Category Archives: Strategy Sustainable Long Term

In Healthcare, Near-Sightedness is “Normalcy”

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In Healthcare, Near-Sightedness is “Normalcy”

Like everyone else, I am thankful the election end is in sight and a degree of “normalcy” might return. By next week, we should know who will sit in the White House, the 119th Congress and 11 new occupants of Governors’ offices. But a return to pre-election normalcy in politics is a mixed blessing.

“Normalcy” in our political system means willful acceptance that our society is hopelessly divided by income, education, ethnic and political views. It’s benign acceptance of a 2-party system, 3-branches of government (Executive, Legislative, Judicial) and federalism that imposes limits on federal power vis a vis the Constitution.

Our political system’ normalcy counts success by tribal warfare and election wins. Normalcy is about issues de jour prioritized by each tribe, not longer-term concern for the greater good in our country. Normalcy in our political system is near-sightedness—winning the next election and controlling public funds.

Comparatively, “normalcy” in U.S. healthcare is also tribal:

while the majority of U.S. adults believe the status quo is not working well but recognize its importance, each tribe has a different take on its future. The majority of the public think price transparency, limits on consolidation, attention to affordability and equitable access are needed but the major tribes—hospitals, insurers, drug companies, insurers, device-makers—disagree on how changes should be made. And each is focused on short-term issues of interest to their members with rare attention to longer-term issues impacting all.

Near-sightedness in healthcare is manifest in how executives are compensated, how partnerships are formed and how Boards are composed.

Organizational success is defined by 1-access to private capital (debt, private equity, strategic investors), 2-sustainnable revenue-growth, 4- scalable costs, 4-opportunities for consolidation (the exit strategy of choice for most) and 5-quarterly earnings. A long-term view of the system’s future is rarely deliberated by boards save attention to AI or the emergence of Big Tech. A vision for an organization’s future based on long-term macro-trends and outside-in methodologies is rare: long-term preparedness is “appreciated” but near-term performance is where attention is vested.

It pays to be near-sighted in healthcare: our complex regulatory processes keep unwelcome change at bay and our archaic workforce rules assure change resistance. …until it doesn’t. Industries like higher education, banking and retailing have experienced transformational changes that take advantage of new technologies and consumer appetite for alternatives that are new and better. The organizations winning in this environment balance near-sightedness with market attentiveness and vision.

Looking ahead, I have no idea who the winners and losers will be in this election cycle. I know, for sure, that…

  • The final result will not be known tomorrow and losers will challenge the results.
  • Short-term threats to the healthcare status quo will be settled quickly. First up: Congress will set aside Medicare pay cuts to physicians (2.8%) scheduled to take effect in January for the 5th consecutive year. And “temporary” solutions to extend marketplace insurance subsidies, facilitate state supervision of medication abortion services and telehealth access will follow quickly.
  • Think tanks will be busy producing white papers on policy changes supported by their funding sponsors.
  • And trade associations will produce their playbooks prioritizing legislative priorities and relationship opportunities with state and federal officials for their lobbyists.

Near-term issues for each tribe will get attention: the same is true in healthcare. Discussion about and preparation for healthcare’s longer-term future is a rarity in most healthcare C suites and Boardrooms. Consider these possibilities:

  • Medicare Advantage will be the primary payer for senior health: federal regulators will tighten coverage, network adequacy, premiums and cost sharing with enrollees to private insurers reducing enrollee choices and insurer profits.
  • To address social determinants of health, equitable access and comprehensive population health needs, regional primary care, preventive and public health programs will be fully integrated.
  • Large, organized groups/networks of physicians will be the preferred “hubs” for health services in most markets.
  • Interoperability will be fully implemented.
  • Physicians will unionize to assert their clinical autonomy and advance their economic interests.
  • The federal government (and some states) will limit tax exemptions for profitable not-for-profit health systems.
  • The prescription drug patent system will be modernized to expedite time-to-market innovations and price-value determinations.
  • The health insurance market will focus on individual (not group) coverage.
  • Congress/states will impose price controls on prescription drugs and hospital services.
  • Employers will significantly alter their employee benefits programs to reduce their costs and shift accountability to their employees. Many will exit altogether.
  • Regional integrated health systems that provide retail, hospital, physician, public health and health insurance services will be the dominant source of services.
  • Alternative-payment models used by Medicare to contract with providers will be completely overhauled.
  • Consumers will own and control their own medical records.
  • Consolidation premised on community benefits, consumer choices and lower costs will be challenged aggressively and reparation pursued in court actions.
  • Voters will pass Medicare for All legislation.

And many others.

A process for defining of the future of the U.S. health system and a bipartisan commitment by hospitals, physicians, drug companies, insurers and employers to its implementation are needed–that’s the point. 

Near-sightedness in our political system and in our health, system is harmful to the greater good of our society and to the voters, citizens, patients, and beneficiaries all pledge to serve.

As respected healthcare marketer David Jarrard wrote in his blog post yesterday “As the aggravated disunity of this political season rises and falls, healthcare can be a unique convener that embraces people across the political divides, real or imagined. Invite good-minded people to the common ground of healthcare to work together for the common good that healthcare must be.”

Thinking and planning for healthcare’s long-term future is not a luxury: it’s an urgent necessity. It’s also not “normal” in our political and healthcare systems.

Steward Files for Bankruptcy and It Feels All Too Familiar

Posted on by • Posted in Bankruptcy, Failure, Financial Advisor, Financial Benchmarks, Financial Forecast, Financial Literacy, Financial Planning, Financial Reserves, Financial Stewardship, Financial Strength, Financial Viability, Financial Vital Signs, Financially Distressed, Health System, Hospital, Hospital Industry, Investment Banking, Leadership, Leadership Culture, Leadership Implementation, Leadership Investment, Leadership Preparation, Leadership Vision, Strategic Balance Sheet Management, Strategic Leadership, Strategic Plan, Strategy Sustainable Long Term • Leave a comment

https://www.kaufmanhall.com/insights/blog/steward-files-bankruptcy-and-it-feels-all-too-familiar

Steward Health Care’s Chapter 11 bankruptcy filing on May 6, 2024, brought back bad memories of another large health system bankruptcy.

On July 21, 1998, Pittsburgh-based Allegheny Health and Education Research Foundation (AHERF) filed Chapter 11. AHERF grew very rapidly, acquiring hospitals, physicians, and medical schools in its vigorous pursuit of scale across Pennsylvania. Utilizing debt capacity and spending cash, AHERF quickly ran out of both, defaulted on its obligations, and then filed for bankruptcy. It was one of the largest bankruptcy filings in municipal finance and the largest in the rated not-for-profit hospital universe.

Steward Health Care is a for-profit, physician-owned hospital company, but its long-standing roots were in faith-based not-for-profit healthcare. Prior to the acquisition by Cerberus Capital Management in 2010, Caritas Christi Health Care System was comprised of six hospitals in eastern Massachusetts. Caritas was a well-regarded health system, providing a community alternative to the academic medical centers in downtown Boston. Over the next 14 years, Steward grew rapidly to 31 hospitals in eight states, most recently bolstered through an expansive sale-leaseback structure with a REIT. Per the bankruptcy filings, the company reported $9 billion in secured debt and leases on $6 billion of revenue.

Chapter 11 bankruptcy filings in corporate America are a means to efficiently sell assets or a path to re-emergence as a new streamlined company. A quick glance at Steward’s organizational structure shows a dizzying checkerboard of companies and LLCs that will require a massive untangling. Further, its capital structure includes both secured debt for operations and a separate and distinct lease structure for its facilities, and in bankruptcy, that signals significant complexity. Bankruptcy filings in not-for-profit healthcare are less common, although it is surprising that the industry did not see an increase after the pandemic. Not-for-profit hospitals that are in distress seem to hang on long enough to find a buyer, gain increased state funding, attain accommodations on obligations, or find some other escape route to avoid a payment default or filing.

Details regarding Steward’s undoing will unfold in the coming weeks as it moves through an auction process. But there are some early takeaways the not-for-profit industry can learn from this:

  1. Remain essential in your local market. Hospitals must prove their value to their constituents, including managed care payers, especially in competitive urban markets, as Steward may have learned in eastern Massachusetts and Miami. Prior strategies of making a margin as an out-of-network provider are no longer viable as patients must shoulder more of the financial burden. Simply put, your organization should be asking one question: does a managed care plan need our existing network to sell a product in our market? If the answer is no, you need to develop strategies that make your hospital essential.
  2. Embrace financial planning for long-term viability. Without it, a hospital or health system will be unable to afford the capital spending it needs to maintain attractive, patient-friendly, state-of-the art facilities or absorb long-term debt to fund the capital. Annual financial planning is more than just a trendline going forward. The scenarios and inputs must be well-founded, well-grounded in detail, and based on conservative assumptions. Increasing attention has to be paid to disrupters, innovators, specialized/segmented offerings, and expansion plans of existing and new competitors. Investors expect this from not-for-profit borrowers. Higher-performing hospitals and health systems of all sizes do this well.
  3. Build capital capacity through improved cash flow. It is undoubtedly clear that Steward, like AHERF, was unable to afford the capital and debt they thought they could, either through flawed financial planning of its future state or, more concerning, the complete absence of it. Or they believed that rapid growth would solve all problems, not detailed financial planning, the use of benchmarks, or a sharp focus on operations. Increasing that capacity through sustained financial performance will allow an organization to de-leverage and build capital capacity.

When the case studies are written about Steward, a fact pattern will be revealed that includes the inability or unwillingness to attain synergies as a system, underspending on facility capital needs given a severe liquidity crunch, labor challenges, and a rapid payer mix shift.

Underlying all of this will undoubtedly be a failure of governance and leadership as we saw with AHERF. It will also likely indicate that one of the most precious assets healthcare providers may have is the management bandwidth to ensure strategic plans are appropriately made, tested, monitored, and executed.

While Steward and AHERF may be held up as extreme cases, not-for-profit hospital governance must continue to focus on checks-and-balances of management resources. Likewise, management must utilize benchmarks, data, and strong financial planning, given the challenges the industry faces.

An Open Letter to Hospital Boards of Directors: Long-Term Strategic Planning needs Your Attention

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An Open Letter to Hospital Boards of Directors: Long-Term Strategic Planning needs Your Attention

As 2023 comes to an end and prognostics for 2024 pepper Inboxes, high anxiety is understandable. The near-term environment for hospitals, especially public hospitals and not-for-profit health systems, is tepid at best: despite the November uptick in operating margins to 2% (Fitch, Syntellis), the future for hospitals is uncertain and it’s due to more than payer reimbursement, labor costs and regulatory changes.

Putting lipstick on the pig serves no useful purpose:

though state hospital associations, AHA, FAH, AEH and others have been effective in fending off unwelcome threats ranging from 340B cuts, site neutral payments and others at least temporarily, the welcoming environment for hospitals in the throes of the pandemic has been replaced by animosity and distrust.

The majority of the population believes U.S. the health system is heading in the wrong direction and think hospitals are complicit (See Polling data from Gallup and Keckley Poll below). They believe the system puts its profit above patient care and welcome greater transparency about prices and business practices. In states like Colorado (hospital expenditure report), Minnesota (billing and collection), and Oregon (nurse staffing levels), new regulations feed the public’s appetite for hospital accountability alongside bipartisan Congressional efforts to limit tax exemptions and funding for hospitals.

It’s a tsunami hospital boards must address if they are to carry out their fiduciary responsibilities:

  • Set Direction: The organization’s long-term strategy in the context of its vision, mission and values.
  • Secure Capital: The amount and sourcing of capital necessary to execute the strategy.
  • Hire a Competent CEO and Give Direction: Boards set direction; CEOs execute.

Regretfully, near-term pressures on hospitals have compromised long-term strategic planning in which the Board play’s the central role. But most hospital boards lack adequate preparedness to independently assess the long-term future for their organization i.e. analysis of trends and assumptions that cumulatively reshape markets, define opportunities and frame possible destinations for hospitals drawn from 5 zones of surveillance:

  • Clinical innovations.
  • Technology capabilities.
  • Capital Market Access and Deployment.
  • Regulatory Policy Changes.
  • Consumer Values, Preferences and Actions.

In reality, the near-term issues i.e. labor and supply chain costs, insurer reimbursement, workforce burnout et al—dominate board meetings; long-range strategic planning is relegated to an annual retreat where the management team and often a consultant present a recommendation for approval. But in many organizations, the long-term strategic plans (LTSPs) fall short:

  • Most LTSPs offer an incomplete assessment of clinical innovations and technologies that fundamentally alter how health services will be provided, where and by whom.
  • Most LTSPs are based on an acute-centric view of “the future” and lack input about other sectors and industries where the healthcare market is relevant and alternative approaches are executed.
  • Most LTSPs are aspirational and short on pragmatism. Risks are underestimated and strengths over-estimated.
  • Most LTSPs are designed to affirm the preferences of the hospital CEO without the benefit of independent, studied review and discussion with the board.
  • Most LTSPs don’t consider all relevant ‘future state’ options despite the Board’s fiduciary obligation to assure they do.
  • Most rely on data that’s inadequate/incomplete/misleading, especially in assessing how and chare capital markets are accessing and deploying capital in healthcare services.
  • Most LTSPs are not used as milestones for monitoring performance nor are underlying assumptions upon which LRSPs are based revisited.

My take:

The Board’s role in Long-Range Strategic Planning is, in many ways, it’s most important. It is the basis for deciding the capital requirements necessary to its implementation and the basis for hiring, keeping and compensating the CEO. But in most hospitals, the board’s desire to engage more directly around long-term strategy for the organization is not addressed. Understandable…

  • Boards are getting more media attention these days, and it’s usually in an unflattering context. Disclosures of Board malperformance in high profile healthcare organizations like Theranos, Purdue and others has been notable. Protocols for responding among Board members in investor-owned organizations is a priority, but less-so in many not-for-profit settings including hospitals often caught by surprise by media.
  • And Board members are asking for their organizations to engage them in more in strategy development. In the latest National Association of Corporate Directors’ survey, 81% of directors cited “oversight of strategic execution” and 80% “oversight of strategy development” as their top concerns from a list of 13 options. Hospital boards are no exception: they want to be engaged and cringe when treated as rubber stamps.

Hospital boards intuitively understand that surviving/thriving in 2024 is important but no guarantee of long-term stability given sobering realities with long-term impact:

  • The core business of hospitals–inpatient, outpatient and emergency services—is subject to market constraints on its prices, consumer and employer expectations and non-traditional competition. Bricks, sticks and clicks strategies will be deployed in a regulatory environment that’s agnostic to an organization’s tax status and competition is based on value that’s measured and publicly comparable.
  • The usefulness of artificial intelligence will widen in healthcare services displacing traditional operating models, staffing and resource allocation priorities.
  • Big tech (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Meta (META), Tesla (TSLA) and Nvidia (NVDA)—collectively almost 60% of all S&P 500 gains in 2023—will play a direct and significant role in how the healthcare services industry responds to macro-opportunities and near-term pressures. They’re not outside looking in; they’re inside looking out.
  • Private capital will play a bigger role in the future of the system and in capitalizing hospital services. Expanded scale and wider scope will be enabled through partnerships with private capital and strategic partners requiring governance and leadership adaptation. And, the near-term hurdles facing PE—despite success in fund-raising—will redirect their bets in health services and expectations for profits.
  • State and federal regulatory policies and compliance risks will be more important to execution. Growth through consolidation will face bigger hurdles, transparency requirements in all aspects of operations will increase and business-as-usual discontinued.
  • The scale, scope and effectiveness of an organization’s primary and preventive health services will be foundational to competing: managing ‘covered lives’, reducing demand, integrating social determinants and behavioral health, enabling consumer self-care, leveraging AI and enabling affordability will be key platform ingredients that enable growth and sustainability.
  • Media attention to hospital business practices including the role Boards play in LRSPs will intensify.

Granted: the issues facing hospitals are reliably short-term: as Congress returns next week, for instance, funding for the FDA, Community Health Center Fund, Teaching Health Center Graduate Medical Education Program, National Health Services Corps and Veterans Health is not authorized and $16 billion in cuts to Medicaid disproportionate share payments remains unsettled, so the short-term matters.

But arguably, engaging the hospital board in longer term planning is equally important. It’s not a luxury.

Happy New Year. Buckle up!

Cain Bros House Calls Kickstarting Innovation (Part 2)

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Cain Bros House Calls Kickstarting Innovation (Part 2)

This is Part 2 of a series by Cain Brothers about the first-ever collaboration conference between health systems and private equity (PE) investment firms. Part 1 of this series addressed the conference’s who, what and where. This commentary will focus on the why. We will explore the underlying forces uniting health systems with private equity during this period of unprecedented industry disruption.

Why Health Systems and PE Need Each Other

On June 13 and 14, 2023, Cain Brothers hosted the first-ever collaboration conference between health systems and private equity (PE) investment firms. Timing, market dynamics and opportunity aligned. The conference was an over-the-moon success. Along with its sponsors, Cain Brothers will seek to expand the conference and align initiatives through the coming years.

Why Now? Healthcare is Stuck and Needs Solutions

As a society, the U.S. is spending ever-higher amounts of money while its population is getting sicker. A maldistribution of facilities and practitioners creates inequitable access to healthcare services in lower-income communities with the highest levels of chronic disease.

New competitors and business models along with unfavorable macro forces, including high inflation, aging demographics and deteriorating payer mixes, are fundamentally challenging health systems’ status quo business practices.

Over the last 50 years, healthcare funding has shifted dramatically away from individuals and toward commercial and governmental payers. In 1970, individual out-of-pocket spending represented 36.5% of total healthcare spending. Today, it is just over 10%.

Governments, particularly the federal government, have become healthcare’s largest payers, funding over 40% of healthcare’s projected $4.7 trillion expenditure in 2023. Individual patients often get lost in the massive payment shuffle between payers and providers.

Meanwhile, governments’ pockets are emptying. As a percentage of GDP, U.S. government debt obligations have grown from 55% in 2001 to 124% currently. With rising interest rates and the commensurate increase in debt service costs, as well as an aging population, there is little to suggest that new funding sources will emerge to fund expansive healthcare expenditures. Scarcity reigns where resources for healthcare providers were once plentiful.

As a consequence, the healthcare industry is entering a period of more fundamental economic limitations. Delaying transformation and expecting society to fund ongoing excess expenditure is not a sustainable long-term strategy. Current economic realities are forcing a dramatic reallocation of resources within the healthcare industry.

The healthcare industry will need to do more with less. Pleading poverty will fall on deaf ears. There will be winners and losers. The nation’s acute care footprint will shrink. For these reasons, health systems are experiencing unprecedented levels of financial distress. Indeed, parts of the system appear on the verge of collapse, particularly in medically underserved rural and urban communities.

More of the same approaches will yield more of the same dismal results. Waking up to this existential challenge, enlightened health systems have become more open to new business models and collaborative partnerships.

Necessity Stimulates Innovation

Two disruptive and value-based business models are on the verge of achieving critical mass. They are risk-bearing “payvider” companies (e.g. Kaiser, Oak Street Health and others) and consumer-friendly, digital-savvy delivery platforms (e.g. OneMedical and innumerable point-solution companies).

Value-based care providers and their investors have the scars and bruises to show for challenging entrenched business practices reliant on fee-for-service (FFS) business models and administrative services only (ASO) contracting. Incumbents have protected their privileged market position well through market leverage and outsized political influence.

Despite market resistance, “payvider” and digital platform companies are emerging from the proverbial “innovators’ chasm.” More early adopters, including those health systems attending the Nashville conference, are embracing value-creating business models. The chart below illustrates the well-trodden path innovation takes to achieve market penetration.

Ironically, during this period of industry disruption, health systems understand they need to deliver greater value to customers to maintain market relevance. It will require great execution and overcoming legacy practices to develop business platforms that incorporate the following value-creating capabilities:

  • Decentralized care delivery (to make care more accessible and lower cost).
  • Root-cause treatment of chronic conditions.
  • Integrated physical and mental healthcare services.
  • Consistent, high-quality consumer experience.
  • Coordinated service delivery.
  • Standardized protocols that improve care quality and outcomes.
  • A truly patient/customer-centric operating orientation.

It’s not what to do, it’s how to get it done that creates the vexing conundrum. Solutions require collaboration. Platform business models replete with strategic partnerships are emerging. Paraphrasing an African proverb, it’s going to take a village to fix healthcare. That’s why the moment for health systems and PE firms to collaborate is now.

PE to the Rescue?

Private equity has become the dominant investment channel for business growth across industries and nations. According to a recent McKinsey report, PE has more than $11.7 trillion in assets under management globally. This is a massive number that has grown steadily. PE changes markets. It turbocharges productivity. It is a relentless force for value creation.

By investing in a wide spectrum of asset classes, private equity has become a vital source of investment returns for pensions, endowments, sovereign wealth funds and insurance companies. Healthcare, given its size and inefficiencies, is a target-rich environment for PE investment and returns. This explains the PE’s growing interest in working with health systems to develop mutually beneficial, value-creating healthcare enterprises.

Despite reports to the contrary, PE firms must invest for the long term. Unlike the stock market, where investors can buy and sell a stock within a matter of seconds, PE firms do not have that luxury. To generate a return, they must acquire and grow businesses over a period of years to create suitable exit strategies.

Money talks. By definition, all buyers of new companies value their purchase more than the capital required for the acquisition. In making purchase decisions, buyers evaluate businesses’ past performance. They also assess how the new business will perform under their stewardship. PE or PE-backed acquirers also consider which future buyers will be most likely acquire the company after a five-plus year development period.

PE’s investment approach can align well with health systems looking to create sustainable long-term businesses tied to their brands and market positioning. PE firms buy and build companies that attract customers, employees and capital over the long term, far beyond their typical five- to seven-year ownership period. Health systems that partner with PE firms to develop companies are the logical acquirers of those companies if they succeed in the marketplace. In this way, a rising valuation creates value for both health systems and their PE partners.

It is important to note that not all PE are created the same. Like health systems, PE firms differ in size, market orientation, investment theses, experience and partner expectations. Given this inherent diversity, it takes time, effort and a shared commitment to value creation for health systems and PE firms to determine whether to become strategic partners. Not all of these partnerships will succeed, but some will succeed spectacularly.

For health system-PE partnerships to work, the principals must align on strategic objectives, governance, performance targets and reporting guidelines. Trust, honest communication and clear expectations are the key ingredients that enable these partnerships to overcome short-term hurdles on the road to long-term success.

Conclusion: Time to Slay Healthcare’s Dragons

Market corrections are hard. As a nation, the U.S. has invested too heavily in hospital-centric, disease-centric, volume-centric healthcare delivery. The result is a fragmented, high-cost system that fails both consumers and caregivers. The marketplace is working to reallocate resources away from failing business practices and into value-creating enterprises that deliver better care outcomes at lower costs with much less friction.

Progressive health systems and PE firms share the goal of creating better healthcare for more Americans. Cain Brothers is committed to advancing collaboration between health systems and PE-backed companies. In addition to the Nashville conference, the firm has combined its historically separate corporate and non-profit coverage groups to foster idea exchange, expand sector understanding and deliver higher value to clients.

The ability to connect and collaborate effectively with private equity to advance business models will differentiate winning health systems. In a consolidating industry, this differentiation is a prerequisite for sustaining competitiveness. It’s adapt or die time. Health systems that proactively embrace transformation will control their future destiny. Those that fail to do so will lose market relevance.

The future of healthcare is not a zero-sum equation. Markets evolve by creating more complex win-win arrangements that create value for customers. No industry requires restructuring more than healthcare. As a nation and an industry, we have the capacity to fix America’s broken healthcare system. The real question is whether we have the collective will, creativity and resourcefulness to power the transformation. We believe the answer to that question is yes.

Paraphrasing Rev. Theodore Parker, the economic arc of the marketplace is long but it bends toward value. Together, health systems and PE firms can power value-creation and transformation more effectively than either sector can do independently. Each needs the other to succeed. Slaying healthcare’s dragons will not be easy but it is doable. It’s going to take a village to fix healthcare.

Thinking Long-Term: Changes in Five Domains will Impact the Future of the U.S. System but Most are Not Prepared

Posted on by • Posted in Change, Change Mindset, Health System, Hospital, Hospital Industry, Market Consolidation, Market Power, Market Trends, Market Uncertainty, Private Equity, Regulation, Regulatory Pressures, Strategic Change, Strategic Imperative, Strategic Leadership, Strategy Sustainable Long Term • Leave a comment
Thinking Long-Term: Changes in Five Domains will Impact the Future of the U.S. System but Most are Not Prepared

The U.S. health system is big and getting bigger. It is labor intense, capital intense, and highly regulated. Each sector operates semi-independently protected by local, state and federal constraints that give incumbents advantages and dissuade insurgents.

Competition has been intramural:

Growth by horizontal consolidation within sectors has been the status quo for most to meet revenue and influence targets. In tandem, diversification aka vertical consolidation and, for some, globalization in each sector has distanced bigger players from smaller:

  • insurers + medical groups + outpatient facilities + drug benefit managers
  • hospitals + employed physicians + insurance plans + venture/private equity investing in start-ups
  • biotech + pharma + clinical data warehousing,
  • retail pharmacies + primary & preventive care + health & wellbeing services + OTC products/devices
  • regulated medical devices + OTC products for clinics, hospitals, homes, workplaces and schools.

The landscape is no man’s land for the faint of heart but it’s golden for savvy private investors seeking gain at the expense of the system’s dysfunction and addictions—lack of price transparency, lack of interoperability and lack of definitive value propositions.

What’s ahead? 

Everyone in the U.S. health system is aware that funding is becoming more scarce and regulatory scrutiny more intense, but few have invested in planning beyond tomorrow and the day after. Unlike drug and device manufacturers with global markets and long-term development cycles, insurers and providers are handicapped. Insurers respond by adjusting coverage, premiums and co-pays annually. Providers—hospitals, physicians, long-term care providers and public health programs– have fewer options. For most, long-range planning is a luxury, and even when attempted, it’s prone to self-protection and lack of objectivity.

Changes to the future state of U.S. healthcare are the result of shifts in these domains:

They apply to every sector in healthcare and define the context for the future of each organization, sector and industry as a whole:

  • The Clinical Domain: How health, diseases and treatments are defined and managed where and by whom; how caregivers and individuals interact; how clinical data is accessed, structured and translated through AI enabled algorithms; how medication management and OTC are integrated; how social determinants are recognized and addressed by caregivers and communities: and so on. The clinical domain is about more than doctors, nurses, facilities and pills.
  • The Technology Domain: How information technologies enable customization in diagnostics and treatments; how devices enable self-care; how digital platforms enable access; how systemness facilitates integration of clinical, claims and user experience data; how operating environments shift to automation lower unit costs; how sites of care emerge; how caregivers are trained and much more. Proficiency in the integration of technologies is the distinguishing feature of organizations that survive and those that don’t. It is the glue that facilitates systemness and key to the system’s transformation.
  • The Regulatory Domain: How affordability, value, competition, choice, healthcare markets, not-for-profit and effectiveness are defined; how local, state and federal laws, administrative orders by government agencies and executive actions define and change compliance risks; how elected officials assess and mitigate perceived deficiencies in a sector’s public accountability or social responsibility; how courts adjudicate challenges to the status quo and barriers to entry by outsiders/under-served populations; how shareholder ownership in healthcare is regulated to balance profit and the public good; et al. Advocacy on behalf of incumbents geared to current regulatory issues (especially in states) is compulsory table stakes requiring more attention; evaluating potential regulatory environment shifts that might fundamentally change the way a system is structured, roles played, funded and overseen is a luxury few enjoy.
  • The Capital Domain: how needed funding for major government programs (Medicare, Medicaid, Children’s, Military, Veterans, HIS, Dual Eligibles et al) is accessed and structured; how private investment in healthcare is encouraged or dissuaded; how monetary policies impact access to debt; how personal and corporate taxes impact capitalization of U.S. healthcare; how value-based programs reduce unnecessary costs and improve system effectiveness; how the employer tax exemption fares long-term as employee benefits shrink; how U.S. system innovations are monetized in global markets; how insurers structure premiums and out of pocket payments: et al. The capital domain thinks forward to the costs of capital it deploys and anticipated returns. But inputs in the models are wildly variable and inconsistent across sectors: hospitals/health systems vs. global private equity healthcare investors vs. national insurers’ capital strategies vary widely and each is prone to over-simplification about the others.
  • The Consumer Domain: how individuals, households and populations perceive and use the system; how they assess the value of their healthcare spending; how they vote on healthcare issues; how and where they get information; how they assess alternatives to the status quo; how household circumstances limit access and compromise outcomes; et al. The original sin of the U.S, health system is its presumption that it serves patients who are incapable/unwilling to participate effectively and actively in their care. Might the system’s effectiveness and value proposition be better and spending less if consumerization became core to its future state?

For organizations operating in the U.S. system, staying abreast of trends in these domains is tough. Lag indicators used to monitor trends in each domain are decreasingly predictive of the future. Most Boards stay focused on their own sector/subsector following the lead of their management and thought leadership from their trade associations. Most are unaware of broader trends and activities outside their sector because they’re busy fixing problems that impact their current year performance. Environmental assessments are too narrow and short-sighted. Planning processes are not designed to prompt outside the box thinking or disciplined scenario planning. Too little effort is invested though so much is at risk.

It’s understandable. U.S. healthcare is a victim of its success; maintaining the status quo is easier than forging a new path, however obvious or morally clear.  Blaming others and playing the victim card is easier than corrective actions and forward-thinking planning.

In 10 years, the health system will constitute 20% of the entire U.S. economy and play an outsized role in social stability. It’s path to that future and the greater good it pursues needs charting with open minds, facts and creativity. Society deserves no less.

The dire state of hospital finances (Part 1: Hospital of the Future series)

Posted on by • Posted in Administrative Footprint, Average Length of Stay (ALOS), Business Model, Business Transformations, Clinical Management of Complex Patients, Cohesive Care Teams, Competition, Cost Management, Cost Reduction, Deferred Healthcare, Disruption, Elective Procedures, Elective Surgery, Employee Layoffs, Employee Loyalty, Employee Staffing, Employee Staffing Shortage, Experience Complexity Gap, External Market Forces, Financial Instability, Financial Pressure, Financial Stewardship, Financial Strength, Financial Viability, Financially Distressed, Health System, High Deductible Health Plans, Home-Based Care, Hospital, Hospital Industry, Inflation, Innovation, Labor Cost Structure, Labor Market, Labor Shortages, Labor Spend Management, Leadership, Mission, Nonoperating Income, Nonoperating Income Dependency, Nurse Agency Staffing, Nurse Retention, Nurse Staffing, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Metrics, Operating Performance, Operating Revenue, Outpatient Care, Outpatient Surgery, Patient Demand, Patient Safety, Payor Contracting, Payor Mix, Post Acute Care, Quality of Care, Rationalization, Recession, Reorganization, Retention, State of the Union, Strategy, Strategy Sustainable Long Term, Streamlining Operations, Supply Chain, Talent Acquisition Strategy, Talent Competition, Talent Management, Turnover, Turnover Rates, Work Life Balance, Work-Life Balance, Workforce Challenges, Workforce Strategy • Leave a comment
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About this Episode

The majority of hospitals are predicted to have negative margins in 2022, marking the worst year financially for hospitals since the beginning of the Covid-19 pandemic.

In Part 1 of Radio Advisory’s Hospital of the Future series, host Rachel (Rae) Woods invites Advisory Board experts Monica Westhead, Colin Gelbaugh, and Aaron Mauck to discuss why factors like workforce shortages, post-acute financial instability, and growing competition are contributing to this troubling financial landscape and how hospitals are tackling these problems.

Links:

As we emerge from the global pandemic, health care is restructuring. What decisions should you be making, and what do you need to know to make them? Explore the state of the health care industry and its outlook for next year by visiting advisory.com/HealthCare2023.

Cartoon – Status Quo Strategy

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Becoming a healthcare platform

Posted on by • Posted in Anywhere Anytime Care, Capability Building, Care Ecosystem, Care Supplier, Customer Loyalty, Health System, Hospital Industry, Integrated Delivery System, Population Health, Population Management Platform, Population Manager, Premium Owner, Strategy, Strategy Sustainable Long Term • Leave a comment

https://mailchi.mp/d73a73774303/the-weekly-gist-may-27-2022?e=d1e747d2d8

As we’ve been discussing over the past few years, several environmental forces—shifting consumer behavior, evolving demographics, new technology, and a flood of new market entrants—are pushing health systems to adopt a more consumer-centric business model. Systems must develop the capabilities needed to create an omnichannel consumer loyalty and population management platform. This platform will be the foundation for connecting consumers, curating providers, and coordinating care.
 
To achieve this vision, health systems must deliver value across two dimensions: increasing their proximity to the consumer (our y-axis) and their proximity to the premium dollar (our x-axis), as shown in the graphic above. Traditionally, health systems have operated primarily in the lower-left quadrant, as “care suppliers.” Some have spent considerable time and resources across the last decade, pushing closer to the premium dollar, to become “population managers.” But, importantly, managing population health is neither patient-facing, nor something consumers demand and seek.

To build deeper consumer loyalty, health systems must also move up the y-axis, creating a “care ecosystem” that provides “anywhere, anytime” care through multiple channels, including virtual and home-based solutions. And for certain populations, like Medicare Advantage, it will make sense for many systems to also explore becoming the “premium owner”, owning the full care budget and ensuring the incentives to design a consumer-centric offering. 

The ideal health system platform should combine all four of these identities, tailored to the local market situation.

The Trend of Health System Mergers Continues

Posted on by • Posted in Antitrust, Federal Trade Commission (FTC), Health System, Hospital, Hospital Industry, Market Consolidation, Market Power, Market Share, Market Trends, Mergers & Acquisitions, Strategic Advantage, Strategic Alignment, Strategic Imperative, Strategic Plan, Strategy Clinical, Strategy Framework, Strategy National, Strategy Sustainable Long Term, Value-Based Contracting, Value-Based Healthcare • Leave a comment

Click to access Industry_Insights_5.24.22.pdf

While healthcare is delivered locally, the business of healthcare
is regional, and the regions are only getting bigger. Hospital
and health system mergers alike have continued to shift from
local to regional, and the recently announced merger between Advocate Aurora
Health and Atrium Health clearly highlights that the regions are only getting
bigger.


Advocate Aurora, with a presence in Illinois and Wisconsin, and Atrium Health,
with a presence in North Carolina, South Carolina, Georgia, and Alabama, will
combine to create a $27 billion health system that will span six states and make it
one of the leading healthcare delivery systems in the country. The combined
organization, which will transition to a new brand, Advocate Health, will operate
67 hospitals and over 1,000 sites of care, employ nearly 150,000 teammates, and
serve 5.5 million patients. Together, Advocate Health will become the 6th largest
system in the country behind Kaiser Permanente, HCA Healthcare, CommonSpirit
Health, Ascension, and Providence.


We have seen a number of large health systems come together recently,
including Intermountain Healthcare + SCL Health to create a $15 billion revenue
system, Spectrum Health + Beaumont ($14 billion), NorthShore University Health
System + Edward-Elmhurst Healthcare ($5 billion), LifePoint Health + Kindred
Healthcare ($14 billion), and Jefferson Health + Einstein Healthcare Network ($8
billion).


The exact reasoning for each merger differs slightly, but one of the common
threads across all is scale. But not scale in the traditional M&A sense. Rather,
scale in covered lives; scale in physician infrastructure and alignment; scale in
clinical and operational capabilities; scale in technology, innovation, and
partnerships with non-traditional players; scale for capital access; and scale for
insurance risk to compete in a value-based world. It is no longer the strong
acquiring the weak. Rather, strong players are coming together to gain scale to
face the headwinds in a unified manner.

For Advocate Aurora and Atrium, coming together is about leveraging their combined clinical excellence,
advancing data analytics capabilities and digital consumer infrastructure, improving affordability, driving health equity, creating a next-generation workforce, research, and environmental sustainability. Together, they have pledged $2 billion to disrupt the root causes of health inequities across underserved communities and create more than 20,000 new jobs.


Both Advocate Aurora and Atrium are no strangers to mergers. Advocate and Aurora came together in 2018, and prior to that Advocate was intending to merge with NorthShore before being blocked due to anti-trust. Atrium has grown over the years, merging with systems such as Navicent Health in Georgia in 2018, Wake Forest Baptist Health in North Carolina 2020, and Floyd Health System in Georgia in 2021. In the newly proposed merger, Advocate Aurora and Atrium are coming together via a joint operating arrangement where each entity will be responsible for their own liabilities and maintain ownership of their respective assets but operate together under the new parent entity and board. This may allow the combined entity more flexibility in local decision-making. The current CEOs, Jim Skogsbergh and Eugene Woods will serve as co-CEOs for the first 18 months, at which point Skogsbergh will retire, and Woods will take over as the sole CEO.


Mergers can come in various shapes and structures, but the driving forces behind consolidation are not unique. With the need to compete in value-based care, adequately manage risk, gain scale across covered lives, physicians, and points of access, successfully deliver affordable high-quality care, and the need to deal with the vertical and horizontal consolidation of the large-scale payers, the markets that health systems operate in must be large enough to be effective and relevant. We fully expect to see more of these larger scale health system mergers in the near term.


The physical delivery of healthcare is local, but, again, the business of healthcare is not; it is regional, and the regions are only getting bigger.

Investment gains masking health system operating margin difficulties 

Posted on by • Posted in Consumer-Centered Care Pathway, Consumer-Centric, Consumerism, Health System, Hospital, Hospital Industry, Investing, Investment Strategy, Investments, Key Performance Indicators, Labor Spend Management, Legacy Business Model, Net Income, Non-Profit Healthcare Industry, Nonoperating Income, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Metrics, Operating Performance, Operating Revenue, Revenue Diversification, Strategy Sustainable Long Term • Leave a comment
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The combination of the Omicron surge, lackluster volume recovery, and rising expenses have contributed to a poor financial start of the year for most health systems. The graphic above shows that, after a healthier-than-expected 2021, the average hospital’s operating margin fell back into the red in early 2022, clocking in more than four percent lower than pre-pandemic levels. 

Despite operational challenges, however, many of the largest health systems continue to garner headlines for their sizable profits, thanks to significant returns on their investment portfolios in 2021.

While CommonSpirit and Providence each posted negative operating margins for the second half of 2021, and Ascension managed a small operating profit, all three were able to use investment income to cushion their performance.

A growing number of health systems are doubling down on investment strategies in an effort to diversify revenue streams, and capture the kind of returns from investments generated by venture capital firms. However, it is unlikely that revenue diversification will be a sustainable long-term strategy.

To succeed, health systems must look to reconfigure elements of the legacy business model that are proving financially unsustainable amid rising expenses, shifts of care to lower-cost settings, and an evolving, consumer-centric landscape.