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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!
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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! By Kenneth Kaufman
For a very long time, hospitals have been organized around three principles that inform the way they run their organizations, and how they conduct themselves in the management suite and the board room. The first principle is the desire to maintain organizational control. This principle has come about in large part because the clinical enterprise is inherently risky. Therefore, leaders do not want to be in a position where they don't have control of the clinical enterprise. That principle has extended beyond specifically clinical matters to all aspects of operation. Maintaining organizational control has come to mean minimizing organizational risk. The second principle, which goes along with the first, is to minimize enterprise risk. Hospitals have always been very risk-averse organizations. Over time, as different concepts have been introduced, organizations have had to be talked into doing things that allowed more risk, and that could result in better financial results from that risk or better strategic results from that risk. The third principle is maintaining operational flexibility. Management teams and boards don't want to get caught in a box when difficult or bad things start to happen. This has to do with the public and reputational notion of running a hospital. Management and boards want to have the operational flexibility to take the actions necessary to resolve any situation that could harm the reputation of the organization. These three principles are all well and good, but they have to be maintained and enforced. And it is expensive to maintain control, minimize risk, and maintain maximum operating flexibility. In general, leaders may believe that these very high levels of healthcare cost come from the way provider organizations are run. But that’s not true. Leaders make decisions every day in which they actually pay to allow those three principles to be in full flight. Let’s look at a metaphor for this situation. If an organization is focused on maintaining control and eliminating to the greatest extent possible the externalities that limit control and increase risk, then when it comes time to finance, that organization will tend to look toward a 30-year fixed-rate transaction, because that transaction eliminates the risks of externalities. However, if an organization wants to lower the costs of that transaction, the organization would do a variable-rate transaction or use certain hedging strategies. But getting those lower costs invites in the externalities of the world—the kind of externalities we saw in 2008 and 2009. So management teams and boards that don’t want to bring in those externalities look toward a 30-year fixed rate transaction at a higher cost. This is a metaphor for all the other operating decisions that a hospital makes. If an organization’s approach is to eliminate risk to the degree possible, and the leaders apply that approach to all their decisions, then the organization can purchase that increased control and minimized risk. But those decisions will result in higher costs. We have recognized for many years that not-for-profit healthcare is expensive. There is a fundamental philosophical reason for that situation. Organizations are trying to maximize the principles of maintaining control, minimizing risk, and maximizing flexibility, and they are paying up to do that. There are hundreds of examples of situations in which organizations have to decide: Do we enforce these three principles? Or do we back off these three principles in order to reduce the overall costs of running the organization? However, if we continue to proceed on this operating philosophy, we will continue to have the high operating costs that are directly correlated with that operating philosophy. If we want to get to a healthcare system that has a different operating cost point, then we have to rethink these operating principles. Also, these operating principles create a perspective in which the needs of the organization are given a higher priority than the consumer’s needs. That’s the opposite of what a company like Amazon does. Amazon’s mantra is, first figure out what the consumer needs, and then figure out what Amazon does. When you insist on organizational control and low enterprise risk, the decisions that are being made in the board room are being made on behalf of the organization, and never really on behalf of the consumer. And that’'s a very unfortunate competitive place to be right now. This is just not the way the American economic model works anymore. The dominant model is the way that Apple, Microsoft, and Amazon behave every day. And in the past year, the dominance of that model has dramatically accelerated. Now, in order for healthcare organizations to take advantage of certain critical opportunities, they are going to have to accept less control, to take more risk, and to reduce their operating flexibility. In particular, that will be necessary in order to reduce cost materially. We’ve picked almost all the low-hanging fruit when it comes to costs, but costs are still too high. And that’s because now we have to attack the operating principles in order to reduce costs more. Next, hospitals will need to take a truly consumer-first attitude. Research shows that what consumers really care about is how they feel as they walk away from the interaction. Not how they felt when they first got there. Not how they felt while the transaction was happening. It's how they feel about the last mile. This has not been an area of focus for healthcare organizations. That last mile may be smooth from the hospital’s perspective, but is the consumer truly happy when the encounter ends? For a company like Amazon, there is an extraordinary focus on making that last mile better and then better still. The changing American economic model is incredibly fluid right now. It’s highly dependent on technical competency and accumulated intellectual capital. Why has Amazon been so extraordinarily effective during the pandemic? Because they accumulated this extraordinary technical competency and this unbelievable intellectual capital, and then they were able to combine that competency and capital, and roll it out during the pandemic. And that was what consumers wanted. Which is why Amazon’s revenue was up 40% in the first quarter of the pandemic and while performance metrics fell through the floor for businesses using traditional business models, or businesses without the necessary technical competency and intellectual capital. Hospitals don't have the technical competency and accumulated intellectual capital to be truly competitive in the dominant economic model. So hospitals will need to be open and experimental about possible partnerships and joint ventures to get that technical competency and intellectual capital. There are so many strategic needs and opportunities in healthcare now. The need to deliver a better experience to consumers. The need to reduce operating costs. The need to integrate digital health into the care process. It's naive to expect that the average American hospital could do all these things themselves, which means that there are going to be many kinds of joint ventures and partnerships to accomplish these things. But in order to do those partnerships and joint ventures, it’s inevitable that hospitals will have to accept less control and take much more risk, and accept reduced flexibility. 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 roughly 19 months since the COVID-19 pandemic emerged, America’s hospitals have borne a huge amount of the pressure and accountability for managing the effects of an unknown and unpredictable virus, and more recently for the complex process of disseminating vaccines. Our nation’s hospitals are doing all of this with relatively little public or political credit, and at great expense to overworked staffs and organizational financial health. And now perhaps, if we are fortunate, we may be starting to come out of the worst of COVID. However, for hospital executives and their boards the question is: coming out into what? How will post-COVID America, its economy, and its culture affect the relative strengths of traditional healthcare provider organizations? And, with COVID having greatly accelerated the growth of virtual business models, how will COVID affect basic patient care delivery and the encroachment of non-traditional competitors on that traditional delivery system? In the absence of clear answers to questions such as these, hospitals and health systems need to prepare for many paths to many alternate strategic scenarios. This preparation will require sophisticated analyses and high level discussion at both the management and board levels. The overall strategic considerations are likely to be the most complex and intricate that healthcare providers have wrestled with in contemporary times. To assist with this strategic re-consideration, I offer the following post-pandemic preparation checklist. Costs. Every hospital and health system has come through COVID differently. Depending on the speed and absolute degree of the return of volumes and revenues, the pre-COVID cost structure still in place at many hospitals may require significant reductions. Given the general economic insecurity in towns and cities across America, any such cost reductions will need to be accomplished in a most thoughtful way. Strategic Repositioning. What does the local and regional market now look like? What about new competitors from national companies? What does your health system portfolio now look like? Are there specific assets within the portfolio that have been damaged? Has overall competition changed? Have direct competitors been weakened or become more aggressive? Are non-traditional competitors making moves into your marketplace? Organic Growth. Do opportunities for organic growth remain in your market? How might COVID have created new opportunities? Inorganic Growth. A competitive marketplace damaged by COVID may offer new and real opportunities for inorganic growth. Inorganic growth, however, always requires unusual levels of both preparation and organizational aggressiveness. Partnerships. The post-COVID environment may create and era of transformative partnerships. Last month, 14 large health systems announced a partnership to create a large-scale database to revolutionize disease prevention and treatment. Just a few days ago, Amazon Care, Ascension, and Intermountain Healthcare announced a coalition to promote care in the home through telehealth, digital therapeutics, and provider home visiting. Hospital and health system executives will need to be attentive and alert to such innovative partnership opportunities and their potential competitive impacts. Telehealth. What is the position of telehealth in your market post-COVID? What is your own level of telehealth capability? How will telehealth impact your overall delivery system and possibly the competitive balance in your marketplace? Importantly, what is your organizational point of view relative to the role of telehealth in your post-pandemic delivery system? For some time we may be in an economic, cultural, and clinical condition where we have many more questions than answers about organizational direction in the post-COVID environment. This suggests that any generic roadmap to the future remains unlikely to impossible. Preparation, though, is both possible and essential. Only with precise and well-thought-out strategic and financial assessment and direction can complex healthcare organizations reasonably expect to navigate the post-pandemic fog. 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
A very interesting short article recently appeared in The New York Times that explored the COVID phenomenon of “languishing.” The author defines languishing as “the collective fog we have endured…trouble concentrating, trouble staying motivated, trouble getting excited about the future.” The author goes on to say that languishing isn’t burnout and is not depression, but instead is a sense of stagnation, a sense of just getting by. As I read the article it occurred to me that not only can individuals languish, but most certainly organizations can languish too. And if any organizations in America deserve to languish, certainly America’s healthcare providers qualify. This notion of a long-standing collective funk introduces an entirely new fiduciary responsibility for hospital boards and CEOs. The past year has been unprecedentedly difficult; every organization, especially hospital providers, is entitled to its moment of languish. But no healthcare organization can afford to languish for long. So how does the board and CEO assure that its collective organization is now moving to a path to get excited about the future. The way forward is to get aggressive about certain business tactics that assure the financial and strategic integrity of your healthcare organization. These tactical steps are as follows: Recalibrate the strategic plan. COVID has changed everything, including finances, demand for medical services, the cultural context within hospitals operate, and the immediate need for healthcare equity and social justice. Given that any hospital’s pre-COVID strategic plan is likely somewhere between partially broken and mostly irrelevant, the first critical step to recovery is to regain control of everything your board and management team needs to know. What does your marketplace now look like? How disrupted is your local demand for services? Is your clinical delivery system still intact? Has your traditional competition changed? Has your organization’s place within the competitive space changed? The questions are endless. But all of the essential questions must be posed and answered within a quantitative analytical framework. And right now, especially, that framework must be technically flawless. Reassess the organization’s financial integrity. The financial questions are going to come fast and furious. Has the basic financial integrity of your organization been damaged? If so, how damaged? How do your pre-COVID and post-COVID operating statements compare? How do your pre-COVID and post-COVID balance sheets compare? Pre-COVID, what was your estimate of capital capacity? What is your revised estimate of capital capacity? If the strategic plan is changing dramatically, are your total financial resources still sufficient to support that post-COVID strategy? Again, there are many more questions than easy answers, and, again, the financial analytics must be impeccable. Rework costs. The third tactical tool necessary to push your organization forward is bringing post-COVID costs in line with post-COVID revenue. I have written on this point previously. Let’s add to the discussion the note that your organization will languish indefinitely if the overall cost structure cannot be brought into line to assure ongoing sufficient profitability and capital capacity. The post-COVID period will demand a new sophistication in establishing a lower overall cost point for your hospital. Four key principles will support this process: recognizing that much of the low hanging costs has already been picked, approaching cost reduction as a continuous process, focusing hard on corporate overhead and shared services costs, and taking a new and fresh look at automation, outsourcing, and offshoring. The last months of the COVID pandemic have been difficult in every way one might characterize difficult. One might say that hospital providers have earned the right for some time to languish. But let’s be candid: the “languish honeymoon” has to end sometime, and from my perspective now would be that time. All hospital boards and associated CEOs need to take a good look at their post-COVID organizations and immediately step forward to assure their organizations’ strategic and financial integrity. 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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