Thought of the Day: On Strategic Change
The Conundrum facing Not-for-Profit Hospital Systems
Does hospital ownership matter? According to a study published last week in Health Affairs Scholar, NOT MUCH. That’s a problem for not-for-profit hospitals who claim otherwise.
58% of U.S. hospitals are not-for-profit hospitals; the rest are public (19%) or investor-owned (24%). In recent months, not-for-profit systems have faced growing antagonism from regulators and critics who challenge the worthwhileness of their tax exemptions and reasonableness of the compensation paid their top executives.
The lion’s share of this negative attention is directed at large, not-for-profit hospital system operators. Case in point: last week, Banner Health (AZ) joined the ranks of high-profile operators taken to task in the Arizona Republic for their CEO’s compensation contrasting it to not-for-profit sectors in which compensation is considerably lower.
Unflattering attention to NFP hospitals, especially the big-name systems, is unlikely to subside in the near-term. U.S. healthcare has become a winner-take-all battleground increasingly dominated by large-scale, investor-owned interests in hospitals, medical groups, insurance, retail health in pursuit of a piece of the $4.6 trillion pie.
The moral high ground once the domain of not-for-profit hospitals is shaky.
The NYU study examined whether hospital ownership influenced decisions made by consumers: they found “Fewer than one-third of respondents (29.5%) indicated that hospital status had ever been relevant to them in making decisions about where to seek care…significantly more important to respondents who indicated the lowest health literacy—74.7% of whom answered the key question affirmatively—than it was for people who indicated high health literacy, of whom only 18.3% found hospital ownership status to be relevant…also considerably more relevant for people working in health care than for those who did not work in health care (61.0% vs 24.5%)…
We found little evidence that hospital nonprofit status influenced Americans’ decisions about where to seek care. Ownership status was relevant for fewer than 30% of respondents and preference was greatest overall for public hospitals. Only 30–45% of respondents could correctly identify the ownership status of nationally recognized hospitals, and fewer than 30% could identify their local hospitals.
These findings suggest that contract failure does not currently provide a justification of nonprofit hospitals’ value; further scrutiny of tax exemption for nonprofit hospitals is warranted.”
Are NFP hospitals concerned? YES. It’s reality as systems address near term operational challenges and long-term questions about their strategies.
Last weekend, I facilitated the 4th Annual Chief Strategy Officers Roundtable in Austin TX sponsored by Lumeris. The group consisted of senior-level strategists from 11 not-for-profit systems and one for-profit. In one session, each reacted to 50 future state scenarios in terms of “likelihood” and “disruptive impact” in the NEAR term (3-5 years) and LONG TERM (8-10 years) using a 1 to 10 scale with 10 HI.
From these data and the discussion that followed, there’s consensus that the U.S. healthcare market is unlikely to change dramatically long-term, their short-term conditions will be tougher and their challenges unique.
- ‘Near-term cost containment is a priority. Hospitals are here-to-stay, but operating them will be harder.’
- ‘Increased scale and growth are necessary imperatives for their systems.’
- ‘Hospital systems will compete in a market wherein private capital and investor ownership will play a growing role, insurers will be hostile and value will the primary focus of cost-reduction by purchasers and policymakers.’
- ‘Distinctions between not-for-profit and for-profit hospitals are significant.’
- ‘Conditions for hospitals will be tougher as insurers play a stronger hand in shaping the future.’
Given the NYU study findings (above) concluding NFP ownership has marginal impact on hospital choices made by consumers, it’s understandable NFPs are anxious.
My take:
The issues facing not-for-profit hospitals in the U.S. are unique and complex. Per the commentary of the CSOs, their market conditions are daunting and major changes in their structure, funding and regulation unlikely.
That means lack of public understanding of their unique role is a conundrum.
Paul
PS: Issues about CEO compensation in healthcare are touchy and often unfair.
In every major NFP system, comp is set by the Independent Board Compensation Committee with outside consultative counsel. The vast majority of these CEOs aren’t in the job for the money joining their workforce in pursuit of the unique higher calling afforded service leaders in NFP healthcare.
Cartoon – Flip You for the CEO position
Cartoon – Finally figured out your insurance
Cartoon – In Denial
Cartoon – Breakthroughs
Getting serious about providing community benefit
https://mailchi.mp/59f0ab20e40d/the-weekly-gist-october-27-2023?e=d1e747d2d8
How should health systems spend their “community benefit” dollars?
That question was at the heart of a discussion we participated in recently at a member board meeting. To maintain their nonprofit status, all health systems are required to devote a portion of their earnings to activities that benefit the communities they serve, based on an assessment of local health needs.
The question our member’s board was grappling with, led by the system’s executive team, was how to ensure their “investment” in the community is as leveraged as possible, and generates the greatest “bang for the buck” in terms of better community health.
As the importance of addressing the social determinants of health grows, many systems are trying to target their resources toward activities that that enhance their ability to improve health status, and to reduce the barriers to better health faced by many. That requires a level of rigor and commitment to “community ROI” that goes beyond simply pointing to charity care statistics and the number of uninsured served.
What most impressed us in the discussion was the application of the same investment mindset to community benefit that the system brings to capital allocation decisions—with due attention to implementation plans, outcomes metrics, and accountability.
As the system’s COO framed it, “We don’t just want to be a ‘piggy bank’ for charitable causes, we want to make sure our investment in the community is really making a difference” in local residents’ health. At the same time, the board recognized that its role extends beyond simply contributing dollars to acting as a convener and facilitator of other community organizations working together toward a common set of goals. A worthy discussion for the board, for sure, and a priority we’re seeing leading systems begin to embrace in a serious way.
Employed physians at Allina Health vote to unionize
https://mailchi.mp/59f0ab20e40d/the-weekly-gist-october-27-2023?e=d1e747d2d8
Around 400 primary and urgent care physicians, along with 150 nurse practitioners and physician assistants, employed by Minneapolis, MN-based Allina Health System have voted to unionize with the Service Employees International Union, forming the largest private-sector union of physicians in the country.
Allina, which operates 12 hospitals across Minnesota and Wisconsin, already saw over 100 inpatient physicians at its Mercy Hospital vote to unionize earlier this year. While Mercy’s physicians organized against pressure to adhere to the hospital’s new length-of-stay guidelines, this larger group of clinic-based providers say they are motivated by chronic understaffing that they claim has caused burnout and threatened patient safety. Allina Health laid off 350 workers this summer after posting a nearly $200M operating loss in 2022.
The Gist: When health systems originally recruited physicians into their newly developed employed medical groups, many pitched the arrangement as more of a partnership than traditional employment.
However, now that a majority of the nation’s physicians are employed by hospitals, some physicians are rethinking their relationships with their employers.
Only six percent of doctors were unionized in 2021, but a recent spate of unionization efforts by residents and physicians suggest that number is on the rise.
Health systems hoping to address physicians’ concerns and unionization activity should note that the motivating factors cited by organizing physicians surround working conditions, including a lack of support staff and professional autonomy, rather than personal wage demands.
California passes law raising healthcare worker hourly minimum wage to $25
https://mailchi.mp/59f0ab20e40d/the-weekly-gist-october-27-2023?e=d1e747d2d8
Earlier this month, Governor Gavin Newsom signed a bill that puts all full- and part-time California healthcare workers, including all ancillary support staff, on a path to earning $25 per hour.
While wage increases will begin phasing in next year, the timeline for implementation depends on facility type and other factors like payer mix. Large health systems and dialysis centers have until 2026 to fully implement the new wage, while rural, independent hospitals and those with high public payer mixes, as well as other clinical facilities, have more time to comply.
The law, which replaces the $15.50 state minimum wage for all workers, is projected to impact over 469K healthcare workers in the state, potentially including 50K who already earn more than $25 per hour but are forecasted to receive wage increases to maintain their pay premiums. Strongly backed by California healthcare unions, the law ultimately received the support of the California Hospital Association on the grounds that it will “create stability and predictability for hospitals” by preempting local wage and compensation measures active in many California cities.
The Gist: On the heels of a tentatively successful labor negotiation with Kaiser Permanente—which would raise the system’s hourly minimum wage to $25—California healthcare unions have flexed their might for another win.
While this new law directly benefits healthcare workers earning less than $25 an hour, its knock-on effects will extend to those earning above that to avoid pay compression, as well as to workers in other industries that draw from the same labor pool.
The mandated higher pay may provide California healthcare employers with a recruitment edge (and lure talent away from neighboring states), but higher costs will exacerbate the margin challenges plaguing many hospitals in the state.
Uneven operating margin recovery for national health systems
https://mailchi.mp/de5aeb581214/the-weekly-gist-october-13-2023?e=d1e747d2d8
Using data from Kaufman Hall’s latest National Hospital Flash Report and publicly available investor reports for some of the nation’s largest health systems, the graphic below takes stock of the state of health system margins.
After the median hospital delivered negative operating margins for twelve-straight months, 2023 has made for a positive but slim year so far, with margins hovering around one percent. Amid this breakeven environment, fortunes have diverged between nonprofit and for-profit health systems.
The largest for-profit systems, HCA Healthcare and Tenet Healthcare, posted operating margins of around 10 percent between July 2022 and June 2023, while the three largest nonprofit systems, Kaiser Permanente, CommonSpirit Health, and Ascension, suffered net losses.
Although Kaiser Permanente’s margin bounced back in the first half of this year, CommonSpirit and Ascension’s margins continued to decline, more than doubling the operating losses of the prior six months.
One key to the recent success of the largest for-profit systems is their diversification away from inpatient care.
Case in point: almost half of Tenet’s profits in 2023 have come from its ambulatory division, driven by its United Surgical Partners International (USPI) ambulatory surgery center network, which has posted 40 percent margins over the past several quarters.
HENRY KOTULA 