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.
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