This week we had a conversation with a health system executive who has been wondering how to make the case to his board for expansion beyond the existing markets where the organization operates.
Like many, he’s confronting declining margin performance, and feeling pressure to combine with another system—joining the wave of cross-market consolidation that’s been dominating discussion among system CEOs recently.
His concern was that his locally governed board may be putting an artificial brake on growth, not seeing value of expansion beyond their market for the community they serve.
That’s a valid point—how does it help a Busytown resident if the local health system expands to operate in Pleasantville? Shouldn’t Busytown Health System just focus its resources and time on improving performance at home, and wouldn’t it represent a loss to Busytown if Pleasantville got investment dollars that could have been spent locally?
That’s a question raised by the “super-regional” or national strategies being pursued by many large systems today, and one worth thinking about.
Whenever a system grows outside its geography, there should be a solid argument that additional scale will reap returns for its existing operations, from better efficiency, better access to innovation and talent, better access to capital, or the like.
Those are legitimate reasons for out-of-market growth and consolidation, as long as the systems involved are diligent in pursuing them.
But local boards are right to hold executives accountable for making the case for growth, and ensuring that growth creates value for local patients and purchasers.
As first half 2023 financial results are reported and many prepare for a busy last half, strategic planning for healthcare services providers and insurers point to 4 issues requiring attention in every boardroom and C suite:
Private equity maturity wall:
The last half of 2023 (and into 2024) is a buyer’s market for global PE investments in healthcare services: 40% of PE investments in hospitals, medical groups and insurtech will hit their maturity wall in the next 12 months. Valuations of companies in these portfolios are below their targeted range; limited partner’ investing in PE funds is down 28% from pre-pandemic peak while fund raising by large, publicly traded, global funds dominate fund raising lifting PE dry powder to a record $3.7 trillion going into the last half of 2023.
In the U.S. healthcare services market, conditions favor well-capitalized big players—global private equity funds and large cap aggregators (i.e., Optum, CVS, Goldman Sachs, Blackstone et al) who have $1 trillion to invest in deals that enhance their platforms. Deals done via special purpose acquisition corporations (SPACS) and smaller PE funds in physicians, hospitals, ambulatory services and others are especially vulnerable. (see Bain and Pitchbook citations below). Addressing the growing role of large-cap PE and strategic investors as partners, collaborators, competitors or disruptors is table stakes for most organizations recognizing they have the wind at their backs.
Consolidation muscle by DOJ and FTC:
Healthcare is in the crosshair of the FTC and DOJ, especially hospitals and health insurers. Hospital markets have become increasingly concentrated: only 12% of the 306 Hospital Referral Regions is considered unconcentrated vs. 23% in 2008. In the 384 insurance markets, 23% are unconcentrated, down from 35% in 2020. Wages for healthcare workers are lower, prices for consumers are higher and choices fewer in concentrated markets prompting stricter guidelines announced last week by the oversight agencies. Big hospitals and big insurers are vulnerable to intensified scrutiny. (See Regulatory Action section below).
Defamatory attacks on nonprofit health systems:
In the past 3 years, private, not-for-profit multi-hospital systems have been targeted for excess profits, inadequate charity care and executive compensation. Labor unions (i.e., SEIU) and privately funded foundations (i.e., West, Arnold Venture, Lown Institute) have joined national health insurers in claims that NFP systems are price gaugers undeserving of the federal, state and local tax exemptions they enjoy. It comes at a time when faith in the U.S. health system is at a modern-day low (Gallup), healthcare access and affordability concerns among consumers are growing and hospital price transparency still lagging (36% are fully compliant with the 2021 Executive Order).
Notably, over the last 20 years, NFP hospitals have become less dominant as a share of all hospitals (61% in 2002 vs. 58% last year) while investor-owned hospitals have shown dramatic growth (from 15% in 2002 to 24% last year). Thus, the majority of local NFP hospitals have joined systems creating prominent brands and market dominance in most regions. But polling indicates many of these brands is more closely associated with “big business” than “not-for-profit health” so they’re soft targets for critics. It is likely unflattering attention to large, NFP systems will increase in the next 12 months prompting state and federal regulatory actions and erosion of public support. (See New England Journal citation in Quotables below)
Campaign 2024 healthcare rhetoric:
Republican candidates will claim healthcare is not affordable and blame Democrats. Democrats will counter that the Affordable Care Act’s expanded coverage and the Biden administration’s attack on drug prices (vis a vis the Inflation Reduction Act) illustrate their active attention to healthcare in contrast to the GOP’s less specific posturing.
Campaigns in both parties will call for increased regulation of hospitals, prescription drug manufacturers, health insurers and PBMs. All will cast the health industry as a cesspool for greed and corruption, decry its performance on equitable access, affordability, price transparency and improvements in the public’s health and herald its frontline workers (nurses, physicians et al) as innocent victims of a system run amuck.
To date, 16 candidates (12 R, 3 D, 1 I) have announced they’re candidates for the White House while campaigns for state and local office are also ramping up in 46 states where local, state and national elections are synced. Healthcare will figure prominently in all. In campaign season, healthcare is especially vulnerable to misinformation and hyper-attention to its bad actors. Until November 5, 2024, that’s reality.
My take:
These issues frame the near-term context for strategic planning in every sector of U.S. healthcare. They do not define the long-term destination of the system nor roles key sectors and organizations will play. That’s unknown.
What’s known for sure is that AI will modify up to 70% of the tasks in health delivery and financing and disrupt its workforce.
Black Swans like the pandemic will prompt attention to gaps in service delivery and inequities in access.
People will be sick, injured, die and be born.
And the economics of healthcare will force uncomfortable discussions about its value and performance.
In the U.S. system, attention to regulatory issues is a necessary investment by organizations in every state and at the federal level. Details about these efforts is readily accessible on websites for each organization’s trade group. They’re the rule changes, laws and administrative actions to which all are attentive. They’re today’s issues.
Less attention is given the long-term. That focus is often more academic than practical—much the same as Robert Oppenheimer’s early musings about the future of nuclear fusion. But the Manhattan Project produced two bombs (Little Boy and Fat Man) that detonated above the Japanese cities of Hiroshima and Nagasaki in 1945, triggering the end of World War II.
The four issues above should be treated as near and present dangers to the U.S. health system requiring attention in every organization. But responses to these do not define the future of the U.S. system. That’s the Manhattan Project that’s urgently needed in our system.
As hospital leaders convene in Seattle this weekend for the American Hospital Association Leadership Summit, their future is uncertain.
Last week’s court decision in favor of hospitals shortchanged by the 340B drug program and 1st half 2023 improvement in operating margins notwithstanding, the deck is stacked against hospitals—some more than others. And they’re not alone: nursing homes and physician practices face the same storm clouds:
Decreased reimbursement from government payers (Medicare and Medicaid) coupled with heightened tension with national health insurers seeking bigger discounts and direct control of hospital patient care.
Persistent medical-inflation driving costs for facilities, supplies, wages, technologies, prescription drugs and professional services (legal, accounting, marketing, et al) higher than reimbursement increases by payers.
Increased competition across the delivery spectrum from strategic aggregators, private equity and health insurers diversifying into outpatient, physician services et al.
Increased discontent and burnout among doctors, nurses and care teams who feel unappreciated, underpaid and overworked.
Escalating media criticism of not-for-profit hospitals/health system profitability, debt collection policies, lack of price transparency, consolidation, executive compensation, charity care, community benefits and more.
Declining trust in the system across the board.
Most hospitals soldier on: they’re aware of these and responding as best they can. But most are necessarily focused only on the near-term: bed needs, workforce recruitment and staffing, procurement costs for drugs and supplies and so on. Some operate in markets less problematic than others, but the trends hold true directionally in every one of America’s 290 HRR markets.
Planning for the long-term is paralyzed by the tyranny of the urgent:
survival and sustainability in 2023 and making guarded bets about 2024 dominate today’s plans. That’s reality. Though the healthcare pie is forecast to get bigger, it’s being carved up by upstarts pursuing profitable niches and mega-players with deep pockets and a take-no-prisoners approach to their growth strategies. The result is an industry nearing meltdown.
Each traditional sector thinks it’s moral virtue more honorable than others. Each blames the other for avoidable waste and inaction in weeding out its bad actors. Each is pays lip service to “value-based care” and “system transformation” while doubling-down on making sure changes are incremental and painless for the near-term. And each believes the long-term destination of the system will be different than the past but no two agree on what that is.
Hospitals control 31% of the spend directly and as much as 43% with their employed physicians included. So, they’re a logical focus of attention from outsiders. Whether not for profit, public or investor owned, all are thought to be expensive and non-transparent and increasingly many are seen as ‘Big Business’ with excessive profits. Complaints about heavy-handed insurer reimbursement and price-gauging by drug companies fall on death ears in most communities. That’s why most are focused on near-term survival and few have the luxury or tools to plan for the future.
As a start, answers to the questions below in the 3-5 (mid-term) and 8–10-year (long-term) time frames is imperative for every hospital leadership team and Board:
Is the status quo sustainable? With annual spending projected to increase at 5.4%/year through 2031– well above population and economic growth rates overall– will employers remain content to pay 224% of Medicare rates to produce profits for hospitals, doctors, drug and device makers and insurers? Will they continue to pass these costs through to their customers and employees while protecting their tax exemptions or will alternative strategies prompt activism? Might employers drive system transformation by addressing affordability, effectiveness, consumer self-care and systemness et al. with impunity toward discomfort created for insiders? Or, might voters reject the status quo in subsequent state/federal elections in favor of alternatives with promised improvement? And who will the winners and losers be?
Are social determinants a core strategy or distraction? 70% of costs in the health system are directly attributable to social needs unmet—food insecurity. loneliness et al. But in most communities, programs addressing SDOH and public health programs that serve less-privileged populations are step-children to better funded hospitals and retail services targeted to populations that can afford them. Is the destination incremental bridges built between local providers and public health programs to satisfy vocal special interest groups OR comprehensive integration of SDOH in every domain of operation? Private investors are wading into SDOH if they’re attached to a risk-based insurance programs like Medicare Advantage and others, but sparingly in other settings. Does the future necessitate re-definition of “community benefits” or new regulations prompting providers, drug companies and payers to fair-share performance. Is the future modest improvement in the “Health or Human Services” status quo OR is system of “Health and Social Services” that’s fully integrated? And might interoperability and connectivity in the entire population become “true north” for tech giants and EHR juggernauts seeking to evade anti-trust constraint and demonstrate their commitment to the greater good? There’s no debate that SDOH is central to community health and wellbeing but in most communities, it’s more talk than walk. Yesterday, SDOH was about risk factors; today, it’s about low-income populations who lack insurance; tomorrow, it’s everyone.
How should the health system of the future be funded? The current system of funding is a mess: In 2021, the federal government and households accounted for the largest shares of national health spending (34 % and 27%, respectively), followed by private businesses (17%), state and local governments (15%), and other private revenues (7%). It will spend $4.66 trillion, employ 19 million and impact every citizen (and non-citizen) directly. But 4 of 10 households have unpaid medical bills. Big employers in certain industries provide rich benefits while half of small businesses provide none. Medicare depends on employer payroll taxes for the lion’s share of its Part A (Hospital) funding exposing the “trust fund” to a shortfall in 2028 and insolvency fears…and so on. Increased public funding via taxes is problematic and debt is more costly as interest rates go up and the municipal bond market tightens. Voters and private employers don’t seem inclined to pay higher taxes for healthcare–:is it worth $13,998 per capita today? $20,426 in 2031? Will high-cost inpatient care and specialty drugs become regulated public utilities in which access and pricing is tightly controlled and directly funded by government? Will private investors and strategic aggregators be required to take invest in community benefits to offset the disproportionate costs borne by hospitals, public health clinics and others? Is there a better formula for funding U.S. healthcare? Other systems of the world spend more on social services and preventive health and less on specialty care. They spend a third less and get comparable if not better outcomes though each is stretched to deal with medical inflation. And in most, government funding is higher, private funding lower and privileged populations have access to private services they pay for directly. Where do we start, and who demands the question be answered?
How will innovations in therapeutics and information technology change how individuals engage with the system? Artificial intelligence will directly impact 60% of the traditional health delivery workforce, negating jobs for many/most. Non-allopathic therapies, technology-enabled self-care, precision medicines, non-invasive and minimally invasive surgical techniques are changing change how care is delivered, by whom and where. Thus, lag indicators based on visits, procedures, admissions and volume are increasingly useless. How will demand be defined in the future? Who will own the data and how will it be accessed? And how will the rights of patients (consumers) be protected in courts and in communities? In the future, information-driven healthcare will be much more than encounter data from medical records and claims-based analyses from payers. It will be sourced globally, housed centrally and accessed by innovators and consumers to know more about their health now and next. Within 10 years, generative AI coupled with therapeutic innovation will fundamentally change roles, payments and performance measurement in every domain of healthcare. Proficiency in leveraging the two will anchor system reputations and facilitate significant market share shifts to high value, high outcome, lower cost alternatives…whether local or not.
How will regulators and court decisions enact fair competition, consumer choices and antitrust protections? The current political environment is united around reforms that encourage price transparency and affordability. FTC and DOJ leaders are aligned on healthcare oversight with a decided bent toward heightened enforcement and tighter scrutiny of proposed deals (both vertical and horizontal integration). But their leaders’ terms are subject to political appointments and elections: that’s an unknown. And while recent rulings of the conservative leaning Supreme Court are problematic to many in healthcare, their rulings are perhaps more predictable than policies, rules and regulations directly impacted by election results.
For hospital leaders gathering in Seattle this week, and in local board meetings nationwide, necessary attention is being given the near-term issues all face. But longer-term issues lurk: the future does not appear a modernized version of the past for anyone in U.S. healthcare, especially hospitals. And among hospitals, fundamental precepts—like tax exemptions for “not-for-profit” hospitals, community benefits and charity care in exchange for tax exemption, EMTALA et al. regulations that require access without pre-condition are among many that will re-surface as the long-term view of the health system is re-considered.
To that end, the questions above deserve urgent discussion in every hospital board room and C suite. Trade-offs aren’t clear, potential future state hospital scenarios are not discreet and winners and losers unknown. But a fact-driven process recognizing a widening array of players with deep pockets and fresh approaches is necessary.
That’s the amount you arrive at if you multiply the number of physicians employed by hospitals and health systems (approximately 341,200 as of January 2022, according to data from the Physicians Advocacy Institute and Avalere) by the median $306,362 subsidy—or loss—reported in our Q1 2023 Physician Flash Report.
Subsidizing physician employment has been around for a long time and such subsidies were historically justified as a loss leader for improved clinical services, the potential for increased market share, and the strengthening of traditionally profitable services.
But I am pretty sure the industry did not have $104 billion in losses in mind when the physician employment model first became a key strategic element in the hospital operating model. However, the upward reset in expenses brought on by the pandemic and post-pandemic inflation has made many downstream hospital services that historically operated at a profit now operate at breakeven or even at a loss. The loss leader physician employment model obviously no longer works when it mostly leads to more losses.
This model is clearly broken and in demand of a near-term fix. Perhaps the critical question then is how to begin? How to reconsider physician employment within the hospital operating plan?
Out of the box, rethink the physician productivity model. Our most recent Physician Flash Report data shows that for surgical specialties, there was a median $77 net patient revenue per provider wRVU. For the same specialties, there was a median $80 provider paid compensation per provider wRVU. In other words, before any other expenses are factored in, these specialties are losing $3 per wRVU on paid compensation alone. Getting providers to produce more wRVUs only makes the loss bigger.
It’s the classic business school 101 problem.
If a factory is losing $5 on every widget it produces, the answer is not to produce more widgets. Rather, expenses need to come down, whether that is through a readjustment of compensation, new compensation models that reward efficiency, or the more effective use of advanced practice providers.
Second, a number of hospital CEOs have suggested to me that the current employed physician model is quite past its prime. That model was built for a system of care that included generally higher revenues, more inpatient care, and a greater proportion of surgical vs. medical admissions. But overall, these trends were changing and then were accelerated by the Covid pandemic. Inpatient revenue has been flat to down. More clinical work continues to shift to the outpatient setting and, at least for the time being, medical admissions have been more prominent than before the pandemic.
Taking all this into account suggests that in many places the employed physician organizational and operating model is entirely out of balance. One would offer the calculated guess that there are too many coaches on the team and not enough players on the field. This administrative overhead was seemingly justified in a different loss leader environment but now it is a major contributor to that $104 billion industry-wide loss previously calculated.
Finally, perhaps the very idea of physician employment needs to be rethought.
My colleagues Matthew Bates and John Anderson have commented that the “owner” model is more appealing to physicians who remain independent then the “renter” model. The current employment model offers physicians stability of practice and income but appears to come at the cost of both a loss of enthusiasm and lost entrepreneurship. The massive losses currently experienced strongly suggest that new models are essential to reclaim physician interest and establish physician incentives that result in lower practice expenses, higher practice revenues, and steadily reduced overall subsidies.
Please see this blog as an extension of my last blog, “America’s Hospitals Need a Makeover.”It should be obvious that by analogy we are not talking about a coat of paint here or even new appliances in the kitchen.
The financial performance of America’s hospitals has exposed real structural flaws in the healthcare house. A makeover of this magnitude is going to require a few prerequisites:
Don’t start designing the renovation unless you know specifically where profitability has changed within your service lines and by explicitly how much. Right now is the time to know how big the problem is, where those problems are located, and what is the total magnitude of the fix.
The Board must be brought into the discussion of the nature of the physician employment problem and the depth of its proposed solutions. Physicians are not just “any employees.” They are often the engine that runs the hospital and must be afforded a level of communication that is equal to the size of the financial problem. All of this will demand the Board’s knowledge and participation as solutions to the physician employment dilemma are proposed, considered, and eventually acted upon.
The basic rule of home renovation applies here as well: the longer the fix to this problem is delayed the harder and more expensive the project becomes. The losses set out here certainly suggest that physician employment is a significant contributing factor to hospitals’ current financial problems overall. It would be an understatement to say that the time to get after all of this is right now.
HBO’s critically acclaimed series Succession recently concluded its fourth and final season with a crescendo of family dramatics and falls from grace. If you haven’t seen the finale, bookmark this article for later. It contains spoilers.
Succession, for those unfamiliar, centers on the uber-wealthy Roy family, majority owners of the global media and entertainment subsidiary Waystar Royco. The plot revolves around the bullishly Machiavellian patriarch Logan Roy and his four adult children, each of them seeking (a) control of the family business and (b) their dad’s approval.
During its run, the show’s endless infighting and fascinating archetypes captivated viewers. But the 39-episode series also provided enduring lessons in dysfunctional leadership, which apply directly and saliently to U.S. healthcare.
As with Waystar Royko, the institutions of medicine (hospitals, medical groups, insurers, pharma and med-tech companies) need excellent leadership just to survive. With millions of dollars and hundreds or thousands of jobs resting on the decisions of top administrators, any major flaw can prove fatal—erasing decades of organizational success.
In any industry, poor leadership can undermine performance and threaten livelihoods. In healthcare, poor leadership puts lives at risk. Here are five dangerous types of leadership personalities, each inspired by a character from Succession:
1. Connor Roy: the delusional leader
In the show’s second season, Connor, the eldest and oft-forgotten son of Logan Roy, launches his U.S. presidential campaign on a “no-tax” platform. When the eve of election arrives, he’s polling at less than 1%, yet he refuses to step aside, still convinced he is capable of doing the job.
Like Connor, healthcare’s delusional leaders overestimate their abilities. Their ideas are unrealistic and their vision for the future: pure fiction. But no matter how outlandish their outlook, delusional leaders will always find apostles among the disenfranchised who, themselves, feel undervalued and overlooked.
When confronted with the harshness of reality, deluded leaders and their followers double down, insisting that everyone else is myopic. “Just follow and you’ll see,” they demand.
Unless senior executives or board members step in to relieve this leader of power, the organization will be as doomed as Connor Roy’s bid for presidency.
2. Kendall Roy: the narcissistic leader
On the surface, Kendall is by far the most capable and experienced candidate to succeed his father. He’s a smart and articulate heir apparent who appears up to the task of CEO.
But underneath the gold plating, his every action is reflexively self-centered. As such, when the time comes to sacrifice something of himself for the good of the company, he freezes and falters, his decisions corrupted by the compulsion to put himself first.
Like Kendall, healthcare’s narcissistic leaders bask in praise and blind loyalty. They reject and punish those who provide honest feedback and fair criticism. Their obsession with status and self-importance blinds them to long-term threats and opportunities, alike.
Unlike delusional leaders, who fail because their vision cuts against the grain of reality, the narcissistic leader’s passion for winning may advance an organization—in the short run. Long-term, however, their flaws will be exposed and weaknesses manipulated by seasoned competitors.
Across four seasons, Kendall can’t fathom that anyone else might be a better choice to run the company. As a result, he underestimates a rival CEO who’s seeking to acquire Waystar, and he overestimates the loyalty of his siblings. In the end, he’s left hopeless and broken.
3. Roman Roy: the immature leader
Roman, the youngest Roy, is brash and witty, but also unpredictable and unrestrained. His penchant for foul language and cutting insults make for good television, but they’re the telltale signs of insecurity and immaturity.
Like all immature leaders, Roman is addicted to novelty and excitement, often acting without regard for the consequences. He’s fast-talking and loud, which makes him likable enough for many to overlook his incompetence. But he’s incapable of filling his father’s shoes.
Immature leaders get promoted before they’re primed and polished. They often lack boundaries and excel at the sport of making others uncomfortable. At times, they seem more interested in causing a scene than creating results. They chase big ideas—if only for the adrenaline rush—but can’t accurately calculate whether the risk of failure is 20% or 80%. This makes them very dangerous as leaders.
4. Shiv Roy: the political leader
In a world of deluded and despotic men, Shiv comes across as the voice of reason. Smart and strategic, relaxed and composed, Shiv carefully cultivates new allies but never establishes an identity of her own. This makes her an excellent political consultant (the job she has) but a poor candidate for CEO (the job she wants).
Political leaders are better at advancing within an organization than advancing the organization itself. Like chameleons, these leaders change with the scenery, shifting alliances and values as organizational power waxes and wanes. While they’re busy focusing on rumors and relationships, they fail to muster real-life business acumen and experience.
Colleagues rarely respect those who play organizational politics. Once political leaders have accrued enough power and advanced their careers to the max, their shallow alliance and inability to drive performance leaves them stranded at the top—with nowhere to go but down.
5. Tom Wambsgans: the compromised leader
Not technically a Roy, Tom is Shiv’s husband and an eager aspirant for CEO.
Once appointed head of Waystar’s struggling cruises division, Tom conceals damaging information to protect his father-in-law. He is a willing henchman, ready to sacrifice his ethics for a shot at the corner office.To advance his interest, Tom repeatedly compromises his integrity, first with Logan, then Kendall, and eventually Lukas Matsson, the incoming global CEO who completes the hostile takeover of Waystar.
In what proves to be Tom’s final interview for U.S. CEO, Matsson asks him whether he will be willing to play the role of “pain sponge,” absorbing any negative fallout the company may experience. After he responds positively, Matsson tests him further by mentioning that he’d like to have sex with Shiv. While viewers squirm in their seats, Tom doesn’t object. For him, every compromise is simply a means to an end.
Compromised leaders are skilled at making promises. They seek support by vowing to fulfill wants and palliate pains. Depending on who these leaders aim to please, they’re willing to slash budgets or raise salaries, regardless of the financial impact. Ultimately, they’ll do anything to keep people happy, even if they have to sink the business in the process.
The three attributes of excellent healthcare leaders
In the final season of Succession, Logan tells his offspring, “I love you, but you are not serious people.” He is both accurate and accountable. Logan was not a serious father and, as a result, his kids were poorly equipped for life and leadership.
The healthcare industry is replete with stories of once-successful institutions falling on hard times under poor leadership. Although there’s no one way to run an organization, all great healthcare leaders share three characteristics:
1. A clear mission and purpose
Leaders have three jobs. They must create a vision, align people around it and motivate them to succeed. To accomplish these tasks, executives may use carrots and sticks, incentives and disincentives, or positive and negative reinforcement. But these tactics will fail unless they reflect a clear mission and purpose.
Years ago, former CMS administrator Don Berwick started a program with an audacious goal of maximizing patient safety and preventing unnecessary deaths. He called it the 100,000 Lives Campaign. And when he spoke of the program, he leaned hard on its righteous mission. Instead of presenting metrics and statistics, he talked about the weddings and graduation ceremonies that parents and grandparents would attend, thanks to the program and the people behind it. Even hard-weathered clinicians in the audience had tears in their eyes.
Financial incentives drive change in healthcare, but rarely achieve the outcomes intended. Everyone engaged in the 100,000 Lives Campaign knew exactly what they needed to accomplish and were motivated to do so.
2. Experience and expertise
Bold ideas and glittering promises always capture attention. Words are powerful and relationships can take aspiring leaders far. But when it comes time to turn big plans into action, there is no substitute for a leader who has been there and done it well.
Exceptional performance, not promises, separate great leaders from the rest—and success from failure. In every industry, past performance is the best predictor of future success. Of course, poor leaders can get lucky and even great ones in bad circumstances may fail. But the odds always favor those who have achieved recurring success throughout their careers.
3. Personal integrity
Emerging leaders can work on their weaknesses. Coaching, training and even therapy can help them quell maladaptive behaviors.
But everything changes when an emerging leader becomes the head of an organization and faces a crisis. As risks and pressures intensify, people tend to fall back on approaches and habits they learned in the past, particularly problematic ones. Whenever tested, the Roy children did exactly that.
After Logan’s death early in the final season, the fatal flaws of each Roy child came into clear view. As a result, the Waystar board made the safest choice for successor: none of the above.
Like a true Shakespearean tragedy, the flaws of the characters in Succession exceeded their abilities.
In healthcare, that’s a guaranteed prescription for failure.
On October 1, 1908, Ford produced the first Model T automobile. More than 60 years later, this affordable, mass produced, gasoline-powered car was still the top-selling automobile of all time. The Model T was geared to the broadest possible market, produced with the most efficient methods, and used the most modern technology—core elements of Ford’s business strategy and corporate DNA.
On April 25, 2018, almost 100 years later, Ford announced that it would stop making all U.S. internal-combustion sedans except the Mustang.
The world had changed. The Taurus, Fusion, and Fiesta were hardly exciting the imaginations of car-buyers. Ford no longer produced its U.S. cars efficiently enough to return a suitable profit. And the internal combustion technology was far from modern, with electronic vehicles widely seen as the future of automobiles.
Ford’s core strategy, and many of its accompanying products, had aged out. But not all was doom and gloom; Ford was doing big and profitable business in its line of pickups, SUVs, and -utility vehicles, led by the popular F-150.
It’s hard to imagine the level of strategic soul-searching and cultural angst that went into making the decision to stop producing the cars that had been the basis of Ford’s history. Yet, change was necessary for survival. At the time, Ford’s then-CEO Jim Hackett said, “We’re going to feed the healthy parts of our business and deal decisively with the areas that destroy value.”
So Ford took several bold steps designed to update—and in many ways upend—its strategy. The company got rid of large chunks of the portfolio that would not be relevant going forward, particularly internal combustion sedans. Ford also reorganized the company into separate divisions for electric and internal combustion vehicles. And Ford pivoted to the future by electrifying its fleet.
Ford did not fully abandon its existing strategies. Rather, it took what was relevant and successful, and added that to the future-focused pivot, placing the F-150 as the lead vehicle in its new electric fleet.
This need for strategic change happens to all large organizations. All organizations, including America’s hospitals and health systems, need to confront the fact that no strategic plan lasts forever.
Over the past 25-30 years, America’s hospitals and health systems based their strategies on the provision of a high-quality clinical care, largely in inpatient settings. Over time, physicians and clinics were brought into the fold to strengthen referral channels, but the strategic focus remained on driving volume to higher-acuity services.
More recently, the longstanding traditional patient-physician-referral relationship began to change. A smarter, internet-savvy, and self-interested patient population was looking for different aspects of service in different situations. In some cases, patients’ priority was convenience. In other cases, their priority was affordability. In other cases, patients began going to great lengths to find the best doctors for high-end care regardless of geographic location. In other cases, patients wanted care as close as their phone.
Around the country, hospitals and health systems have seen these environmental changes and adjusted their strategies, but for the most part only incrementally. The strategic focus remains centered on clinical quality delivered on campus, while convenience, access, value, affordability, efficiency, and many virtual innovations remain on the strategic periphery.
Health system leaders need to ask themselves whether their long-time, traditional strategy is beginning to age out. And if so, what is the “Ford strategy” for America’s health systems?
The questions asked and answered by Ford in the past five years are highly relevant to health system strategic planning at a time of changing demand, economic and clinical uncertainty, and rapid innovation. For example, as you view your organization in its entirety, what must be preserved from the existing structure and operations, and what operations, costs, and strategies must leave? And which competencies and capabilities must be woven into a going-forward structure?
America’s hospitals and health systems have an extremely long history—in some cases, longer than Ford’s. With that history comes a natural tendency to stick with deeply entrenched strategies. Now is the time for health systems to ask themselves, what is our Ford F150? And how do we “electrify” our strategic plan going forward?
A couple of months ago, I got a call from a CEO of a regional health system—a long-time client and one of the smartest and most committed executives I know. This health system lost tens of millions of dollars in fiscal year 2022 and the CEO told me that he had come to the conclusion that he could not solve a problem of this magnitude with the usual and traditional solutions. Pushing the pre-Covid managerial buttons was just not getting the job done.
This organization is fiercely independent. It has been very successful in almost every respect for many years. It has had an effective and stable board and management team over the past 30 to 40 years.
But when the CEO looked at the current situation—economic, social, financial, operational, clinical—he saw that everything has changed and he knew that his healthcare organization needed to change as well. The system would not be able to return to profitability just by doing the same things it would have done five years or 10 years ago. Instead of looking at a small number of factors and making incremental improvements, he wanted to look across the total enterprise all at once. And to look at all aspects of the enterprise with an eye toward organizational renovation.
I said, “So, you want a makeover.”
The CEO is right. In an environment unlike anything any of us have experienced, and in an industry of complex interdependencies, the only way to get back to financial equilibrium is to take a comprehensive, holistic view of our organizations and environments, and to be open to an outcome in which we do things very differently.
In other words, a makeover.
Consider just a few areas that the hospital makeover could and should address:
There’s the REVENUE SIDE: Getting paid for what you are doing and the severity of the patient you are treating—which requires a focus on clinical documentation improvement and core revenue cycle delivery—and looking for any material revenue diversification opportunities.
There is the relationship with payers: Involving a mix of growth, disruption, and optimization strategies to increase payments, grow share of wallet, or develop new revenue streams.
There’s the EXPENSE SIDE: Optimizing workforce performance, focusing on care management and patient throughput, rethinking the shared services infrastructure, and realizing opportunities for savings in administrative services, purchased services, and the supply chain. While these have been historic areas of focus, organizations must move from an episodic to a constant, ongoing approach.
There’s the BALANCE SHEET: Establishing a parallel balance sheet strategy that will create the bridge across the operational makeover by reconfiguring invested assets and capital structure, repositioning the real estate portfolio, and optimizing liquidity management and treasury operations.
There is NETWORK REDESIGN: Ensuring that the services offered across the network are delivered efficiently and that each market and asset is optimized; reducing redundancy, increasing quality, and improving financial performance.
There is a whole concept around PORTFOLIO OPTIMIZATION: Developing a deep understanding of how the various components of your business perform, and how to optimize, scale back, or partner to drive further value and operational performance.
Incrementalism is a long-held business approach in healthcare, and for good reason. Any prominent change has the potential to affect the health of communities and those changes must be considered carefully to ensure that any outcome of those changes is a positive one. Any ill-considered action could have unintended consequences for any of a hospital’s many constituencies.
But today, incrementalism is both unrealistic and insufficient.
Just for starters, healthcare executive teams must recognize that back-office expenses are having a significant and negative impact on the ability of hospitals to make a sufficient operating margin. And also, healthcare executive teams must further realize that the old concept of “all things to all people” is literally bringing parts of the hospital industry toward bankruptcy.
As I described in a previous blog post, healthcare comprises some of the most wicked problems in our society—problems that are complex, that have no clear solution, and for which a solution intended to fix one aspect of a problem may well make other aspects worse.
The very nature of wicked problems argues for the kind of comprehensive approach that the CEO of this organization is taking—not tackling one issue at a time in linear fashion but making a sophisticated assessment of multiple solutions and studying their potential interdependencies, interactions, and intertwined effects.
My colleague Eric Jordahl has noted that “reverting to a 2019 world is not going to happen, which means that restructuring is the only option. . . . Where we are is not sustainable and waiting for a reversion is a rapidly decaying option.”
The very nature of the socioeconomic environment makes doing nothing or taking an incremental approach untenable. It is clearly beyond time for the hospital industry makeover.
Correction: An earlier version incorrectly referenced a Texas deal between Houston Methodist and Baylor Scott and White. News about deals is sensitive and unnecessarily disruptive to reputable organizations like these. I sourced this news from a reputable deal advisor: it was inaccurate. My apology!
Congressional Republicans and the White House spared Main Street USA the pain of defaulting on the national debt last week. No surprise.
Also not surprising: another not-for-profit-mega deal was announced:
St. Louis, MO-based BJC HealthCare and Kansas City, MO-based Saint Luke’s Health System announced their plan to form a $9.5B revenue, 28-hospital system with facilities in Missouri, Kansas, and Illinois.
This follows recent announcements by four other NFP systems seeking the benefits of larger scale:
Gundersen Health System & Bellin Health (Nov 2022): 11 hospitals, combined ’22 revenue of $2.425B
Froedtert Health & ThedaCare (Apr 2023 LOI): 18 hospitals, combined ’22 revenues of $4.6B
And all these moves are happening in an increasingly dicey environment for large, not-for-profit hospital system operators:
Increased negative media attention to not-for-profit business practices that, to critics, appear inconsistent with a “NFP” organization’s mission and an inadequate trade for tax exemptions each receives.
Decreased demand for inpatient services—the core business for most NFP hospital operations. Though respected sources (Strata, Kaufman Hall, Deloitte, IBIS et al) disagree somewhat on the magnitude and pace of the decline, all forecast decreased demand for traditional hospital inpatient services even after accounting for an increasingly aging population, a declining birthrate, higher acuity in certain inpatient populations (i.e. behavioral health, ortho-neuro et al) and hospital-at-home services.
Increased hostility between national insurers and hospitals over price transparency and operating costs.
Increased employer, regulator and consumer concern about the inadequacy of hospital responsiveness to affordability in healthcare.
And heightened antitrust scrutiny by the FTC which has targeted hospital consolidation as a root cause of higher health costs and fewer choices for consumers. This view is shared by the majorities of both parties in the House of Representatives.
In response, Boards and management in these organizations assert…
Health Insurers—especially investor-owned national plans—enjoy unfettered access to capital to fund opportunistic encroachment into the delivery of care vis a vis employment of physicians, expansion of outpatient services and more.
Private equity funds enjoy unfettered opportunities to invest for short-term profits for their limited partners while planning exits from local communities in 6 years or less.
The payment system for hospitals is fundamentally flawed: it allows for underpayments by Medicaid and Medicare to be offset by secret deals between health insurers and hospitals. It perpetuates firewalls between social services and care delivery systems, physical and behavioral health and others despite evidence of value otherwise. It requires hospitals to be the social safety net in every community regardless of local, state or federal funding to offset these costs.
These reactions are understandable. But self-reflection is also necessary. To those outside the hospital world, lack of hospital price transparency is an excuse. Every hospital bill is a surprise medical bill. Supporting the community safety net is an insignificant but manageable obligation for those with tax exemption status. Advocacy efforts to protect against 340B cuts and site-neutral payment policies are about grabbing/keeping extra revenue for the hospital. What is means to be a “not-for-profit” anything in healthcare is misleading since moneyball is what all seem to play. And short of government-run hospitals, many think price controls might be the answer.
My take:
The headwinds facing large not-for-profit hospitals systems are strong. They cannot be countered by contrarian messaging alone.
What’s next for most is a new wave of operating cost reductions even as pre-pandemic volumes are restored because the future is not a repeat of the past. Being bigger without operating smarter and differently is a recipe for failure.
What’s necessary is a reset for the entire US health system in which not-for-profit systems play a vital role. That discussion should be led by leaders of the largest NFP systems with the full endorsements of their boards and support of large employers, physicians and public health leaders in their communities.
Everything must be on the table: funding, community benefits, tax exemption, executive compensation, governance, administrative costs, affordability, social services, coverage et al. And mechanisms for inaction and delays disallowed.
It’s a unique opportunity for not-for-profit hospitals. It can’t wait.
As Danville, Pa.-based Geisinger Health awaits the closure of a deal that will make it the first health system to join Kaiser Permanente’s new nonprofit organization, Risant Health, President and CEO Jaewon Ryu, MD, said the system must remain focused on driving its strategy forward with “the same rigor to address the challenging headwinds our industry and our communities continue to face.”
Oakland-based Kaiser said in a May 15 financial report that it expects its deal to acquire Geisinger to close in 2024, pending regulatory approval.
The newly created Risant Health, which will be headquartered in Washington, D.C., aims to “expand and accelerate the adoption of value-based care in “diverse, multipayer, multiprovider, community-based health system environments.”
Dr. Ryu will transition to the role of Risant Health CEO as the deal approaches closure. He recently connected with Becker’s about why Geisinger joined Risant and how the new organization will measure success.
Editor’s note: Responses have been lightly edited for brevity and clarity.
Q: Geisinger is the first health system to join Risant Health. How did Geisinger get involved and why did it decide to be the first to join?
Dr. Jaewon Ryu: This came on the heels of strategic planning work that we had started over four years ago, when we were looking at ways that we might accelerate our goal — to make better health easier for the communities we serve. This path with Kaiser Permanente through Risant Health presented a great way to join with a fellow nonprofit, mission-aligned organization that is like minded and focused on improving health outcomes, affordability and access. Kaiser Permanente has been a best-in-class organization of this approach for quite some time, often viewed as the gold standard in value-based care, with operations across eight states and the District of Columbia, 39 hospitals, and top-notch physician groups. And Geisinger has been similarly committed to advancing innovation and value-based care models, partnering with other payers and other physician groups and health systems to do so.
Being part of Risant Health will allow Geisinger to access tools, capabilities and investments required to accelerate our charitable mission and strategy and continue to expand our impact to our communities.
Q: What is the most exciting aspect of joining Risant?
JR: In addition to accelerating our ability to deliver on our mission and carrying forth the vision of our founder Abigail Geisinger, we’re excited to have a broader impact in healthcare.
We’ve always believed Geisinger’s model in Pennsylvania — with a focus on value-based care leveraging multipayer and multiprovider capabilities — could be scaled to other places and benefit more people and communities. This “pluralistic” approach to value-based care, across communities less dense than more urban areas, is a capability that complements Kaiser Permanente’s other capabilities. Through Risant Health, we see an opportunity to further enhance our model and add to the suite of Risant Health capabilities so that more communities can benefit. As the first health system to become part of Risant Health, Geisinger will participate in building out the organization’s strategy and operational model. Working with Kaiser Permanente and connecting with like-minded health systems through Risant Health will allow us to be a part of the solution for the industry’s challenges in a rapidly changing healthcare environment.
Q: The deal is now awaiting regulatory approval. As that process unfolds, what is Geisinger doing to prepare for the transition?
JR: Geisinger remains focused on delivering on our mission of making better health easier for the communities that we serve. In other words, our good work continues. Should the acquisition be approved, Risant Health’s model will be designed to support local ownership over operations and regional strategy while also preserving strong community engagement. This local ownership means that while we await a regulatory decision, but even beyond, we must remain focused on driving our strategy forward with the same rigor to address the challenging headwinds our industry and our communities continue to face.
Q: You will be transitioning into the role of Risant CEO. Will that be in addition to your role at Geisinger, or will the system be getting a new CEO? If the latter, is there a succession plan in place?
JR: I’m focused on my role as the president and CEO of Geisinger, ensuring our organization is delivering on our stated mission. Should we receive the necessary state and federal regulatory approvals, I will transition from my current role to serve as CEO of Risant Health as the transaction nears completion. While no definitive plans have been made, there will be a formal process to select a new CEO at the appropriate time, just as we have with prior leadership transitions.
Q: How will joining Risant benefit or enhance Geisinger’s health plan?
JR: Geisinger will deliver the same quality care programs, benefits coverage and prevention support. We will enhance our capabilities over time in areas such as digital tools that make things easier for our members, or using augmented data and analytic tools that help target care programs at the right time so that we can address clinical needs before disease worsens. So while Geisinger’s approach to care will remain one anchored around outcomes and caring, how we go about this work will be bolstered with these and other capabilities.
Q: How will the success of Risant Health be measured?
JR: Through Risant Health, Kaiser Permanente has shared its desire to seek out like-minded entities that are committed to quality care and improving access and affordability by promoting value-based care models through a “pluralistic” chassis, as mentioned earlier. In a very simple sense, success will be evaluated through better measures of health across more populations. For example, success could be lower blood sugars in diabetic patients, fewer ER or hospital visits for those with congestive heart failure or earlier detection of cancers through more effective preventive screening rates.
HENRY KOTULA 