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August 3, 2021

Healthcare Financials: M&A, Digital Transformation, and Consumber Focus with Rob DeMichiei

In a world searching for the new normal post-pandemic, experiences among health systems are a mixed bag. Rob DeMichiei, retired CFO for UPMC, Strategic Advisor for Health Catalyst, and Board Member at Waystar, joined Influencers to discuss digital transformation, the outlook on healthcare financials, and the consumer relationship.

It’s a Whole Different Story for Healthcare Financials

Rob DeMichiei This Week in Health IT

Rob DeMichiei, Strategic Advisor, Board Member, and Retired CFO

According to DeMichiei, each health system has its own story coming out of the pandemic, depending on its size and geography. Systems are experiencing losses, slightly positive losses, or reduced losses. In general emergency rooms, volumes are decreasing, yet acuity is increasing. There is not yet enough clarity to see the direction healthcare will be going.

Healthcare, like the general public, is resuming traveling, entertainment, and a return to the office.

“There was a standard or a way that things were done before the pandemic. And now, we’re all conjecturing what’s going to happen if we come out,” he said.

Market Forces and Consumer Preference Direct Future of Healthcare

Healthcare is shifting as consumers change their preferences, opinions, and means of entertainment. According to DeMichiei, all these changes impact the way a post-pandemic world could unfold. He expressed that in the next six to twelve months, the public will have a clearer picture of the “new normal.”

As an industry and infrastructure, healthcare has traditionally wanted to return to where it was before. However, significant market forces have been pushing for a future in the opposing direction. It is a clash of two different forces, DeMichiei explained.

“If you think of an industry that’s ever had tremendous inertia, it is healthcare,” he said.

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Projected Margins Bring Uncertain Financial Future to Small Health Systems

As economists project negative margins for 2021, smaller organizations are prone to financial struggles more larger health systems, DeMichiei predicted.

According to DeMichiei, the gap between the size of health systems is widening, and market pressures are making it more challenging for smaller systems to survive losses. While larger health systems will survive projected margins and later thrive, the fate of more small and rural organizations is questionable. Beyond this, even if small systems overcome these financial obstacles, they will still need to invest in digital innovations for the future.

Acquisitions are the Way to Ensure a Future

Post-pandemic, mergers and acquisitions (M&A) are set to return, according to DeMichiei. The larger trend, he shared, is on the acquiree side, which addresses future challenges and protects healthcare.

Significant IT transformations could take place in these acquisitions. For organizations that need to undergo digital transformations or adopt the latest technologies, an acquisition can guarantee their new organizing entity will fund the changes.

According to DeMichiei, the industry will continue to see successful mid-sized health systems making strategic decisions for the future. The best way to do this is by partnering with a large nation or regional entity to guarantee this future.

“I see a world [that] is going to be very difficult to survive with hyper-competition. And so M&A is the way to guarantee the future,” he said.

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Healthcare Financials: Is the Future Mega-Systems?

DeMichiei has believed that the country is moving towards a future of mega systems and super regionals, as it is a high-cost, high-fixed infrastructure business. This includes IT, physical plants, patient amenities, and medical technology.

“Healthcare is a very expensive industry, and there is a level of fixed costs that you have to invest in and then create volume and revenue levels to overcome that, to stay profitable. So I think we’re headed towards a new model [of mega systems],” he said.

This transition to mega systems would present the question of how to deliver healthcare to rural or under-served areas. While telehealth is changing the access to healthcare, the health system is the largest employer in many communities. M&As could result in job losses and changes to infrastructure.

“I’d say it’s interesting times, if not scary times, for healthcare in terms of where it’s headed. The only thing I can predict is that it will not be the same that it was. This is [a] massive and major disruption that’s occurring. And how it ends up on the other side I think is subject to all of our best guesses,” he said.

Small-to-mid-sized healthcare delivery systems need to look at who they are going to partner with for the future, DeMichiei explained. Not moving towards partnerships can be both ambitious and naive. Partnerships are about the path moving forward, ways to benefit the community, and keeping healthcare and its services close to home.

Ownership is a Problem for Larger Health Systems

The conversation for larger health systems is the connection to patients. The digital front end determines if the insurer or health system owns the end-to-end healthcare experience, influencing consumer relationships with consumers.

According to DeMichiei, the past strategy of larger systems is to own services, costs, and quality. However, insurers are now trying to provide care at a better price, quality, and location by being closer to consumers.

“If I sit back as a traditional health system with the fixed costs that span the entire pre-acute to post-acute, if I start losing volume because somebody else is steering patients to other sites, that creates a real financial problem for me in terms of generating profitability,” he said.

This is a significant problem for larger health systems. According to DeMichiei, systems need to think about if they can own the patient end-to-end.

“If the answer is no, how do I reimagine my system to do what you do very well and be the premium provider in that area? To ensure that I can stay close to the patient and that my cost footprint after I start rethinking what assets am I going to own? What capabilities am I going to own? And does it look the same 5-year from now as it looks today?” he explained.

The Questions Boards Should Be Asking About Digital Transformation

A recent article in the Harvard Business Review discussed the five questions boards should be asking about digital transformation. Digital transformation in its entirety needs to be addressed to maintain the patient relationship and create a digital front door and experience.

Understanding the Implications of Digital and Technology to Provide Guidance

According to DeMichiei, a board’s understanding depends on the size of the system. Since small-to-medium organizations partake in transformation later, this is primarily a question for larger corporations, institutions, or health systems. By their size and competitive markets, they have likely experienced some transformation within the last decade.

It is less about board members having an IT background as much as it having the experience.

“The successes and failures that they’ve already seen in their own businesses and being able to relate those to the boards that they serve on are absolutely critical,” he said.

Does Digital Transformation Change Healthcare Financials?

There should be a focus on two aspects of digital transformation: cost-effectiveness and improving the relationship with the end customer.

According to DeMichiei, cost-effectiveness is having the transformation substantially reducing costs and increasing productivity. Regarding the end customer, the transformation should facilitate interaction, as it is a consumer experience.

“The two-fold focus of the transformation is around getting close to the patient and enhancing the brand and the experience so that they walk away with an affinity for your organization because it’s so easy to use or it’s so easy to access,” he said.

The industry cannot always accurately make guesses for the future. However, the value-creation business is easier. According to DeMichiei, the two winning formulas for business are improving customer relationships and reducing costs.

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Axios Article Sheds Light on Non-Profit Efforts

A recent Axios article about top hospitals hounding patients with predatory billing made headlines. DeMichiei explained that it also highlighted the quality of charity care and the mission of hospitals is an aspect that the industry should have more focus on.

While there are ample announcements for new business initiatives in healthcare, there is less coverage on bold initiatives by non-profit hospitals around mission and charity care.

“Everybody reports in the [Form] 990 information, but who is taking pride? Who’s a trendsetter? Where are the new innovative charity care programs? Where are the new bold $50 million or $100 million investments in community health and charity care? I can’t think of any that I’ve heard of,” he said.

For DeMichiei, this article represented the first time in a while that a major publication is attempting to quantify the efforts of non-profit hospitals.

Study Shows a Large Percentage of Denial Rates Are Preventable

A Healthcare Innovation article put the spotlight on a survey finding one-third of hospitals are nearing the danger zone in denial rates. The survey reported 85% of denials are preventable. However, prevention takes improving the skills in hospitals and improvement in the strength of leadership.

For DeMichiei, this is not a surprise. There needs to be a world-class revenue cycle department to avoid denials, he expressed. Additionally, the relationship between the provider and insurer influences these rates. He said that this occurrence can be partly due to the pandemic. However, there may also be some truth to the fact there is some upcoding taking place.

“There’s also a power dynamic as well. And as the provider in that region has more power in terms of their presence in the market, sometimes the friction reduces. And conversely, when the payer has more power in that region, sometimes these problems become more pronounced,” he said.

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