The Financial Outlook of Healthcare in 2022 with Rob DeMichiei

Episode 480: Transcript - January 21, 2022

This transcription is provided by artificial intelligence. We believe in technology but understand that even the smartest robots can sometimes get speech recognition wrong.

Bill Russell: [00:00:00] Today on This Week in Health IT.

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

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

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

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

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

Bill Russell: Yeah. It was an interesting set of presentations this year. The usual suspects were there. Some people were absent. Providence wasn't there this year. And I look forward to hearing from those guys. But what was it about 20, 20 [00:02:00] presentations, CFOs, CEOs, predominantly presenting. You get strategy and then you get performance. How are they doing and those kinds of things. What were some of the themes? Let's start with strategy. I mean, the financial performance, I think, is going to be an interesting conversation as well, but let's start with just high-level themes. What we heard from some of these CEOs.

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

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

[00:03:00] The providers are now kind of realizing where the competition's going to be, and they're expanding, they're acquiring assets away from just the kind of acute area thinking about being upfront with the patient, the consumer. They're thinking about the whole continuum of care, whether that's home care, whether that's ancillary types of services, whether that's value based care.

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

Bill Russell: So that's interesting because Bert Zimmerli came out and said this is the first year that greater than 50% of their revenue is not coming from fee for service. You had Ascension. Actually, I was kinda surprised. I looked at the Ascension number this morning. I think they have close to gosh, like [00:04:00] 2 billion.

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

Rob DeMichiei: I think it is. And again, it's in two areas, it's the diversifying some into value based care and there's some really [00:04:30] good success stories. You have your traditional ones, like your Kaiser's and your Intermountains and your UPMCs who have been in the insurance business for awhile. But you have others that are now beginning to invest more heavily, whether it's those initial, I think Prisma called it the value journey or the risk journey, but there are others like Spectrum Health where actually a nice story about 60% of their revenues is from the insurance side as opposed to the provider side.

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

And I've heard some of your previous guests in discussions around this whole Ascension versus Intermountain. And you have to understand that to have an insurance [00:05:30] product, you need to be concentrated and be able to create a network, an attractive network. And if you're Ascension and you're located across the US as a footprint, very difficult to build a risk product around a dispersed operation like they have versus an Intermountain or a Kaiser or UPMC, which has a really concentrated catchment area in terms of their provider assets.

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

And I'm not looking for you to weigh in on that. I'm just, it would appear to me that there's an aspect of this that requires you to have a good continuum of care and be able to contract in, with density and with scale in certain areas. But you also have systems in the other I don't know, out of the other side of their mouth [00:06:30] essentially saying that they're looking to break out of the geography.

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

Rob DeMichiei: Well, I think those, and it may be kind of an older way of thinking around creating national scale [00:07:00] and the scale economics of adding hospitals in different regions of the country. And there's also a mission driven part of that with Ascension and Common Spirit, right. It's to spread this ministry and that type of care across the country.

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

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

It isn't just how geographically dispersed can you be. It's where can you actually make a mark, make a presence with your [00:08:00] size and with your offering. And that's reputational .That's quality. That service lines. And it's hard to do with a national footprint like those organizations have.

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

Bill Russell: Yeah it's interesting. I do want to move to the financial aspect of this, but the Common Spirit acquired CHI. CHI was loaded with outposts as opposed to [00:08:30] I mean, they had some areas where they were geographically focused and so Common Spirit is I think at the end of their two to three year digestion of that elephant and they've done the things they need to do and they're starting to return to the financial performance I think that people expect. But at the end of the day, it's $33 billion. I mean, there's this, the scale of that is pretty significant. It gives you, as we've talked before, it gives you a lot of leverage to pool doesn't it? I mean, that's, that's a big system.

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

Again, it isn't just, as I've said before, it isn't just the other system across town. It's all of these other disruptors that are entering the markets, the [00:09:30] digital, the insurance and that's just very formidable competition, especially. So it's one thing if you're very strong in one area, like a Northwell, like a Mayo, like a Cleveland clinic, UPFC where they own a region basically.

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

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

Rob DeMichiei: Yeah. Actually Prisma's always well at least the last two years has been one of my favorites. I made a mark again this year, a great [00:10:30] presentation by the CEO and CFO. I think they're on the right path. Their message this year was, was again the push to ambulatory, the pushing to home care. And they've created, I think, a, an arrangement or a venture where they have created a new revenue stream of very profitable margin wise stream of work by pushing things outside of the acute footprint, back into the home.

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

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

Bill Russell: Rob, this is what happens when we have just an off the cuff conversation. We start and I said, we're going to talk strategy and then I got into [00:11:30] specific presentations. What other themes? I mean, one of the themes I heard was this labor crisis seems to be pervasive across the entire country. It's not regional or market-based. And the word that I heard over and over again was headwinds. So I heard that as headwinds. Which obviously increases the cost of labor. There's a concern about inflation. Inflationary pressures coming. Additional headwinds. Were there other headwinds that you heard about and how would you comment on the first two?

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

But what you heard in terms of the presentations built, and I think one of the problems is yes, [00:12:30] right now everyone's dealing with, it's a supply issue. It's a supply of labor. And so there were many creative. Discussions around how they're dealing with the supply issues for labor, whether it's working with community colleges or colleges or training programs or team-based nursing.

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

So they're dealing with the, not the supply issue, which you have to deal with tactically but I think it was good to hear at least from a few of them, not enough of them is what are you doing strategically to change care delivery, to reduce the demand. And that's very hard to do right now when you're dealing with a crisis and your hospitals are [00:13:30] full.

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

One system can talk about an immigration program, which would was bringing nursing labor in from other countries. [00:14:00] And ultimately, this is a whole other show you could do, maybe not your swim lane but in terms of our country's immigration policy we've always relied on immigration and immigrant labor to deal with the great growth in our country.

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

Bill Russell: As a CIO, we we're always looking at sponsoring people coming into the country and whatnot, cause we always had areas within IT. Not all of IT but certain areas where we needed specialized talent. Inflation. Is [00:15:00] anyone worried about inflation or is this

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

Bill Russell: Yeah. We heard that from some of the CFOs. Labor inflation is going to be around for a while. So let me ask you this. I mean, does that mean we should expect the cost of care to go up [00:16:00] or is there enough competition that you're not going to be able to raise those? I mean, some of the rates are fixed obviously, but or should we expect fee for service to go up next year? I would assume.

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

So you have expenses wanting to go up, but I would argue Bill, we're probably at an apex in terms of pricing where the market I'm [00:16:30] not sure how much more price inflation the market can bear. And you have these new entrants coming in as well. And I hate, I feel like every time we're on the call coming from a provider environment, like you, I have a a place in my heart for the great work that's done by all the providers.

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

And at the same time, they're seeing competition from new, not only new entrants but also different modes of care delivery, which are less labor intensive, which are asset light. So it's really a bad formula for the traditional healthcare provider when you know those digital assets, the impact of inflation is not as great on somebody who has a digital first model or an insurer who has kind of franchised out [00:17:30] there, their care continuum to partners. So again, it's another headwind against traditional providers.

We'll get back to our show in just a minute. I'd love to have you join us for our upcoming webinar that's going to inform and equip you and your staff in the 2022 cybersecurity landscape. Our webinar is entitled Stories From the Trenches: How to Protect Your Active Directory Against Ransomware Attacks.

Bill Russell: And we're going to have experts from Semperis and Sirius Healthcare. And they're going to walk [00:18:00] through the lessons they've learned from years of response and recovery experience. Your active directory can be the most vulnerable part of your organization. Protect your system and community from bad actors.

Join us Thursday, January 27th at 2:00 PM Eastern time or 11:00 AM Pacific for the full webinar. You can also go ahead and register anyway and we'll send you a link following the webinar and you can come to the on demand version of the webinar. You can register now at this [00:18:30]weekhealth.com/trenches. T R E N C H E S. Or by clicking on the registration link in the description below. Now back to our show.

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

And they were able to penetrate that market with really an asset light [00:19:00] strategy. I didn't hear that as much this year. I would assume the pandemic is not all encompassing. These are large organizations. They have people that can focus on different things, but it has taken a lot of the operational energy that is usually required for some of those growth initiatives. So while we heard people talk about strategically, how they're going to grow and whatnot, I didn't hear as many of those successful, Hey, we moved into digital and we're doing this. We moved into an asset like we used an asset light strategy to go into these new [00:19:30] markets as we have in the past.

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

What they haven't talked about is what I'll call the stranded capacity that's left behind. So it's great that you're growing in the [00:20:00] areas that you need to, but you're still saddled with this infrastructure, this old kind of bulky asset, heavy infrastructure of inpatient beds and inpatient locations.

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

And at the same time, they're expanding their ambulatory footprint. So an interesting statistic between 2017 and [00:21:00] 2021, Tenant reduced their acute care hospitals from 76 to 60. And they increased their ambulatory surgery centers from 267 to 438, and they have plans to go to 600 AFCs by 2025. So you think about what they're doing.

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

We're going to invest in the facilities, the infrastructure we're going to do really, really well in fewer locations. But we're going to go to where the action is, which is in the ASC and expand our footprint. So again, it's trying to be less capital reliant, less infrastructure aligned, fewer beds, less inpatient, right. Everything's moving away from, from inpatient. So I think you have to look at tenant as a model. The question is, can the other [00:22:00] non-pro providers mimic that model. It's very difficult to do. As a for-profit it's easier, but a nonprofit's worried about the mission. They're worried about the communities that they serve, but as they expand horizontally, there has to be a realization that volumes going, it isn't going to increase, that volume is just going to be spread out from inpatient outpatient settings to preventative care, to wellness and whole health care.

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

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

And that got walked back a bit by [00:23:00] the Biden administration. But I think ultimately we've seen that care can be delivered safely in an outpatient setting. So that is the future. What surgery partners forecasts. It's about a $90 billion market today, that's going to go up an additional 60 billion will shift to outpatient, and it's an area where the statistic was there are 6,000 ASCs today across the country, and about 70% of them are independant. So it's an opportunity for them to kind [00:23:30] of roll up the industry and to consolidate the industry. But I think from a Denovo standpoint, it's an opportunity for them to grow as well. And it's interesting, they do joint ventures with physicians to some extent so that the physicians have a stake in the success, the quality, the cost, the delivery of care in their model and that's very attractive to a physician and it's also the incentives are not misaligned, right? It's all about doing something successfully, doing it cheaply and doing it in a [00:24:00] way which is great for the the customer and for the patient. Interesting you talked about net promoter scores. And they have a net promoter score of 94.

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

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

Rob DeMichiei: Yeah, I think it was a combination of and you touched on this in some of your other discussions, but the balance sheets statistics were through the roof. It's a combination of things. Some of them [00:25:00] rationed capital during the the heat of the COVID crisis. There was massive federal stimulus dollars that went to the large successful system.

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

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

They don't have the balance sheets. They don't have the investment portfolios, which had significant [00:26:00] returns during the last several years. So it probably would have been better directed towards those small midsize rural systems that weren't financially stable and actually still aren't financially stable as opposed to the large successful systems because the rating agencies have to love this, the based cash on hand, the are all of 'em probably at all time highs. The leverage is decreasing as the investment balances have increased. So it was a great story from a [00:26:30] balance sheet standpoint.

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

And so that number 50% of their free cash flow is somewhere between 20 and [00:27:00] $25 billion. If you think about that, that's available again, they can return it to the shareholders, they can put it onto the balance sheet or they can go out and do strategic acquisitions. And this would be a great chart for somebody to show the insurers and all of the rapid acquisitions that they've done. Just a couple of Walgreens talked about. And again, these are all provider patient centric, patient facing entities. They're acquiring a [00:27:30] Walgreens acquired Village Health, which is primary care, Shields Health, which is specialty pharma and Care Centrics which is sort of home care technology and services.

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

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

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

There's a lot of pharma kind of on Wednesday and Thursday and I don't follow the pharma is much, but I use Wednesday and Thursday [00:28:30] and this past weekend to go back and rewatch. And because the for-profits to me, that is ask all my nonprofit colleagues and even your listeners go out to their websites.

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

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

I think one of the smallest was Oregon Health and Sciences was one of the smaller ones. Prisma is [00:29:30] probably one of the smaller ones, but they're sizeable. I mean, they have some scale. But there's an awful lot of others that didn't receive that funding tha t maybe are struggling. Are they just out now acquisition targets at this point, or are they going to be able to claw their way back?

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

But I think with these other issues and in our previous discussion a few minutes ago about the move away from acute care inpatient beds, I think it's gotta be a combination of the that the country needs a rationalization. How is care delivered and the industry's talked about for years, right? More telehealth, true hub and spoke. How do you actually deliver care? And these insurers are talking about delivering care. I think it was, trying to [00:30:30] think of which insurer it was. It might've been Cigna. It was Cigna that talked about actually a whole person health and delivering virtual primary care virtual, chronic care, virtual behavioral health care.

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

It's [00:31:00] just the reality I think, of the economics of where we are as an industry or these rural providers will need to be subsidized by the government, which is, which also might be a good use of funds. Basically if the business model can't sustain them. But I don't know that their acquisition targets. And the attitude of the Biden administration has been to actually crack down and put more scrutiny on these acquisitions by health systems of other providers. So [00:31:30] there's a regulatory headwind there as well when it's probably the right business decision for some of these struggling providers to look for consolidation partners.

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

Bill Russell: Yeah, I worked with some of the smaller systems and one of the stories I hear is they're, they're struggling for talent because at least on the it side if you train them on that, And they live in a rural area, there's nothing to keep somebody from Philadelphia, New York or whatever from hiring them away. These IT organizations now have a 48 state strategy for providing the services they need. So they hire an Epic analyst in a small town. [00:32:30] They get a significant pay increase, and now they're really struggling for the talent they need to keep going.

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

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

Rob DeMichiei: Well, it was [00:33:00] interesting. I think it was the you'll appreciate this. I think it was the Advent discussion. It was Advent around their Epic install and they gave a price point of $750 million. And that was 370 and Capitol and then 380 in OPEX over the next two years to implement Epic.

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

So I'm sure the price points have increased exponentially, but that's a significant price tag and I know that an EMR is a necessity, but I just I struggle with how there's a return on investment for that. [00:34:00] So I really, again, you think about the barriers to entry. Well, one of the opportunities for entry is when price points get to be very, very high. So that just struck me as, I don't know if you caught that Bill, that

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

And my concern on these things is the [00:34:30] grass is greener on the other side, you still have to be able to execute against the, creating the system to work, creating the order sets and creating the workflows and all those other, those other things. And if you can't do it on top of Cerner, there's a better than average chance you're going to struggle on top of Epic. And you just spent actually as much as the 750 million is hard to get a return on the two years that you end up spending is also something that's hard to get a return on, but at the end of the day, would you rather be a system on a single [00:35:00] consolidated platform with common order sets and common set of books and that kind of stuff? Or would you like to have the challenge that Ascension has where they have 55 different EMR is running 140 different hospitals.

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

Wow. They must have either been really dissatisfied or view some tremendous benefit from the Epic suite and I'm a fan of [00:35:30] Epic. And I know I don't know that there's any physician, that's a fan of an EMR, but I think yeah, when comparing them, they do like the, some of the functionality of epic and it's a great product and a great company, but that, that is an extremely high price tag, I think, for a conversion or another system.

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

Baylor Scott and White, My BSW Health, Jefferson, my Jefferson Health, Advocate Aurora has a LivWell app. So everybody was talking about their digital front door and owning that. And I think that is the critical battlefield of the [00:36:30] future. Because if again, I go back to the insurers.

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

So the winner, the person that owns that digital front door is going to have a real benefit in steering [00:37:00] the patient and the consumer to their preferred mode of care of their preferred delivery of care and hopefully their low cost, high quality mode of care. And that's certainly the aspiration of all these startups.

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

But again, these digital disruptors and these insurers, if they have 90 NPS scores and 95 NPS scores, it's going to be really hard for, I think, health systems to duplicate that level of functionality. IT functionality. Access with physicians as opposed to retail and digital, and many of the health plans now are creating kind of a virtual first [00:38:00] steerage where, and again it's not that you have to reduce your network or you don't have access to a high reputation provider of acute care.

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

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

And so now I own the patient, I own the consumer, I own the patient and I'm going to steer them to all these offerings, whether it's pharmacy, whether it's virtual, whether it's [00:39:00] rehab, it's labs. And ultimately if you need to go to an ICU or an inpatient stay or a surgery, I may divert you to an outpatient surgery center in your community, which has high quality, high outcomes.

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

Bill Russell: Yeah, and I really want to wade into that portion of the conversation, but I want to hit you up on a couple of other [00:39:30] things here. So it's the investment arms. Let me get more specific. The innovation investment arms seems to be heating up as well. I mean, Mayo talked about their investments. UPFC obviously has been a player for decades. Jefferson partnered with General catalyst. They also participated in Livongo. They're participating in Transcarent. You had a Bon Secours Mercy actually hired a chief diversified growth officer, I believe it was called. I mean, and so [00:40:00] they're all looking to grow. I mean, strengthen the core. I don't want anyone to hear that they're running away from acute and you haven't said that either. I mean, they're, they're strengthening that core.

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

Rob DeMichiei: Yeah. It's interesting. That was another theme advocate Aurora talked about an enterprises arm. Northwell continues to invest in that. So everybody has moved to that space. And again, we can have a separate discussion around, again, federal stimulus dollars kind of [00:41:00]coming in to the balance sheet and then enterprise type investments going out into what are riskier investments than a traditional investment portfolio balance between equity and fixed income.

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

They're bought by somebody, they go public. And many of these investments are [00:42:00] minority investments and not majority operating investments. So to me I get the idea of how can we take either stumping and I forget someone had a slide around the different ways to create these opportunities. And one of them was inside out and one of them was outside in, if you recall that when there was sorta like four ways to create the investment.

Bill Russell: That was Bon Secours.

Rob DeMichiei: Yeah, that's great. Right? Because what you're saying is like, Hey, if we develop something internally, whether it's a clinical, whether it's pharmaceutical, whether it's revenue cycle [00:42:30] administrative, if I can take that to others and create a business, something that was successful for me and make it relevant to others and monitize that, that's fantastic. Right? Why wouldn't you do that and bring those dollars back. And I think somebody called it a virtuous cycle, as opposed to a vicious cycle. This is a virtuous cycle of those dollars. Now go back into the mission, but I would tell you that primarily what they do is they go back onto the balance sheet.

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

I think that the guard rails you have to have around that is like, who's monitoring it. How do you define success? What is success? And with a lot of these for every nine failures, you need one to be successful, but someone's got to be, I think, from a community from a governance [00:43:30]standpoint, to make sure that there, there is board supervision of what's happening.

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

Bill Russell: It's, I don't want to sound bearish here but I am a little concerned, quantitative easing pulling back inflation, going forward. There's more money in health tech investment than we've ever seen. I mean, it's just record year after year and it doubles almost every year now. And [00:44:00] you have all this money going this direction. And sometimes I look at these plans and I look at what they're doing and I'm like, I don't see the business model.

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

It just happens over time. There could be a shakeup in this area. So I think that idea of having oversight [00:44:30] in this area is really important and really putting the right scrutiny on these investments moving forward, because it's, as they say, it was easy to make money in the market over the last three years. And it was probably easy to make money in health tech over the last three years. But moving forward that might get a little hard.

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

And Medicare advantage is a great example of that. And that was a theme. We've been [00:45:00]seeing it with the valuations, with the stock prices. There was just a great article in modern healthcare, which kind of summarized what's happening. So I think some of that irrational exuberance is coming out. The estimates for cost savings, if you would have added them all up from all the new entrants right, you'd have something larger than the entire addressable market. So there was some irrational exuberance. That doesn't mean those opportunities still aren't there. And so with Medicare advantage, it's still a fantastic market. There's a real opportunity out there. And interesting. There was a great, one of my [00:45:30] favorite slides actually was from Alignment Healthcare, and they had on one page, it was what I call it Medicare Advantage on one page. It's really great when you can go back and see it, but it talked about the change in the market. It's going from 270 billion in 2019, over 500 billion in 2025 with the addressable market. Medicare advantage is going to be about 47% of all the Medicare participants and the best statistic that every day we add 10,000 new people to Medicare roles.[00:46:00]

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

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

So I don't know that the investments are going to stop. I think there's going to be a much more critical eye placed on where those investments are. And there are a lot of bargains out there. So we talked before about those with [00:47:00] capital and cash, looking to acquire. I think some of these organizations which are struggling right now with lower stock, valuations are going to be targeted it's for additional consolidation by some of the larger insurers or larger companies.

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

Bill Russell: I was looking, this, probably the last thing I'll hit on. The, the Intermountain balance sheet. 460 days cash [00:47:30] on hand. Is that an indication that they have some some dry powder?

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

I think again, I get back to, and this isn't talking about Intermountain. It's just talking about the large nonprofit providers and you start to get into a discussion about you know how much is too much and what is the right [00:48:00] amount of reserves that's needed to run a system successfully and have insurance capital reserves, which are statutory, but you get to a point where some of this starts to be questionable and you invite regulation and politicians to come in and comment on your industry, on you specifically, but also on your industry.

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

Bill Russell: Yeah, the thing I would have liked to have seen is and I don't understand why it doesn't [00:49:00] exist in healthcare is somebody who really bakes that consumer experience, the clinician, the digital front door, all those things before they really go about doing all their M&A. Right. They should, be able to look at it and say, look, this is how they're performing.

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

Rob DeMichiei: And did mention Intermountain. There was one or two others that talked about how they're integrating digital. So it wasn't, many of the providers had 3%, 4% telehealth, and then it went up to 20% during the pandemic. And then it came back down again to something higher than it was. But 7, 9% let's say So we again, it was used as a crisis and then it went back down to the, the standard or previous levels, but [00:50:00] inner mountain, one other system talked about, no, we're actually integrating this into our delivery of care. We're going to use digital. Isn't just a tactical solution. We're going to integrate that into our care delivery and into our continuum. I think that's the answer because that's certainly what the insurers are doing. So I think that's the right strategy. We only heard that though from two or three of the providers that presented.

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

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

Bill Russell: What a fantastic discussion. If you know someone that might benefit from our channel, from these kinds of discussions, please forward them a note, perhaps your team, your staff. I know if I were a CIO today, I would have everyone on my team listening [00:51:00] to this show. It's conference level value every week of the year. They can subscribe on our website this weekhealth.com or they can go wherever you listen to podcasts apple Google overcast Spotify Stitcher you name it We're out there Go ahead Subscribe today Send a note to someone and have them subscribe as well We want to thank our keynote sponsors who are investing in our mission to develop the next generation of health leaders Those are Sirius healthcare VMware Transcarent press Ganey Semperis and Veritas. Thanks for listening. That's all [00:51:30] for now.