CFO Role During Crisis with Rob DeMichiei, Retired CFO UPMC

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Bill Russell / Rob DeMichiei

Rob DiMichiei UPMC This Week in Health IT

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March 27, 2020: The financial viability of health systems is a major concern during the crisis and we had Rob DeMichiei, recently retired CFO for UPMC on the show to share his thoughts on the matter. In our conversation, we talk about what the CFOs for these health systems are facing right now, and what we should and shouldn’t be worried about regarding finances. Rob makes an argument for a complete role reversal required by CFOs whereby they shift from being regulators into facilitators on the frontlines, also sketching out what else might be required of them after the situation changes. We also cover the topic of which financial institutions have what it takes financially to make it through this and which ones should be the recipients of government cash cushions. Larger institutions are well equipped financially and have the capacity to be innovative but in Rob’s opinion, it is the more rural ones at risk. Our guest gets into some of the specifics of strains in healthcare systems which are raising budget alarms too, speaking about the idea of stranded costs and how COVID-19 cases have replaced ones that require surgery. We also hear some far more positive news from Rob, as he weighs in on the many gains we will see coming out of this situation such as the many changes the industry could see technologically. Tune in for an insightful look at the current situation from a financial point of view.

Key Points From This Episode:

  • A Slack channel and free coaching provided by Bill and sponsors during the crisis.
  • How CFOs need to shift from being friction creators to facilitators, procuring resources.
  • Rob’s worry that the smaller health systems will be under existential threat.
  • Less reimbursement due to COVID-19 rather than surgery-based admissions.
  • Increases in Medicaid and unreimbursed customer payments due to unemployment.
  • Shortages in labor due to short staff that will spike costs.
  • ‘Stranded costs’: continuous payment of specialist staff who aren’t working.
  • Knock-on effects of nonprofits and donors losing multi-billion dollar investment portfolios.
  • Timeframes for the shifting roles of CEOs as the crisis passes.
  • Accelerations in the adoption of telehealth; how crises ask systems to reset themselves.
  • Other positive results at the end fo the crisis: physician assistant licensures, and more.
  • A move to local production driven by offshore mask manufacturing.
  • State cash injections and how large institutions will have cash on hand to get through this.
  • Discussions to siphon cash cushions to smaller, more vulnerable institutions.

CFO Role During Crisis with Rob DeMichiei, Retired CFO UPMC

Episode 211: Transcript – March 27, 2020

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

[00:00:04] BR: Welcome to This Week in Health IT with our continuing series on COVID-19 preparations from the healthcare industry. My name is Bill Russell, healthcare CIO coach and creator of This Week in Health IT, a set of podcast videos and collaboration events dedicated to developing the next generation of health leaders. 

Before we get going, I want to give you three resources for those of you are in health IT during the crisis. The first is for CIOs. I’m currently helping my coaching clients, CIOs, as a sounding board advisor through this time. If you’d like to connect with me over the next two months to experience coaching at no cost, shoot me a note at [email protected] 

For anyone in health IT who finds themselves in unchartered territory and you want to crowd source solutions with a team of seasoned professionals, we have set up two ways that you could do that. We now have a Slack channel that is monitored and supported by our sponsors, VMware, Galen Healthcare, Sirius Healthcare, StarBridge Advisors, and Pro Talent Advisors, as well as Health Lyrics, which is myself. The Slack channel allows you to get your questions answered, “Can my telehealth scale?” “What do I do about VDI?” “My EHR performance is lagging,” any of those kinds of things. We have experts. We have technology experts. We have architects. We have CMIOs, CIOs who can step in and help you out with crowd sourcing those solutions as well as other health systems are bouncing ideas off each other. 

If you want to access, send me a note at [email protected] That’s Slack, [email protected], and we’re going to get you set up immediately. 

The second channel is – Our sponsors are also supporting in the email channel at [email protected] If you just want to shoot an email over with your question, we will get it routed to an expert from one of our sponsors who will be able to support you in that challenge. I want to thank each of our sponsors for stepping up to provide these services to our listeners and to the industry. 

I wanted to have a conversation around the financials of what’s going on. I’ve seen a lot of posts. People are concerned about the financial viability of health systems and what’s going on with the health systems and they’re losing revenue and those kinds of things. There’s no one better in the industry that I know of to talk to about this than Rob DeMichiei. He’s the recently retired CFO for UPMC. He’s a great resource. Every time I talk to him, I just learn a ton and I thought he would be a good person to talk through this with. So here’s the conversation with Rob. 

 

[00:02:35] BR: This afternoon, we’re joined by Rob DeMichiei, recently retired CFO for UPMC. Congrats on the retirement, and welcome back to the show, Rob. 

 

[00:02:44] RD: Thanks, Bill. Good to be here. Always great to have a discussion with you. 

 

[00:02:48] BR: Well, I’m looking forward to this. Just out of curiosity, what are you doing in retirement?

 

[00:02:54] RD: So I’m working out like a fiend. I’m running every other day. Having a new granddaughter. So I’m first time grandparent. Granddaughter new to us. We’re loving that. Then professionally, I’ve joined the board of Waystar. A great company, and then also working as a strategic advisor for Health Catalyst. Two great companies with great leaders, Matt Hawkins and Dan Burton, and even better people. Good to work with both of those individuals in these companies. 

 

[00:03:24] BR: Yeah. I’ve had both of them on the show, and they are phenomenal. The industry expertise is amazing, their generosity. They’re just great people. Just great people to have on the show.

 

[00:03:36] RD: Yes.

 

[00:03:36] BR: I wanted to have a conversation around the financial challenges that health systems are either facing right now and some of the strategies they’re using to address that. As we know, elective surgeries have stopped. That’s a major source of income. I’ve ben told that a lot of physician practices have all but almost closed down and gone to telehealth, and we know that telehealth pays at a different scale than in-office visit. I really wanted to start by having you sort of level set us. We both went to the J.P. Morgan Conference, and as they present the financials days cash on hand is a very important metric and some systems have a lot, 200 days cash on hand. Some have 90 days cash on hand. Can you give us an idea of what that metric is why that’s important in normal times as well as in times of crisis?

 

[00:04:33] RD: One thing I have to do before we start though, I really want to acknowledge the people on the frontlines here, Bill, the caregivers. Not just the physicians and the nurses, but the EVS people, the dietary folks, the transport people. You go in grocery stores now and you see how people are tentative about how close they get to people. Imagine being a frontline caregiver and the danger they’re putting themselves in everyday to see us through this crisis and then going home to their families at night. I think it’d be a remiss if we didn’t.  

 

[00:05:09] BR: Yeah, absolutely. The other thing is just from a leadership standpoint, you have these people who are doing these heroic things during the day, but they still have to go home to their families at night, and there’s concern. When you go home at night, you have to explain it to your kids and you’re talking to your 80-year-old father or whatever and you’re really burning the candle at both ends. Those people really are heroic at this point. 

 

I don’t want this conversation to seem maybe premature, but as I’m looking at this, there’s a part of me that’s worried that the health systems are going to run out of money. They’re going to run out of cash. Then you’re going to exacerbate this problem of not only of trying to care for people without the proper PPE and the tests are taking 10 days, but now they’re worried about not getting paychecks. I know we’re not going to let that happen, but that is a very real concern I think is certainly to pop up.

 

[00:06:11] RD: We’ll talk about that. I was going to sort of discount the entire conversation to say the financial discussion right now is probably the least important thing that we can talk about. This is about getting through the crisis and saving lives. But having said that, I think the role of a CFO needs to be different. In the past, a CFO’s role was really a person that created friction to make sure that finite resources were being allocated appropriately, driving efficiency through an organization. I think that’s really flipped now, Bill. The CFO needs to take a role as a facilitator. Really, kind of a road grader for the clinical folks, cutting through red tape, speeding up decision making. Really, just about procuring resources as supposed to maybe being the person who put a stop on things in the past. 

 

I think in terms of the financial challenges, there’s surely a tale of two cities in terms of the large, successful, financially successful systems today will be impacted, but they will not be impacted in a way that’s sort of existential. What I worry about are the small systems, the rural systems, the single hospital systems that already had challenges. 

 

If you think of the haves will be impacted, but will be okay. The have-nots I think would be in a situation where when this is done, it will force probably further consolidation or a bail out from the government or additional struggles for them. It’s really going to, I think, make that line of demarcation even greater than it is today in term of the haves and have-nots. 

 

The large systems have a great deal of financial stability and strength. I think the other thing that matters is kind of location right now. If you’re in one of these hotspots there are immediate financial pressures. Other parts of the country are still waiting to see what this going to really develop into. 

 

The financial impact found, rule of thumb, about 70% of the inpatient admissions are driven through the emergency department. Much of that will continue, although people will avoid the emergency department. That will be impacted as well. The other 30% is considered elective. That will be impacted. Just because it’s called elective doesn’t mean that it’s someone choice. These are, in some cases, either life-threatening or dire pain circumstances where intervention is needed. But it is going to have an impact and we’ll see a switch from these surgical procedures to more of these medical admissions or COVID-19 admissions which are much less reimbursement than the traditional surgical interventions, which are traditionally higher margin opportunity for health systems.

 

That is going to impact the revenue line of these health systems. I think the other thing that we can’t discount is the impact on the other industries. In the coming weeks and months, as the unemployment starts to spike here, it’s seen estimates of up 20% unemployment. Don’t forget, people will be losing their commercial coverage through their employers. So they’re going to see increasing payer, increasing Medicaid as a payer and uncompensated care as well. That’s going to impact the revenue of these systems also. 

 

I think the other thing is when we think about costs from a labor standpoint and a supply standpoint, right now labor is at a premium. So there is significant overtime. There’s temporary employees. There’s labor shortage, if you will. With some of the caregivers who will be impacted by COVID-19, there’s going to be a shortage. 

 

Costs will be spiking significantly. Supply costs, from what I understand from talking to some of my colleagues, there are critical shortages of PPE. There are some bad behavior going on in the supply chain with some of the suppliers in terms of pricing and availability and a real lack of domestic suppliers. Most of this is offshore in terms of the supply chain, the ultimate [inaudible 00:10:21]. These are all things negatively impacting the financials. 

 

The other thing that can’t be discounted is what I call stranded overhead. Think of what’s happening. By stranded overhead, what I mean by that is you have an operating room, operating rooms which are very expensive to maintain. Anesthesiologists, CRNAs, boarding staff, those costs are really fixed. There is a level of surgical volume that’s anticipated and as that drops, people aren’t going to be laying off their anesthesia department or the anesthesiologists. Those costs are stranded, if you will. 

 

Health systems will continue to incur those costs without the adequate level of surgical volumes, imaging volumes, specialists. What are your arthropods and your neurosurgeons going to be doing when they can’t be intervening in terms of surgeries? Those costs will be spiking as well or will not be covered by revenue. These are all financial issues that are manifesting themselves now and will accelerate as this disease progresses.

 

[00:11:30] BR: Yeah. So right now, we’re on the – We have not flattened the curve. Essentially, we’re right in the midst of the crisis itself. The CFOs role is really as a facilitator. Taking out the roadblocks. Making sure that there is the funds available to do the things that it need to do. That’s the role. Once the curve flattens and we start to see this, then does the role change? I mean, will there be different phases in the role over the next six months I guess?

 

[00:12:00] RD: I think so. I mean, this is probably going to have a rather long period. Even though the curve gets flattened, if anything, that just is hopefully right where we’re wanting to extend this so that isn’t a spike, but it’s a much longer time-frame. 

 

This facilitation role I think will go on for six months, nine months until the crisis truly passes. The other thing, there are other impacts. We haven’t talked about the investment portfolios, Bill. Many of the large nonprofits have multi-billion dollar investment portfolios. Some of them use them to support and fund operations. With where the equity marks, that’s going to be years before they recover. 

 

I think what you’re going to see is financial impact. Again, these are paper loses to many of the health systems, but others do use these funds to support operations. These large organizations, you’re going to see investment loses in the hundreds of millions of dollars, close to a billion dollars on some of these systems. You’ll see those as soon as the first quarter, but certainly for the full year. That’s going to impact ratios, potentially lending arrangements. That can’t be discounted either in terms of the impact. 

 

Also, philanthropy, donors who had significant equity portfolios. Their charitable decision making will change. Will likely become more conservative. Again, we have many systems that equate well on philanthropy. That’s going to be impacted as well. 

 

I think the CFO role is going to be this way probably for the next 6 to 12 months and then, really, it’s going to be about actually some retrospective work in thinking about what could have gone better? How could we have reacted? How could we have prepared better as an executive team for or the next crisis. There will be a next crisis, whether it’s in several years, or 10 years, or 20 years. But I guess the way viruses work these things, they continue to recur. 

 

[00:14:09] BR: Yeah. Rob, does this represent a reset? I mean, can we almost look at this as a reset? Like you have the crisis and then you come out of it, and maybe the business model changes as a result of it and you’re starting to think about different strategies? I mean, one of the things we’re seeing is the telehealth volumes. First of all, we know that telehealth has a net promoter score that’s extremely high. People love it once they use it. Now all of a sudden we have 70%, 80% of visits are being done via telehealth. Could that potentially change behavior? Will that change business models? Do you see some things – Is this a reset of how we do things?

 

[00:14:54] RD: I think anytime you go into and come through a crisis like this, things change on the back side of this. I view these as positives. I absolutely believe telehealth will go from something that has been very difficult to establish funding. Many of the payers have long resisted telehealth. They viewed it as becoming incremental instead of replacing existing modes of care and primary care to a more efficient, more consumer-friendly manner. It was often viewed as just an incremental way to spend healthcare dollars. 

 

I think the telehealth will come through this now as an established bona fide way of delivering care. In fact, I think it provides some hope to health systems, Bill. You look at what’s happening with CBS and with United in terms of convenience care and putting things in stores and making it part of a retail experience, Walmart.

 

Telehealth allows the large traditional health systems to leapfrog that convenience care, because nothing is more convenient than your iPhone. If the reimbursement is available, it’s certainly accepted by the consumer. The consumers that I talk to absolutely love it. You don’t need your home and you can get a number of services in a very convenient manner. I think telehealth is one of the bright spots in terms of the future of healthcare, but I think this crisis is going to push to the forefront as an accepted way of doing business. 

 

I think a couple of the other things, there’s a lot of talk now about practicing at the top of your license. I know some of the states are suspending licensure to allow physician assistants to do more things. I think that is a real positive. We’ve been held back by many cases, licensure, but also tradition in terms of what can advance practitioner do safely and effectively versus what they can’t do. I think that’s another change on the backend of this, is that we are going to push to get more people practicing at the top of their license. That creates capacity. That allows our specialists to do more intensive and complex cases, but I think it’s an overall positive for the industry to create capacity. 

 

I think the other thing is that, again, once we get through this, and I don’t want to discount where we are now. We’re just entering this crisis, but we will get through it. That’s a positive. This is not going to destroy the world. It’s going to be very terrible, but it won’t destroy us. But on the backend of this, I think when we look at this in a retrospective way, we’re all going to revisit preparedness and capacity. 

 

What are the right number of ICU beds and what do we do in terms of consumables and inventory stocking levels? There’s a great article I read today. This crisis is being driven by a 75 cent mask that no one domestically produces. I think you’re going to see a discussion around domestic manufacturing come back to life now. What should be done in terms of national security and preparedness done onshore versus offshore? I think you’re going to look at what are the appropriate staffing levels. What types of equipment should be utilized? We’re always struggling, again, as finance profession trying to be efficient and lower the cost of healthcare. But this is kind of a sunk cost that we know that we need to prepare for disasters and for these once in a lifetime types of issues that come about. I think it is going to cost us all to relook. 

 

There’s nothing like a crisis to prepare you for the next one. I think that’s going to happen. I think just really this retrospective look at operations and leadership. On the backend of this, how did the organizations, whether – Again, the clinical operations, the IT staff, the HR, the finance, the supply chain stuff, the leadership of the organizations. How did they react? How did they respond? Did they step up to the challenge? Were they’re lacking? I think it’s, again, another way that we can come out of this in a more positive way and as better health systems and better stewards of the health of the population. 

 

[00:19:04] BR: I wanted to talk about cash, which is where I started, and it’s probably where we’re going to finish, which is the federal government understands that these people are on the frontlines and they understand what they’re doing and they’re not going to let this happen. They’re not going to let people go without paychecks and those kinds of things, especially in this situation. But there are some systems that will start struggling from a cash perspective and some that will have cash to weather the storm as you talked about earlier. What can a CFO do that are struggling with from a cash position right now? 

 

[00:19:41] RD: I said that I would present some positives as well. The positives to this, the legislation that was passed today, and the details are still forthcoming, but I understand about $130 billion of funding that’s going to go towards hospitals and healthcare providers. That’s going to be a needed infusion of cash and funding for these struggling organizations. There’s going to be a 20% add-on. At least some of the earlier legislations talk about a 20% add-on for Medicare payments for COVID-19 treatments. They were talking about suspending some of the Medicare sequestration reductions. So that’s going to be positive financially for the health systems. 

 

In terms of days cash on hand, if you look at the AA Credits, Bill, the AA Rated Credits, many of them have 200. I think the average is about 270 days cash on hand. That’s only three-quarters of a year, and that measurement is with no revenue. Just covering expenses. These significant cushions were put in place for the benefit, really, of bond holders so that the ability to service your debt is still there. 

 

I would argue that these days cash on hand cushions are here for this very reason to get us through these types of situations. Again, these strong, healthy financial systems, you’ve got the days cash on hand, you have the resources to counter this kind of an issue, and they will. 

 

The large systems, there’s no need to worry. They will be fine. They will certainly impacted, but they were built for this kind of a situation. Not just financially, but even in terms of their mission. They’re researchers. They’re in the academic elements. So they were built to innovate. They were built to improvise. They were built to discover. 

 

I think this can be the finest hour for many of these institutions. I do really worry though about the smaller institutions, the struggling institutions. They will be impacted. You are right. Some of them may have difficulty making payrolls, and that’s where federal stimulus, these dollars, it will be important they are infused into the system quickly. 

 

Now, the question is who will they go to and [inaudible 00:21:55] maybe allocated? I would submit to you that they probably should be weighted more towards the struggling small rural systems that are financially delicate right now as supposed to those that are have built in these very significant strong cushions. I know that was part of the discussion at J.P. Morgan, was really – With some of these financial results, how much is too much? The large capital expenditure programs and the investments and alternative lines of business to diversify revenues, these are all things that can be deferred and likely will be deferred. But I have no worries about the strong systems. It’s these smaller rural systems and standalone systems that will be significantly impacted. 

 

[00:22:39] BR: Rob, I appreciate you coming on the show and letting me just bumble through questions with you. I saw a post just before we came on here where somebody was saying, “Hey, what if we don’t have enough money for this?” It is a very really concern, and I think it’s probably – I mean, if you are in the leadership team, it’s probably something that you might want to communicate to the entire organization of, “Hey, we are built for this. We do have the wherewithal. We do have the days cash on hand. We are going to weather this. 

 

I mean, this is a time of leadership and communication. This is not a time to be clearly sitting at a room and counting the numbers. As you indicated, the good CFOs are front and center right now knocking down barriers and making sure things get done. 

 

[00:23:29] RD: No, I think you’re right. You can look at this as a real negative. It is. But you can also think about all the positives that can come of this, the great stories that we’re hearing and we’ll continue to hear about about people stepping up and providing leadership and comfort and care for people. We’ll get through this. It will be a tough time, but this can also be your greatest hour.  

 

[00:23:53] BR: We are resourceful. Have you seen the number of ways people are making ventilators?

 

[00:23:56] RD: No. I’ve seen 3D manufacturing. People are doing things at home. That’s why I said, these academic settings, these folks are innovators, Bill. They solve issues. They run emergency departments. They protect us in disasters. In Pittsburgh, we have the Tree of Life Shooting. It’s the same people that stepped up in the Tree of Life Shooting at UPMC that are now stepping to the forefront to help Pittsburgh combat and Pennsylvania combat the COVID-19 issue. It’s tough times, but I think there are a lot of great things that will come out of it, and we’ll survive. Leadership is important. In these large systems where you have 20,000 employees and 50,000, and 80,000 employees, it’s at an individual level. It’s a one-to-one kind of leadership imperative that we have. I think we’ve got great leaders in healthcare and people will step up.

 

[00:24:53] BR: Absolutely. Rob, I’ll let you have the last word, and I really appreciate you really focusing in and helping us to understand the financial aspects of this. These are some truly extraordinary times and it calls for great leadership, and I appreciate you taking the time to share your wisdom and expertise with us. 

 

[00:25:13] RD: Thanks, Bill. Stay safe.

 

[END OF INTERVIEW]

 

[00:25:16] BR: I love my conversations with Rob. I learned so much from him, and I just really appreciate him taking the time to level set on what the CFOs for these health systems are facing right now and what are valid concerns and what are maybe not concerns at the present time for health systems. Again, really, I just want to thank him first time. 

 

Special thanks to our sponsors. Again, VMware, StarBridge Advisors, Galen Healthcare, Health Lyrics and Pro Talent Advisors for choosing to invest in developing the next generation of health leaders. This show is a production of This Week in Health IT. For more great content, check out the website, thisweekhealth.com, or the YouTube channel. If you want to support the show, the best way to do that is to share it with a peer. Just shoot him a note. However you share stuff with your friends, go ahead and do that. 

 

We’re going to keep dropping episodes, one a day. For the foreseeable future, focusing in on solutions and answering the kind of questions that you guys are asking, and we really appreciate all your support of this show. If you keep listening, we’ll keep dropping the shows. 

 

Thanks for listening. That’s all for now. 

 

[END]