We’ve been working with a CEO and his strategy team around their health system’s five-year strategic plan. It’s still early in development, and they’re considering some bold moves. Given that some of the ideas are disruptive, he astutely observed they needed to bring a clinical leader into the process before the strategy is fully developed, but he’s having trouble identifying the right physician to be part of the very small executive working group.
We began listing the important attributes, creatingarough job description for a “clinician strategist”: the ability to consider clinical and operational implications but not get bogged down in details; bold, big-picture thinking and a willingness to take risks; strong communication and leadership skills.
As the list grew longer, we began to wonder if we were really telling the CEO to chase a unicorn. Some of the characteristics that typically make for an outstanding clinician—reliance on data and evidence, lower risk tolerance—might conflict with embracing disruptive change. Much of strategic decision making is about finding “80-20” compromises, while doctors often tend to get bogged down in detail (for good reason) and are quick to poke holes.
And our ideal physician strategist, out of a desire to safeguard patient care, might sometimes find that the strategy team isn’t adequately considering the ramifications for quality and safety. Finding a physician leader who also has the skills of a chief strategy officer is indeed a rare thing. It’s probably a better bet to identify early-career doctors who have the right mindset and an interest in strategy and help them develop their leadership skills over time.
Regardless, this CEO’s instinct was correct. Bringing doctors into the strategy-setting process early is crucial, even if the perfect clinician strategist might prove difficult to find.
An estimate from the Partnership for America’s Healthcare Future predicts that nearly four out of five 60- to 64-year-olds would enroll in Medicare, with two-thirds transitioning from existing commercial plans, if “Medicare at 60” becomes a reality.
In the graphic above, we’ve modeled the financial impact this shift would have on a “typical” five-hospital health system, with $1B in revenue and an industry-average two percent operating margin.
If just over half of commercially insured 60- to 64-year-olds switch to Medicare, the health system would see a $61M loss in commercial revenue.
There would be some revenue gains, especially from patients who switch from Medicaid, but the net result of the payer mix shift among the 60 to 64 population would be a loss of $30M, or three percent of annual revenue, large enough to push operating margin into the red, assuming no changes in cost structure. (Our analysis assumed a conservative estimate for commercial payment rates at 240 percent of Medicare—systems with more generous commercial payment would take a larger hit.)
Coming out of the pandemic, hospitals face rising labor costs and unpredictable volume in a more competitive marketplace. While “Medicare at 60” could provide access to lower-cost coverage for a large segment of consumers, it would force a financial reckoning for many hospitals, especially standalone hospitals and smaller systems.
In our work over the years advising health systems on M&A, we’ve been struck by how often “social issues” cause deals that are otherwise strategically sound to go off the rails.
Of course, it’s an old chestnut that “culture eats strategy for breakfast”, but what’s been notable, especially recently, is how early in the process hot-button governance and leadership issues enter the discussions.
Where is the headquarters going to be? Who’s going to be the CEO of the combined entity? And most vexingly, how many board seats is each organization going to get? That last issue is particularly troublesome, as it’s often where negotiations get bogged down. But as one health system board member recently pointed out to us, getting hung up on whether board seats are split 7-6 or 8-5 is just silly—in her words, “If you’re in a position where board decisions turn on that close of a margin, you’ve got much bigger strategic problems.”
It’s an excellent point. While boards shouldn’t just rubber stamp decisions made by management, it’s incumbent on the CEO and senior leaders to enfranchise and collaborate with the board in setting strategy, and critical decisions should rarely, if ever, come down to razor-thin vote tallies.
If a merger makes sense on its merits, and the strategic vision for the combined organization is clear, quibbling over how many seats each legacy system “gets” seems foolish. No board should go into a merger anticipating a future in which small majorities determine the outcome of big decisions.
A complete financial recovery for many organizations is still far away, findings from Kaufman Hall indicate.
For the past three years, Kaufman Hall has released annual healthcare performance reports illustrating how hospitals and health systems are managing, both financially and operationally.
This year, however, with the pandemic altering the industry so broadly, the report took a different approach: to see how COVID-19 impacted hospitals and health systems across the country. The report’s findings deal with finances, patient volumes and recovery.
The report includes survey answers from respondents almost entirely (96%) from hospitals or health systems. Most of the respondents were in executive leadership (55%) or financial roles (39%). Survey responses were collected in August 2020.
Findings from the report indicate that a complete financial recovery for many organizations is still far away. Almost three-quarters of the respondents said they were either moderately or extremely concerned about their organization’s financial viability in 2021 without an effective vaccine or treatment.
Looking back on the operating margins for the second quarter of the year, 33% of respondents saw their operating margins decline by more than 100% compared to the same time last year.
Revenue cycles have taken a hit from COVID-19, according to the report. Survey respondents said they are seeing increases in bad debt and uncompensated care (48%), higher percentages of uninsured or self-pay patients (44%), more Medicaid patients (41%) and lower percentages of commercially insured patients (38%).
Organizations also noted that increases in expenses, especially for personal protective equipment and labor, have impacted their finances. For 22% of respondents, their expenses increased by more than 50%.
IMPACT ON PATIENT VOLUMES
Although volumes did increase over the summer, most of the improvement occurred in areas where it is difficult to delay care, such as oncology and cardiology. For example, oncology was the only field where more than half of respondents (60%) saw their volumes recover to more than 90% of pre-pandemic levels.
More than 40% of respondents said that cardiology volumes are operating at more than 90% of pre-pandemic levels. Only 37% of respondents can say the same for orthopedics, neurology and radiology, and 22% for pediatrics.
Emergency department usage is also down as a result of the pandemic, according to the report. The respondents expect that this trend will persist beyond COVID-19 and that systems may need to reshape their business model to account for a drop in emergency department utilization.
Most respondents also said they expect to see overall volumes remain low through the summer of 2021, with some planning for suppressed volumes for the next three years.
Hospitals and health systems have taken a number of approaches to reduce costs and mitigate future revenue declines. The most common practices implemented are supply reprocessing, furloughs and salary reductions, according to the report.
Executives are considering other tactics such as restructuring physician contracts, making permanent labor reductions, changing employee health plan benefits and retirement plan contributions, or merging with another health system as additional cost reduction measures.
THE LARGER TREND
Kaufman Hall has been documenting the impact of COVID-19 hospitals since the beginning of the pandemic. In its July report, hospital operating margins were down 96% since the start of the year.
As a result of these losses, hospitals, health systems and advocacy groups continue to push Congress to deliver another round of relief measures.
Earlier this month, the House passed a $2.2 trillion stimulus bill called the HEROES Act, 2.0. The bill has yet to pass the Senate, and the chances of that happening are slim, with Republicans in favor of a much smaller, $500 billion package. Nothing is expected to happen prior to the presidential election.
As Warren Buffett turns 90, the story of one of America’s most influential and wealthy business leaders is a study in the logic and discipline of understanding future value.
Patience, caution, and consistency. In volatile times such as these, it may be difficult for executives to keep those attributes in mind when making decisions. But there are immense advantages to doing so. For proof, just look at the steady genius of now-nonagenarian Warren Buffett. The legendary investor and Berkshire Hathaway founder and CEO has earned millions of dollars for investors over several decades (exhibit). But very few of Buffett’s investment decisions have been reactionary; instead, his choices and communications have been—and remain—grounded in logic and value.
Buffett learned his craft from “the father of value investing,” Columbia University professor and British economist Benjamin Graham. Perhaps as a result, Buffett typically doesn’t invest in opportunities in which he can’t reasonably estimate future value—there are no social-media companies, for instance, or cryptocurrency ventures in his portfolio. Instead, he banks on businesses that have steady cash flows and will generate high returns and low risk. And he lets those businesses stick to their knitting. Ever since Buffett bought See’s Candy Shops in 1972, for instance, the company has generated an ROI of more than 160 percent per year —and not because of significant changes to operations, target customer base, or product mix. The company didn’t stop doing what it did well just so it could grow faster. Instead, it sends excess cash flows back to the parent company for reinvestment—which points to a lesson for many listed companies: it’s OK to grow in line with your product markets if you aren’t confident that you can redeploy the cash flows you’re generating any better than your investor can.
As Peter Kunhardt, director of the HBO documentary Becoming Warren Buffett, said in a 2017 interview, Buffett understands that “you don’t have to trade things all the time; you can sit on things, too. You don’t have to make many decisions in life to make a lot of money.” And Buffett’s theory (roughly paraphrased) that the quality of a company’s senior leadership can signal whether the business would be a good investment or not has been proved time and time again. “See how [managers] treat themselves versus how they treat the shareholders .…The poor managers also turn out to be the ones that really don’t think that much about the shareholders. The two often go hand in hand,” Buffett explains.
Every few years or so, critics will poke holes in Buffett’s approach to investing. It’s outdated, they say, not proactive enough in a world in which digital business and economic uncertainty reign. For instance, during the 2008 credit crisis, pundits suggested that his portfolio moves were mistimed, he held on to some assets for far too long, and he released others too early, not getting enough in return. And it’s true that Buffett has made some mistakes; his decision making is not infallible. His approach to technology investments works for him, but that doesn’t mean other investors shouldn’t seize opportunities to back digital tools, platforms, and start-ups—particularly now that the COVID-19 pandemic has accelerated global companies’ digital transformations.
Still, many of Buffett’s theories continue to win the day. A good number of the so-called inadvisable deals he pursued in the wake of the 2008 downturn ended paying off in the longer term. And press reports suggest that Berkshire Hathaway’s profits are rebounding in the midst of the current economic downturn prompted by the global pandemic.
At age 90, Buffett is still waging campaigns—for instance, speaking out against eliminating the estate tax and against the release of quarterly earnings guidance. Of the latter, he has said that it promotes an unhealthy focus on short-term profitsat the expense of long-term performance.
“Clear communication of a company’s strategic goals—along with metrics that can be evaluated over time—will always be critical to shareholders. But this information … should be provided on a timeline deemed appropriate for the needs of each specific company and its investors, whether annual or otherwise,” he and Jamie Dimon wrote in the Wall Street Journal.
Yes, volatile times call for quick responses and fast action. But as Warren Buffett has shown, there are also significant advantages to keeping the long term in mind, as well. Specifically, there is value in consistency, caution, and patience and in simply trusting the math—in good times and bad.
IN THE New York Times, Stephen I. Sadove, chairman and chief executive of Saks Inc., explains that it is culture that drives results:
It starts with leadership at the top, which drives a culture. Culture drives innovation and whatever else you’re trying to drive within a company — innovation, execution, whatever it’s going to be. And that then drives results.
When I talk to Wall Street, people really want to know your results, what are your strategies, what are the issues, what it is that you’re doing to drive your business. They’re focused on the bottom line. Never do you get people asking about the culture, about leadership, about the people in the organization. Yet, it’s the reverse, because it’s the people, the leadership, the culture and the ideas that are ultimately driving the numbers and the results.
While we know that our most important resource is our people, it’s not so easy to get people “all in”—convincing people to “truly buy into their ideas and the strategy they’ve put forward, to give that extra push that leads to outstanding results.”
All In by Adrian Gostick and Chester Elton explains why some managers are able to get their employees to commit wholeheartedly to their culture and give that extra push that leads to outstanding results and how managers at any level, can build and sustain a profitable, vibrant work-group culture of their own. All In takes the principles found in their previous books—The Orange Revolution and The Carrot Principle—and expands on them and places them in a wider context.
They begin by explaining that it all rests on the “belief factor.” People want to believe, but given the fact that “failure could cost them their future security why shouldn’t they be at least a little dubious about your initiatives?” But belief is key. “As leaders we must first allow people on our teams to feel like valuable individuals, respecting their views and opening up to their ideas and inputs, even while sharing a better way forward. It’s a balancing act that requires some wisdom.”
To have a culture of belief employees must feel not only engaged, but enabled and energized. What’s more, “each element of E+E+E can be held hostage by an imbalance in the other two.”
The authors have created a 7 step guide to develop a culture where people buy-in:
Define your burning platform. “Your ability to identify and define the key “burning” issue you face and separate it from the routine challenges of the day is the first step in galvanizing your employees to believe in you and in your vision and strategy.”
Create a customer focus. “Your organization must evolve into one that not only rewards employees who spot customer trends or problems, but one that finds such challenges invigorating, one that empowers people at all levels to respond with alacrity and creativity.”
Develop agility. “Employees are more insistent than ever that their managers see into the future and do a decent job of addressing the coming challenges and capitalizing on new opportunities.”
Share everything. “When we aren’t sure what’s happening around us, we become distrustful….In a dark work environment, where information is withheld or not communicated properly, employees tend to suspect the worst and rumors take the place of facts. It is openness that drives out the gray and helps employees regain trust in culture.”
Partner with your talent. “Your people have more energy and creativity to give. There are employees now in your organization walking around with brilliant ideas in their pocket. Some will never share them because they don’t have the platform to launch those ideas on their own. Most, however, will never reveal them because they don’t feel like a partner in the organization.”
Root for each other. “Our research shows incontrovertible evidence that employees respond best when they are recognized for things they are good at and for those actions where they had to stretch. It is this reinforcement that makes people want to grow to their full shape and stature.”
Establish clear accountability. “To grow a great culture, you need to cultivate a place where people have to do more than show up and fog a mirror; they have to fulfill promises—not only collectively but individually.” And this has to be a positive idea.
Gostick and Elton explain that the “modern leader provides the why, keeps an ear close to those they serve, is agile and open, treats their people with deference, and creates a place where every step forward is noted and applauded.”
The authors skillfully examine high-performing cultures and present the elements that produce them. A leader at any level can implement these ideas to drive results. A great learning tool.