.paulkeckley.com). This new survey caught my attention:
According to the Generation Lab’s survey of 1250 college students released last week, healthcare reform is a concern. When asked to choose 3 “issues most important to you” from its list of 13 issues, healthcare reform topped the list. The top 5:
- Health Reform (40%)
- Education Funding and access (38%)
- Economic fairness and opportunity (37%)
- Social justice and civil rights (36%)
- Climate change (35%)
If college kids today are tomorrow’s healthcare workforce and influencers to their peers, addressing the future of health system with their input seems shortsighted. Most hospital boards are comprised of older adults—community leaders, physicians, et al.
And most of the mechanisms hospitals use to assess their long-term sustainability is tethered to assumptions about an aging population and Medicare.
College kids today are sending powerful messages about the society in which they aspire to be a part. They’re tech savvy, independent politically and increasingly spiritual but not religious. And the health system is on their radar.
6 priorities for health system strategists in 2024
Health systems are recovering from the worst financial year in recent history. We surveyed strategic planners to find out their top priorities for 2024 and where they are focusing their energy to achieve growth and sustainability. Read on to explore the top six findings from this year’s survey.
Research questions
With this survey, we sought the answers to five key questions:
- How do health system margins, volumes, capital spending, and FTEs compare to 2022 levels?
- How will rebounding demand impact financial performance?
- How will strategic priorities change in 2024?
- How will capital spending priorities change next year?
Bigger is Better for Financial Recovery
What did we find?
Hospitals are beginning to recover from the lowest financial points of 2022, where they experienced persistently negative operating margins. In 2023, the majority of respondents to our survey expected positive changes in operating margins, total margins, and capital spending. However, less than half of the sample expected increases in full-time employee (FTE) count. Even as many organizations reported progress in 2023, challenges to workforce recovery persisted.
40%
Of respondents are experiencing margins below 2022 levels
Importantly, the sample was relatively split between those who are improving financial performance and those who aren’t. While 53% of respondents projected a positive change to operating margins in 2023, 40% expected negative changes to margin.
One exception to this split is large health systems. Large health systems projected above-average recovery of FTE counts, volume, and operating margins. This will give them a higher-than-average capital spending budget.
Why does this matter?
These findings echo an industry-wide consensus on improved financial performance in 2023. However, zooming in on the data revealed that the rising tide isn’t lifting all boats. Unequal financial recovery, especially between large and small health systems, can impact the balance of independent, community, and smaller providers in a market in a few ways. Big organizations can get bigger by leveraging their financial position to acquire less resourced health systems, hospitals, or provider groups. This can be a lifeline for some providers if the larger organization has the resources to keep services running. But it can be a critical threat to other providers that cannot keep up with the increasing scale of competitors.
Variation in financial performance can also exacerbate existing inequities by widening gaps in access. A key stakeholder here is rural providers. Rural providers are particularly vulnerable to financial pressures and have faced higher rates of closure than urban hospitals. Closures and consolidation among these providers will widen healthcare deserts. Closures also have the potential to alter payer and case mix (and pressure capacity) at nearby hospitals.
Volumes are decoupled from margins
What did we find?
Positive changes to FTE counts, reduced contract labor costs, and returning demand led the majority of respondents in our survey to project organizational-wide volume growth in 2023. However, a significant portion of the sample is not successfully translating volume growth to margin recovery.
44%
Of respondents who project volume increases also predict declining margins
On one hand, 84% of our sample expected to achieve volume growth in 2023. And 38% of respondents expected 2023 volume to exceed 2022 volume by over 5%. But only 53% of respondents expected their 2023 operating margins to grow — and most of those expected that the growth would be under 5%. Over 40% of respondents that reported increases in volume simultaneously projected declining margins.
Why does this matter?
Health systems struggled to generate sufficient revenue during the pandemic because of reduced demand for profitable elective procedures. It is troubling that despite significant projected returns to inpatient and outpatient volumes, these volumes are failing to pull their weight in margin contribution. This is happening in the backdrop of continued outpatient migration that is placing downward pressure on profitable inpatient volumes.
There are a variety of factors contributing to this phenomenon. Significant inflationary pressures on supplies and drugs have driven up the cost of providing care. Delays in patient discharge to post-acute settings further exacerbate this issue, despite shrinking contract labor costs. Reimbursements have not yet caught up to these costs, and several systems report facing increased denials and delays in reimbursement for care. However, there are also internal factors to consider. Strategists from our study believe there are outsized opportunities to make improvements in clinical operational efficiency — especially in care variation reduction, operating room scheduling, and inpatient management for complex patients.
Strategists look to technology to stretch capital budgets
What did we find?
Capital budgets will improve in 2024, albeit modestly. Sixty-three percent of respondents expect to increase expenditures, but only a quarter anticipate an increase of 6% or more. With smaller budget increases, only some priorities will get funded, and strategists will have to pick and choose.
Respondents were consistent on their top priority. Investments in IT and digital health remained the number one priority in both 2022 and 2023. Other priorities shifted. Spending on areas core to operations, like facility maintenance and medical equipment, increased in importance. Interest in funding for new ambulatory facilities saw the biggest change, falling down two places.
Why does this matter?
Capital budgets for health systems may be increasing, but not enough. With the high cost of borrowing and continued uncertainty, health systems still face a constrained environment. Strategists are looking to get the biggest bang for their buck. Technology investments are a way to do that. Digital solutions promise high impact without the expense or risk of other moves, like building new facilities, which is why strategists continue to prioritize spending on technology.
The value proposition of investing in technology has changed with recent advances in artificial intelligence (AI), and our respondents expressed a high level of interest in AI solutions. New applications of AI in healthcare offer greater efficiencies across workforce, clinical and administrative operations, and patient engagement — all areas of key concern for any health system today.
Building is reserved for those with the largest budgets
What did we find?
Another way to stretch capital budgets is investing in facility improvements rather than new buildings. This allows health systems to minimize investment size and risk. Our survey found that, in general, strategists are prioritizing capital spending on repairs and renovation while deprioritizing building new ambulatory facilities.
When the responses to our survey are broken out by organization type, a different story emerges. The largest health systems are spending in ways other systems are not. Systems with six or more hospitals are increasing their overall capital expenditures and are planning to invest in new facilities. In contrast, other systems are not increasing their overall budgets and decreasing investments in new facilities.
AMCs are the only exception. While they are decreasing their overall budget, they are increasing their spending on new inpatient facilities.
Why does this matter?
Health systems seek to attract patients with new facilities — but only the biggest systems can invest in building outpatient and inpatient facilities. The high ranking of repairs in overall capital expenditure priorities suggests that all systems are trying to compete by maintaining or improving their current facilities. Will renovations be enough in the face of expanded building from better financed systems? The urgency to respond to the pandemic-accelerated outpatient shift means that building decisions made today, especially in outpatient facilities, could affect competition for years to come. And our survey responses suggest that only the largest health system will get the important first-mover advantage in this space.
AMCs are taking a different tack in the face of tight budgets and increased competition. Instead of trying to compete across the board, AMCs are marshaling resources for redeployment toward inpatient facilities. This aligns with their core identity as a higher acuity and specialty care providers.
Partnerships and affiliations offer potential solutions for health systems that lack the resources for building new facilities. Health systems use partnerships to trade volumes based on complexity. Partnerships can help some health systems to protect local volumes while still offering appropriate acute care at their partner organization. In addition, partnerships help health systems capture more of the patient journey through shared referrals. In both of these cases, partnerships or affiliations mitigate the need to build new inpatient or outpatient facilities to keep patients.
Revenue diversification tactics decline despite disruption
What did we find?
Eighty percent of respondents to our survey continued to lose patient volumes in 2023. Despite this threat to traditional revenue, health systems are turning from revenue diversification practices. Respondents were less likely to operate an innovation center or invest in early-stage companies in 2023. Strategists also reported notably less participation in downside risk arrangements, with a 27% decline from 2022 to 2023.
Why does this matter?
The retreat from revenue diversification and risk arrangements suggests that health systems have little appetite for financial uncertainty. Health systems are focusing on financial stabilization in the short term and forgoing practices that could benefit them, and their patients, in the long term.
Strategists should be cautious of this approach. Retrenchment on innovation and value-based care will hold health systems back as they confront ongoing disruption. New models of care, patient engagement, and payment will be necessary to stabilize operations and finances. Turning from these programs to save money now risks costing health systems in the future.
Market intelligence and strategic planning are essential for health systems as they navigate these decisions. Holding back on initiatives or pursuing them in resource-constrained environments is easier when you have a clear course for the future and can limit reactionary cuts.
Advisory Board’s long-standing research on developing strategy suggests five principles for focused strategy development:
- Strategic plans should confront complexity. Sift through potential future market disruptions and opportunities to establish a handful of governing market assumptions to guide strategy.
- Ground strategy development in answers to a handful of questions regarding future competitive advantage. Ask yourself: What will it take to become the provider of choice?
- Communicate overarching strategy with a clear, coherent statement that communicates your overall health system identity.
- A strategic vision should be supported by a limited number of directly relevant priorities. Resist the temptation to fill out “pro forma” strategic plan.
- Pair strategic priorities with detailed execution plans, including initiative roadmaps and clear lines of accountability.
Strategists align on a strategic vision to go back to basics
What did we find?
Despite uneven recovery, health systems widely agree on which strategic initiatives they will focus more on, and which they will focus less on. Health system leaders are focusing their attention on core operations — margins, quality, and workforce — the basics of system success. They aim to achieve this mandate in three ways. First, through improving efficiency in care delivery and supply chain. Second, by transforming key elements of the care delivery system. And lastly, through leveraging technology and the virtual environment to expand job flexibility and reduce administrative burden.
Health systems in our survey are least likely to take drastic steps like cutting pay or expensive steps like making acquisitions. But they’re also not looking to downsize; divesting and merging is off the table for most organizations going into 2024.
Why does this matter?
The strategic priorities healthcare leaders are working toward are necessary but certainly not easy. These priorities reflect the key challenges for a health system — margins, quality, and workforce. Luckily, most of strategists’ top priorities hold promise for addressing all three areas.
This triple mandate of improving margins, quality, and workforce seems simple in theory but is hard to get right in practice. Integrating all three core dimensions into the rollout of a strategic initiative will amplify that initiative’s success. But, neglecting one dimension can diminish returns. For example, focusing on operational efficiency to increase margins is important, but it’ll be even more effective if efforts also seek to improve quality. It may be less effective if you fail to consider clinicians’ workflow.
Health systems that can return to the basics, and master them, are setting a strong foundation for future growth. This growth will be much more difficult to attain without getting your house in order first.
Vendors and other health system partners should understand that systems are looking to ace the basics, not reinvent the wheel. Vendors should ensure their products have a clear and provable return on investment and can map to health systems’ strategic priorities. Some key solutions health systems will be looking for to meet these priorities are enhanced, easy-to-follow data tools for clinical operations, supply chain and logistics, and quality. Health systems will also be interested in tools that easily integrate into provider workflow, like SDOH screening and resources or ambient listening scribes.
Going back to basics
Craft your strategy
1. Rebuild your workforce.
One important link to recovery of volume is FTE count. Systems that expect positive changes in FTEs overwhelmingly project positive changes in volume. But, on average, less than half of systems expected FTE growth in 2023. Meanwhile, high turnover, churn, and early retirement has contributed to poor care team communication and a growing experience-complexity gap. Prioritize rebuilding your workforce with these steps:
- Recover: Ensure staff recover from pandemic-era experiences by investing in workforce well-being. Audit existing wellness initiatives to maximize programs that work well, and rethink those that aren’t heavily utilized.
- Recruit: Compete by addressing what the next generation of clinicians want from employment: autonomy, flexibility, benefits, and diversity, equity, and inclusion (DEI). Keep up to date with workforce trends for key roles such as advance practice providers, nurses, and physicians in your market to avoid blind spots.
- Retain: Support young and entry-level staff early and often while ensuring tenured staff feel valued and are given priority access to new workforce arrangements like hybrid and gig work. Utilize virtual inpatient nurses and virtual hubs to maintain experienced staff who may otherwise retire. Prioritize technologies that reduce the burden on staff, rather than creating another box to check, like ambient listening or asynchronous questionnaires.
2. Become the provider of choice with patient-centric care.
Becoming the provider of choice is crucial not only for returning to financial stability, but also for sustained growth. To become the provider of choice in 2024, systems must address faltering consumer perspectives with a patient-centric approach. Keep in mind that our first set of recommendations around workforce recovery are precursors to improving patient-centered care. Here are two key areas to focus on:
- Front door: Ensure a multimodal front door strategy. This could be accomplished through partnership or ownership but should include assets like urgent care/extended hour appointments, community education and engagement, and a good digital experience.
- Social determinants of health: A key aspect of patient-centered care is addressing the social needs of patients. Our survey found that addressing SDOH was the second highest strategic priority in 2023. Set up a plan to integrate SDOH screenings early on in patient contact. Then, work with local organizations and/or build out key services within your system to address social needs that appear most frequently in your population. Finally, your workforce DEI strategy should focus on diversity in clinical and leadership staff, as well as teaching clinicians how to practice with cultural humility.
3. Recouple volume and margins.
The increasingly decoupled relationship between volume and margins should be a concern for all strategists. There are three parts to improving volume related margins: increasing volume for high-revenue procedures, managing costs, and improving clinical operational efficiency.
- Revenue growth: Craft a response to out-of-market travel for surgery. In many markets, the pool of lucrative inpatient surgical volumes is shrinking. Health systems are looking to new markets to attract patients who are willing to travel for greater access and quality. Read our findings to learn more about what you need to attract and/or defend patient volumes from out-of-market travel.
- Cost reduction: Although there are many paths health systems can take to manage costs, focusing on tactics which are the most likely to result in fast returns and higher, more sustainable savings, will be key. Some tactics health systems can deploy include preventing unnecessary surgical supply waste, making employees accountable for their health costs, and reinforcing nurse-led sepsis protocols.
- Clinical operational efficiency: The number one strategic priority in 2023, according to our survey, was clinical operational efficiency, no doubt in response to faltering margins. Within this area, the top place for improvement was care variation reduction (CVR). Ensure you’re making the most out of CVR efforts by effectively prioritizing where to spend your time. Improve operational efficiency outside of CVR by improving OR efficiency and developing protocols for complex inpatient management.
An Open Letter to Hospital Boards of Directors: Long-Term Strategic Planning needs Your Attention
As 2023 comes to an end and prognostics for 2024 pepper Inboxes, high anxiety is understandable. The near-term environment for hospitals, especially public hospitals and not-for-profit health systems, is tepid at best: despite the November uptick in operating margins to 2% (Fitch, Syntellis), the future for hospitals is uncertain and it’s due to more than payer reimbursement, labor costs and regulatory changes.
Putting lipstick on the pig serves no useful purpose:
though state hospital associations, AHA, FAH, AEH and others have been effective in fending off unwelcome threats ranging from 340B cuts, site neutral payments and others at least temporarily, the welcoming environment for hospitals in the throes of the pandemic has been replaced by animosity and distrust.
The majority of the population believes U.S. the health system is heading in the wrong direction and think hospitals are complicit (See Polling data from Gallup and Keckley Poll below). They believe the system puts its profit above patient care and welcome greater transparency about prices and business practices. In states like Colorado (hospital expenditure report), Minnesota (billing and collection), and Oregon (nurse staffing levels), new regulations feed the public’s appetite for hospital accountability alongside bipartisan Congressional efforts to limit tax exemptions and funding for hospitals.
It’s a tsunami hospital boards must address if they are to carry out their fiduciary responsibilities:
- Set Direction: The organization’s long-term strategy in the context of its vision, mission and values.
- Secure Capital: The amount and sourcing of capital necessary to execute the strategy.
- Hire a Competent CEO and Give Direction: Boards set direction; CEOs execute.
Regretfully, near-term pressures on hospitals have compromised long-term strategic planning in which the Board play’s the central role. But most hospital boards lack adequate preparedness to independently assess the long-term future for their organization i.e. analysis of trends and assumptions that cumulatively reshape markets, define opportunities and frame possible destinations for hospitals drawn from 5 zones of surveillance:
- Clinical innovations.
- Technology capabilities.
- Capital Market Access and Deployment.
- Regulatory Policy Changes.
- Consumer Values, Preferences and Actions.
In reality, the near-term issues i.e. labor and supply chain costs, insurer reimbursement, workforce burnout et al—dominate board meetings; long-range strategic planning is relegated to an annual retreat where the management team and often a consultant present a recommendation for approval. But in many organizations, the long-term strategic plans (LTSPs) fall short:
- Most LTSPs offer an incomplete assessment of clinical innovations and technologies that fundamentally alter how health services will be provided, where and by whom.
- Most LTSPs are based on an acute-centric view of “the future” and lack input about other sectors and industries where the healthcare market is relevant and alternative approaches are executed.
- Most LTSPs are aspirational and short on pragmatism. Risks are underestimated and strengths over-estimated.
- Most LTSPs are designed to affirm the preferences of the hospital CEO without the benefit of independent, studied review and discussion with the board.
- Most LTSPs don’t consider all relevant ‘future state’ options despite the Board’s fiduciary obligation to assure they do.
- Most rely on data that’s inadequate/incomplete/misleading, especially in assessing how and chare capital markets are accessing and deploying capital in healthcare services.
- Most LTSPs are not used as milestones for monitoring performance nor are underlying assumptions upon which LRSPs are based revisited.
My take:
The Board’s role in Long-Range Strategic Planning is, in many ways, it’s most important. It is the basis for deciding the capital requirements necessary to its implementation and the basis for hiring, keeping and compensating the CEO. But in most hospitals, the board’s desire to engage more directly around long-term strategy for the organization is not addressed. Understandable…
- Boards are getting more media attention these days, and it’s usually in an unflattering context. Disclosures of Board malperformance in high profile healthcare organizations like Theranos, Purdue and others has been notable. Protocols for responding among Board members in investor-owned organizations is a priority, but less-so in many not-for-profit settings including hospitals often caught by surprise by media.
- And Board members are asking for their organizations to engage them in more in strategy development. In the latest National Association of Corporate Directors’ survey, 81% of directors cited “oversight of strategic execution” and 80% “oversight of strategy development” as their top concerns from a list of 13 options. Hospital boards are no exception: they want to be engaged and cringe when treated as rubber stamps.
Hospital boards intuitively understand that surviving/thriving in 2024 is important but no guarantee of long-term stability given sobering realities with long-term impact:
- The core business of hospitals–inpatient, outpatient and emergency services—is subject to market constraints on its prices, consumer and employer expectations and non-traditional competition. Bricks, sticks and clicks strategies will be deployed in a regulatory environment that’s agnostic to an organization’s tax status and competition is based on value that’s measured and publicly comparable.
- The usefulness of artificial intelligence will widen in healthcare services displacing traditional operating models, staffing and resource allocation priorities.
- Big tech (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Meta (META), Tesla (TSLA) and Nvidia (NVDA)—collectively almost 60% of all S&P 500 gains in 2023—will play a direct and significant role in how the healthcare services industry responds to macro-opportunities and near-term pressures. They’re not outside looking in; they’re inside looking out.
- Private capital will play a bigger role in the future of the system and in capitalizing hospital services. Expanded scale and wider scope will be enabled through partnerships with private capital and strategic partners requiring governance and leadership adaptation. And, the near-term hurdles facing PE—despite success in fund-raising—will redirect their bets in health services and expectations for profits.
- State and federal regulatory policies and compliance risks will be more important to execution. Growth through consolidation will face bigger hurdles, transparency requirements in all aspects of operations will increase and business-as-usual discontinued.
- The scale, scope and effectiveness of an organization’s primary and preventive health services will be foundational to competing: managing ‘covered lives’, reducing demand, integrating social determinants and behavioral health, enabling consumer self-care, leveraging AI and enabling affordability will be key platform ingredients that enable growth and sustainability.
- Media attention to hospital business practices including the role Boards play in LRSPs will intensify.
Granted: the issues facing hospitals are reliably short-term: as Congress returns next week, for instance, funding for the FDA, Community Health Center Fund, Teaching Health Center Graduate Medical Education Program, National Health Services Corps and Veterans Health is not authorized and $16 billion in cuts to Medicaid disproportionate share payments remains unsettled, so the short-term matters.
But arguably, engaging the hospital board in longer term planning is equally important. It’s not a luxury.
Happy New Year. Buckle up!
Cartoon – Reorganization Reality
Health System Chief Strategy Officer Roundtable Assessment: ‘The Near-Term is Tough, the Long-Term is Uncertain and the Deck is Stacked against Hospitals’
On November 2-3 in Austin, I moderated the 4th Annual CSO Roundtable* in which Chief Strategy/Growth Officers from 12 mid-size and large multi-hospital systems participated. The discussion centered on the future: the issues and challenges they facing their organizations TODAY and their plans for their NEAR TERM (3-5 years) and LONG-TERM (8-10 years) future. Augmenting the discussion, participants rated the likelihood and level of disruptive impact for 50 future state scenarios using the Future State Diagnostic Survey. *
Five themes emerged from this discussion:
1-Major change in the structure and financing of U.S. health system is unlikely.
- CSOs do not believe Medicare for All will replace the current system. They anticipate the existing public-private delivery system will continue with expanded government influence likely.
- Public funding for the system remains problematic: private capital will play a larger role.
- CSOs think it is unlikely the public health system will be fully integrated into the traditional delivery system (aka health + social services). Most hospital systems are expanding their outreach to public health programs in local markets as an element of their community benefits strategy.
- CSOs recognize that states will play a bigger role in regulating the system vis a vis executive orders and referenda on popular issues. Price controls for hospitals and prescription drugs, restraints on hospital consolidation are strong possibilities.
- Consensus: conditions for hospitals will not improve in the immediate and near-term. Strategies for growth must include all options.
2-Health costs, affordability and equitable access are major issues facing the health industry overall and hospitals particularly.
- CSOs see equitable access as a compliance issue applicable to their workforce procurement and performance efforts and to their service delivery strategy i.e., locations, patient experiences, care planning.
- CSOs see reputation risk in both areas if not appropriately addressed in their organizations.
- CSOs do not share a consensus view of how affordability should be defined or measured.
- There is consensus among CSOs that hospitals have suffered reputation damage as a result of inadequate price transparency and activist disinformation campaigns. Executive compensation, non-operating income, discrepancies in charity care and community benefits calculations and patient “sticker shock” are popular targets of criticism.
- CSO think increased operating costs due to medical inflation, supply chain costs including prescription drugs, and labor have offset their efforts in cost reduction and utilization gains.
- CSO’s are focusing more of their resources and time in support of acute clinical programs where streamlining clinical processes and utilization increases are achievable near-term.
- Consensus: the current financing of the system, particularly hospitals, is a zero-sum game. A fundamental re-set is necessary.
3-The regulatory environment for all hospitals will be more challenging, especially for not-for-profit health systems.
- Most CSOs think the federal regulatory environment is hostile toward hospitals. They expect 340B funding to be cut, a site neutral payment policy in some form implemented, price controls for hospital services in certain states, increased federal and state constraints on horizontal consolidation vis a vis the FTC and State Attorneys General, and unreasonable reimbursement from Medicare and other government program payers.
- CSOs believe the challenges for large not-for-profit hospital systems are unique: most CSOs think not-for-profit hospitals will face tighter restrictions on their qualification for tax-exempt status and tighter accountability of their community benefits attestation. Most expect Congress and state officials to increase investigations about for-profit activities, partnerships with private equity, executive compensation and other issues brought to public attention.
- CSOs think rural hospital closures will increase without significant federal action.
- Consensus: the environment for all hospitals is problematic, especially large, not-for-profit multi-hospitals systems and independent rural facilities.
4-By contrast, the environment for large, national health insurers, major (publicly traded) private equity sponsors and national retailers is significantly more positive.
- CSOs recognize that current monetary policy by the Fed coupled with tightening regulatory restraints for hospitals is advantageous for national disruptors. Scale and access to capital are strategic advantages enjoyed disproportionately by large for-profit operators in healthcare, especially health insurers and retail health.
- CSOs believe publicly traded private equity sponsors will play a bigger role in healthcare delivery since they enjoy comparably fewer regulatory constraints/limitations, relative secrecy in their day-to-day operations and significant cash on hand from LPs.
- CSOs think national health insurer vertical consolidation strategies will increase noting that all operate integrated medical groups, pharmacy benefits management companies, closed networks of non-traditional service providers (i.e. supplemental services like dentistry, home care, et al) and robust data management capabilities.
- CSOs think national retailers will expand their primary care capabilities beyond traditional “office-based services” to capture market share and widen demand for health-related products and services
- Consensus: national insurers, PE and national retailers will leverage their scale and the friendly regulatory environment they enjoy to advantage their shareholders and compete directly against hospital and medical groups.
5-The system-wide shift from volume to value will accelerate as employers and insurers drive lower reimbursement and increased risk sharing with hospitals and medical groups.
- CSOs think the pursuit of value by payers is here to stay. However, they acknowledge the concept of value is unclear but they expect HHS to advance standards for defining and measuring value more consistently across provider and payer sectors.
- CSOs think risk-sharing with payers is likely to increase as employers and commercial insurers align payment models with CMS’ alternative payment models: the use of bundled payments, accountable care organizations and capitation is expected to increase.
- CSOs expect network performance and data management to be essential capabilities necessary to an organization’s navigation of the volume to value transition. CSOs want to rationalize their current acute capabilities by expanding their addressable market vis a vis referral management, diversification, centralization of core services, primary and preventive health expansion and aggressive cost management.
- Consensus: successful participation in payer-sponsored value-based care initiatives will play a bigger role in health system strategy.
My take:
The role of Chief Strategy Officer in a multi-hospital system setting is multi-functional and unique to each organization. Some have responsibilities for M&A activity; some don’t. Some manage marketing, public relations and advocacy activity; others don’t. All depend heavily on market data for market surveillance and opportunity assessments. And all have frequent interaction with the CEO and Board, and all depend on data management capabilities to advance their recommendations about risk, growth and the future. That’s the job.
CSOs know that hospitals are at a crossroad, particularly not-for-profit system operators accountable to the communities they serve. In the 4Q Keckley Poll, 55% agreed that “the tax exemption given not-for-profit hospitals is justified by the community benefits they provide” but 45% thought otherwise. They concede their competitive landscape is more complicated as core demand shifts to non-hospital settings and alternative treatments and self-care become obviate traditional claims-based forecasting. They see the bigger players getting bigger: last week’s announcements of the Cigna-Humana deal and expansion of the Ascension-LifePoint relationship cases in point. And they recognize that their reputations are under assault: the rift between Modern Healthcare and the AHA over the Merritt Research ’s charity care study (see Hospital section below) is the latest stimulant for not-for-profit detractors.
In 1937, prominent literary figures Laura Riding and Robert Graves penned a famous statement in an Epilogue Essay that’s especially applicable to hospitals today: “the future is not what it used to be.”
For CSO’s, figuring that out is both worrisome and energizing.
Cartoon – Next Generation Leadership
Health systems bulk up C-suites ahead of transformation
Faced with tighter margins and continued rising costs, many health system C-suites are restructuring. At least 17 health systems have reorganized executive teams and some eliminated C-suite roles.
The chief operating officer role in particular has been on the chopping block for health systems but not everyone is slimming down.
Some are bulking up amid organizational transformation with an eye on the future.
In June, Sutter Health in Sacramento, Calif., named Todd Smith, MD, its inaugural senior vice president and chief physician executive, responsible for supporting the health system through clinical transformation. Dr. Smith will focus on service line standards, reducing variation and strengthening the system’s relationship with medical group and community physicians.
Sutter isn’t the only system adding clinical leaders to the C-suite. Mass General Brigham in Somerville, Mass., named Erica Shenoy, MD, PhD, its first chief of infection control in June. Her expanded role is accountable for leading the integration of infection control at the system and developing and implementing infection control standards, policies and measurements. She was also appointed to the National Infection Control Advisory Committee to guide HHS earlier this year.
Meritus Health in Hagerstown, Md., added physician leadership to its executive team. Adrian Park, MD, became the system’s first chief surgical officer with responsibility for building a surgical program with advanced technology and minimally invasive procedures to the system. He is known for surgical innovation in laparoscopic techniques, and holds more than 20 patents.
MaineHealth in Portland recently added Chris Thompson, MD, to the C-suite as the system’s first chief medical transformation officer. He is responsible for chief medical officer duties as well as innovating in care delivery.
Richmond, Va.-based VCU Health and OU Health in Oklahoma City named their first chief nursing executives as well earlier this year.
Health systems are also adding strategic experts with expertise in patient experience, transformation and data analytics.
Atlanta-based Emory Healthcare created a new role for Amaka Eneanya, MD, to serve as chief transformation officer, accountable for enhancing patient and clinician experiences. She took on the role in July and is tasked with developing systemwide strategies to boost patient experience, improve access to care, increase community engagement and enrich clinician experience. Dr. Eneanya works with the system’s diversity, equity and inclusion office to prioritize strategies for health equity, diversity and inclusion in care delivery as well.
“Amaka is a forward-thinking leader who is well versed in transformational strategy and operational structure and will help us move Emory Healthcare to the next level,” said Joon S. Lee, MD, CEO of Emory Healthcare. “We look forward to working with her in our continued pursuit to transform and strengthen patient access and the patient experience.”
Last year, Centura Health in Centennial, Colo., also added a chief transformation officer, Scott Lichtenberger, MD, as a new position to balance short-term improvements and long-term value. He is responsible for ensuring the system delivers results quickly.
Finally, Cleveland Clinic has elevated another IT leader into the C-suite in recent weeks. Albert Marinez was named the system’s first chief analytics officer, set to begin his new role Aug. 28. He previously served as chief analytics officer of Intermountain Health in Salt Lake City, and will be responsible for overseeing data strategies for better patient care and lower costs at Cleveland Clinic. He will also have accountability for boosting the system’s growth alongside chief digital officer Rohit Chandra, PhD.
HENRY KOTULA 