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By Kenneth Kaufman
A couple of months ago, I got a call from a CEO of a regional health system—a long-time client and one of the smartest and most committed executives I know. This health system lost tens of millions of dollars in fiscal year 2022 and the CEO told me that he had come to the conclusion that he could not solve a problem of this magnitude with the usual and traditional solutions. Pushing the pre-Covid managerial buttons was just not getting the job done. This organization is fiercely independent. It has been very successful in almost every respect for many years. It has had an effective and stable board and management team over the past 30 to 40 years. But when the CEO looked at the current situation—economic, social, financial, operational, clinical—he saw that everything has changed and he knew that his healthcare organization needed to change as well. The system would not be able to return to profitability just by doing the same things it would have done five years or 10 years ago. Instead of looking at a small number of factors and making incremental improvements, he wanted to look across the total enterprise all at once. And to look at all aspects of the enterprise with an eye toward organizational renovation. I said, “So, you want a makeover.” The CEO is right. In an environment unlike anything any of us have experienced, and in an industry of complex interdependencies, the only way to get back to financial equilibrium is to take a comprehensive, holistic view of our organizations and environments, and to be open to an outcome in which we do things very differently. In other words, a makeover. Consider just a few areas that the hospital makeover could and should address: There’s the revenue side: Getting paid for what you are doing and the severity of the patient you are treating—which requires a focus on clinical documentation improvement and core revenue cycle delivery—and looking for any material revenue diversification opportunities. There is the relationship with payers: Involving a mix of growth, disruption, and optimization strategies to increase payments, grow share of wallet, or develop new revenue streams. There’s the expense side: Optimizing workforce performance, focusing on care management and patient throughput, rethinking the shared services infrastructure, and realizing opportunities for savings in administrative services, purchased services, and the supply chain. While these have been historic areas of focus, organizations must move from an episodic to a constant, ongoing approach. There’s the balance sheet: Establishing a parallel balance sheet strategy that will create the bridge across the operational makeover by reconfiguring invested assets and capital structure, repositioning the real estate portfolio, and optimizing liquidity management and treasury operations. There is network redesign: Ensuring that the services offered across the network are delivered efficiently and that each market and asset is optimized; reducing redundancy, increasing quality, and improving financial performance. There is a whole concept around portfolio optimization: Developing a deep understanding of how the various components of your business perform, and how to optimize, scale back, or partner to drive further value and operational performance. Incrementalism is a long-held business approach in healthcare, and for good reason. Any prominent change has the potential to affect the health of communities and those changes must be considered carefully to ensure that any outcome of those changes is a positive one. Any ill-considered action could have unintended consequences for any of a hospital’s many constituencies. But today, incrementalism is both unrealistic and insufficient. Just for starters, healthcare executive teams must recognize that back-office expenses are having a significant and negative impact on the ability of hospitals to make a sufficient operating margin. And also, healthcare executive teams must further realize that the old concept of “all things to all people” is literally bringing parts of the hospital industry toward bankruptcy. Healthcare comprises some of the most wicked problems in our society—problems that are complex, that have no clear solution, and for which a solution intended to fix one aspect of a problem may well make other aspects worse. The very nature of wicked problems argues for the kind of comprehensive approach that the CEO of this organization is taking—not tackling one issue at a time in linear fashion but making a sophisticated assessment of multiple solutions and studying their potential interdependencies, interactions, and intertwined effects. My colleague Eric Jordahl has noted that “reverting to a 2019 world is not going to happen, which means that restructuring is the only option. . . . Where we are is not sustainable and waiting for a reversion is a rapidly decaying option.” The very nature of the socioeconomic environment makes doing nothing or taking an incremental approach untenable. It is clearly beyond time for the hospital industry makeover. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success!
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By Kenneth Kaufman
On October 1, 1908, Ford produced the first Model T automobile. More than 60 years later, this affordable, mass produced, gasoline-powered car was still the top-selling automobile of all time. The Model T was geared to the broadest possible market, produced with the most efficient methods, and used the most modern technology—core elements of Ford’s business strategy and corporate DNA. On April 25, 2018, almost 100 years later, Ford announced that it would stop making all U.S. internal-combustion sedans except the Mustang. The world had changed. The Taurus, Fusion, and Fiesta were hardly exciting the imaginations of car-buyers. Ford no longer produced its U.S. cars efficiently enough to return a suitable profit. And the internal combustion technology was far from modern, with electronic vehicles widely seen as the future of automobiles. Ford’s core strategy, and many of its accompanying products, had aged out. But not all was doom and gloom; Ford was doing big and profitable business in its line of pickups, SUVs, and -utility vehicles, led by the popular F-150. It’s hard to imagine the level of strategic soul-searching and cultural angst that went into making the decision to stop producing the cars that had been the basis of Ford’s history. Yet, change was necessary for survival. At the time, Ford’s then-CEO Jim Hackett said, “We’re going to feed the healthy parts of our business and deal decisively with the areas that destroy value.” So Ford took several bold steps designed to update—and in many ways upend—its strategy. The company got rid of large chunks of the portfolio that would not be relevant going forward, particularly internal combustion sedans. Ford also reorganized the company into separate divisions for electric and internal combustion vehicles. And Ford pivoted to the future by electrifying its fleet. Ford did not fully abandon its existing strategies. Rather, it took what was relevant and successful, and added that to the future-focused pivot, placing the F-150 as the lead vehicle in its new electric fleet. This need for strategic change happens to all large organizations. All organizations, including America’s hospitals and health systems, need to confront the fact that no strategic plan lasts forever. Over the past 25-30 years, America’s hospitals and health systems based their strategies on the provision of a high-quality clinical care, largely in inpatient settings. Over time, physicians and clinics were brought into the fold to strengthen referral channels, but the strategic focus remained on driving volume to higher-acuity services. More recently, the longstanding traditional patient-physician-referral relationship began to change. A smarter, internet-savvy, and self-interested patient population was looking for different aspects of service in different situations. In some cases, patients’ priority was convenience. In other cases, their priority was affordability. In other cases, patients began going to great lengths to find the best doctors for high-end care regardless of geographic location. In other cases, patients wanted care as close as their phone. Around the country, hospitals and health systems have seen these environmental changes and adjusted their strategies, but for the most part only incrementally. The strategic focus remains centered on clinical quality delivered on campus, while convenience, access, value, affordability, efficiency, and many virtual innovations remain on the strategic periphery. Health system leaders need to ask themselves whether their long-time, traditional strategy is beginning to age out. And if so, what is the “Ford strategy” for America’s health systems? The questions asked and answered by Ford in the past five years are highly relevant to health system strategic planning at a time of changing demand, economic and clinical uncertainty, and rapid innovation. For example, as you view your organization in its entirety, what must be preserved from the existing structure and operations, and what operations, costs, and strategies must leave? And which competencies and capabilities must be woven into a going-forward structure? America’s hospitals and health systems have an extremely long history—in some cases, longer than Ford’s. With that history comes a natural tendency to stick with deeply entrenched strategies. Now is the time for health systems to ask themselves, what is our Ford F150? And how do we “electrify” our strategic plan going forward? Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
For hospital providers across the country, the year 2022 was a big mess. A Kaufman Hall report prepared for the American Hospital Association predicts that 55% of hospitals will lose money from operations in 2022. And hospital margins have fallen by 31% from 2019 pre-pandemic levels. A very common question from hospital executives and board members alike is, “What happened? How and why did we fall from financial grace?” The most obvious answer is that the critical relationship between revenue and expenses is unexpectedly broken. Inpatient revenue is flat, leading to year-over-year increase of net operating revenue of only 3%. Expenses, on the other hand, have increased by 8% in the past year, with labor expenses up, since 2019, by a remarkable 23%. As usual, statistics tell the story, but they don’t tell the entire story. The hospital industry is, for sure, bedeviled by a revenue-statement problem, but the range of operating and strategic problems within hospitals is much more nuanced. One particular problem worth focusing on is what I call the “productization” of healthcare. Historically hospitals offered what was loosely referred to as “healthcare,” which meant a series of diagnostic and treatment services for which there was sufficient patient demand from an associated market area. Those services could be occasionally connected into a “center” concept, with mammograms, breast surgery, and oncology being one example. In other situations, hospital services could be discrete and disconnected, and often developed from a particular physician’s unique expertise. But in no case were these connected or disconnected services referred to as products or operated as products. Fast forward to now, and pretty much everything in healthcare has been organized into what is commercially known as products. The healthcare product list is long and comprehensive. Some services that are now products include urgent care, mammography, dermatology, ambulatory surgery, imaging centers, Walmart primary care, Walgreens primary care, and CVS primary care. That list is off the top of my head, but I am sure my reading audience can add many others to the “product” list. Given the unsettled hospital environment, both financially and clinically, it is abundantly clear that hospitals struggle in a “productized” marketplace. Products require careful construction, and they require sophisticated and very close management. Products tend to operate as their own brand or under the aegis of a larger brand. Products tend to have close and individual financial management, because they tend to financially succeed or fail on their own. All of this is counter-intuitive to many hospitals. Hospitals lean toward managing a patient population, and then selected services are enlisted for the benefit of those patients. Hospitals have “brands,” but their services generally don’t. Management is very sophisticated within the hospital ecosystem, but that management approach is generally operated with the entire enterprise in mind. And finally, while more and more hospitals have capable cost accounting systems in place, hospital financial management tends to operate as a complex web of cross-subsidies based on profitable and unprofitable services, all operating on top of an ever changing payer mix. Such a financial structure was never designed to compete within a corporate or entrepreneurial product-centered market. Hospitals are suffering in a “productized” world. As more and more so-called services are segregated into discrete products by larger corporations, by start-ups, and by private equity and venture capital, it seems inevitable that hospitals are losing traditional utilization and the financial rewards of that utilization. The statistics are not yet available to definitively prove this point, but the financial chaos of 2022 certainly suggests that hospitals find themselves at a significant competitive disadvantage in our fast changing “productized” healthcare world. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
“In the beginner’s mind there are many possibilities, but in the expert’s, there are few.” This famous observation by Shunryu Suzuki, which posits the importance of intellectual humility in understanding a new situation, is especially apt for healthcare’s unprecedented workforce challenges. During the pandemic, almost 1 in 5 healthcare workers quit their jobs. One-third of nurses plan to leave their current roles by the end of 2022, with more than a quarter of those intending to become traveling nurses. At the same time, hospitals find themselves competing with non-hospital employers that are aggressively pursuing hourly staff—companies that can pass along wage increases to consumers in the form of higher prices in a way that healthcare organizations cannot. Unprecedented problems require new solutions. Finding those new solutions starts with setting aside long-held preconceptions, listening intently to the wants and needs of the many diverse stakeholders that constitute the healthcare workforce, and addressing what is heard with actions that are more nuanced and more flexible than ever before. Addressing the Foundational IssuesWhile the industry faces an exceptional crisis related to staffing, the issue is symptomatic of more foundational workforce problems. Even prior to the pandemic, workforce burnout was a growing problem, with nearly 1 in 3 nurses, and 42% of physicians experiencing the physical and emotional stress and exhaustion and sense of detachment characterized as burnout. With serious margin declines occurring during Q1 2022, maintaining financial integrity remains an ever-present concern, with organizations appropriately initiating cost-reduction strategies to drive lean operations. These efforts taking place alongside staffing shortages may prompt concern across the workforce regarding availability of resources and a health system’s commitment to investing in its people. The technologies implemented over the last ten years often provide little time or work savings (and sometimes create even more complications), as many organizations have not updated their processes to create real efficiencies. Diversity, equity, and inclusion investments have been made, but many hospitals have not made transformative progress. Health systems need to favor prompt, innovative, and tailored actions, understanding that difficult cultural and leadership changes are required. Organizations need to address their workforce challenges as a foundational and cultural opportunity, with strategic and operational interventions. Different Segments with Subtly Different Needs Each segment of the workforce has its own wants and needs, satisfiers and dissatisfiers, with the current crisis emphasizing subtle and changing differences among groups and individuals. Capturing these subtleties requires assessing workforce needs with multiple approaches to segmentation, including job category, job type, job level, demographics, and value orientation. Job category is a traditional way to segment the health system workforce, in which the categories roughly correspond to departments or divisions, such as administration, nursing, diagnostic imaging, physical therapy, environmental services, and so forth. Within each job category are many subcategories, each with its own workplace experiences. For example, in a survey on the pandemic’s impact on physicians, employed physicians, primary care physicians, females, and those under age 45 reported experiencing more burnout than their respective counterparts. Segmenting the workforce by job type, for example, knowledge workers, caregivers, administrative employees, and service workers, can help leaders see worker needs with more nuance. Job level, including hourly/nonexempt, professional, managers and directors, and executives, is frequently a relevant classification. Demographics cut across all other categories. Demographic factors include age, educational attainment, certifications/ licenses, disability, family and marital status, foreign-born workers, and race and ethnicity. Value orientation is another approach to workforce segmentation that cuts across all job categories and levels. Some people place a high value on intrinsic rewards, including deriving a sense of identity and meaning from one’s job, and perfecting one’s work. Others are driven by extrinsic motivators, such as compensation and status. Someone who is future-focused values future accomplishments over today’s experiences and may seek to make a positive difference in society. A person who values the experience of work may have strong preferences about the variety of tasks they wish to perform, the degree of control they want to have over their own work, and the amount of teamwork in which they wish to engage. Discerning Differences Although workforce segments are motivated by many of the same factors, variations on these themes may reflect different causes, which in turn suggest different solutions. For example, consider the issue of compensation, which has been identified by physicians, nurses, and hourly workers alike as a motivating factor. Dig a little deeper and you’ll discover that the nature of the concerns that surfaced during the pandemic years differs significantly among these groups. In a survey conducted by a professional association, nearly 7 in 10 independent physicians (and 44% of those who are employed) described concerns about income stability, stemming from a reduction in income they experienced as a result of COVID. In contrast, another survey found that nurses’ primary concern about compensation during this period was that travel nurses received ultra-premium wages for doing the same work that they, the permanent staff, were doing. And hourly workers, who are often at the bottom of the hospital pay scale, simply wanted higher wages, cited by 69% of respondents as their most wanted change. In some instances, the problems experienced by one segment of the workforce are not shared by all. The extreme circumstances of the pandemic have led to correspondingly extreme variations in workplace experience. For example, nurses have been targeted by an uptick in violence perpetrated by patients and family members against healthcare workers, triggered by anger about hospitals’ mask requirements and other COVID-related restrictions on visitors. In a survey conducted by the nursing union National Nurses United, 48% of hospital nurses reported experiencing an increase in workplace violence. Yet the issue of physical safety, critically important to direct-care nurses, is likely a non-issue for employees who work in roles with little direct public contact. It’s important, too, to discern assumed versus actual differences about segments. For example, executives may voice concerns about a specific generational demographic—for example, that Millennials do not work as hard, or that Gen Zers’ workplace flexibility expectations are untenable. The research shows that these are meta-stereotypes, with evidence suggesting only very small differences in the wants across ages. In fact, between the first quarter of 2021 and 2022, the greatest growth in resignations across all industries was among people aged 40 to 60, and those with an average tenure of 10 years. Listening Reimagined Most hospitals and health systems have well-established employee satisfaction and engagement surveys and metrics. In light of the changes that the pandemic has brought about, however, it’s time to take a fresh look at them. To understand changing workforce attitudes and needs and produce actionable information, all aspects of your organization’s information-gathering process require reexamination, including the frequency, level of specificity, sample size, forums, and tools that are brought to bear. Approaching this task with a beginner’s mind can lead toward questions that reveal deeper insights, such as, “What does flexibility mean to you?” as a follow-up to, “Is flexibility important to you?” Cultivating a beginner’s mind can also help you formulate questions that enable people to articulate ideas they may not have shared with their employers before, like responses to, “What is meaningful work for you?” and, “What would cause you to stay rather than leave for another job opportunity?” It is important to also include tough questions, such as queries about whether people have experienced workplace aggressions, and to frame those questions using everyday language. Approaching the Workforce with Empathy The messages that executives hear from this highly discerning approach to listening and assessment will in all likelihood reflect the dramatic social and economic changes taking place throughout the nation. The intensity of these changes, as well as the high stakes for patients and providers, call for innovative actions. When we think about innovation in this context, the most important quality is empathy. With different segments and subsegments voicing different needs, organizations need to provide workers with pay, benefits, support, and environments that are tailored to an extent healthcare organizations have never done in the past. This is decidedly not the traditional approach to human resources management, which for very good reasons has emphasized consistency, and expectations of rules and control. In most organizations, workers are expected to adapt to the rules developed for human resources management. But if workers are first approached from a position of empathy, it’s the rules that adapt to meet the needs of the workers. In this environment, everything is on the table: wage scales, bonuses, job classifications, access to health coverage, schedules, work setting, and opportunities for change and growth. And in this environment, every type of worker support needs to be considered: first-year mentoring, relief from administrative tasks, transportation, child-care, tuition assistance, and more. The Necessity of Humility The COVID-19 pandemic has led each member of the American workforce to question what they want from a job. And for many workers, the pandemic has provided the means to follow the answer to that question into new types, locations, and experiences of employment. To be the employer of choice in this time of change requires an unprecedented level of humility. Employers need to assume that what will attract and keep an engaged workforce is very different than has been provided in the past. Employers must place themselves right alongside their employees in their quest to determine what is wanted and expected from work. The answers employers hear will be new ones. They will challenge the status quo. They may be discomfiting. It is critical that hospital and health system leaders leave their preconceived notions at the door during these conversations. All of society is in a position of learning and exploring. And meaningful participation in that effort is only possible with eyes, ears, and mind wide open. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
How soon they forget. Throughout 2020 and 2021, the media was full of praise for hospitals and healthcare workers on the frontlines of the COVID-19 pandemic. When the pandemic was new in the spring of 2020, Americans were effusive in their appreciation of hospitals and the people who worked in them. At that time, a COVID vaccine was a distant dream, and personal protective equipment was so scarce it had to be rationed and reused. To all who valued the safety of home in those early days, it was clear that healthcare workers weren’t running away from danger; they were running toward it. In New York City, which was the U.S. pandemic epicenter that spring, a curious ritual played out every evening at 7 o’clock. People emerged from quarantine onto balconies, fire escapes, front stoops, and rooftops to cheer for their city’s healthcare heroes using whatever makeshift noisemakers they could find. They shared videos of these flash events on social media. Later, as the pandemic spread across the country, yard signs popped up in cities large and small: “A healthcare hero lives here”…“Thank you, healthcare heroes.” Press coverage conveyed a sense of awe at both the personal sacrifices and the heroic efforts healthcare workers made on a daily basis. That was then. This is now: We are currently witnessing a media free-for-all challenging the tax-exempt status, financial practices, and ostensible market power of not-for-profit hospitals and health systems. This is happening despite the fact that thousands of Americans are still hospitalized with the COVID-19 virus and more than 400 are dying of it on any given day. And despite the fact that America’s hospitals are dealing with an exceptional and unexpected aftermath of the pandemic. Today, the financial health of America’s hospitals is in serious jeopardy. Indeed, our projections show that 2022 is shaping up as the worst financial year for hospitals in memory. In the first six months of 2022, hospital operating margins fell 102% compared with pre-pandemic levels. Median operating margins for hospitals have been negative through all of 2022. Through the end of 2022, hospitals are projected to lose billions of dollars with no foreseeable federal support. Expenses are projected to increase nearly $135 billion over 2021 levels. More than half of hospitals are projected to have negative operating margins in 2022. At the same time, shortages of nurses and other clinicians are putting severe pressure on clinical teams and creating backlogs of patients in desperate need of hospital beds. As one hospital nurse put it, “We’re drowning.” There are other, more nuanced stories behind healthcare industry headlines. For example, media commentators often applaud the big-tech companies disrupting healthcare, such as Amazon, Google, and Apple, for their customer-centric, technology-savvy approach to healthcare. What doesn’t get mentioned is what hospitals do every day that these other companies do not and will not: Take care of people with the most critical ill patients requiring the most sophisticated treatments and procedures. Take care of people who do not have insurance or the means to pay. And do all that 24 hours a day in a face-to-face environment. These big tech players don’t have the costly stand-ready responsibilities or the duty to provide unprofitable but medically essential services that hospitals do. We as a society need to realize that all of these “must have” clinical services, which we and our families depend on in every kind of healthcare situation, don’t just magically appear. It requires the work and cooperation and self-sacrifice of doctors, frontline healthcare workers, administrators and Board members. It requires enough money, the right facilities, and some of the most complex processes and procedures operating within any part of our overall economy. It requires the hardest of hard work each and every day. During a period marked by both existential challenges and daily crises, our country’s hospitals and healthcare workers found a multitude of ways to meet the moment, and without question saved countless lives. But hospitals and healthcare workers aren’t looking for impromptu serenades. Or even yard signs. They’re just doing their jobs. Hospitals and healthcare workers are simply looking for our support and validation in the face of extreme economic and organizational headwinds. The cooperation, the support, and the best thoughts and intentions of all who are involved in the American healthcare system, from those who provide the care to those who provide the funding and to the patients who participate, are essential for that system to be one we can all be proud of. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
When it comes to equity, healthcare organizations face three different and very difficult challenges: health disparities among patient populations, income inequality in the healthcare workforce, and of diversity in the C-suite and the boardroom. To get the job done, you have to tackle all three. And that takes an uncommon—even selfless—type of leadership. In his decision to retire from coaching, Tampa Bay Buccaneers head coach Bruce Arians showed what that kind of leadership looks like. If you follow football, you know that Arians’ retirement announcement came as a surprise, if not a shock, to the NFL community. With a stellar 80-48-1 career win-loss record, a Super Bowl victory in 2021, and the recent return of superstar quarterback Tom Brady, Arians had good prospects of coaching the Bucs to another Super Bowl victory this year. That would have virtually assured his ascension to the Pro Football Hall of Fame. But Arians had a different kind of legacy in mind. After assembling one of the most diverse staffs in football, Arians saw an opportunity to elevate defensive coordinator Todd Bowles, his handpicked successor, at a time when the Bucs were poised for success. Surely it was clear to Arians that no one is tackling the abysmal diversity hiring record in the NFL in a meaningful way despite the recent lawsuit alleging discriminatory hiring practices by the league. Of 500-plus head coaches in the NFL since its inception in 1920, just 24 were Black and most of those held interim positions. Bowles is one of only four Blacks who are currently working as a head coach. Arians saw an opportunity to be part of the solution and he seized it. He timed it when the team was well situated, knowing that Black head coaches rarely get the second chances with other teams that whites do when their teams don’t succeed. Solving equity—whether in football or in healthcare—requires having the right values, making the right decisions, and implementing those decisions. By his actions, Arians came through on all counts. He went a step further by recognizing that it’s not enough to give people from underrepresented groups a chance; they need and deserve a chance to succeed. The NFL was supposed to have a structural solution for diversity in the head coaching ranks. The Rooney Rule, established in 2003, required that any NFL team with a head coach opening must include at least one diverse candidate among its slate of interviewees. I think everyone would agree that the Rooney Rule has been a failure—that including a diverse candidate did not create a situation in which a minority candidate was actually hired and, when hired, was successful. In the absence of a structural solution for diversity among NFL head coaches, Arians substituted his own personal level of leadership. The NFL is not alone in this regard. No industry vertical has come up with that solution, including healthcare. While we continue to look for those structural solutions, the kind of strategic leadership shown by Arians appears to be the way forward. Healthcare leaders can take a page from Arians’ playbook to address all three types of equity challenges in healthcare. Health disparities. People in healthcare circles have been talking about the zip code effect for years. Zip code is a proxy for a series of health inequities that have plagued marginalized communities of color for decades, affecting a person’s health and life expectancy more than any other factor. Soon after the COVID-19 pandemic began, it became clear that Blacks and Latinos were being hospitalized and dying at much higher rates than whites. At that point, it became impossible to rationalize health disparities any longer. Income inequality. About 4.5 million people working in healthcare settings are considered low-wage workers, defined as the bottom 20% of wage earners. Deemed essential workers during the pandemic, they include nursing assistants and aides as well as environmental services, laundry and food service workers. These frontline workers, who are disproportionately female, Black and Latino, are not compensated at a level that they can effectively manage within our economy. The pathway to income equity for these workers remains unclear. Diversity in leadership. At the C-suite level, progress in improving diversity has been slow. An analysis of leadership diversity in 100 leading hospitals found that only 6% of CEOs were Black. Just 18% of hospitals had at least one Black leader in a common C-suite role. The highest percentage of Black leaders in a C-suite role was in diversity/equity. Women are also under-represented at the executive level. Although they hold three-quarters of healthcare jobs, only 15% of healthcare organization CEOs are female. If you want to move the needle on diversity, having the right values is the starting point. But unless you make decisions based on those values and implement those decisions strategically, as Bruce Arians did, we will be having the same conversations about healthcare equity in five years that we’re having now. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
In behavioral economics, the sunk cost fallacy describes the tendency to carry on with a project or investment past the point where cold logic would suggest it is not working out. Given human nature, the existence of the sunk cost fallacy is not surprising. The more resources—time, money, emotions—we devote to an effort, the more we want it to succeed, especially when the cause is an important one. Under normal circumstances, the sunk cost fallacy might qualify as an interesting but not especially important economic theory. But at the moment, given that 2022 will likely be the worst financial year for hospitals since 2008 and given that the hospital revenue/expense relationship seems to be entirely broken, there is little that is theoretical about the sunk cost fallacy. Instead, the sunk cost fallacy becomes one of the most important action ideas in the hospital industry’s absolutely necessary financial recovery. Historically, cases of the sunk cost fallacy can be relatively easy to spot. However, in real time, cases can be hard to identify and even harder to act on. For hospital organizations that are subsidizing underperforming assets, identifying and acting on these cases is now essential to the financial health of most hospital enterprises. For example, perhaps the asset that is underperforming is a hospital acquired by a health system. (Although this same concept could apply to a service line or a related service such as a skilled nursing facility, ambulatory surgery center, or imaging center.) The costs associated with integrating an acquired hospital into a health system are typically significant. And chances are, if the hospital was struggling prior to the acquisition, the purchaser made substantial capital investments to improve the performance. As time goes on, if the financial performance of the entity in question continues to fall short, hospital executives may be reluctant to divest the asset because of their heavy investment in it. This understandable tendency can lead the acquiring organization to throw good money after bad. After all, even when an asset is underperforming, it can’t be allowed to deteriorate. In the case of hospitals, that’s not just a matter of keeping weeds from sprouting in the parking lot. The health system often winds up supporting an underperforming hospital with both working capital and physical capital, which compounds the losses. And the costs don’t stop there, because other assets in the system are supporting the underperforming asset. This de facto cross-subsidy has been commonplace in hospital organizations for decades. Such a cross subsidy was probably never sustainable, but it is even less so in the current challenging financial environment. This is a transformative period in American healthcare, when hospital organizations are faced with the need to fundamentally reinvent themselves both financially and clinically. The opportunity costs of supporting assets that don’t have an appropriate return are uniquely high in such an environment. This is true whether the underperforming asset is a hospital in a smaller system, multiple hospitals in a larger system, or a service line within a hospital. The money that is being funneled off to support underperforming assets may be better directed, for example, toward realigning the organization’s portfolio away from inpatient care and toward growth strategies. In some cases, the resources may be needed for more immediate purposes, such as improving cash flow to support mission priorities and avoiding downgrades of the organization’s credit rating. The underlying principle is straightforward: When a hospital supports too many low-performing assets, the capital allocation process becomes inefficient. Directing working capital and capital capacity toward assets that are dilutive to long-term financial success means that assets that are historically or potentially accretive don’t receive the resources they need to grow and thrive. The underlying principle is a clear lose-lose. In the highly challenging current environment, it is especially important for boards and management to recognize the sunk cost fallacy and determine the right size of their hospital organizations—both clinically and financially. Some leadership teams may determine that their organizations are too big, or too big in the wrong places, and need to be smaller in order to maximize clinical and balance-sheet strength. Other leadership teams may determine that their organizations are not large enough to compete effectively in their fast-changing markets or in a fast-changing economy. Organizational scale is a strategy that must be carefully managed. A properly sized organization maximizes its chances of financial success in this very difficult inflationary period. Such an organization invests consistently in its best performing assets and reduces cross-subsidies to services and products that have outlived their opportunity for clinical or financial success. Executives may see academic economic theory as arcane and not especially relevant. However, we have clearly entered a financial moment when paying attention to the sunk cost fallacy will be central to maintaining, or recovering, the financial, clinical, and mission strength of America’s hospitals. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
One of the COVID pandemic’s most bitter lessons has been the complete inadequacy and dysfunction of the U.S. public health system, if the word “system” can even be applied. Prior to COVID, these shortcomings were hiding in plain sight. Now, they are evident to all and exacerbated as the nation struggles to protect the health of its citizens in the face of a pandemic entering its third year. At the outset of the pandemic, research showed a $4.5 billion funding shortfall to provide what authors of a study in The Milbank Quarterly called “a minimum standard of foundational public health capabilities.” Further, more than 85% of public health funding comes from state and local sources, leading to significant variation by geography. For example, states including New York, New Hampshire, and Montana spend more than $129 per person to public health, while states including Nevada, Missouri, and Indiana spend less than $59. This geographic variation in funding indicates a significant inequity in the types and levels of public health services. Certainly, the existing public health infrastructure did not protect historically vulnerable populations from the effects of COVID, with Hispanic and Black individuals at least twice as likely to die from COVID as whites and almost three times as likely to be hospitalized, according to a Kaiser Family Foundation analysis of CDC data. Public health agencies also suffer from chronic understaffing. In the decade prior to COVID, state public health agencies lost 16% of their full-time positions, and county and city public health agencies lost 20% of their positions in the past 15 years. The result has been an inadequate, unequitable, and fragmented collection of services that, when COVID hit, was unable to deliver what the country desperately needed: prompt, consistent, and widespread testing and vaccination; effective contact tracing; and clear communication with the public about healthy practices. The politicization of health has made a bad situation worse. As of September 2021, 26 states passed laws that limited public health powers, and 303 state and local public health department leaders resigned, retired, or had been fired. Hospitals have always been the organizations that truly matter when it comes to healthcare delivery. And now, highlighted by COVID, hospitals have become the organizations that truly matter when it comes to public health. Consider some of the core services of public health, as defined by the CDC:
The slow but inexorable shift of financial risk from insurers to providers has created the economic incentive for hospitals and health systems to better understand population health status and the specific factors that influence it; to enhance access to care particularly in underserved areas; and to reach out into communities to manage health risks before they produce the need for more intensive levels of intervention. Perhaps more important than economic incentive has been the mission incentive of not-for-profit providers. Almost universally, not-for-profit hospitals and health systems articulate a mission to improve the health and wellbeing of communities. Increasingly, this mission has led hospitals into the challenging public health arena. The COVID crisis has taken these new health system responsibilities to a different level. Health systems were instrumental in developing and administering COVID tests, tracing COVID’s path, educating communities about the virus and how to avoid it, and providing front-line care for the huge swath of Americans affected by the virus. Moving forward, hospitals will be asked by communities all over the country to be the organizations that deal with a broader set of national problems related to the wellbeing of patients and communities—problems that COVID has made much worse, problems that the public sector has never been able to solve. With this new set of responsibilities comes an entirely new set of strategic, operational, and financial implications for hospitals and health systems. Meeting these challenges will require a new level of health system ideas, a new level of health system aggressiveness, and a new level of health system ambition. More than ever, health systems will need to have to address social determinants of health; access and analyze data about health conditions, reimagine access to preventive care, develop care models tailored to specific populations. The costs will be enormous, and the need for intellectual capital considerable. America is looking to someone or something to take on what is now a paramount set of national healthcare problems. It is up to the hospital sector to bring its charitable mission, its resources, and its passion to bear on this awesome responsibility. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
In February, U.S. inflation as measured by the Consumer Price Index grew 7.9% year-over-year, the highest increase in four decades. The factors influencing the current inflationary environment are many and interconnected, including supply chain disruptions, infusions of stimulus money, pent-up demand for goods and services, and more recently, the war in Ukraine and the resulting economic sanctions for Russia. And while the entire global economy has been affected by the current inflationary period, the challenges facing U.S. healthcare providers are particularly pronounced. Many of the household items that have risen in price—from gasoline to food prices—are likely to stabilize and even decline with time. Unfortunately for hospitals, however, skyrocketing labor costs will likely result in a sustained structural reset of their expense base—at least until the emergence of offsetting workflow restructuring or technology solutions. In February, hospitals’ labor expense per adjusted discharge rose a staggering 32% from February 2020, immediately prior to the onset of the COVID-19 pandemic in the United States, and was 15.3% up from February 2021, according to the most recent Kaufman Hall National Hospital Flash Report. Beyond rising salaries, hospitals are also faced with shortages of all types of workers in multiple departments—from nursing to environmental services. With U.S. unemployment rates nearing all-time lows, hospitals must now aggressively compete with every employer in their communities for entry-level workers. Some economists predict worker shortages and related higher costs will persist for decades to come. And in contrast to similar positions in other industries, even entry-level healthcare workers require significant training before they are prepared to work in a hospital. The very nature of hospital employment is also shifting rapidly. In February, the median contract labor expense as a proportion of U.S. hospitals’ overall labor expense in U.S. hospitals reached approximately 12%—up from roughly 2% as recently as October 2020, according to Kaufman Hall data. And while many hospitals may view travel nursing primarily in terms of cost, it’s possible that a sizeable percentage of the nursing workforce—including younger Millennial and Generation Z workers—will prefer the lifestyle flexibility of travel nursing for years to come. In all likelihood, the current workforce challenges will require a new set of solutions to complement efforts to increase productivity and optimize a given hospital or health system’s workforce. The current combination of broader macroeconomic pressures and workforce shortages with the specific inflationary pressure in the healthcare workforce has created a perfect inflationary storm. More than ever in the past, hospital leaders must be able to develop a clear organizational point of view about the near-term and then systemic implications of inflation and other macroeconomic forces. If an organization believes we are in a long-term expense restructuring cycle, that will suggest one set of resource management decisions. If an organization believes that inflationary pressures will be more muted or short-term, that would suggest a different set of decisions. For example, if an organization is contemplating the need to issue additional debt, and if the organization believes inflation will be long-term, the organization should move as quickly as possible to issue fixed-rate debt to defend against the prospect of rising interest rates. On the other hand, if an organization believes that inflation will be temporary, it could be more deliberate about issuing debt and might assess structuring options that trade the possibility of lower cost for the retention of interest rate risk. Moving forward, hospital financial planning exercises should include a careful assessment of what the future might hold for their organizations and the broader industry climate, including:
While some of those pressures may ease with time, rising labor costs and ongoing workforce shortages indicate a lasting, structural change in expenses is in the offing. Hospitals seeking to remain resilient through this perfect inflationary storm must be able to clearly assess the broader macroeconomic forces influencing their organizations, integrate those assessments with their existing financial planning frameworks, and allocate resources accordingly to protect their organizations from future shocks. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! By Kenneth Kaufman
One of the COVID pandemic’s most bitter lessons has been the complete inadequacy and dysfunction of the U.S. public health system, if the word “system” can even be applied. Prior to COVID, these shortcomings were hiding in plain sight. Now, they are evident to all and exacerbated as the nation struggles to protect the health of its citizens in the face of a pandemic entering its third year. At the outset of the pandemic, research showed a $4.5 billion funding shortfall to provide what authors of a study in The Milbank Quarterly called “a minimum standard of foundational public health capabilities.” Further, more than 85% of public health funding comes from state and local sources, leading to significant variation by geography. For example, states including New York, New Hampshire, and Montana spend more than $129 per person to public health, while states including Nevada, Missouri, and Indiana spend less than $59. This geographic variation in funding indicates a significant inequity in the types and levels of public health services. Certainly, the existing public health infrastructure did not protect historically vulnerable populations from the effects of COVID, with Hispanic and Black individuals at least twice as likely to die from COVID as whites and almost three times as likely to be hospitalized, according to a Kaiser Family Foundation analysis of CDC data. Public health agencies also suffer from chronic understaffing. In the decade prior to COVID, state public health agencies lost 16% of their full-time positions, and county and city public health agencies lost 20% of their positions in the past 15 years. The result has been an inadequate, unequitable, and fragmented collection of services that, when COVID hit, was unable to deliver what the country desperately needed: prompt, consistent, and widespread testing and vaccination; effective contact tracing; and clear communication with the public about healthy practices. The politicization of health has made a bad situation worse. As of September 2021, 26 states passed laws that limited public health powers, and 303 state and local public health department leaders resigned, retired, or had been fired. Hospitals have always been the organizations that truly matter when it comes to healthcare delivery. And now, highlighted by COVID, hospitals have become the organizations that truly matter when it comes to public health. Consider some of the core services of public health, as defined by the CDC:
Perhaps more important than economic incentive has been the mission incentive of not-for-profit providers. Almost universally, not-for-profit hospitals and health systems articulate a mission to improve the health and wellbeing of communities. Increasingly, this mission has led hospitals into the challenging public health arena. The COVID crisis has taken these new health system responsibilities to a different level. Health systems were instrumental in developing and administering COVID tests, tracing COVID’s path, educating communities about the virus and how to avoid it, and providing front-line care for the huge swath of Americans affected by the virus. Moving forward, hospitals will be asked by communities all over the country to be the organizations that deal with a broader set of national problems related to the wellbeing of patients and communities—problems that COVID has made much worse, problems that the public sector has never been able to solve. With this new set of responsibilities comes an entirely new set of strategic, operational, and financial implications for hospitals and health systems. Meeting these challenges will require a new level of health system ideas, a new level of health system aggressiveness, and a new level of health system ambition. More than ever, health systems will need to have to address social determinants of health; access and analyze data about health conditions, reimagine access to preventive care, develop care models tailored to specific populations. The costs will be enormous, and the need for intellectual capital considerable. America is looking to someone or something to take on what is now a paramount set of national healthcare problems. It is up to the hospital sector to bring its charitable mission, its resources, and its passion to bear on this awesome responsibility. Planning your next event? Get in touch with us at the Capitol City Speakers Bureau today to schedule your ideal speaker and make your event a success! |
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