One trend is a focus on the “sweet spot” of integrated care and coverage, either through direct ownership of provider and insurance assets or through virtual approaches for contracting or partnership.
Health systems are emphasizing similar growth strategies and innovations, but they also are demonstrating independent transformational activity and high-value unique approaches and ‘pearls of innovation,’ as shared at the 19th annual Citi/AHA/HFMA Not-for-Profit Healthcare Investor Conference held on May 17-18 in New York. This conference, hosted by Citi and co-sponsored by the American Hospital Association (AHA) and HFMA, included presentations by 27 tax-exempt health systems and multiple panel discussions.
See related sidebar: Health Systems Present at Investor Conference
Notably, the themes at another major annual healthcare investor conference held earlier in the year, the JPM Healthcare Investor Conference, were largely consistent with those at the May event, although unique insights and initiatives varied. One-third of the Citi/AHA/HFMA presenters had presented at the JPM conference.
The following are some of the common themes from the May 2018 conference. Following this listing are more detailed discussions on each common theme, as well as highlights of more unique elements.
Interdependence of finance and strategy. Given the theme of the conference, many systems discussed the importance of integrating financial and strategic planning, deploying limited capital strategically, and interplay between strategies and financial performance and balance sheets.
Deep commitment to quality and safety. This was a common theme in prior years and at JPM but was highlighted by essentially every presenter.
Consumer centricity. Most systems have restated/refined their mission and vision statements and core strategies, with heavy investment and redesign to put the consumer/patient/member at the center. There has been increased attention to member/patient acquisition and retention.
Focus on value and affordability. While some noted that the move from volume to value has progressed slower than expected, there was wide commitment to improving value and addressing affordability. Many systems have focused on reducing provider and per member per month (PMPM) costs, and other initiatives to increase value. Many organizations are expanding participation in risk contracts and direct or virtual capitated pre-payment, although some systems have continued to downsize their insurance operations, largely due to challenges in healthcare exchange products.
Growth. Many of the systems have achieved substantial growth, as well as revenue diversification and expansion across the continuum of care. While there is wide recognition of decline in inpatient use rates, many systems are seeing substantial overall growth driven by mergers and acquisitions (M&As), strong demographics (select markets), strategic growth investments, brand, destination programs, and investment/growth in non-acute and alternative revenue streams.
Driving transformation, innovation, and disruption. The vast majority of presenting systems celebrated the opportunity to proactively drive transformation in their organizations, clinical and business processes, services, and the communities they serve. Growing trends include leveraging partnerships with niche organizations, monetizing IP, and investing in Innovation funds.
Leveraging scale. Many systems emphasized the value of scale, including market relevance, operational efficiencies, access to new competencies, and advocacy voice. Much scale is being developed through traditional M&As, although it is becoming more common to create scale through partnerships, virtual relationships, and other approaches. For example, Mission Health in Ashville decided to sell itself to HCA as a strategy to access scale.
Leveraging integration, including between insurance and provider operations. A number of systems are still in the process of integrating/optimizing assets post-merger. Several systems discussed the “sweet spot” of integrated care and coverage, either through direct ownership of both provider and insurance assets or through virtual approaches of contracting or partnership.
Addressing social determinants of health. Compared to prior years and even versus the January 2018 JPM conference, more systems have expanded their focus on addressing social determinants of health as both a mission and business imperative.
Performance improvement. Most systems, including those in strong markets, have put emphasis on performance improvement relative to cost management, clinical redesign, growth, revenue management, and population health.
Emphasis on operating models, governance, and talent management. There is clearly substantial turnover at the C-suite level. A number of systems referenced their system operating models as a critical enabler to increase business discipline, leverage scale, and accelerate value creation. Multiple systems emphasized their strategies to strengthen talent and empower their teams, as well as efforts to streamline governance.
Managing the “bank side” of the organization. Most health systems are half bank and half operating unit based on invested assets and associated cash flows. Many systems provided highlights of debt and investment structures.
IT investments including EHRs, digital enablement, telemedicine, analytics and AI. Those systems that did not fully implement Meaningful Use continue to invest in electronic health records (EHRs), and broadly, relative to analytics, population health, digital enablement, telemedicine and artificial intelligence (AI).
Opioid epidemic. Many systems referenced their work to address opioid addiction in their communities.
Financial performance trends. Due to market differences and interim impacts from EHR installs, exchange losses, and strategic investments, overall performance trends have been somewhat mixed, but on balance remain good. Because of strong stock market returns, balance sheets have strengthened everywhere. There was a broad expectation that the future will be more challenging.
It was exciting and humbling to see the passion across the tax-exempt health systems to maximize how they serve their communities, and to see the magnitude of transformation broadly across healthcare.
The following provides additional information on common themes identified above as well as some “pearls of innovation” in each area. While the examples of innovation are only that, as there is much innovation across healthcare, they do represent unique perspectives and approaches that could potentially be scaled more significantly across healthcare.
Interdependence of finance and strategy. Given the theme of the conference, many systems discussed the importance of integrating financial and strategic planning, deploying limited capital strategically, and interplay between strategies and financial performance and balance sheets. CFOs have long known that “a strategic plan without an integrated financial plan is just a set of dreams.” Many systems described how they leveraged their existing balance sheets and financial platforms to invest strategically, and how those investments, system strategies and operational efforts helped further strengthen the organization.
Importance of partnership between chief strategy officers (or chief development officers) and CFOs was emphasized in panel discussion and multiple presentations. The need for financial market and rating agency engagement/transparency was echoed by many, with a common sentiment being “we don’t manage to bond ratings, but they do matter.” The importance of philanthropy as a source of funds and alignment with strategy was also discussed by multiple systems.
Deep commitment to quality and safety. It is great to see that every health system has defined quality and safety as essential and core to mission and success. All have been driving improvements in their processes and metrics, which further raises the bar for top quartile or top decile performance. More have continued to join the journey to be a high reliability organization (HRO) committed to the pursuit of zero serious safety events and overall process improvement.
Consumer centricity, including digital enablement. Given transformation in other industries healthcare has now clearly recognized that the consumer should take center stage. There is broad restating of mission and vision statements, core strategies, processes, and investments to address this commitment. This will clearly drive substantial transformation in healthcare. Some call them consumers, others call them patients (including families), or members or individuals. Part of the shift is being driven by raising customer service in other industries, heightened expectations in an internet-based world, and changing demographics. As Banner noted, an insured individual with a $300 deductible in the past is very different from an individual today with a $8,000 deductible. There is much focus across health systems relative to patient and/or member acquisition and retention.
Many organizations are using technology to improve the patient experience. Most systems now have a digital portal and other digital enablement. Kaiser has an enormous clinical call center and other patient-friendly vehicles to engage with members/patients without the need for a visit to a physical facility.
Focus on value and affordability. Unlike at prior Citi or JPM conferences there was not much explicit reference to the ACA as a driver to value-based care. However, most systems have included in their mission/vision statements and core strategies a commitment to focus on value and improving affordability. This is recognized as both a mission and business imperative. Many were proud that they had in fact bent the cost curve. Some organizations have focused on driving down per unit costs to make themselves more attractive to insurers and patients on a fee-for-service basis.
Others have focused on reducing per unit and PMPM costs so that they can offer insurance products, directly or virtually, as a lower cost “high-performing network.” Kaiser, which receives 97 percent of its revenues in the form of pre-payment, has been able to moderate care cost increases which then allows them to offer lower cost insurance products, further driving membership growth. Glenn Steele, vice chairman of the Health Transformation Alliance (HTA), a group of 40+ employers representing more than 6 million covered lives, described success building high-value provider networks in collaboration with a number of healthcare systems.
Growth. Most systems have included growth as a key strategic priority, although specific strategies vary by market. Except in high growth markets, most are seeing or expecting pressure on inpatient volume due to use rate declines. More than a third of the systems presenting have achieved CAGRs (compound annual growth rates) in excess of 10 percent, allowing the systems to double in size over the last 6-8 years. Much of that growth has come through M&As. Many are trying to grow to increase market relevance, create greater value from scale, diversify revenue streams, acquire new competencies, or increase market share to offset use rate declines. Growth is still often measured by net revenues, although an increasing number of systems measure their size by the number of unique individuals served.
M&A growth has come through acquisitions of other organizations, and a few through “mergers of equals.” AdvocateAuroraHealth co-CEOs jointly discussed the rational for merging their two systems. While scale was important, they said the greatest opportunity was to “open doors that they could not have opened individually.” Both CHI and Dignity presented separately, but both emphasized the synergies from their merger that would allow them to better support the communities they serve. Banner celebrated the fact that 25 percent of their revenue now comes from academic services, in part resulting from their acquisition of University of Arizona healthcare services, and 15 percent from capitated payment.
There has been enormous investment in ambulatory activities, as well as in the full continuum of non-acute services. SSM referenced their efforts to find “capital light ways to treat the elderly.” Creating broad, easy access is a common strategy across the industry. These investments help drive market share, but also allow the organization to better manage patient care in a pay-for value environment. Physician alignment and employment is widespread, as is the establishment of clinically integrated networks (CINs). Many of the systems have strategies to leverage their strong brands and/or to drive growth of their destination programs.
In addition to diversifying revenues across the care continuum, some are leveraging the intercept of care and coverage. Obviously, Kaiser is the best example of an organization that provides care for those that it insures. A number of the other presenters have a long history of operating both provider and plan assets and referenced how this intercept is supporting accretive growth. Others are moving into this space, either directly or through partnerships, to support growth.
Many systems discussed the need for disciplined growth, with recognition that some acquisitions have substantially stressed organizations. Integration execution is critical. While some systems still have material facility replacement needs, most have de-emphasized inpatient bricks and mortar, and instead are finding “balance sheet light” approaches to strengthen market position, access, and continuum. This is more commonly being done through partnerships with niche for-profit firms.
Driving transformation, innovation, and disruption. The vast majority of presenting systems celebrated the opportunity to proactively drive transformation in their organizations, clinical and business processes, services, and in some cases the communities they serve. Clearly the industry has shifted substantially away from running inpatient hospitals. Consumerism, digital, genomics, telemedicine, big data, artificial intelligence, robotic process automation, niche/specialized care models, rapid development of new diagnostics (e.g., liquid biopsies) and therapeutics (e.g., biologicals, biosimilar drugs) and many other issues will drive change in healthcare, potentially very rapidly.
Innovation is driving how care is provided, sometimes with dramatic outcomes. Trinity Health noted that they have reduced readmissions from 13 percent to 8 percent, in part due to their Home Care Connect digital home care platform. Kaiser and others have leveraged digital platforms to shift substantial care to virtual settings. Some transformation is focused on disintermediating unnecessarily high cost. For example, both SSM and Trinity highlighted their participation in Project Rx, a collaborative effort of four large health systems to find ways to ensure cost effective access to generics. Geisinger discussed changes in clinical practice (specifically adding high protein feeding before and after surgery) which is improving outcomes materially.
Transformation is being driven in many ways. SSM and others emphasized the importance of clinician driven transformation. Some have structured innovation teams, others have extensively trained their associates in LEAN to allow point of care/activity redesign, and others have created internal “Shark Tanks” to identify and leverage innovations internally. Many have engaged national consulting firms, partnered with innovative niche companies, added new competencies to their boards or management teams, and/or made strategic capital investments to accelerate transformation. Academic institutions have been working to monetize their discoveries. For example, Northwell Health has established True North as an internal venture fund. Other organizations, such as Ochsner have invested in outside healthcare venture funds as a way to gain early access to innovative technologies/capabilities, drive surplus returns, and diversify revenue streams.
Many talked about harnessing big data. Geisinger noted that the stability of the population in their markets makes them the “Iceland of America” relative to leveraging genetic testing for drug discovery and improved care. They have completed full exome gene sequencing for 200,000 community members in partnership with Regeneron, and plan on expanding this to 1 million individuals. While this is less robust than the NIH “All of Us” initiative, it is clearly having substantial impacts by allowing much more proactive identification and treatment of conditions.
Leveraging scale. There is clearly accelerated consolidation and partnership activity across the industry to drive growth and scale. This was highlighted by many presenters who are pursing scale to increase market relevance, drive operational efficiencies, provide access to new competencies, strengthen their advocacy voice, etc. Much scale is being developed through traditional mergers and acquisitions, although it is becoming more common to create scale through partnerships, virtual relationships and other approaches. Many large regional and national systems are creating scale by establishing and rolling out common “playbooks” for strategic, clinical and operational excellence. Some systems are leveraging capabilities of others without the “brain damage of merger.” For example, Sentara is providing an insurance/TPA platform to Ohio Health. Some organizations discussed pre-defined “partnership principles” to help proactively guide partner identification, prioritization and engagement. Many systems are trying to position themselves as a “desirable partner” that others might want to join.
In addition to those pursuing asset mergers, there is also much scale being enabled by virtual partnerships, both between tax-exempt organizations and with enabling for-profit entities. There are many innovative firms specializing in aspects of transformation, disintermediation or other value creation. By partnering with these firms, sometimes coupled with an equity relationship, health systems can drive transformation more quickly and less expensively.
Ron Paulus, Mission Health’s CEO, described why their organization decided to be acquired by HCA in return for funding of a large foundation focused on improving the health of the region, saying “HCA is the nation’s most efficient operator of hospitals, so this was a way to achieve scale economies.” He also emphasized that “Organizations need to find a partner before they actually need one.”
Leveraging integration, including between insurance and provider operations. A number of systems highlighted their success at driving integration, either post-merger or as part of a fundamental strategy to create value. Need for accelerated speed and nimbleness was noted by multiple speakers. AdvocateAuroraHealth intends on completing the vast majority of integration activities within 12 months of their recent merger, creating scale while maintaining two strong brands. Mercy Health (Ohio), who will be merging with Bon Secours by the end of the year, noted that 2016 was about stabilization, 2017 was about optimization, and 2018 is focused on growth and innovation.
A number of the systems referenced the “sweet spot” of integrated care of coverage (receiving capitated payment and providing care for those members/patients), either through direct ownership of an insurance entity or through virtual approaches of contracting or partnership. If done well, this can clearly help accelerate the triple (or quadruple) aim. More systems that do not own insurance operations are participating in or creating ACOs and clinically integrated networks or entering into full-risk partnerships for Medicare Advantage or commercial populations to economically benefit from care transformation. Some systems, such as Northwell Health, have exited from direct participation in insurance markets because of unfavorable exchange product performance.
Addressing social determinants of health. Compared to prior years and even versus the January 2018 JPM conference, more systems discussed their expanded focus on addressing social determinants of health as both a mission and business imperative. A number of systems have included addressing social determinants in their mission statements.
Rush System for Health described their commitment and efforts to address the fact that average life expectancy varies from 85 to 69 years between two zip codes in western Chicago suburbs that are less than four miles apart. Violence explains only a small part of this difference, with the rest significantly impacted by other social determinants of health. Geisinger described how they use Epic and other data sets to identify patients with food instability and high risk for diabetes. They have then given those individuals access to a free healthy food bank, with very positive results (drop of A1Cs by 2.5 on average and drop in PMPM costs that are far larger than the cost of free food).
Performance improvement. Many systems, including those in strong markets, anticipate future financial pressures so they have a heavy focus on performance improvement relative to cost management, clinical redesign, growth, revenue management, and population health. The magnitude of historical and targeted future improvement efforts appears to vary based on environmental pressures faced by each entity. Some organizations have built robust internal performance improvement functions, while others have engaged outside consulting resources to accelerate value creation. For some, scale has been very helpful in driving performance improvement. For example, some large systems have leveraged a single “instance” of Epic to reduce cost and better facilitate systemwide improvement.
Emphasis on operating models, governance, and talent management. A number of presenters referenced their system operating models as critical to increase business discipline, leverage scale, and accelerate value creation. As an example, Trinity Health’s “3 Tier Operating Framework” and associated “Strategic and Growth Engine” were established as a standardized system approach to drive operational performance and strategic positioning across all of their markets. Rush System for Health reviews their balanced indicator report at the C-suite level every week to maintain focus. Dignity and CHI collectively, as do a number of other systems, have a robust set of playbooks to accelerate performance improvement. A number of systems, including SSM, emphasized talent management as critical to organizational success. Finally, several organizations commented on the importance of strong, engaged, and streamlined governance.
Managing the “bank side” of the organization. Most health systems are half bank and half operating unit based on invested assets and associated cash flows. As this was a healthcare investor conference, most systems provided at least an overview of their debt, assets, pension funded status, and revenue and margin trends. Due to the strong investment markets, most balance sheets strengthened last year. There is a substantial mix of investment strategies (fully diversified portfolios versus higher cash/fixed income) and debt structures (with a bias towards higher mix of real or synthetic fixed rate debt).
IT investments. A number of systems referenced current or recent investment in EHRs, specifically those that had not fully implement during Meaningful Use days. There is widespread investment relative to digital enablement, telemedicine, analytics, cybersecurity, and population health. Multiple health systems discussed big data and artificial intelligence. Clearly, these will be major drivers of transformation in the future, and health systems will likely need to partner with others given the enormous cost and potential scale of these opportunities.
Opioid epidemic. Many systems referenced their work to address opioid addiction in their communities. This is now commonly included as a core priority in health systems’ community needs assessments. A number of systems discussed dramatic decreases in opioid prescriptions in their emergency departments (EDs), as well as other protocol changes. Mercy in Ohio noted that they now have “opioid free zones” in some of their EDs, and many systems are changing prescribing practices and proactively identifying at risk patients.
Financial performance trends. Because of market differences and interim impacts from EHR installs, exchange losses, and merger disruptions, overall performance trends have been somewhat mixed but on balance remain good. Actual performance levels appear heavily impacted by payer mix, market relevance, size, and growth trends.
Edward Chadwick is president, Integrated Healthcare Financial Strategies, LLC, and currently serves on HFMA’s national board. He was previously system CFO for Henry Ford Health System, Wake Forest Baptist Health, and Trinity Health.