This January, BDO hosted healthcare and life sciences leaders on the sidelines of JP Morgan’s Healthcare Conference to glean insights from those at the forefront of these rapidly evolving industries.
In a series of intimate breakout discussions, these leaders discussed the challenges they’re seeing and what they anticipate the near future will hold. Here are four of their biggest takeaways that industry stakeholders need to know:
· Healthcare labor needs a makeover
One of the biggest issues we’re seeing in healthcare today is the overburdening of clinicians and other healthcare staff. This year, healthcare leaders need to prioritize enabling clinicians to practice at the top of their licenses. That means reducing their administrative burden so they can spend more time doing what they do best: working with patients and dispensing care.
· Healthcare valuations are moderating
In the past year, healthcare company valuations have been very high. We’re now seeing valuations moderate, which could mean a major shift in the deal landscape, with deal opportunities opening up as the price is right.
· Health equity is about choice
The reality is that each individual patient has unique needs that require tailored solutions. One important tool for improving health equity is technology that enables patients to choose what is right for them and their situation. That’s why capabilities like self-scheduling are so important, despite the fact that they are currently a missed opportunity for many providers.
· Life sciences leaders are looking at drug timelines differently
COVID-19 showed how quickly a drug can be safely developed when the right resources are in place. Moving forward, life sciences leaders are likely to pressure test drug timelines, which could lead to a shift in how the industry looks at drug development as a whole.
· While it’s impossible to know exactly what the future holds, we’re thankful that we were able to hear from industry leaders with on-the-ground knowledge of what’s happening now and what’s likely ahead. In the months and years ahead, we’ll continue to look to these leaders for their insights.
The Taylor Swift ticketing debacle of 2022 left thousands of frustrated ‘Swifties’ without a chance to see their favorite artist in concert. And it also highlighted the trouble that arises when companies like Ticketmaster gain monopolistic control.
In any industry, market consolidation limits competition, choice and access to goods and services, all of which drive up prices.
But there’s another—often overlooked—consequence.
Market leaders that grow too powerful become complacent. And, when that happens, innovation dies. Healthcare offers a prime example.
And industry of monopolies
De facto monopolies abound in almost every healthcare sector: Hospitals and health systems, drug and device manufacturers, and doctors backed by private equity. The result is that U.S. healthcare has become a conglomerate of monopolies.
For two decades, this intense concentration of power has inflicted harm on patients, communities and the health of the nation. For most of the 21st century, medical costs have risen faster than overall inflation, America’s life expectancy (and overall health) has stagnated, and the pace of innovation has slowed to a crawl.
This article, the first in a series about the ominous and omnipresent monopolies of healthcare, focuses on how merged hospitals and powerful health systems have raised the price, lowered the quality and decreased the convenience of American medicine.
Future articles will look at drug companies who wield unfettered pricing power, coalitions of specialist physicians who gain monopolistic leverage, and the payers (businesses, insurers and the government) who tolerate market consolidation. The series will conclude with a look at who stands the best chance of shattering this conglomerate of monopolies and bringing innovation back to healthcare.
How hospitals consolidate power
The hospital industry is now home to a pair of seemingly contradictory trends. On one hand, economic losses in recent years have resulted in record rates of hospital (and hospital service) closures. On the other hand, the overall market size, value and revenue of U.S. hospitals are growing.
This is no incongruity. It’s what happens when hospitals and health systems merge and eliminate competition in communities.
Today, the 40 largest health systems own 2,073 hospitals, roughly one-third of all emergency and acute-care facilities in the United States. The top 10 health systems own a sixth of all hospitals and combine for $226.7 billion in net patient revenues.
Though the Federal Trade Commission and the Antitrust Division of the DOJ are charged with enforcing antitrust laws in healthcare markets and preventing anticompetitive conduct, legal loopholes and intense lobbying continue to spur hospital consolidation. Rarely are hospital M&A requests denied or even challenged.
The ills of hospital consolidation
The rapid and recent increase in hospital consolidation has left hundreds of communities with only one option for inpatient care.
But the lack of choice is only one of the downsides.
Hospital administrators know that state and federal statutes require insurers and self-funded businesses to provide hospital care within 15 miles of (or 30 minutes from) a member’s home or work. And they understand that insurers must accept their pricing demands if they want to sell policies in these consolidated markets. As a result, studies confirm that hospital prices and profits are higher in uncompetitive geographies.
These elevated prices negatively impact the pocketbooks of patients and force local governments (which must balance their budgets) to redirect funds toward hospitals and away from local police, schools and infrastructure projects.
Perhaps most concerning of all is the lack of quality improvement following hospital consolidation. Contrary to what administrators claim, clinical outcomes for patients are no better in consolidated locations than in competitive ones—despite significantly higher costs.
How hospitals could innovate (and why they don’t)
Hospital care in the United States accounts for more than 30% of total medical expenses (about $1.5 trillion). Even though fewer patients are being admitted each year, these costs continue to rise at a feverish pace.
If our nation wants to improve medical outcomes and make healthcare more affordable, a great place to start would be to innovate care-delivery in our country’s hospitals.
To illuminate what’s possible, below are three practical innovations that would simultaneously improve clinical outcomes and lower costs. And yet, despite the massive benefits for patients, few hospital-system administrators appear willing to embrace these changes.
Innovation 1: Leveraging economies of scale
In most industries, bigger is better because size equals cost savings. This advantage is known as economies of scale.
Ostensibly, when bigger hospitals acquire smaller ones, they gain negotiating power—along with plenty of opportunities to eliminate redundancies. These factors could and should result in lower prices for medical care.
Instead, when hospitals merge, the inefficiencies of both the acquirer and the acquired usually persist. Rather than closing small, ineffective clinical services, the newly expanded hospital system keeps them open. That’s because hospital administrators prefer to raise prices and keep people happy rather than undergo the painstaking process of becoming more efficient.
The result isn’t just higher healthcare costs, but also missed opportunities to improve quality.
Following M&A, health systems continue to schedule orthopedic, cardiac and neurosurgical procedures across multiple low-volume hospitals. They’d be better off creating centers of excellence and doing all total joint replacements, heart surgeries and neurosurgical procedures in a single hospital or placing each of the three specialties in a different one. Doing so would increase the case volumes for surgeons and operative teams in that specialty, augmenting their experience and expertise—leading to better outcomes for patients.
But hospital administrators bristle at the idea, fearing pushback from communities where these services close.
Innovation 2: Switching to a seven-day hospital
When patients are admitted on a Friday night, rather than a Monday or Tuesday night, they spend on average an extra day in the hospital.
This delay occurs because hospitals cut back services on weekends and, therefore, frequently postpone non-emergent procedures until Monday. For patients, this extra day in the hospital is costly, inconvenient and risky. The longer the patient stays admitted, the greater the odds of experiencing a hospital acquired infection, medical error or complications from underlying disease.
It would be possible for physicians and staff to spread the work over seven days, thus eliminating delays in care. By having the necessary, qualified staff present seven days a week, inpatients could get essential, but non-emergent treatments on weekends without delay. They could also receive sophisticated diagnostic tests and undergo procedures soon after admission, every day of the week. As a result, patients would get better sooner with fewer total inpatient days and far lower costs.
Hospital administrators don’t make the change because they worry it would upset the doctors and nurses who prefer to work weekdays, not weekends.
Innovation 3: Bringing hospitals into homes
During Covid-19, hospitals quickly ran out of staffed beds. Patients were sent home on intravenous medications with monitoring devices and brief nurse visits when needed.
Clinical outcomes were equivalent to (and often better than) the current inpatient care and costs were markedly less.
Building on this success, hospitals could expand this approach with readily available technologies.
Whereas doctors and nurses today check on hospitalized patients intermittently, a team of clinicians set up in centralized location could monitor hundreds of patients (in their homes) around the clock.
By sending patients home with devices that continuously measure blood pressure, pulse and blood oxygenation—along with digital scales that can calibrate fluctuations in a patient’s weight, indicating either dehydration or excess fluid retention—patients can recuperate from the comforts of home. And when family members have questions or concerns, they can obtain assistance and advice through video.
Despite dozens of advantages, use of the “hospital at home” model is receding now that Covid-19 has waned.
That’s because hospital CEOs and CFOs are paid to fill beds in their brick-and-mortar facilities. And so, unless their facilities are full, they prefer that doctors and nurses treat patients in a hospital bed rather than in people’s own homes.
Opportunities for hospital innovations abound. These three are just a few of many changes that could transform medical care. Instead of taking advantage of them, hospital administrators continue to construct expensive new buildings, add beds and raise prices.
Big questions tend to have no easy answers. Fortunately, few people would say they went into healthcare for its ease.
The following questions about hospitals’ culture, leadership, survival and opportunity come with a trillion-dollar price tag given the importance of hospitals and health systems in the $4.3 trillion U.S. healthcare industry.
1. How will leaders insist on quality first in a world where it’s increasingly harder to keep trains on time?
Hospitals and health systems have had no shortage of operational challenges since the COVID-19 pandemic began. These organizations at any given time have been or still are short professionals, personal protective equipment, beds, cribs, blood, helium, contrast dye, infant formula, IV tubing, amoxicillin and more than 100 other drugs. After years of working in these conditions, it is understandable why healthcare professionals may think with a scarcity mindset.
This is something strong leaders recognize and will work to shake in 2023, given the known-knowns about the psychology of scarcity. When people feel they lack something, they lose cognitive abilities elsewhere and tend to overvalue immediate benefits at the expense of future ones. Should supply problems persist for two to three more years, hospitals and health systems may near a dangerous intersection where scarcity mindset becomes scarcity culture, hurting patient safety and experience, care quality and outcomes, and employee morale and well-being as a result.
The year ahead will be a great test and an opportunity for leaders to unapologetically prioritize quality within every meeting, rounding session, budgetary decision, huddle and town hall, and then follow through with actions aligned with quality-first thinking and commentary. Working toward a long-term vision and upholding excellence in the quality of healthcare delivery can be difficult when short-term solutions are available. But leaders who prioritize quality throughout 2023 will shape and improve culture.
2. Who or what will bring medicine past the scope-of-practice fights and turf wars that have persisted for decades?
It is naive to think these tensions will dissolve completely, but it would be encouraging if in 2023 the industry could begin moving past the all-too-familiar stalemates and fears of “scope creep,” in which physicians oppose expanded scope of practice for non-physician medical professionals.
Many professions have political squabbles and sticking points that are less palpable to outsiders. Scope-of-practice discord may fall in that category — unless you are in medicine or close to people in the field, it can easily go undetected. But just as it is naive to think physicians and advanced practice providers will reach immediate harmony, so too is it naive to think that aware Americans who watch nightly news segments about healthcare’s labor crisis and face an average wait of 26 days for a medical appointment will have much sympathy for physicians’ staunch resistance to change.
The U.S. could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, according to the Association of American Medical Colleges. Ideally, 2023 is the year in which stakeholders begin to move past the usual tactics, arguments and protectionist thinking and move toward pragmaticism about physician-led care teams that empower advanced practice providers to care for patients to the extent of the education and training they have. The leaders or organizations who move the needle on this stand to make a name for themselves and earn a chapter or two in the story of American healthcare.
3. Which employers will win and which will lose in lowering the cost of healthcare?
Employers have long been incentivized to do two things: keep their workers healthy and spend less money doing it. News of companies’ healthcare ventures can be seen as cutting edge, making it easy to forget the origins of integrated health systems like Oakland, Calif.-based Kaiser Permanente, which dates back to one young surgeon establishing a 12-bed hospital in the height of the Great Depression to treat sick and injured workers building the Colorado River Aqueduct.
Many large companies have tried and failed, quite publicly, to improve healthcare outcomes while lowering costs. Will 2023 be the year in which at least one Fortune 500 company does not only announce intent to transform workforce healthcare, but instead point to proven results that could make for a scalable strategy?
Walmart is doing interesting things. JPMorgan seems to have learned a good deal from the demise of Haven, with Morgan Health now making some important moves. And just as important are the large companies paying attention on the sidelines to learn from others’ mistakes. Health systems with high-performing care teams and little variation in care stand to gain a competitive advantage if they draw employers’ attention for the right reasons.
4. Who or what will stabilize at-risk hospitals?
More than 600 rural hospitals — nearly 30 percent of all rural hospitals in the country — are at risk of closing in the near future. Just as concerning is the growing number of inner-city hospitals at increased risk of closure. Both can leave millions in less-affluent communities with reduced access to nearby emergency and critical care facilities. Although hospital closures are not a new problem, 2022 further crystalized a problem no one is eager to confront.
One way for at-risk hospitals to survive is via mergers and acquisitions, but the Federal Trade Commission is making buying a tougher hurdle to clear for health systems. The COVID-19 public health emergency began to seem like a makeshift hospital subsidy when it was extended after President Joe Biden declared the pandemic over, inviting questions about the need for permanent aid, reimbursement models and flexibilities from the government to hospitals. Recently, a group of lawmakers turned to an agency not usually seen as a watchdog for hospital solvency — HHS — to ask if anything was being done in response to hospital closures or to thwart them.
Maintaining hospital access in rural and urban settings is a top priority, and the lack of interest and creativity to maintain it is strikingly stark. As a realistic expectation for 2023, it would be encouraging to at least have an injection of energy, innovation and mission-first thinking toward a problem that grows like a snowball, seemingly bigger, faster and more insurmountable year after year.
Look at what Mark Cuban was able to accomplish within one year to democratize prescription drug pricing. Remember how humble and small the origins of that effort were. Recall how he — albeit being a billionaire — has put profit secondary to social mission. There’s no one savior that will curb hospital closures in the U.S., but it would be a good thing if 2023 brought more leadership in problem-solving and matching a big problem with big energy and ideas.
5. Which hospital and health system CEOs will successfully redefine the role?
Many of the largest and most prominent health systems in the country saw CEO turnover over the past two years. With that, health systems lost decades of collective industry and institutional knowledge. Their tenure spanned across numerous milestones and headwinds, including input and compliance with the Affordable Care Act, the move from paper to digital records, and major mergers and labor strikes. The retiring CEOs had been top decision-makers as their organizations met the demands of COVID-19 and its consequences. They set the tone and had final say in how forcefully their institutions condemned racism and what actions they took to address health inequities.
To assume the role of health system CEO now comes with a different job description than it did when outgoing leaders assumed their posts. Many Americans may carry on daily life with little awareness as to who is at the top of their local hospital or health system. The pandemic challenged that status quo, throwing hospital leaders into the limelight as many Americans sought leadership, expertise and local voices to make sense of what could easily feel unsensible. The public saw hospital CEOs’ faces, heard their voices and read their words more within the past two years than ever.
In 2023, newly named CEOs and incoming leaders will assume greater responsibility in addition to a fragile workforce that may be more susceptible to any slight change in communication, transparency or security. They will need to avoid white-collar ivory towers, and earn reputations as leaders who show up for their people in real, meaningful ways. Healthcare leaders who distance themselves from their workforce will only let the realistic, genuine servant leaders outshine them. In 2023, watch for the latter, emulate them and help up-and-comers get as much exposure to them as possible.
Healthcare leaders now need to strike a delicate balance that requires managing financial and growth metrics, increasing the speed of transformation, and building the health systems of tomorrow. So how do we redefine compensation models to reward all these behaviors?
Executive compensation might not spring to mind as a key driver of healthcare transformation, nor does it seem naturally connected to critical issues such as health equity, patient safety, or quality of care – just a few of the areas where significant changes can be made to transform healthcare. But, in fact, executives leading not-for-profit health systems today are tasked with delivering measurable results that improve the health status of their patients and their communities. And to ensure that these new performance metrics are met, we must change how we think about —and deliver—compensation.
Defining a new model
While executive compensation has always been tied to specific objectives, they have historically leaned heavily toward financial performance, volume and margins, with a modest portion of compensation aligned to quality of care and patient outcomes. But transformative approaches such as population health, value-based care, patient wellness and health outcomes are shifting the mark.
Healthcare leaders now need to strike a delicate balance that requires managing financial and growth metrics, increasing the speed of transformation, and building the health systems of tomorrow. So how do we redefine compensation models to reward all these behaviors?
Some might say that the answer lies in adjusting incentive plans. While incentive plans across health care have not changed significantly in the past decade, the sophistication of the plans has changed, reflecting greater attention to delivering a better patient experience. But delivering better experiences does not imply that health systems have transformed from the top down. In my mind, adjusting incentive plans only solves part of the problem.
If we want true health care transformation—and we should, in order to best serve patients and communities—health systems need to re-evaluate the outcomes for each stakeholder and create incentives to evolve leadership as a whole. We need to rethink executive compensation models to align with value-based care, patient experience, and the resulting outcomes, along with traditional performance measurements.
Leading through lingering disruption
But rethinking executive compensation models won’t be an easy task, especially given the external challenges and changes thrust upon the health care system over the last few years.
As with nearly every other aspect of health care, pay for performance was disrupted during the pandemic. Demand for health services changed dramatically, labor and attrition issues intensified, and supply chain problems and operational costs increased. These new pressures required executives to manage through long periods of uncertainty where meeting operational pay-for-performance goals was nearly impossible. Fast-forward to today, the executive talent market remains extraordinarily competitive. Demand outpaces supply due to higher-than-typical retirements, effects of the great resignation, the need for new skill sets and overall burnout.
As a result, there has been upward pressure on compensation to address and fulfill unexpected but immediate needs such as rewarding executives for managing in a unique and challenging performance environment, increasing efforts to recruit and retain, and recognizing leaders for their hard-won accomplishments.
Considerations and changes
When considering adjusting models for 2023 and beyond, CEOs and compensation committees need to take these pressures and disruptions into account. They should look closely at their own compensation data from the past two years – not as a lighthouse for future compensation, but as data that may need to be set aside due to the volume of performance goals and achievements that were up-ended by the pandemic. When relying on external industry data, the same rules apply; smaller data sets or those that don’t account for the past two years may be misleading, so review carefully before using limited data sets to inform adjusted models.
Just as important, CEOs and compensation committees should consider new performance measurements tied to both financial and quality or value-based transformation metrics. We don’t need to eliminate traditional financial and operational goals because viability is still a business mandate. But how can we articulate compensation-driven KPIs for stewardship of patient and community health, improved outcomes and reduced cost of care? Too many measures are akin to having no measures at all.
The compensation mix should take into account a more focused approach to long-term measures. The old paradigm of 12-month incentive cycles is not enough to address the time required to truly transform health care. Another consideration should be performance-based funding of deferred compensation based on achieving transformation goals, and greater use of retention programs to support the maintenance of a stable executive team during the transformation period. Covid-19 proved how crisis can be an accelerator for change. True transformation should blend the skills gained from crisis management with planful, thoughtful and intentional change.
In addition, some metrics may need to incorporate a discretionary component, considering ongoing disruption within the workforce, supply chain limitations, and energy, equipment and labor cost increases. More organizations are also including health equity, DE&I, and ESG goals in incentive programs to tighten alignment with mission-critical board-mandated goals.
Transformative change
There are four elements that are vital in the journey to transform health care from “heads in beds” to the public-service-oriented organizations that they were meant to be—and can be again. With mounting pressure from patients, communities, and payers to boards and employees, CEOs and compensation committees must become key drivers of change, setting the right goals and incentives from the top down.
Affordability: can patients afford the care they need?
Quality: is the care being delivered of the utmost quality?
Usability: how can we reduce hurdles to undertaking the care plan?
Access: are all community members able to access needed care?
Solving for each of these elements is one of the biggest challenges we face, and as we begin to emerge from the disruption of the pandemic, leaders will be watched closely to ensure that they deliver—and can clearly show the path to delivery.
Ideally, end achievements would include patients spending less to achieve better health; payers controlling costs and reducing risk; providers realizing efficiencies and greater patient satisfaction; and alignment of medical supplier pricing to patient outcomes. And when you zoom out to reveal the bigger picture, all of these pieces come together to achieve healthier populations and lower overall health care costs, while still meeting the financial goals of the organization.
We’re asking a lot of already-overburdened health care executives. Stakeholders must prove that we value leaders with the right mindset and skillset in order to attract executives who can shepherd organizations through the transformation journey. This requires a setting where there is supportive leadership, a compelling mission and opportunity for personal growth and development. It will not be easy, but without rethinking how we design compensation models from the top down, it will be unnecessarily challenging.
HENRY KOTULA 