Leadership & Project Management: Must See
Wolf Pack Leadership
Thought of the Day: Paradoxes of Life
Sign of the Times: Pills/Surgery vs Lifestyle Change
Thought of the Day: Developing a Winning Attitude & Mindset
When Financial Performance Matters
https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/when-financial-performance-matters
The Sunk Cost Fallacy
In behavioral economics, the sunk cost fallacy describes the tendency to carry on with a project or investment past the point where cold logic would suggest it is not working out. Given human nature, the existence of the sunk cost fallacy is not surprising. The more resources—time, money, emotions—we devote to an effort, the more we want it to succeed, especially when the cause is an important one.
Under normal circumstances, the sunk cost fallacy might qualify as an interesting but not especially important economic theory. But at the moment, given that 2022 will likely be the worst financial year for hospitals since 2008 and given that the hospital revenue/expense relationship seems to be entirely broken, there is little that is theoretical about the sunk cost fallacy. Instead, the sunk cost fallacy becomes one of the most important action ideas in the hospital industry’s absolutely necessary financial recovery.
Historically, cases of the sunk cost fallacy can be relatively easy to spot. However, in real time, cases can be hard to identify and even harder to act on. For hospital organizations that are subsidizing underperforming assets, identifying and acting on these cases is now essential to the financial health of most hospital enterprises.
For example, perhaps the asset that is underperforming is a hospital acquired by a health system. (Although this same concept could apply to a service line or a related service such as a skilled nursing facility, ambulatory surgery center, or imaging center.) The costs associated with integrating an acquired hospital into a health system are typically significant. And chances are, if the hospital was struggling prior to the acquisition, the purchaser made substantial capital investments to improve the performance.
As time goes on, if the financial performance of the entity in question continues to fall short, hospital executives may be reluctant to divest the asset because of their heavy investment in it.
This understandable tendency can lead the acquiring organization to throw good money after bad. After all, even when an asset is underperforming, it can’t be allowed to deteriorate. In the case of hospitals, that’s not just a matter of keeping weeds from sprouting in the parking lot. The health system often winds up supporting an underperforming hospital with both working capital and physical capital, which compounds the losses.
And the costs don’t stop there, because other assets in the system are supporting the underperforming asset. This de facto cross-subsidy has been commonplace in hospital organizations for decades. Such a cross subsidy was probably never sustainable, but it is even less so in the current challenging financial environment.
This is a transformative period in American healthcare, when hospital organizations are faced with the need to fundamentally reinvent themselves both financially and clinically. The opportunity costs of supporting assets that don’t have an appropriate return are uniquely high in such an environment. This is true whether the underperforming asset is a hospital in a smaller system, multiple hospitals in a larger system, or a service line within a hospital.
The money that is being funneled off to support underperforming assets may be better directed, for example, toward realigning the organization’s portfolio away from inpatient care and toward growth strategies. In some cases, the resources may be needed for more immediate purposes, such as improving cash flow to support mission priorities and avoiding downgrades of the organization’s credit rating.
The underlying principle is straightforward:
When a hospital supports too many low-performing assets, the capital allocation process becomes inefficient. Directing working capital and capital capacity toward assets that are dilutive to long-term financial success means that assets that are historically or potentially accretive don’t receive the resources they need to grow and thrive. The underlying principle is a clear lose-lose.
In the highly challenging current environment, it is especially important for boards and management to recognize the sunk cost fallacy and determine the right size of their hospital organizations—both clinically and financially.
Some leadership teams may determine that their organizations are too big, or too big in the wrong places, and need to be smaller in order to maximize clinical and balance-sheet strength. Other leadership teams may determine that their organizations are not large enough to compete effectively in their fast-changing markets or in a fast-changing economy.
Organizational scale is a strategy that must be carefully managed. A properly sized organization maximizes its chances of financial success in this very difficult inflationary period. Such an organization invests consistently in its best performing assets and reduces cross-subsidies to services and products that have outlived their opportunity for clinical or financial success.
Executives may see academic economic theory as arcane and not especially relevant. However, we have clearly entered a financial moment when paying attention to the sunk cost fallacy will be central to maintaining, or recovering, the financial, clinical, and mission strength of America’s hospitals.
Care Now, Pay Later – How Embedded Finance is Poised to Improve Healthcare
In an era of significant medical debt, rising healthcare costs and delayed
treatments, our current healthcare system is ripe for solutions that alleviate the
burden of paying patient bills.
Enter embedded finance. While not a new concept by any stretch – it
has long existed in retail – fintechs and traditional banks are determined to give patients more
options and a fundamentally better experience in the way they pay for healthcare services. In doing
so, a financially strained domestic healthcare system stands to benefit from increased cash flow,
improved health equity and optimized patient engagement.
Simply put, embedded finance is the integration of financial services – such as payment, lending,
banking and insurance features – into another company’s normal service or products. We have all
undoubtedly come across these offerings in our daily lives as consumers. Think private label credit
cards with retail chains or airlines, digital wallet purchase options at the Amazon checkout, a buynow-pay-later (BNPL) plan from Affirm or Klarna, or insurance obtained from a car rental.
The goal of embedded finance:
is to improve a user’s experience by accessing financial services
without leaving a brand’s platform. By layering application programming interface (API)-driven
fintech or banking capabilities on top of a website or mobile app for, say, a hospital patient portal, the
bundled solution allows the user to stay on one website or application to complete a financial
transaction. Doing so removes friction in the experience and delivers a breadth of contextual
information that a provider or payer can use to prompt further action on the patient’s medical journey.
The implications for embedded finance in healthcare are vast and benefit every stakeholder across the revenue cycle value chain:
Patients: Flexibility and convenience to better structure and plan bill payment while receiving
greater access to financial options and additional services that improve the care experience
such as reminders and health tracking
Providers: Faster and higher rates of collections coupled with ongoing patient dialogue that
cements loyalty, affords clinicians the opportunity to suggest customized treatment options,
and improves revenue composition and potential valuation
Payers: More efficient claims processing cycle, automated processes and improved data
security
The burden of patient bills and increasing medical costs are not new to our system. Yet there has
been a confluence of fundamental changes that make embedded finance particularly attractive in
healthcare going forward, including increased smartphone usage and Internet penetration, COVID19 adoption of fintech products across healthcare settings, rising inflation rates that reduce a
patient’s ability to pay and the adoption of mobile-based apps among younger, digitally native
consumers and lower income patients.
These tailwinds support a massive addressable market as healthcare is expected to comprise approximately 23% of a U.S. embedded finance industry set to exceed $230 billion by 2025, or a 10x increase from $23 billion in 2020.
Significant attention and capital investment are accelerating the rise of embedded finance in healthcare.
Punctuated by attractive elements at the intersection of technology, financial services and healthcare sectors, nimble fintech companies and large financial institutions alike are competing for market presence. For example, pioneering healthcare-focused fintech PayZen closed $220 million in fresh capital in late 20223, while banks such as Wells Fargo and Synchrony have launched the popular medical-focused credit cards Health Advantage and CareCredit, respectively. Cain Brothers’ parent company, KeyBank, has also advanced an embedded strategy to provide healthcare digital innovation at scale and enhance patient experiences by acquiring XUP Payments in 2021. The resulting U.S. landscape for healthcare embedded finance is one that is evolving rapidly and that we are monitoring closely for investment and eventual M&A consolidation.
With expanding options around the type of medical care received and where it is received, we expect the financial tools at a patient’s disposal to garner significant attention in the years to come.
Embedded finance is a leading solution positioned to improve health equity and the financial well-being of millions of patients across the U.S., as well as fuel sector growth. Just as we’re accustomed now to buying pretty much anything with a few clicks, so too will embedded finance become a ubiquitous part of the healthcare landscape.
The Physician Employment Model, Continued
https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/physician-employment-model-continued
From time to time the blogging process stimulates a conversation between the author and the audience. This type of conversation occurred after the publication of my recent blog, “The Hospital Makeover—Part 2.” This blog focused entirely on the current problems, financial and otherwise, of the hospital physician employment model. I received responses from CEOs and other C-suite executives and those responses are very much worth adding to the physician employment conversation. Hospital executives have obviously given the physician employment strategy considerable thought.
One CEO noted that, looking back from a business perspective, physician employment was not actually a doctor retention strategy but, in the long run, more of a customer acquisition and customer loyalty strategy.
The tactic was to employ the physician and draw his or her patients into the hospital ecosystem. And by extension, if the patient was loyal to the doctor, then the patient would also be loyal to the hospital. Perhaps this approach was once legitimate but new access models, consumerism, and the healthcare preferences of at least two generations of patients have challenged the strategic validity of this tactic.
The struggle now—and the financial numbers validate that struggle—is that the physician employment model has become extraordinarily expensive and, from observation, does not scale.
Therefore, the relevant business question becomes what are the most efficient and durable customer acquisition and loyalty models now available to hospitals and health systems?
A few more physician employment observations worth sharing:
- Primary Care. The physician employment model has generally created a one-size-fits all view of primary care. Consumers, however, want choice. They want 32 flavors, not just vanilla. Alternative primary care models need to match up to fast-changing consumer preferences.
- Where Physician Employment Works. In general, the employment model has worked where doctor “shift work” is involved. This includes facility-based specialists such as emergency physicians, anesthesiologists, and hospitalists.
- Chronic Care Management. Traditional physician employment models that drive toward doctor-led physical clinics have generally not led to the improved monitoring and treatment of chronic care patient problems. As a result, the chronic care space will likely see significant disruption from virtual and in-home tools.
All in all, the four very smart observations detailed above continue the hospital physician employment conversation. Please feel free to add your thoughts on this or on other topics of hospital management which may be of interest to you. Thanks for reading.
California system’s 10.2% operating margin bucks national trend
Mountain View, Calif.-based El Camino Health ended the first quarter with an impressive operating margin of 10.2 percent when many health systems saw their margins hover above zero or fall into the red. The system’s revenue for the quarter totaled $131,290.
For the nine months ended March 31, the two-hospital system posted an operating gain of $141.4 million on revenue of just over $1 billion.
However, like most health systems, El Camino’s expenses are substantially higher than the same period last year, increasing 10.6 percent year over year for the nine months ending March 31, 2023, to $881.9 million.
The system is making a conscious effort to march down labor costs while also placing a significant emphasis on retention. In June, El Camino agreed a deal to increase pay for nurses by 16 percent over three years.
“Like nearly all hospitals, our nursing staff comprises the largest part of our workforce. With the recruitment of a single nurse estimated to be nearly $60,000, our primary strategy to reduce labor costs is to focus on decreasing turnover,” El Camino CEO Dan Woods told Becker’s.
“Our turnover rate for nurses is just about 8 percent while the turnover rate nationally is still running at 22 percent.”
In March, the system also received a credit rating upgrade from Moody’s, which noted the system’s “superlative cash metrics and operating performance.” Fitch Ratings also revised El Camino’s outlook to positive in February, noting that the system has a history of generating double-digit operating EBITDA margins, driven by a solid market position that features strong demographics and a very healthy payer mix.
Hospital CEOs get serious about cutting labor costs
Labor costs have spun out of control in the last few years as inflation set in and hospitals relied on contracted travel nurses to combat nationwide workforce shortages.
The secret to lowering labor costs now, hospital CEOs say, is putting a modern spin on a tried-and-true strategy: retention.
Dan Woods, CEO of El Camino Health in Mountain View, Calif., estimates the cost of recruiting a single nurse as being nearly $60,000, which drove his team’s decision to focus on reducing labor costs by decreasing turnover. The nurse turnover rate is around 22 percent nationally, but El Camino has achieved just 8 percent nurse turnover rate through a variety of retention efforts.
“We continue to chip away at our turnover rate by fostering a positive practice environment for our nurses,” said Mr. Woods. “We achieve this by creating structures and enabling processes so our staff are engaged in assisting with making changes within their practice environments. Also, our staffing and scheduling processes promote efficiency while meeting the needs of our staff, which is essential for retention.”
El Camino does have guardrails to ensure nurses don’t self-schedule overtime or other premium pay. Mr. Woods also mentioned positive labor relations as a retention tool.
“We just completed a new three-year agreement with our nursing union prior to the existing contract expiring and without strikes or the acrimony often associated with labor relations,” he said.
David Callendar, MD, president and CEO of Memorial Hermann Health System in Houston also recently told Becker’s the system is relying less on contract labor and increasing retention through its Well Together employee experience model, which allows employees to personalize programs and benefits to meet their individual needs.
“At Memorial Hermann, we believe that investing in our workforce is the most effective approach to managing labor costs,” said Dr. Callendar. “We accomplish this in three ways: one, creating a workplace where all feel valued and welcomed, and diversity is celebrated; two, investing in employee health and wellness programs; and three, providing professional development and career growth opportunities.”
Rochester (N.Y.) Regional Health is transforming its operating model and workforce strategy to offer more flexibility and build a culture valuing team members for retention.
“We’ve created a new in-house agency to significantly reduce our reliance on third-party contracts and improve staff integration within the health system to foster a more robust culture of collaboration, interdependency, alignment and system-ness,” said Richard Davis, PhD, CEO Of Rochester Regional.
Jeffrey P. Gold, chancellor of the University of Nebraska Medical Center in Omaha, said the academic medical center is focused on reducing the cost per unit of labor and lowering the number of units. The hospital is considering several tactics including additional training and mentorship, evaluating its benefits program and productivity across the organization.
The University of Nebraska Medical Center is also evaluating fixed labor cost departments and roles, and slowing or eliminating full-time employee growth to force innovation, organizational redesign, use of technology and productivity gains with staff retained.
Many hospitals are seeing wages increase within their markets, and increasing pay for existing team members is often less expensive than recruiting and onboarding new ones.
“Obviously, compensation is a key element of staffing, and we are working diligently to ensure that we are competitive within our market,” said R. Kyle Cramer, CEO of Day Kimball Health in Putnam, Conn. “Concurrently, we are evaluating how we staff our clinical areas and the mix of professionals we utilize to create a stronger level of team support and patient engagement. Ultimately we see stabilizing our workforce and reducing turnover through retaining strong members of our clinical and operational team as the key to effectively managing labor costs in this new era.”
Paula Ellis, DNP, interim CEO of F.W. Huston Medical Center in Winchester, Kan., said the critical access hospital has salaries in line with competitors but found benefits lagging. The hospital increased 401K match, provided better health insurance rates, improved tuition assistance and added competitive scholarships to keep employees engaged. The hospital also combined four positions into two.
“Staff were willing and able to take on new duties in exchange for a better schedule,” said Dr. Ellis. “We believe the best method to manage labor costs is to retain staff.”
HENRY KOTULA 