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 Welcome to this Week in Health It where we amplify great thinking to Propel Healthcare Forward. My name is Bill Russell Healthcare, CIO, coach and creator of this week in Health. It a set of podcast videos and collaboration events dedicated to developing the next generation of health leaders. Have you missed our live show?

It is only available on our YouTube channel. What a fantastic conversation we had with, uh, direct Ford David Mutz. S Shade. Around what's next in health. It, uh, you can view it on our website with our new menu item appropriately named live. Or just jump over to the YouTube channel. And while you're at it, you might as well subscribe to our YouTube channel and click on Get Notifications to get access to a bunch of content only available on our YouTube channel.

Uh, live will be a new monthly feature only available on YouTube. How many times did I say YouTube in that paragraph? Subscribe to YouTube. We're gonna have some great stuff over there. This episode in every episode since we started the Covid 19 series has been sponsored by Sirius Healthcare. Uh, they reached out to me to see how we might partner during this time, and that is how we've been able to support producing daily shows.

Special thanks to Sirius for supporting the show's efforts during the crisis now onto today's show. This morning we're joined by Rob, recently retired c fm.

Morning Bill. Great to be here. Good to be back. Yeah. We were, we were talking earlier that, uh, we, we talked early on in this process. Uh, I, I don't know how long ago it was, but it feels like it was six months ago, but it was probably more like six weeks ago. And we did a show, and at that point we were looking forward, we were trying to figure out, you know, what.

This experience and starting to see the first signs of revenue returning, uh, to sort of look back and then look forward to what's, what's gonna be next. So I'm, I'm looking forward to this conversation. Uh, so I, as well, it was actually March 25th, um, that you mentioned it. And so, um, we, we know so much more now than we did then.

We did, we were speculating a lot back then. We were saying, well, we, we think this and we think we, we really didn't, we, a lot of the things we were couching with, we dunno, we think. Um, so what, what have we learned in the last, I don't know, 50 days or so? Well, I think the thing, so, so I did watch that, I rewatched it last night.

And I think the thing that we underestimated. At least from my standpoint, I thought that every city in town would ultimately look like New York City. Right? Um, we knew what happened with the electives, but we thought that would be replaced with this wave of covid 19 volumes, right? Bursting at the seams with medical patients versus surgical.

Um, and what happened was even worse, bill, because the electives, uh, effectively were shut off the emergency rooms emptied. That wave of covid, for the most part, did not come. So if you think of, um, kind of, uh, other than on the coasts, did not see a surge of patients, thankfully, um, given all the great work by the healthcare providers, but financially, that ended up being even worse because there were no volumes.

So we had empty facilities, empty outpatient facilities, empty beds. So it was really a double whammy financially for, for health systems. Yeah, and I've talked to, well this, you know, we're, we're recording on, uh, on Wednesday and this morning's show was with, uh, Baptist out of Memphis. And what they said is, you know, we prepared, we ended up with 10% of the capacity, covid capacity, uh, being used that we anticipated.

So really accentuating your point. Look, we, we shut everything down and we have one, uh, positive, you know, covid positive patient, and, uh, and, and they didn't really shut everything down, right? I mean, the capacity for the, OR was still at roughly about 50% for most health systems. So there were some mitigating factors here on, on the revenue side.

So.

Well, you know, I go back to, if you think about where we are now, so we we're coming out of this on the other side, and so we're starting to see some of the volumes return. But you, you know, the saying, uh, never let a good crisis go to waste. And, and people think that was a, a political, um, term, or it was invented by a politician.

But I tried to trace this back was actually a medical analogy, right? So if you have a, a. Use that crisis as a way to change your lifestyle, your eating and diet, um, to emerge from that crisis better and and healthier. So I think it's very, uh, very fitting analogy for where we are as, as health systems. So really at a crossroads bill with where do we go from here?

Is it back to normal? And I think there may be some bias that, okay, things are going to return to normal, the volumes will come back. We're fine. Does this become a transformational time in healthcare where, um, you have the opportunity to, to change the way you deliver care, to use this as a, uh, really as a major event to, to change the, uh, velocity or the direction of healthcare or otherwise?

I believe if we don't, uh, we're all going to be working for insurers. Um, and that that may happen sooner rather than later. Wow. Well, alright, so you just you opened up two, two channels of significant conversation. Um, and I did, I did want to get to the insurers and they seem to be coming outta this pretty strong.

I do wanna focus on that, but you also set up a conversation around, uh, fundamentally changing how we deliver care and how.

You know, the advent of telehealth and the funding for telehealth from CMS, which will probably be followed by, uh, commercial payers. The, the question becomes, you know, how will healthcare look different and what are the opportunities for it to look different, uh, to maybe increase access, reduce, uh, to hit.

So the, the things there, there are a lot of negatives that go into this. So if you think of the traditional ways of recovery or the traditional ways of. Of improving healthcare, finances, um, rates are always the, the first go-to, and, and it's usually the commercial payers that are paying the freight for that.

But given where we are with the economy, those commercial contracts come from the, the big corporations and from the, and small businesses from the employer population. And we know right now. Employer businesses are struggling mightily. And so when we come out of this, there will be bankruptcies, there will be companies that are trimming down their insurance offerings or not offering insurance.

So we're not going to get any relief from commercial rates. Um, payer mix is going to be very negatively affected. So they're talking about ultimately 20% unemployment, right? So. Um, the rates that we're going to be getting for the same level of volumes will be negative. Will we, we'll be dealing with Medicaid and exchange and uninsured patients as opposed to that bulk of commercial patients that we've had in the past.

Uh, children's hospitals will be particularly impacted by that day. Traditionally have very strong, uh, lucrative commercial contracts. Some of that volume in the, in the children's hospitals will be moving to Medicaid, so payer mix will be impacted. Volumes will go down, bill. I don't believe it will ever come back completely.

Um, as you said with telehealth, there'll be more movement to, uh, away from physical locations. Uh, utilization. There are some things where people just did not seek care for, for back pain. Um, just, um, excessive use of the emergency room. I know that will ever come back. Um. We may see some volume upticks just through provider consolidation, which we can get to later.

So those traditional levers to improve the finances will not be available. So now you're stuck with then, okay, now what do I do? The things I've traditionally done I can no longer do. So I need these transformational initiatives. We can talk about those you like. Yeah, so I do talk about those because generally speaking, we make the most on commercial.

We, uh, break even from time to time on Medicare contracts. We lose money on Medicare and Medicaid traditionally, uh, large system system

that, um, it's either break even or, or losing money on Medicare, Medicaid contracts. Um, and I remember our CEO talking about we're not, we're not done redefining healthcare until we're actually, uh, a little bit better than break even on those contracts. We have to figure out how to be an efficient health system, uh, in delivering those, those, uh, uh, to those contracts, uh, the way they're, and, and still be able to make money and serve that entire population.

There are some systems, populations. Is their prerogative. So what are some things we're.

Uh, to make money across all those contracts they do. So, uh, you know, we have a problem in that the cost of revenue is too high, right? So we're, we're not going to be able to increase revenue, increase volume, increase rates. So we have to start looking at the cost of the revenue and kind of the, the dirty secret of healthcare is that.

We're a highly, I don't know if it's a dirty secret, but it's, we're a highly fixed cost environment, and so I like to use the benchmark about 70% of the costs in a healthcare system are fixed, uh, in that they, they move very little with volumes bill. So, um, you know, the cost of an, or the cost of inpatient stay with one patient or a hundred patients, there's a level of costs that are incurred.

And so this is really about structure. The physical locations and really how suboptimal the, the utilization of assets are in healthcare. So inpatient beds are underutilized, exam rooms are underutilized in physician offices. Uh, surgery suites are all underutilized. And so, um, that's the kind of of fundamental change we need around.

So forget about lowering supply cost. Over time in variable labor, what we're talking about is transforming this fixed cost that I'm talking about of healthcare. So it's sites of service. It's, it's the, it's the length of stay. It's the things which drive up the need for this fixed infrastructure. So, um, that is new territory.

These are difficult things to do, difficult decisions to make around closures, uh, around transformation. But I think it's. Um, if you think about it, the types of strategies and initiatives you need. So, um, I, I've talked, listened to some of your other guests talk about service lines and, and the, and really service line implementation is nascent at most health systems.

It's talked about quite a bit, but it's an area where, um, they still continue to operate is these very strong vertical hospitals, if you will. Of a physical location as opposed to looking at the geography that they're serving and creating a service line, an efficient service line delivery method, which is, um, we've seen both better for quality and for cost and efficiency.

So I think this is really going to accelerate service line consolidation, and that's one of the, the new levers that can be utilized. Yeah, you talked, um, uh, two episodes ago. You and I talked about really understanding your costs, and we talked about some examples of once you understand your costs, you can, you, you get transparency into where those inefficiencies lie.

The, uh, unutilized, uh, exam rooms, you un underutilized beds. Uh, what kind of a.

Coming outta this crisis. So I think it's, it's going to be absolutely critical now. And if you think about the traditional way of, of looking at a hospital is as an individual hospital. And so most systems, many systems find it very difficult to look horizontally across their system from location to location to compare physician to physician.

So they're the traditional ways to look vertically. Within the four walls of the hospital. So you've gotta have the capability to look horizontally and to understand your costs, uh, within those service lines. And so, um, having a an accurate cost accounting system, you've gotta understand the keys consumptions.

You have to understand where resources are being consumed. And so. If we compare a physician with a two day length of stay versus a four day length of stay, right? That's double the actual consumption of inpatient resources. But many hospitals will, they'll blame or they'll hold the hospital president responsible for the length of stay.

But really you have to hold the caregiver responsible, the physician in charge of that particular patient in the service line. So having that, that robust cost accounting system, allows you to do this type of service line analytic. These types of productivity analyses in a systemic, repeatable, real-time, um, manner bill.

And, and many systems don't have the capability and it becomes more of a, of an exercise as opposed to a, uh, a repeatable, um, analytical function. So that, that's an absolutely critical, um, skill and, um, center of excellence that's needed in the new world. Yeah, I, I know our listeners are gonna want me to come back to this insurer, and I do want to come back to it, but I, I, I, I wanna stay on this just for a little bit more.

Um, we, we've sort of, as healthcare, we sort of had an addiction to, to capital, to debt and, uh, to a certain extent, didn't we? I mean, isn't that gonna be a significant burden trying to come out of this with 15, 10?

And then we have these, you know, hundreds of millions, billions of dollars of projects that we've done over the years that, that becomes a debt burden. Is that, how are we gonna juggle that? Well, I think, I think we've, we've gotta stop the addiction to capital and the addiction to growth and healthcare, right?

The, uh, if you look from an industry standpoint. Healthcare has one of the lowest, um, sort of returns on invested capital. We create these, uh, facilities and locations, and then they're grossly underutilized in most cases. And that was all driven by this addiction to growth. And, and the fee for service environment, I call kind of the golden goose.

You know, the more, the more you do, the more you make and . Like the golden goose we're, you know, we're killing it because our employers and our, our country and our GDP can no longer pay for it. So I think the, the, and this also becomes a cash conservation, um, method, right? By reducing new capital projects and the cash consumption that's, that's related to them.

So this is no longer about growth. The, the capital needs to be spent on transformation. So how do we look at our existing facilities? What can we do to increase the throughput of those existing facilities? Okay. How can we consolidate? So it's actually. Fewer physical locations. How do we close? Um, uh, I can't say outright hospitals, but that may even be the case with, for a large system.

But how do we close physician offices? How do we close surgery centers to increase the volume and the throughput of the existing remaining facilities? So capital will need to be redeployed in a way which delivers productivity and efficiency and lowers cost as. Um, providing capacity for additional volume or amenities for patient experience.

So this is really about, um, transforming the system and the way it delivers care because the insurers will get to those guys eventually are starting from a greenfield, so they're creating a competing. Provider capacity in a greenfield environment in a highly efficient, so they're starting on a greenfield.

We're starting with existing inefficient assets, which need now to be redeployed and transformed in a more efficient way. Yeah, I, I know you're teeing me up to go to insurance and I'm gonna get there in a minute because they, they are efficient. I mean, my insurance carrier has telehealth, you know, as sort of a entree into the, uh, into the care platform and it's just interesting to me.

So we'll get there in a second, but the, the last question on this is gonna be.

You know, we talk about these strategies and a lot of it, because I came from a large IDN, you came from a, a large health system. Um, are, are these strategies the same for small rural community all the way through large IDN or are they, are they fairly different? I think they're, they're quite different. If you think of the, what's happening with the.

Small, rural, um, they're, they're going to struggle mightily, um, through this. And so their strategy is one of survival. And I think, um, when we think about critical access hospitals, they're going to need to be, um, provided funds, um, you know, we can call it, uh, being saved, a bailout from federal government.

Many of the other, um, smaller regional systems which are competing today with large. Uh, academic medical centers and large IDNs, I think will, um, be, be faced with closure, and that's difficult to say, and there's political implications. Uh, we can't forget that healthcare provides such a, a impact on the economy in terms of jobs and employment.

In a local community as well as the construction, um, um, trades work that comes from the capital projects. But this is really a contraction. And so I think what you're gonna find are those, um, smaller medium hospitals, which are competing with larger systems are going to be forced with. Potential acquisition or affiliation, and we may have to change the way that the FTC and the Department of Justice defines competition.

Do we now include insurers in that calculation as to the actual entity that we're looking at for competition and competitiveness? But I think there needs to be this, this kind of shakeout in the industry bill, the, the, um, critical access hospitals, though they will need to be. Um, you know, they are the only, in some cases, the only way to get care in, in a very large region.

So those will, there will need to be some that are saved and there will some to be, there will need to be others that actually will fail and, and that's part of this transformation that's needed because the cost of healthcare and the inefficiency of healthcare as it stands today, um, can't continue.

Do anticipate ID. Declaring bankruptcy or just not being able to make it at this point, or there just too much. They have too many resources to, to be put in that situation. No. So, and, and we talked about this, uh, on the last, uh, uh, broadcast that you and I, uh, did, the, the, the financial resources are there, they will be impacted significantly.

So, you know, we saw the announcement from Kaiser, but that was really more so their investment losses and.

You know, don't really look at the net income per se. You wanna look at the operating income to what's really happening with day-today. Um, stability and cash. The larger systems will have losses. Um, you can't lose 70, 80% of your volume and not have significant losses. So, but they will be fine. They will need to transform, they will be fine in the short term bill.

So in six months, nine months. 18 months, they have, um, very large cash reserves. So if they're break even or they're losing tens or even hundreds of millions of dollars, that can be sustained for some amount of time, but it cannot be sustained, uh, in the long term. So that's why I'm saying transformation's absolutely necessary to lower the cost of delivering services.

So.

And, uh, I received an email this morning, in fact from someone who said, Hey, we're starting to see a significant rebound in our, our, our numbers. And I think we will see it. We have a, a lot of pent up demand, right? So we're gonna see a significant rebound, but we, we may get stuck at that 80 to 85% 'cause people are still gonna stay away for fear, uh, from a fear standpoint.

Um, there's the payer mix, as you talked about. It's not gonna be as profitable work. Um, and, and that's, that's where we're gonna get stuck. So you're saying the same thing, we're not gonna return to pre covid levels of, of revenue or even the quality of revenue pre covid levels. Exactly. And, and I think that's one of the, um, one of the traps in this is that, you know, we start to see, we start to feel good a bit while the volume's returning, but.

Um, 85 or even 90% of the revenue still leaves a significant gap, right? That revenue falls straight down to the bottom line. As I said, in a highly fixed cost environment that falls straight through the bottom line. So there aren't many systems around that are going to be able to be profitable at 90% of revenue.

And, and I don't see the economy. They're saying, you know, this is going to go into two. Um, um, the, the Covid 19 situation and, and its impact on the economy. So there is not going to be any quick return. So even at 90% of revenue returning or 95%, um, we're still gonna be faced with this cost issue. So I don't see it going away.

And in fact, I view it as a little bit of a, of a trap, if you will, in that we get comfortable saying what's going be like.

All right. So last, uh, you know, five, six minutes of the show, I wanna talk about what you called prior to, prior to the, uh, starting the recording you called The Rise of the Insurer. Um, talk a little bit about what, what you mean by the rise of the insurer? Yeah, so sort of like a bad movie, right? The rise of the insurers.

Um, if you think about what the opportunity they have now. This has been, uh, a financial benefit, right? This lack of utilization, this lack of healthcare expenditure has been a benefit to the insurer. So, and as opposed to the provider network, which is, is again, it's uh, it's, it's basically a regional network.

So we have large providers, but no providers are as large in scale and in economic clout and cash reserves as the large insurers. And. Getting better and stronger. Right now there many of their investment portfolios because of the regulatory capital, it's more fixed income than it's equity. So they haven't had the impact of the, the overall market like the providers have.

Um, if you think what's happening, their, their ability to expand bill. Many of the valuations are very low now. So we talk about the independent physicians, which are struggling right now because they've lost all of their volume, where their practices were even closed. And so the valuations and the financial struggles of, of their remaining independent physicians, they will be susceptible to acquisitions.

They may need to be acquired by somebody, whether it's another hospital system, but this provides an opportunity for the insurers to expand their. Their footprint in the provider space, uh, as I said, they're cash rich, so they have the ability to acquire physicians, uh, surgery centers. So they're gonna continue to grow their footprint in a very efficient manage manner.

Remember, they're, they're starting from more or less a greenfield. And what, um, the high unemployment does is in terms of benefit design. So when times are good, when you have very low unemployment. Employees will look at the health plan of a company. So they'll decide, I'm gonna leave this company because somebody else has a better benefit plan or allows me to see the hospitals and doctors that I wanna see.

But, um, in times of high unemployment, they're happy to have a job. They're happy to have healthcare. So what does that mean? You start to see now again, uh, changes in benefit design. You start to see more narrow networks. Um, you start to see rate compression. You start to see the insurers tier, tiering and steering people to low cost, uh, opportunities to get healthcare.

All of these things are bad for the traditional, um, large providers and for hospitals, right? Because they're trying to find lower, uh, sites of care. They're trying to, uh, steer people to their own facilities, right? CVS and Aetna United. Um, owning physicians in MedExpress. So this is only going to make their position both as providers and as the people that directionally control healthcare.

Um, their position is even stronger. So I don't view the threat necessarily. Again, the threat is if we don't transform as providers, um, they're now stronger and more aggressive and so. And less impacted by C Ovid 19. In fact, you could argue in a way they have been helped by C Ovid 19 financially. So I view the big threat ultimately is the failure to transform, allows the insurers the opportunity to continue to make inroads in the provider space.

Well, I mean, gosh. If I'm c for a health system and I just heard that and I'm looking at my market, here's what, here's what I'm, um, hearing. I, I'm, I've gotta get hyper efficient where I'm gonna become the high acuity center for our region and I'm gonna have a ton of competition for my surgery centers.

Ton of competition for, uh, buying medical groups. The medical groups, uh, will essentially have big offers from the insurance carriers or the payers. And if I'm gonna have a lot more competition there, I'm gonna have, uh, you know, essentially, uh, I mean the employers are gonna really work on their relationship with their carrier.

They're guide and direct where care is delivered all over the community. So they, they're, they're, they're going to be the really, the, the driver. Um, is that, am I hearing that correctly or am I overstating that? No, I think this is a, again, a very difficult time for providers because. Um, the risk is that you, you sort of get lulled to sleep by thinking things are going to return to normal.

But what has to happen right now is that the chief financial officer needs to be the chief provocateur. Along with the CEO, along with the operators to say, you know, this isn't, uh, a created crisis. This is a burning platform we have right now. How do we begin to transform? Because the insurers will continue to use the providers for the high end, the high acuity, the ICU, but all these other services, many of which are very lucrative, whether it's the imaging, whether it's.

Lucrative.

To, um, you know, assets that are either owned by the insurer or that are low cost alternatives. And again, employers will be happy to still be in business, employees will be happy to have insurance of any kind. And so again, in low unemployment, you're saying, well, look, I don't want to go to this second tier, um, um, um, reputational hospital.

I wanna go to the academic medical center in my community, in the new world. It's, geez, I'm, I'm happy that I have healthcare coverage. I.

We've gotta make sure that the providers can now create this transformational change now to lower the cost structure of the traditional hospital care delivery model. Yeah. So the CCFO early on in the pandemic was about knocking down barriers. But now we're saying, Hey, CFO, you've gotta be looking at transformation.

Uh. Uh, cost-based, uh, accounting across the board, visibility into what's going on, looking at the market, understanding, um, the trends that are going on, um, uh, are, are you recommending that, I mean, a lot of health systems either had plans, health plans, or they had covered lives in partnership in some way?

Uh, I, I guess what I'm hearing from is that all those things are.

No, I think that the, definitely the, um, you know, there are some systems that have embraced the idea of risk and capitation and, and have taken on, taken on covered lives in different forms, whether it's a Kaiser or a Geisinger or A-U-P-M-C that have large health plans. And again, many of them have now a natural hedge in that they're both a provider and a payer.

So while their financials have been impacted on the provider side, they're seeing the benefit on the payer side. For the others, I think again, the insurers are, are entering. So this there, this is a new space. Now, there aren't just payers and providers. There are these hybrids, which are I IDFs, integrated delivery and financing systems payer providers.

And so the payers are doing it. The providers need to begin to do it as well. They need to understand that if we're truly committed to the triple aim, quality value. The benefits of, of the triple aim really accrue more so to the insurer because the, the old model of fee for service goes away. So yes, this is a multi-year journey.

If you haven't started now, how do you, um, hire and create the capacity to underwrite risk to understand population health? I think it has to be part of the strategy of any large system, because you think about it, the, the crown jewel of delivering healthcare is the provider network that they have. It's the, the world class physicians that they have.

So they have all the tools to build a world class. Insurance operation and deliver that directly, if you will, to the employers and not need the, the payer as a, as a middle person if you'll, so I think, yes, the, the whole idea of risk and becoming a, a payer has to be a strategy of any large, uh, IDN or any large health system.

Well, Rob, thank.

It's, it's gonna be, these are, these are challenging times. It's gonna be interesting. Um, maybe not over the next three, three or six months, but it'll be interesting over the next couple of years to see how this plays out. And it's, it's always great when you, when you make, and when we make these kinds of predictions, uh, when they're captured on video, we have to see, see what they look like in six months and 12 months to see how right.

Or.

Absolutely. Well, I, I'll give you a shot towards the end of the year to adjust again, we'll call up and we'll, we'll another see how, see how things are progressing. But I, I, gosh, I think we're seeing that, we're seeing the health systems that had covered lives of some kind to one system and said, look, you know, we're losing this much from operations, but.

In that money. So, uh, the, there was, there, there was a benefit, but, uh, a lot of health systems have shied away from that because their first foray into taking on risk was not that good. Because it ties back to what you said earlier, we don't know our cost. And, and, and it's that, and, and it's not that, um, the ones that backed away, it's not a bad strategy.

It's usually about execution and, and being, uh, an underwriting risk is not like being a provider. And so I think a lot that went in and, and, and got out quickly, it was because of poor execution. The strategy is a good one and uh, and it really needs to be one that they have that capability and competency for.

Thanks, bill. That's all for this week. Special thanks to our sponsors, VMware Starbridge Advisors, Galen Healthcare Health lyrics, serious Healthcare and pro talent advisors for choosing to invest in developing the next generation of health leaders. If you wanna support the fastest growing podcast in the health IT space, the best way to do that is to share it with the peer.

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