Episode 480: Transcript - January 21, 2022

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Rob DeMichiei: I have a a place in my heart for the great work that's done by all the providers. But I think they're really in a bad place strategically because they've got labor assets. They're heavy in labor assets. They're heavy in infrastructure in terms of physical locations, construction, new construction, replacement construction. And repairs and maintenance. So all those areas inflation will be hitting. And at the same time, they're seeing competition from not only new entrants but also different modes of care delivery, which are less labor [00:00:30] intensive, which are asset light. So it's really a bad formula for the traditional healthcare provider.

Thanks for joining us on this week health Keynote. My name is Bill Russell. I'm a former CIO for a 16 hospital system and creator of This Week in Health IT. A channel dedicated to keeping health it staff current and engaged. Special thanks to our Keynote show sponsors Sirius Healthcare, VMware, Transcarent, Press Ganey, Semperis and Veritas for choosing to invest in developing the next [00:01:30] generation of health IT leaders.

Today we are joined by guest Rob DeMichiei, retired CFO for UPMC and Strategic Advisor to several companies within healthcare. Good morning, Rob. Welcome back to the show.

Rob DeMichiei: Morning Bill. Great to be here. Always look forward to our JP Morgan debrief every year.

Rob DeMichiei: From a strategy perspective and I think we come from this, you and I from sort of a provider angle, given that was both of our backgrounds, but this industry is becoming as [00:02:30]much about the for-profits and the IPO's and the private equity investors as it is the non-profits. These worlds are really converging.

So in terms of strategy, it was interesting. What I saw from the providers Bill is in the past, we've talked a lot about insurers acquiring provider assets and kind of moving into that space and becoming payviders. And one of the macro themes that I saw really emphasized with all the nonprofit presentations was a convergence of the strategy.

So I think what I saw was a real emphasis this year was a realization on the providers part that they can't survive just [00:03:30] being fee for service, acute care kind of hub business, they need to actually expand their offerings and get ready for the future. So I think that's the, the battlefield has been set and it's across all these areas of care.

And and yeah, 2.3 billion in care in that is being provided through their payer arm. You had Bon Secours Mercy also talked about really diversifying. They're, they're all talking about diversifying. Is that the drive here? Is it diversification primarily?

So that whole thing Bill, not [00:05:00] only is it expanding into the insurance and the risk-based arena but it's moving away from acute care only as kind of a hub focus business to say, we've got to start thinking about ambulatory care. We've got to start thinking about home health. So they're expanding both their offerings and then also their business approach in terms of fee for service versus risk-based.

Bill Russell: The interesting question I have on that is, and I made the provocative statement that if I were Ascension, I would look to maybe [00:06:00] consolidate so that they could build those things out more effectively. And if they're going to do that, they should potentially look at some markets and sell off some of those markets where they just identify that they're not going to be able to do that.

But completely different strategies. They're not looking to break out of the geography by acquiring more health systems. They're looking to break out of the geography by embracing digital. Embracing new products. New ways of going to market. I throw that out really, I guess, to get your comment of how you might be thinking about this thing if you were the CFO.

But I think one of the realities is to leverage scale. There's a tipping point in terms of a market presence where you start to realize the benefits of scale. And if you don't get to that tipping point, then you have more of what I call an outpost. And you're not able to leverage either payer contracts or [00:07:30] staffing or your physician network to your benefit.

So I think that's some of what maybe those large systems, those large Catholic systems are facing with their dispersed. When you hear others talking about look we're going to focus on core markets where we have basically a tipping point of scale and size and market presence. So I think that is the future Bill.

So I think in the future, they probably will. And they have to some extent looked at their footprint and rationalized, but that's probably something that you're going to see more of in the future. Absolutely.

Rob DeMichiei: That's a big, big [00:09:00] operation to manage effectively. It takes great people. It takes great leadership and the degree of difficulty is just off the charts. I think Bill that, that's the tough part for anyone that size and that scale. Especially, and I know we'll get to this with all the competition that providers are facing and will face going forward.

And so they can hopefully compete effectively against these large new entrance. But to be a small regionally small system, maybe part of a larger system, but small, regionally, very difficult to [00:10:00] have a competitive offering in a local market with all the competition.

Bill Russell: Small, regional. We talked about Prisma last year. The Prisma presentation is interesting to me. I mean, I look at their geography. It's mostly rural except for Columbia, South Carolina and South Carolina health system. And really impressive results and their strategies is really impressive given their geography.

And they also talked about the risk journey. So they are moving aggressively not necessarily with a health [00:11:00] plan, but into risk-based contracts with payers to, to move away from from fee for service to value. So this is a couple of years now where Prisma's had really interesting presentations.

So I think it's a combination. They do a good job there with their slides and their presentation, but also the underlying messages is very, very strong and the right ones. So I think they're headed in the right path and the results have been improved the last few years.

Rob DeMichiei: [00:12:00] Well, I think nearly every presentation dealt with the labor either in their presentation or through follow-up questions. So it's an issue for everyone. And there were different numbers thrown out. Advent had 440 million in excess agency spend. So if you think about that in a traditional year, that would be right off of the bottom line. Intermountain had $95 million in budget overages.

But what I didn't hear a lot of, I heard some of it and actually I think Intermountain talked about this. Who's dealing with the demand for nursing? How are you changing your care delivery to deal with this nursing shortage? And I [00:13:00] think Intermountain spoke about actually kind of using digital and remote monitoring to keep people at home. To keep them well, to avoid the hospital, basically.

So it's really hard to be strategic and think about these things when you're in the midst of a tactical crisis. So but you heard mostly about the supply issues Bill and the reaction and the creative responses to the supply, but think longer term, this becomes a demand discussion. How do you reduce the demand for nursing or deliver care differently?

And I go back to the steel industry and the coal industry. In the twenties and thirties and the forties, nobody wanted to do those jobs. And so they relied on immigrant labor to do that work. And you created a whole new generation of Americans basically from that. [00:14:30] And we have that same opportunity now in healthcare and hospitality, where we could be training and integrating a whole new influx of amazing American citizens, but politically it's probably unlikely to happen, but a couple of systems are exploring this option with using foreign labor.

Rob DeMichiei: No. Inflation is, it's only transitory on certain items and the supply chains and distribution will catch up and other items that will be more permanent. So I don't know, this isn't a doomsday scenario with inflation, but it will be something that is dealt with. But competition is great and competition ultimately will drive some of these prices back down. I think labor competition is going to be here again until we have a solution in terms of with [00:15:30] immigration or enhancing or increasing our workforce, or again, reducing demand for the workforce, whether it's robotic automation. Or other solutions care delivery changes, more digital, those kinds of things. Inflation labor inflation is here for a a long haul.

Rob DeMichiei: Well, so the, these interesting market dynamics, right. You have inflation with labor, you have inflation with some supplies, especially ones driven by different commodities where those prices are increasing.

But I think they're really in a bad place strategically because they've got labor assets. They're heavy in labor assets. They're heavy in infrastructure in terms of physical locations, construction, new construction, replacement, construction. And [00:17:00] repairs and maintenance. So all those areas inflation will be hitting.

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We heard at Baylor Scott and White last year talked about their asset light strategy to go into, I think it was Austin. And it was really fascinating. It was really effectively done. And they have since shored that up with some additional infrastructure around that Austin market.

Rob DeMichiei: You've hit on another issue is that while the traditional providers have talked about expanding horizontally into different areas away from acute, right. The front end, also the backend post-acute home. So they've talked about expanding to go where that demand is to own that full continuum of care.

And so what no one talked about, these are the really difficult discussions. How do you minimize that footprint? That inpatient acute footprint, while at the same time, expanding your ambulatory and outpatient footprint. So I always look to the for-profits for thought leadership[00:20:30] and it's interesting on the same vein Bill during Tenant's presentations, Tenant is a provider. So what is tenant doing to get ready for the future? Very interesting. Tenant, and they announced this several months ago, they're reducing their acute care footprint. They're reducing the number of hospitals that they own.

They're successfully becoming lighter. They're maybe not asset light like an insurer, but they're becoming lighter to say we're truly going to have a hub and spoke model where we do acute care. And this goes back to our Common Spirit, [00:21:30] Ascension discussion. Where we're going to have an acute hospital, we're going to be a market leader.

And that's going to reduce the demand for the inpatient and acute beds. So the strategy is in front of everyone. The question is who can [00:22:30] execute to it. The other discussion was with a public company, Surgery Partners, and they're in the the ASC business as well. And I thought it was interesting.

They're looking at this outpatient surgery market. Now, the CMS has kind of backtracked on this inpatient only list thing. There was just a ruling where they were going to be eliminating a bunch of procedures from the inpatient only list that was going to be a boom for the the ASC industry.

And if you think of, and this was a lot of the presentations had NPSs and they were in the nineties, some of the digital providers and in some of the other new entrants and these are higher than Apple, Amazon Costco. So this is the winning model that I think the providers need to look to. The question is can they execute on that [00:24:30] difficult of a shift in strategy? And in some cases mission.

Bill Russell: Let's talk about the CFO portion of the presentation. So the CFO's got up there. The investment returns this year had to be astronomical I would imagine because it would indicate that all their balance sheets looked pretty strong. All the ratios look pretty strong. I would assume that's a result of the investment returns .

This is really kind of a size based stimulus. So the larger you were, or are, the more and stimulus dollars that you received. Really only one and I may be shorting someone here, but the only one that I know of that announced the return of the stimulus dollars was Mayo. Everybody else rightfully so, took the stimulus dollars, but in [00:25:30] hindsight, Bill, if you think of it, these systems have done quite well.

The ones that have an insurance arm actually did better. The question is we think about stimulus and we were all thinking about how do we maintain care? And this is a crisis and let's get funds immediately to, to where care's being delivered. But in hindsight, those stimulus dollars probably would have been better used on the struggling systems because they're still struggling.

But again, it's unfortunately it's dwarfed by the capacity of the insurers and some of the large retailers as we go into another tangent. Just one statistic, CVS in their presentation, they said that about 50% of their free cash flow was going to be available for either M&A activities, dividends to shareholders or stock buybacks.

So these insurers are out there with tens of billions of dollars in dry powder to again, build out their provider network and the provider assets. And that's really again, dwarfs even the largest provider is very small compared to some of the, the scale that these insurers and these retailers have. [00:28:00]So tough.

Bill Russell: It sounds like you, I sat in on the nonprofit track. Sounds like you hit a lot of the for-profit track as well.

Rob DeMichiei: So the beauty of a virtual conference is everything's recorded. So my strategy with this coverage thing, as I listened live to the non-profits on Monday and Tuesday, and then in the evening I go back and I watched the virtual presentations and then.

They're public companies. They publish this information. These presentations are all on their websites. And if you want to get a roadmap for how the competition is viewing your business and this addressable market, go listen to what they say. And it will be, I think it will help you as a provider executive to think about the need [00:29:00] for future thinking and for being strategic and where you need to be as a system versus where you are today.

Bill Russell: You brought this up and at JPM we're primarily, I think the smallest system we're listening to is maybe a billion. Maybe 2 billion, maybe even 3 billion at this point. So those are fairly sizeable. And if they're at JPM, they generally have a market short up that they're serving.

Rob DeMichiei: I wish I had a great answer to that because if you think about it in the old world, they'd be acquisition targets and primarily the ones that are partially healthy or ones that could really benefit by a larger provider partner who can [00:30:00] provide academic physician staffing or some scale around supply chain.

so these new technologies providing for rural areas that this will become available to them. So what do you need? What do you need in your community? Certainly like an emergency department or some kind of capability. But do you now have to move to a hub model where you need to travel a bit for surgery of some type.

So again, they're in a really bad position. I think Bill, they don't have the financial. They don't have scale and scope. So it's really hard and they, and they have the same competition that these large providers do with all the digital disruptors and the insurance companies. And of course, in these rural areas, there's a CVS and there's a Walmart as well. So they're going to face the same competition [00:32:00] as the large providers are going to be facing in the cities.

Rob DeMichiei: They have the same weapon available to them, right? It's going to be at a higher price point. So there's going to be labor inflation, but you know, they can hire a person from New York city to work in a rural Pennsylvania community basically, right that they couldn't do before, when they had to get them to relocate to their town.

Bill Russell: Yeah. Other presentations have now, we've gone through the financials a little bit. We've gone through the strategies. Are there any other presentations that sort of jumped out?

And I was kind of stunned by that number. Now, granted Advent's a larger system, but that is if you [00:33:30] think about that, that just seems astronomical to me. So I was really surprised at that number. I mean, I haven't been through a full Epic install. I've been through pieces of it and, and UMC on the ambulatory side, did it I believe in the late nineties or early two thousands.

Bill Russell: I've heard that conversation. I've had that conversation in several different levels. It's interesting to me, because they're going from Cerner to Epic. It's it's not like they're going from disparate systems and whatnot. I think they have a consolidated system already.

Rob DeMichiei: Well, that's just it. If this was Denovo or Greenfield where you had no EMR understands there's initial investment, but to switch from one vendor to another.

And especially in light of the acquisition by Oracle, I think there's an opportunity actually for Cerner to claw their way back, basically. So that was just one thing, though. That was a bit stunning to me. The other, again, not a specific [00:36:00] presentation, but the whole discussion around the digital front door and owning the consumer was, we've talked about this a few times already, but I saw this basically, everybody talked about it.

I go back to the retail as well. Right. Anyone who's had a COVID test at CVS, but I think we probably all have you need to register with them on their platform. My CVS or whatever it's called. So everybody's creating these front doors. And the benefit to that is from a steerage and a quarterbacking standpoint.

And many of them talk Clover health, Oak street health. Everybody is looking to be the front end and then turn hospitals and health systems into just a point solution. Right. And the hospital's trying to avoid being a point solution, right? They [00:37:30] want to be your comprehensive destination for care, and I'm not sure who's going to win that battle.

You do, but they're saying, look, your first stop is our virtual. Interaction or virtual consultation before you just run to a specialist. So this battle for the digital front door and primary care that I think is the greatest risk to the health systems. The health systems want to maintain primary care as a way to feed [00:38:30] specialists and keep hospitals full.

And they want to expand to have other offerings across the continuum. And what the insurers and the retailers are doing instead, Bill is they're saying, look, we're going to control primary care. We're investing in primary care and we're partnering in primary care and we're creating this high touch, high NPS, consumer digital experience.

But ultimately if you need it, I'm going to have inpatient, acute care as a point of service solution. So the war to me, the worst primary care in digital, and I think it's going to be tough for providers to win in that space.

They're making it operationally efficient and doing the things they can do to help it to scale it and be efficient. But there's an awful lot of investments going on outside of, well, within healthcare, but outside of the traditional model do they do health systems believe that that [00:40:30] is a significant avenue for new revenues for them to participate in that space. And you're seeing them hire people with investment backgrounds and people that you would see at a VC firm or you'd see at a private equity firm.

So everyone's doing it. Whether you're going to create a new revenue stream as part of your operations, I think is that's very, very difficult to create something that you now run, which is delivering operating revenue and operating income. What we've seen these do is really they, [00:41:30] when they're successful again and so for every Evolent that UPMC had, or every ensemble that Bon Secours had, there are 50 other, or actually more than 50, there are hundreds of other investments that there's a news release and a press release in a splash. And then you don't hear anything about it. And that usually means that they weren't successful, but when they are successful, bill, what usually happens is that they're monetized, right.

Bill Russell: That was Bon Secours.

So they don't become an operating entity, a new division of [00:43:00] any of these large systems, which becomes an operating division. It usually becomes a monetization, which is great. Right? I mean, if you can return hundreds of millions of dollars or billion dollars back to your clinical mission and your community, that's fantastic.

But to me, Bill, it's not a new revenue stream in terms of recurring revenue. It's usually a monetization event that gets reinvested in the organization.

Who's going to pay for this. Oh, the consumer. No, they're not. Who's going to pay for it. I don't know. I and you just sort of look at that and there's, there's a lot of those out there that I think when the tide rolls back and if you have as much gray hair as you and I do, you know that the tide comes in, tide goes back.

Rob DeMichiei: So this cycle, right? We, never learn, right. The markets never learn. So we had irrational exuberance for several years and you're already seeing things start to pull back.

So this again, baby boomers, aging, 10,000 new consumers of Medicare every day. And if about half of them are going into Medicare advantage, so it's a great market, but so those opportunities are still there. Those disruptors are still needed. It's just the valuations were off the charts. And so I always say that the best investment is to be the second person in, right? Whether it's somebody opens up a restaurant, you want to be the person that comes in and buys all the assets at a discount after the first restaurant closed and buy [00:46:30] everything at a discount. And it's the same with a lot of these investments.

There's great technology out there. The ideas are great ideas. They are game changers. They will become part of the future. I think it's just evaluation and pricing issue, and there's still a ton of money looking for return. So I don't know that the and healthcare is still a very, very lucrative space for them to play in.

So M and A will continue. This will be a consolidation space. They'll still be new entrants but I think you're going to see much more consolidation Bill in the, certainly this year and the years to come.

Rob DeMichiei: A lot of dry powder and great. The rating agencies love it. And every year Burke puts a slide out where he shows their ratings and and they're proud of them. And rightfully so, that's a well-run system. And they've got this figured out in terms of delivering care.

So I think that's one of the things that we have to watch as large providers and large systems. Some of this financial health could raise a red flag, but at the same token the dry powder that you mentioned of all these systems, [00:48:30] the one thing they have in their favor, because we just spent the last 40 minutes talking about all the headwinds that providers have with insurers and new entrants so, this at least gives them one advantage, which is a strong balance sheet to invest into move to post-acute and to close down redundant facilities and to move to service lines and reduce inpatient capacity. So some of the tough things they need to do at least they've got the tailwind of a strong balance sheet.

But if we overlay our systems, our processes, our workflow, our operational efficiencies, our digital front door, we're going to be able to get this much more market. It just seems I will. We'll see. Intermountain just bought SEL and we'll see how that goes for, I imagine [00:49:30] it'll go well, I'll see. SEL is pretty well-run system.

Bill Russell: Rob. If I ever go to a Joe Rogan three-hour show, you're going to be the first person I call because we could keep this conversation [00:50:30] going, I think for another, for another couple of hours. But thanks for coming on the show. Thanks for sharing your experience and wisdom. I do agree with you. There's a lot of coverage on this conference now and it's gotten to be really good. But still, I, love what we're able to do. Just bounce this back and forth.

Rob DeMichiei: Always a great conversation and always enjoy the time Bill. So thanks.