Healthcare’s Financial Health, JP Morgan Conference, and Price Transparency with Retired CFO

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Bill Russell / Rob DeMichiei

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January 22, 2021: Rob DeMichiei, Board Director, Strategic Advisor and Former CFO lends Bill his wisdom and expertise in dissecting the JP Morgan Healthcare Conference. What did they hear and what are the implications moving forward? Social determinants of health is a key area of focus and investment. How can this issue be addressed? Who are the new entrants into healthcare? Will CVS, Walmart and Amazon be the biggest players? What’s going on in the financial reports of health systems right now? What do you do with a workforce that is fatigued from the demands of COVID? Can we get the pre-pandemic volumes of people back in? Or has the model completely changed?

Key Points:

  • Health systems employee satisfaction surveys are showing a 10% rise. Employees like the flexibility of working from home. [00:05:40] 
  • From a balance sheet standpoint and a liquidity standpoint, the takeaway from the conference is that health systems are still in very good shape [00:07:15]
  • You’ve got to pull that Cares Act funding out to see where you really stand from a true volume, less volume slash revenue, less expense standpoint.
  • Ascension’s horizontal integration plan [00:09:20] 
  • Price transparency is the first crack in the dam. Over the coming years, there will be more disclosure and more transparency. And once brokers, insurers and employers get a hold of this data it’s going to lead to lower prices for providers. No doubt. [00:33:20] 
  • Fee for service is a brutal paradigm to be in [00:38:40] 
  • JP Morgan Healthcare Conderence

Healthcare’s Financial Health, JP Morgan Conference, and Price Transparency with Retired CFO Rob DeMichiei

Episode 355: Transcript – January 22, 2021

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

[00:00:00] Bill Russell: [00:00:00] Thanks for joining us on This Week in Health IT influence. My name is Bill Russell, former healthcare CIO for 16 hospital system and creator of This Week in Health IT, a channel dedicated to keeping health IT staff current and engaged. 

[00:00:17]Today I am excited to have Rob DeMichiei come back on the show. We are going to do a really fun conversation. Rob was the CFO for UPMC and he has many other board [00:00:30] roles and those kinds of things now that he has retired. We have a great conversation. We both attended the virtual JP Morgan healthcare conference and we are going to discuss what we heard and what the implications of that are moving forward.

[00:00:42]Special thanks to our influence show sponsors Sirius Healthcare and Health Lyrics for choosing to invest in our mission to develop the next generation of health IT leaders. If you want to be a part of our mission, you can become a show sponsor. The first step is to send an email to [email protected]

[00:00:59] A quick [00:01:00] note, we launched a new podcast Today in Health IT. You’re not going to find it on This Week in Health IT podcast feed. It’s a new channel. It’s its own show. We look at one story every weekday morning. Check it out. We, you know, it’s roughly about six to eight minutes long. It’s an easy way to stay current on what’s going on in the health IT space. Subscribe wherever you listen to podcasts or you can hit our website this weekhealth.com, hit the subscribe button and it’ll show you how to find the [00:01:30] podcast. 

[00:01:31] If you’re new to this show or returning after a while, we now do three shows on this channel on This Week in Health IT. On Monday we cover the news and I do that now with a round robin group of about six to eight people. So it’s a back and forth on the news and what’s going on. On Wednesday we have an influence or a solution showcase episode, and every Friday we’re going to do an influence episode just like this one. Be sure to check back for more great content and now onto today’s show. today. We’re [00:02:00] joined by Rob DeMichiei, retired CFO for UPMC and strategic advisor for Health Catalyst, and board member for Waystar. Rob, welcome back to the show. 

[00:02:10] Rob DeMichiei: [00:02:10] Thanks Bill. Great, great to be back and kick off 2021. 

[00:02:14] Bill Russell: [00:02:14] Yeah, I think everybody’s ready for a new year. This is going to be an interesting year in healthcare. We both just attended the JP Morgan conference. I don’t have the list of companies, but I sat through the entire nonprofit track. And so, you know, we got to [00:02:30] hear from, you know, from Ascension, from Providence, we got to hear from Ohio Health, we got to hear really Spectrum Health from a lot of different parts of the country.

[00:02:40] I would say medium-sized IDN’s to large IDN’s. In the other track, I think you attended some of those. We had insurance carriers, we had startup companies, we have pharma and other,  so I stayed pretty true to the nonprofit track. And I’m going back now and watching some of [00:03:00] those. Some of the other videos I watched the CVS video this morning. I think we’re going to talk a little bit about CVS. Pretty interesting stuff. 

[00:03:07] Rob DeMichiei: [00:03:07] No I think I always look forward to the JP Morgan conference. It’s become the de facto standard and sets the tone for the, for the upcoming year, I think. And you’re right. I like looking and viewing the nonprofit track.

[00:03:22] And it’s interesting. It’s a bit of a paradox because then you see some of the insurers and the digital [00:03:30] disruptors saying kind of the opposite or countervailing strategies that they have. So you know, it was really interesting. And maybe first one observation Bill was that, you know what, the theme non-financial that I heard from all of them talking about COVID ongoing and the heroic efforts, not only the caregivers, but if you think about it, the executives, the administrators, the IT, people just how long can they go on this whole idea of [00:04:00] fatigue? And so how do you implement strategy and massive change when you’re also, you have a workforce that has been and continues to be fatigued because of the demands of COVID.

[00:04:11] So I thought that was interesting to see. And then everybody, you know, took time to pay tribute to those workers. There was a lot of talk about social determinants of health and how that actually needs to be addressed. And if you think about it as non-profit health systems, these are things that, you know [00:04:30] mission-based organizations, these were things that always were supposed to be important.

[00:04:34] And I think not only are they important from a mission standpoint, there’s a realization that they’re important from a financial standpoint and they’re drivers of healthcare costs. And then also the other theme was kind of racial equity health disparities, and really a pledge from many of the presenters that this was going to be an area of focus and investment.

[00:04:55] And this was something that was important to the nonprofit community. So those were some [00:05:00] themes that were non-financial. The financial themes though, were, were very interesting, Bill. We should talk, we could talk for a long time about those.

[00:05:12] Bill Russell: [00:05:12] I’m writing some stuff down. You know, usually I have a very defined script but because JPM just happened and I know you can handle this kind of conversation. I didn’t really send over questions ahead of time. Where we’re sort of just we’re making this script up as we go along. It’s interesting.

[00:05:28] Yes, [00:05:30] they absolutely taught almost every presentation started with our COVID journey and our heroes on the front lines. And that’s appropriate. It’s interesting to take that with just some of the information we’re seeing come out of health systems right now that their employee satisfaction surveys have shown like a 10% bump because of the work from home and the flexibility that they’re getting now. This is probably not the frontline workers. I mean, they are, they’re working extremely hard, but but your, your [00:06:00] back office and whatnot, the work from home has seen a has given people a, you know, just a different way to, to work and they seem to really like it.

[00:06:10] And it’ll be interesting to see moving forward. How much of that gets incorporated? I didn’t hear a lot in the presentation of, you know, plans to bring employees back after after the COVID pandemic subsides. Did you hear any of that? 

[00:06:26] Rob DeMichiei: [00:06:26] I didn’t hear much at all. And I think in a way it’s an [00:06:30] issue that’s already been decided, Bill, I think not only in healthcare, but in, in industry there’s an acknowledgement that it’s not going to be a hundred percent remote in the future, but it certainly will never be a hundred percent in office.

[00:06:41] And so. The, the idea of what, what is an office and how do people work has been changed forever. So I kind of viewed that as just something that’s been accepted by everybody. I’ll, jump into the financials if you want, because I thoughtthere was some very interesting things there. And I always go [00:07:00] back to our initial discussion last year when COVID was breaking and some of the predictions that we made and you know, one that’s that’s held true is around the balance sheets and the kind of overall financial health of these large systems.

[00:07:13] And I think the takeaway was all of them from a balance sheet standpoint, from a liquidity standpoint they’re all in instill in very good shape. You know, they’ve taken steps around moderating CapEx, all of them, really many put a freeze [00:07:30] on cap where moderated new projects are building. And so they, they throttle back on cap ex.

[00:07:36] There was, there were borrowings so really kind of shoring up the balance sheet from a line of credit standpoint, the Medicare advanced payments, and then, one thing we got wrong last year was I had forecasts that equity portfolios would take years to return and we’ve seen that that that’s already happened. So I I’m still not sure I understand [00:08:00] why, but like all of us, I enjoy the fact that, that, you know, the equity markets came back. 

[00:08:04] So all of those things together led to real stability in the balance sheets of these systems, where it got interesting. And I know you want to talk a little bit about risk and value based care.

[00:08:16] But let me talk about the income statements for a while because the income statements were as you would agree. Bill absolutely brutal. And all of them were [00:08:30] really improved by the Cares Act funding. And so those results were all embedded in the results that were presented. But even with those Cares Act funds being recognized.

[00:08:43] Amost all the systems had operating margin losses, or I know all of them had significant degradation from the prior year. So you know,  and that’s really when, when I read or see any financial report from a health system, I immediately go to the cares [00:09:00] act funding. And I pulled that out because what you’re trying to really understand is what I call the annuity earnings of the organization.

[00:09:06] So cares act funding is one time, or it may be two times if there’s another round of funding approved, but this certainly won’t be an ongoing method or means of support for health systems years into the future. So you’ve got to pull that Cares Act funding out to see where you really stand from a true volume, less volume slash revenue, less expense standpoint. So [00:09:30] all of them were I think showing very difficult results. Some were forecasting, a return in volumes in the second half of the year. And some even returned to profitability in 21. 

[00:09:43] I don’t see that. And I think that’s going to be a really a tough putt. But others were forecasting. No return to profitability, ex Cares act until 22 or some of them were even saying 2023, which I think is a more realistic estimate. 

[00:10:00] [00:10:00] Bill Russell: [00:10:00] You know, they all have that donut hole, right. So they had that March to let’s say March, April, May, roughly the end of may significant drop-off and because of the elective surgeries being diverted and those kinds of things.

[00:10:16] But I don’t know if you are open to really talking about the individual company returns. I, the one that really every year sort of shocks me is Intermountain. Because they actually did [00:10:30] talk about their financials and they took out the Cares Act money, and they were still able to weather the storm without, even if they hadn’t gotten the Cares Act money, they would have been able to weather it just fine.

[00:10:41] Is that just indicative of their health going into it and their, the makeup of their business having that diversity already built in? 

[00:10:53] Rob DeMichiei: [00:10:53] Well, I think it’s you know, for one, Intermountain is a powerhouse, is a Titan. They’ve got significant market [00:11:00] share and reputation, well earned, I should say.

[00:11:04] But interesting, you know, let’s not forget, they also have an insurance division and I’m always looking for one-time items, not even one time, but there are things that are specific to insurers and intermountain. I think what they had disclosed bill was they recognized the risk corridor payment of about $290 million.

[00:11:25] So although you’re right, they did exclude the Cares Act funding they included as you [00:11:30] should, as an insurer. The risk corridor funding, and  that’s from taking care of those that have a number of conditions, basically. So your risk population has heavy needs. And so there’s a way for you to be reimbursed for that higher risk pool that you’re taking on.

[00:11:47] So that improved their financial results. But you know, in general, Intermountain’s got a very strong payer mix and market share. And so they’re a very strong system. So even they were impacted though by the COVID [00:12:00] volumes. 

[00:12:00] Bill Russell: [00:12:00] Well, yeah, everybody was impacted and you and I talked about this and it was gonna really be who could get who could return the volume, who could get the people back? And to all the areas of care and, and one of the things that’s, I think pretty consistent across the board is we have not gotten people back into the into the emergency departments. And that was a significant theater into the rest of the system.

[00:12:25] Do you think that’s going to continue into 21? We’re still [00:12:30] going to struggle to get people back in or are we going to see the model just completely changed as a result of this. 

[00:12:36] Rob DeMichiei: [00:12:36] Wow. I think there’s a shorter term issue, and then there’s a longer term issue. And so I think the whole idea, and I know we want to talk more about these longer-term changes to healthcare around volumes.

[00:12:48] So I think as COVID, as the, as this starts to take on a longer period than we had hoped for and the vaccinations continue. And you know, now we’re talking about [00:13:00] summer or fall for return to normal. So this, this COVID, period’s going to be extended maybe a little bit longer than when we, than we had hoped for.

[00:13:07] And so that’s going to continue to impact volumes and elective procedures. And people’s idea about utilizing the emergency room. And some of these things may not be short term, but they may become, you know, a permanent fixture in the way people think and utilize health care. So, so I think the volume issues will continue this year because of COVID and nobody really [00:13:30] got back to a hundred percent.

[00:13:31] In general Bill there was, there was sort of a spike in in the summer where people were working down backlog that had been created from the spring time. And I think once that backlog was worked down, then the fall had kind of plateaued a bit. And then COVID round two, started back again with the colder weather in the North.

[00:13:54] So volumes didn’t  return and have not yet returned and may [00:14:00] never return longer-term because of some of these issues. So, and we’ll con, let’s talk more about the longer term, you know, a couple other, you talked about highlighting a few of the presenters and I’ll never want to present or criticize anyone but some of the things that I really liked, I’ll talk about.

[00:14:18] And the only criticism would be that I think certainly people weren’t necessarily proud of all their results. And so some were, some of the presentations were very transparent and others actually had no numbers or no [00:14:30] income statements that were presented. So, you know, just an observation there.

[00:14:34] And I think there’s an acknowledgement as to why. And everyone knows why the results weren’t income statement results. Weren’t great this year, but you know, a couple that stood out to me Prisma. Which people may or may not have heard of, this is a health system in South Carolina, and it’s the combination of the old Palmetto and GHS health systems.

[00:14:54] And they actually had improved financial results. Bill, I don’t know if you caught that there was [00:15:00] a reason for that. They re actually with a new CEO and management team started to integrate those two entities, I think very aggressively. And what I really liked, they talked about how they were restructuring their business.

[00:15:12] Not only because of the integration, but also because of COVID. So there was talk about restructuring the business. They made some moves around personnel and staffing until the volumes returned and they really started to restructure their physical footprint. So I thought that was kind of interesting and a nice [00:15:30] highlight.

[00:15:31] The other one was, was Jefferson. And the thing I liked about Jefferson in Philadelphia was the transparency. I mean, the their financial presentation was. Absolutely transparent. They showed the actually showed a full income statement and talked about the the impact that COVID has had. And they weren’t forecasting a return to operating margin profitability until 2023.

[00:15:55] And Steve classical talked about what they called the jet initiative, which was [00:16:00] a rethinking for the future of, of the delivery of care, how, and the patient experience and making it a nimble digital enterprise. So I thought that was you know  unique or stood out. 

[00:16:13] Bill Russell: [00:16:13] But actually before you go to the next one, it’s interesting that you brought those two up.

[00:16:16] Cause I was going to bring those two up, which is fascinating. The question I have on this isn’t it timing though? I mean, just Jefferson sorta got caught. They got caught. They were expanding rapidly. I mean, they had acquired [00:16:30] every health system that made an overture towards them, they had acquired in the last, you know, two to three years.

[00:16:36] And actually they had to pull back from I forget the name of it, but a cancer center that they were going to acquire. Yeah, so they were on a very aggressive track. They were using a lot of capital when COVID hit, whereas Prisma had started their, their integration, really their optimization of the two organizations, [00:17:00] probably almost at the exact right time in order for this.

[00:17:04] I mean, because when COVID hit, everyone did exactly what Prisma already had in the pipeline. Was There a significant timing aspect of this. 

[00:17:14] Rob DeMichiei: [00:17:14] I mean, it all depends. And I don’t know that the, you have to think about the kind of the quality and the strategic fit of the acquisitions that were completed.

[00:17:23] And so a lot of Jefferson’s acquisitions I think were higher quality organizations. So they weren’t [00:17:30] fixer-uppers if you will, where they were taking on something that was already unprofitable, these were more ones that made sense from a geography and service line standpoint. So I think there was some of that from a timing standpoint and you can look at somebody like Tower Healthcare do, you know, tower has been struggling and that was a roll up of.

[00:17:49] Of several health systems that maybe weren’t as financially strong. And so you’re right. This volume impact becomes exponential. Then when you are in a mode of trying to repair or [00:18:00] fix something that you brought into your system and then the bottoms fall out on the volumes. So I think there was some of that with Jefferson, but, you know, it’s just, it’s really to all of them Bill it isn’t you know, this is an issue there, there are income statement, profitability issues for all of these systems and.

[00:18:18] And just to kind of cap this off without the return full return of volumes, they need other strategies to return to profitability without care Zack funding, if they don’t have risk-based [00:18:30] upside, because that’s the other thing that the other theme on this was many of the systems were truly, use this as a hedge, if you will.

[00:18:39] So they had risk contracts, they had risk positions, whether it could be anything from an Intermountain or UPMC who wasn’t at the JP Morgan confererence but also has a large insurance enterprise. You know, these insurance and just like the insurers have had very successful financial results because of the utilization going down significantly.

[00:19:00] [00:18:59] And so that goes directly to improving their medical expense ratios and then falls to the bottom line. So the, these income statement impacts from the provider side. In the organization that had value-based contracts or had taken on risk, these acted as natural hedges and improve the operating margin results.

[00:19:19] So without those their pure provider results would have sort of shown through and their overall results would have been much worse. 

[00:19:29] Bill Russell: [00:19:29] Do you think the [00:19:30] boards right now are, I mean, so they looked at this and they said, all right, look, we need diversification. We’ve got to accelerate our value based care. We’ve got to accept risk. Get into this more covered lives, insurance plays for providers. Is that the primary conversation that, that you think is going on in the boardroom? 

[00:19:49] Rob DeMichiei: [00:19:49] Well, you know, certainly those that have been on that path before are looking very, very smart right now. And you know, we often talk about where’s the tipping point [00:20:00] between value based and fee for service? And there is no good tipping point. They’re truly countervailing strategies. And as utilization goes up, that’s great for fee for service. And as utilization goes down, that’s bad for fee for service. And the  reverse for payers, but you know, yes, I think not only from a board strategy standpoint, but also from a CMS standpoint. The Obama administration  had been [00:20:30] oone that brought bundles and risk and value based care. And we expect to see some of that returning with the Biden administration. And so, and we all know when CMS implements initiatives, it tends to, you know you talk about what changes healthcare and certainly CMS and how systems get paid impacts healthcare.

[00:20:48] So I think it’s going to be a combination of the board seeing what has happened from the impact of lower volumes but also the activities of CMS. 

[00:20:59] Bill Russell: [00:20:59] Yeah. A lot [00:21:00] of people, well, not a lot, but I saw a bunch of them broke out the number that that they get with regard to Medicare revenue. A lot of them it’s 50% or greater. I mean, I guess that’s the, just the baby boom generation. It’s just demographics but that’s a significant amount that’s tied to that. And when you get into those bundles and you get into those fixed payments for certain things. And they don’t, by the way that they don’t take the really low end things, they take the the things which [00:21:30] generally generated an awful lot of revenue and profit for organizations.

[00:21:34] And they put bundles around those things and it’s, and it’s not only the cost of delivering those services, the bundles actually make you take responsibility for pre and post. Yes. So you have to orchestrate an awful lot even, not only within your house, but sometimes outside the guide.

[00:21:53] Rob DeMichiei: [00:21:53] Absolutely. You’ve, you’ve got to now coordinate care. And so you know, it’s [00:22:00] difficult to do, but it’s actually very effective in lowering the cost of care. And we saw that with the total knee bundle, because, you know, it was very easy to send people to inpatient rehab just through force of habit.

[00:22:14] But if that becomes part of what needs to be paid through a bundle, you take a very hard look about where somebody is going to do rehab. Can they do it at home? Can they do it in an outpatient setting? And so, you know this idea of making people accountable for the cost of healthcare. It actually [00:22:30] works.

[00:22:30] And so that’s what the, the total hip total knee bundle did. It caused systems to start looking at the entire continuum of care. And that’s, this is a good segway. We talked about the other presenters and you know, this, this whole notion that, that I’ve been calling with you, bill, the balkanization of healthcare.

[00:22:50] And that just means, you know, the disorderly fragmentation of healthcare but specifically provider revenues. And there is a giant [00:23:00] target on Medicare advantage. So you mentioned the aging population and also the increase in prevalence of Medicare advantage. And so many of the for-profit presentations at JP Morgan were organizations that are in that space, either the traditional insurers, but also some of these digital startups that are solely focused on addressing Medicare advantage spend.

[00:23:26] And this market I think is actually going to double [00:23:30] in the next five years from some of the presentations. So this is a high growth market. We think about where providers make money, right? The math for revenue is volume utilization and rate. And so we also want to talk about price transparency, and that’s the rate discussion, but from a volume standpoint, Think of your older population, Medicare, those are your high utilizers.

[00:23:58] Right? As we get older, we get [00:24:00] chronic conditions. We get bad knees and bad hips. And so, you know, that’s where the insurers are focusing. And so the insurers, their presentations, they were talking about the continuing vertical integration of the insurers. So they’re becoming providers, they’re insourcing providers.

[00:24:16] And I think yesterday it was announced that Optum acquired the largest remaining independent physician group in Massachusetts. So 700 physicians, independent docs, Optum acquired them. And if you think about the [00:24:30] role of a physician. A primary care physician on the provider side, in addition to providing good care, they become the conduit or the feeder to refer to a specialist and the specialist becomes the conduit to refer to the hospital.

[00:24:45] So this is all about really being a referral engine, if you will. But when an insurer owns a primary care physician, what they’re trying to do is become a wellness provider or a gatekeeper. So the [00:25:00] primary care physician’s role was to keep the person from needing the specialist. And the specialist role is to avoid the inpatient event.

[00:25:09] And so this whole thing takes on a whole other meaning in terms of the utilization of, of these provider resources. So not only are they continuing this, this vertical integration with owning surgery centers and physician groups, but now you’ve got all these startups. And so some of them were, you know, Oak street health.

[00:25:28] And Clover, [00:25:30] One Medical another example is Ken med. These are all businesses that are based on reducing utilization and reducing medical spend. And and it’s focused on Medicare advantage. And they have proven results where they’re, they’re focused on not fee for service, not generating RVU or, or, or CPT, but when they’re focused on wellness and keeping people healthy, [00:26:00] There’s a significant impact on volumes and utilization.

[00:26:04] And so this is part of this. When I talk about this attack on the whole idea of provider volumes, no these, these startups that have very high valuations and they’re the darlings of the investor community because of this gigantic opportunity that they present to reduce healthcare spending, 

[00:26:22] Bill Russell: [00:26:22] You know it’s interesting in the, again I’m going to go back and listen to some of those presentations. And I think it was [00:26:30] Ascension that actually broke out the five areas that they are looking at for horizontal integration or horizontal integration. It was a pharmacy, ambulatory surgery centers, imaging lab and home, I think it was supposed to cue to  home care, right? 

[00:26:48] Rob DeMichiei: [00:26:48] Yes, it was. That was actually another one of the interesting ones I didn’t mention, but you know, they talked about this horizontal strategy. So, we talk about the attack on revenue and the question is what are you doing as a [00:27:00] provider to prepare for that and strategically to be ready for that? And so essentially it was one that says, you know, yes, we’re going to look. We have this expansive health system and we’re going to look horizontally with the service line service center strategy to optimize these five areas.

[00:27:16] And again, not just for cost savings, because those will happen, but also for standardization and for qualities, when you do this as a center of excellence and you eliminate variation. And you eliminate the different, [00:27:30] ways of practicing, you get higher quality and better results and better outcomes.

[00:27:33] So, that one was, I thought was, a very forward-looking strategy that, essentially is implemented 

[00:27:40] Bill Russell: [00:27:40] Yeah. So it’s, but that will still drive their revenues down. Right. Where do they make it up? Cause it’s not, it’s not in rate. It’s not, it, it’s not in utilization. I mean, where do they make it up? Don’t they have to essentially assume risk for that population to make it up? 

[00:28:00] [00:28:00] Rob DeMichiei: [00:28:00] If you, if you can’t get higher rates for what you’re doing and you can’t do more of it, you’ve got to become efficient from a cost standpoint. And you’ve got to differentiate your offering from a quality standpoint. So if you think about what’s, what’s the new growth strategy for the future for health systems and in the past, it was like, well, we’re going to build more AFCs or we’re going to geographically expand, or we’re going to take market share, you know?

[00:28:25] Yes. In some markets you can still do those, but I would argue bill the new growth [00:28:30] strategy. Is quality cost and patient satisfaction. So how do you differentiate yourself in a static or a shrinking market? How do you grow? Will you grow by differentiation and this also ties into the price transparency.

[00:28:48] You can’t have irrational pricing but you can charge for something that’s a premium. And you create a premium service by having something that’s new from a technology standpoint or innovation standpoint. But you also do [00:29:00] that by having an amazing patient experience by having great quality and outcomes and also on costs. And so that’s the new paradigm. So when I hear Ascension talking about horizontal integration and cost management. Those kinds of things to me, that is, is where success lies in the future. 

[00:29:21] Bill Russell: [00:29:21] It’s, there’s a couple of things I want to hit with you. But you know, I, we’re going to leave them wanting more with the show I was feeling because there’s [00:29:30] so much to talk about the so I want to talk price transparency, but also we’re talking about the new entrants right?

[00:29:37] So I watch CBS. Well, let’s start with price transparency. So the price transparency rules out there they’re supposed to have their shoppable services. Pricing published at this point. It was interesting because that was a question that came up in a lot of the Q and A’s and most people said, yeah, we’re we’re compliant.

[00:29:58] Others [00:30:00] may not have been compliant. They sort of walked around the question. But the question is, does this really leads to price transparency? Does putting your shoppable services out there really lead to it. 

[00:30:10] Rob DeMichiei: [00:30:10] So again back to this balkanization this absolutely is going to impact price eventually. And what I mean by that is this isn’t a tool that’s going to be easy to use for a consumer, but if I’m a competing insurer and if I’m an employer, I’m either scouring through those [00:30:30] records or I’m hiring a third party to help me find these kinds of nuggets of gold in those, in those 70 shoppable services that are required to be disclosed.

[00:30:41] So it’s you know, first it’s, they’re not easy to find. I mean, I’ve been doing some searches trying to find from different systems, so that might’ve been helpful. And so, you know, from CMS, CMS, a lot of criticism, but for me, it’s a good first step. It’s not perfect, but it’s going to lead to something better.

[00:30:58] I would have had some standardization about [00:31:00] where on your website, you had to place this and maybe what, what kind of user format, but eventually. There are, there are some smart people that are going to find the data on these 70 shoppable services that are required and start really analyzing them for what I’ll call this irrational pricing.

[00:31:19] And it’s out there. There’s significant variation. So if I’m an employer, I’m pointing out other, other places in my market that I have a significant price discrepancy. So it’s going to [00:31:30] lead inevitably has to lead to transparency, leads to lower prices. It just does. But if that gets back to the point where if it’s a commodity, the prices should go down.

[00:31:41] And I think the opportunity though, Bill is if you truly have a premium service and you’ve differentiated yourself, And it may be initially by reputation, but ultimately it’s by patient satisfaction. It’s by outcomes. There’s no reason you can’t charge more for that premium service. And so it, it [00:32:00] may sound like it’s going against the grain, but it isn’t about just lowering the prices.

[00:32:04] It’s about getting rational prices, because if something actually costs more justifiably and it’s a premium, you should pay more for it. And so this is hopefully a bit of a plug in terms of, of cost management, cost accounting. The work I’m doing with health catalyst and chorus, it actually matters which service lines are profitable and which, which individual procedures are profitable and which physicians are [00:32:30] profitable.

[00:32:31] And until you actually know that, honestly, with accurate data you can’t have, you can’t, you don’t really care about cost. If you have irrational pricing, now that we’re going to have eventually rational pricing, you need to have rational costs, but where you do have higher costs and they’re justifiable.

[00:32:47] So, you know, if you want to have cardiac procedures at the Cleveland clinic, that should be a premium, or you want to get cancer treatment at the Hillman center at UPMC, that’s a premium or neurosurgery at Mayo. But you know, to get [00:33:00] imaging or labs or. I’d even say total knee replacement, like, is that still a premium service?

[00:33:06] They become shoppable. You can go to many, many places to get these services done with the same, same quality and outcomes. And so I think that’s where we’re headed. It’s early but this price transparency it’s sort of the first crack in the dam. But I think what you’re going to see over the coming year and years will be more disclosure more [00:33:30] transparency. And once these  brokers, insurers and employers get a hold of this data, it’s going to lead to lower prices for providers. No doubt. 

[00:33:38] Bill Russell: [00:33:38] And then they really do, and this is where the cost-based accounting. That’s our first conversation. If people want to listen to this, the first conversation you and I had was completely around cost-based accounting.

[00:33:49] And what Health Catalyst was doing was actually at the Health Catalyst conference. You really have to have we’re going to change to an an industry that understands our costs [00:34:00] really for the first time. I mean, we sort of put our thumb in the air and said, yeah, it sort of looks like this, but as a whole we’re making money, but we didn’t really know what our costs were, but that’s about to change. I would think. 

[00:34:14] Rob DeMichiei: [00:34:14] It is. And you know most cost accounting systems were developed in the seventies and eighties in healthcare. And it was before the electronic medical record. And why that’s significant is because the EMR has all the data you would ever want around [00:34:30] consumption. We can tell which physician consumed, how long the length of stay was, how long they were in the operating room.

[00:34:36] And the secret in healthcare is that, you know, about 70% of your costs are in these areas that are used by multiple patients. So the length of stay with an inpatient, a bed nursing resources operating rooms, labs, imaging, they’re utilized by multiple patients. So you can’t just say, here’s a knee implant and I’m going to properly cost that. [00:35:00] Now I understand my costs. It’s a small percentage of the inpatient stay. And that’s on a surgical procedure. On a medical procedure it’s mostly these indirect clinical costs. And so you need to understand there needs to be actually a cost of a length of stay. If I’m a physician with a four-day length of stay.

[00:35:19] And my colleague has a three-day length of stay, that’s a significantly lower cost profile that needs to be reflected. And so we need to hold people accountable for their consumption. [00:35:30] So again, as pricing gets squeezed because of transparency, costs will matter much more than they ever have in the past.

[00:35:37] Bill Russell: [00:35:37] All right. So we’re going to get to the, the other, the new entrance. They’re not really new anymore, but the entrants into the market. But I wanted to ask one last thing about real estate. I have a feeling, you know, based on what we’ve seen during COVID rise of telehealth, the ability to do more things out of the home. I mean we’ve sort of proved it. I mean, we just had a [00:36:00] massive pilot of a lot of these programs. We sort of proved that it can be done. Will this mean a significant shift in what the real estate profile looks like for a health system? 

[00:36:10] Rob DeMichiei: [00:36:10] I think it has to you know, we can’t just make telehealth and incremental costs and granted it’s a much lower cost than a physical visit. But I’ve seen different presentations to say, look, this isn’t a cost savings initiative. Well look, if you’re going to move a significant amount of your volume to a virtual setting well, that means [00:36:30] your physical settings are going to be even more under utilized than they are today. And so, you know, interesting with telehealth.

[00:36:36] What we saw is we saw this immediate spike. With COVID and people not wanting to visit an office and neither physicians nor patients feeling safe to once the summer came, you know, it sort of dropped back down again, still higher than it was pre COVID, but it became more of an event than an integrated strategy.

[00:36:59] So the [00:37:00] question is who out there is actually thinking of telehealth as a long-term strategy, as opposed to just something that we use to manage through a crisis? And what is the future role? And once that’s been determined, what does that mean for my physical footprint and for my delivery of healthcare? And it’s got to end up, so the introduction of new technology.

[00:37:21] I in every other industry results in a lowering of costs. So I think though it has to result in a tough [00:37:30] look at again, you know, the horizontals, what are my physical locations? Where do I have excess capacity or duplication, and then even where maybe do I, am I not addressing the population growth?

[00:37:43] So this isn’t just all about reducing. It may actually identify where there’s population growth in a certain area that I need to close some kind of physical location on this side of town. And I need to open one on a different side of town. And so yes, this is where the fixed [00:38:00] costs are resonant in these physical locations.

[00:38:02] So how do we optimize them? Not only the current utilization, but also the integration of new technology and telehealth. 

[00:38:09] Bill Russell: [00:38:09] And it’s interesting. Yeah. And we saw that we saw the tele-health spike. And then we saw it sort of come back down and I’ve been talking to different health systems and they’re like, look, the physicians really drive where telehealth gets done and they’re bringing people back into the office and it’s a misalignment of incentives know you could [00:38:30] guarantee that Kaiser is not bringing those people back. I mean, there, because of the different incentives for a fare provider. 

[00:38:36] Rob DeMichiei: [00:38:36] It’s this it’s this fee for service. It is a it is a brutal paradigm you’re in. And so the whole idea is like, okay, we’re open back up again. Let’s get every bat, everybody back into the office. We’ve got to get the volumes back up.

[00:38:49] And so again, it, isn’t more of the long-term strategy of how do I integrate a lower cost alternative that our patients love. And it’s a part of my ongoing strategy as opposed to like, okay, we’re back to normal. [00:39:00] Let’s try to, to get the volume back. So this is something everybody needs to work on. W what is the true role of a virtual and tele-health and how does that actually, again, not only improve my patient satisfaction, I wouldn’t blame this all on the physicians, because many of the physicians love the whole idea of virtual visits.

[00:39:18] It’s also the administrators. How do I actually think differently about the immediate impact of fee for service, as opposed to the longer term view of my overall offering? 

[00:39:28] Bill Russell: [00:39:28] All right. I want to look at three players and [00:39:30] they’re big players. So you’ll be able to and I sorta want to say, ask you, you know, what are their strengths in attacking this market?

[00:39:38] And let’s, you know, it’s going to be CVS, Walmart and Amazon, because I think those are the players that that I see that is Bill’s prediction that I see making the biggest move over the next five years. And so let’s start with CVS, you know, CVS did 10 million COVID tests. I mean to give you a comparison, [00:40:00] Henry Ford did 300,000 Henry Ford health system. They did 10 million. The scale of CVS. I mean, they are, they’re literally everywhere. They’ve done a million of vaccinations at this point, and they’re only doing them in long-term care facilities, but they’re going to be eventually, they’re going to be a location that we can go for a vaccine and they intend to ramp up to about 20 million, some odd vaccines.

[00:40:28] I think it was every month. [00:40:30] 20 million a month that they’re going to be able to administer. So talk about what is CVS is strength and their, their strategy moving forward. And how does that play against a health system? 

[00:40:42] Rob DeMichiei: [00:40:42] So, you know, I’ve kind of said this from the beginning of CVS and the the merger with Aetna is that again, this whole idea of vertical integration. So they have not a pure play provider, but certainly they’re in the healthcare continuum with [00:41:00] a, with your hometown pharmacy, if you will. And so all of them will point to their access to population within so many miles of a location. So certainly CVS and Walmart have a national footprint.

[00:41:14] And so from a geographic standpoint, we talked before about health systems are disadvantaged because they’re located sometimes in the center city and they’ve been put together through affiliation or acquisition, whereas a CVS or a Walmart has been put in based on. [00:41:30] Transportation, interstates, population growth.

[00:41:33] And so they’re perfectly fit to service the overall population. Now you’ve got. Aetna who has a a series of covered lives. And now, again, instead of relying completely on the provider health system to deliver a care and send checks to the provider, they’re insourcing that care with not only pharmacy, but now these health hubs.

[00:41:57] And again, focusing on senior citizens and [00:42:00] Medicare advantage, but also moving now towards what I’ll say is gaining kind of reputational awareness and a bit of a halo as being like, look we’re, we can actually go out and administer a COVID vaccine to massive populations faster than anyone  else.

[00:42:18] So CVS has again, they have the payer connection. And so there’s a question for Walmart. Walmart has a better physical footprint and the larger scale. [00:42:30] So the question that people always ask about Walmart is when are they going to acquire an insurer? And to me, I think that would be a really, really smart move for them because, and now we talk about social determinants of health.

[00:42:41] And so you’ve got, you’ve got food, you’ve got a grocery store at your Walmart. So think of how, and you’ve got a consumer information about what they’re buying, what kind of food they’re buying. Now we either privacy issues we can think about as well, but you know, these are the things that drive health.

[00:42:57] So Walmart to me is very [00:43:00] well positioned. They need to have a reason to do this as opposed to driving bodies into the store, it becomes managing covered lives. So I think that if they ever require insure, that’s really a real risk. 

[00:43:13] Bill Russell: [00:43:13] So managing covered lives. So I go in there and I start buying food that’s bad for me. I get to the register and they’re good to go. Yeah. And you can have this, you can’t have this. 

[00:43:21] Rob DeMichiei: [00:43:21] Or let’s keep it positive on your piece of paper slip, you get discounts for fruit and vegetables and healthy foods. [00:43:30] That makes sense in a way they’re subconsciously incenting you to lead a better lifestyle. You know, it just, it gets really interesting as to, as this can change. This is just a whole game changer because we, when I talk about the balkanization Walmart and CVS, they’re not going to do neurosurgery and they’re not going to do intensive care or emergency rooms, but. Health systems traditionally were built on this very large [00:44:00] again, pre acute, and post-acute this entire continuum of care and doing everything primary care and everything in between imaging labs.

[00:44:09] And when I say balkanization, they’re not going to take everything, but they’re going to pluck and pick things apart. And focus on them. And so what happens to the traditional provider? The costs don’t go away. Bill, the inpatient footprint. Doesn’t change very hard to get those costs out, but guess what?

[00:44:27] The revenue starts to disappear or the revenue [00:44:30] starts there is no growth. And so COVID was an unnatural event. What happens when this becomes part of the ongoing strategy and competition from these other players in the market? It makes for a tough road ahead for somebody who’s a pure play fee for service health system.

[00:44:48] Bill Russell: [00:44:48] You know we sawAmazon Berkshire share JPM their Haven sort of implode. And that was, I mean, hindsight is, it was almost predictable when you take [00:45:00] three large organizations like that and say, we’re going to, we’re going to do something. And the cultures couldn’t be more different when you think about those three organizations, but Amazon has been doing stuff every you know, all along the way now, it wasn’t a part of Haven. They’d launched Amazon health and they have a really cool service that they set up for their employees in Seattle. And now down in Texas, they’re doing the same thing. The employee sat on it is really high.

[00:45:28] They’re doing things in [00:45:30] pharmacy. So that’s another area. They’re doing stuff in durable goods and whatnot. Health system, durable goods. What not. And there probably could be a significant supply chain partner for health systems as well, if they want it to. But this is another organization that could, that they ended up themselves.

[00:45:51] They could still disrupt the the employer health plan market. If they can take what they’re doing for [00:46:00] themselves and scale it, which they’re really good at. And then all of a sudden start offering that. To these you know, mid size and even large organizations. 

[00:46:09] Rob DeMichiei: [00:46:09] But yeah, no, absolutely. I, you know, it was, it was funny. I think there was a bit of a, of glee when Haven was not successful from the, you know, people were very worried about Haven. And so I think people might have been happy to find out that it had not succeeded. I didn’t feel that way. I think they, they maybe had a noble, certainly had a noble [00:46:30] mission and caused.

[00:46:31] But you’re right. With three very different employee demographics and populations in a way they would have been working against one another in some cases. So but because the big idea was not successful. That doesn’t mean again, that all of these individual disruptors can’t do something even even greater than, than just one large organization.

[00:46:55] So Amazon certainly will be a player. And again, it’s because of. [00:47:00] Access to consumers. They may have the best access to consumers and they have a transportation network that’s fully built out. They have goods that are going through their pipeline if you will, whether it’s pharmacy, whether it’s DME.

[00:47:15] And so, you know, again, they’re also positioned to disrupt this value chain and there is a piece of the addressable market that they can take away from health systems. So it isn’t about taking over everything. But they represent and they affiliate [00:47:30] with, with large employers. And so when we talk about the cost of healthcare is not only concern for the government, but it is for large employers as well.

[00:47:41] And they’re finally saying like, look enough, are our economics have been impacted by COVID? We’ve got to find way to save costs and, and healthcare is a big line item. So all of these things are part of this overall. Long-term threat to the traditional provider business. 

[00:47:57] Bill Russell: [00:47:57] Well, we still have another hour of this [00:48:00] show, but we’re gonna, we’re gonna cut it off. That’ll give us something to talk about and you and I are going to touch base a couple more times this year. So we’ll circle back on some of these things and see how they progress. Rob. Thanks again for for taking the time. I appreciate your wisdom and expertise in dissecting the JP Morgan conference with me.

[00:48:20] Rob DeMichiei: [00:48:20] Thanks Bill. It’s always it’s always great to just sit down and chat with you. Always fun and interesting. So thanks. 

[00:48:26]Bill Russell: [00:48:26] What a great discussion. If you know someone that might benefit [00:48:30] from our channel from these kinds of discussions, please forward them a note. They can subscribe on our website thisweekhealth.com or you can go to wherever you listen to podcasts, Apple, Google, Overcast, that’s what I use. Spotify, Stitcher. We’re out there. You can find us. Go ahead, subscribe today or send a note to someone and have them subscribe. We want to thank our channel sponsors who are investing in our mission to develop the next generation of health IT leaders. Those are VMware, Hill-Rom and Starbridge Advisors. Thanks for listening. That’s all for now. [00:49:00]