July 16, 2021: Rob DeMichiei, Board Director, Strategic Advisor and Former CFO is back with Bill. What does digital transformation mean in 2021? What is the current CIO CFO conversation? Economists are predicting negative margins through the end of the year. What kind of impact will that have? Could there be IT motives for mergers and acquisitions moving forward? Smaller health systems are throwing up their hands at cyber attacks at this point. They just can’t make the investments necessary to protect themselves. What is the path forward for small to medium size healthcare systems? Who should they be partnering with? And can a large health system truly own the patient end to end?
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The Financial Outlook of Healthcare with Rob DeMichiei
Episode 425: Transcript – July 16, 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. Today we are joined by Rob DeMichiei retired CFO for UPMC, Strategic Advisor for Health Catalyst and Board Member at Waystar.
[00:00:25] Special thanks to our influence show sponsors Sirius Healthcare and Health Lyrics for choosing to invest in our [00:00:30] 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 as well. The first step is to send an email to [email protected]
[00:00:40] Just a quick note, before we get to our show, we launched a new podcast Today in Health IT. We look at one story every weekday morning and we break it down from a health IT perspective. You can subscribe wherever you listen to podcasts. Apple, Google, Spotify, Stitcher, Overcast. You name it, we’re out there. You can also [00:01:00] go to todayinhealthit.com. And now onto today’s show.
[00:01:03] Today we are joined by Rob DeMichiei retired CFO for UPMC, Strategic Advisor for Health Catalyst and Board Member at Waystar. Good morning, Rob. Welcome back to the show.
[00:01:13] Rob DeMichiei: [00:01:13] Morning Bill. Great to be here.
[00:01:15] Bill Russell: [00:01:15] Are all those things still accurate? You’re still a board member at Waystar.
[00:01:17] Rob DeMichiei: [00:01:17] Absolutely. Great, great company making great progress growth great to be associated with them and health catalyst as well. So same, same story, bill keeping busy.
[00:01:28] Bill Russell: [00:01:28] Yeah, well Waystar started did a [00:01:30] few ad spots on the US open golf event this past weekend. First time I’ve seen them. Maybe they’ve been out there before, but that’s big time stuff.
[00:01:38] Rob DeMichiei: [00:01:38] It is, I think establishing a as a national brand, trying to create awareness with the market and the products and they were well received great commercials. So if you haven’t seen it, check it out. But yeah, exciting times it’s really the growth story has been great. So it’s exciting.
[00:01:55] Bill Russell: [00:01:55] And people who are watching this on video will notice that you have a new setup. You look great. [00:02:00] The sound is great. And you’re preparing to speak at the virtual health catalyst conference, which is coming up in, actually it’s a couple of months out isn’t it?.
[00:02:10] Rob DeMichiei: [00:02:10] Yeah. Yeah, it’s actually in September. And so I’ve got my new equipment here for my virtual recording. So this is the dry run using the equipment.
[00:02:19]Bill Russell: [00:02:19] Yeah, this is kind of fun. I think everybody’s upgrading their equipment just because we do so many of these calls. It’s kind of amazing, but they really hooked you up pretty well. All right. [00:02:30] So I’m going to walk you through this but the last time we spoke, last time you came on the show, we were going through the JP Morgan conference, which I think sets up the conversation for the year, from a financial perspective.
[00:02:41] If people haven’t heard that episode, I highly recommend they, they go out and download that it was right around the January timeframe. And what I’d like to do is let’s pick up where we left off. So in January we were in a very different place. New administration, the vaccine was developed. We’re in the midst of a distribution process.
[00:02:59] We [00:03:00] didn’t know how fast we were going to be able to get it out there. Government assistance to healthcare was starting to show up in the financial numbers. Virtual visits had receded somewhat from its peak. But they they’re still significantly above the previous levels that were established and volumes were still not completely back to pre pandemic levels in many cases.
[00:03:23]Where do you feel like we’re at today from the conversations and the things that you’re experiencing.
[00:03:28] Rob DeMichiei: [00:03:28] You know it’s interesting. [00:03:30] I wish there was kind of a one answer. Sure. A homogeneous answer for all the health systems but it’s really a mixed bag. And I think it’s, you, you start to see some positive signs with volumes returning and andsome level of moving from either losses to slightly positive or reduced losses.
[00:03:50] And when I say this I’m thinking all without the government assistance revenues. So you see some positive moves Bill. I don’t think there’s one [00:04:00] story to be told. It’s really dependent on the size of the health systems that we’re talking about. There’s really a different story for what’s happening with the larger systems versus the small and medium sized systems.
[00:04:10] I think there are different stories geographically. And then as we’ve talked about, certainly those that have a payer side or a risk side, it’s a much different. story. And those those risk-based contracts and those with insurance enterprises have done very well and have really it’s acted as a buffer with the volume [00:04:30] losses over time.
[00:04:30] So it’s really a mixed story. And I don’t know that we have enough clarity yet to see where we’re going. It’s what you do see in general was that the emergency room volumes are down, but the acuity is up. You still see softness and inpatient admissions. But I think it’s like everything with post pandemic, right?
[00:04:49]When you go into the pandemic and you come out of the pandemic, whether it’s our dining habits, it’s what we watch in terms of entertainment. It’s travel. It’s [00:05:00] returne to office, right? All these things, 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 is we come out.
[00:05:09] I think the one thing that we know is that they’re not going to be exactly the same, right. Everything our consumer preferences have changed. Our our entertainment has changed. Our, everyone has different ideas about return to office. So I don’t know why that would be any different with healthcare. It’s not going to be the, exactly the same that it was before the pandemic.
[00:05:29] And then the [00:05:30] question is, what does that new world look like? But I think it’s probably six months or a year from now, before we’ll really see what the new normal is.
[00:05:41] Bill Russell: [00:05:41] You know, it’s interesting. I literally could pull up articles that say the exact opposite things in terms of where we’re going around telehealth, around inpatient volumes, around the people coming back to the hospital or not coming back to the hospital. I mean, literally in their studies it’s like, hey, we did this survey, we’re finding. But [00:06:00] it really is. It really is all over the board.
[00:06:03]Rob DeMichiei: [00:06:03] And what’s interesting about it though, is if you think of an industry that’s ever had tremendous inertia, it is healthcare. So you have an industry and an infrastructure with tremendous inertia that wants to carry it back to the way things were. But you have these market forces, these massive market forces, whether it’s the insurers that we’ve talked about, whether it’s these private equity investments around disrupting healthcare, whether it’s employers who are looking [00:06:30] for a new way into the future heading in the opposite direction.
[00:06:34] So it is really this clash of two overwhelming forces. So I don’t think it’s easy for anyone to predict how it’s gonna turn out.
[00:06:42] Bill Russell: [00:06:42] So the Economists out there, the Kaufman Halls and other are projecting negative margins through the end of the year. And again, for larger health systems, that’s not that big of a deal. They have the cash reserves and they can get through that. But for the smaller players, that’s a significant conversation. That’s a boardroom level conversation to have those negative [00:07:00] margins going through the end of the year. What kind of impact will that have overall on healthcare? And I’m not going to ask you to predict whether it’s gonna be negative or positive margins, because again, it really depends on the market and a lot of other factors.
[00:07:14] But if there are negative margins through the end of the year, what kind of impact will that have?
[00:07:17]Rob DeMichiei: [00:07:17] I think you’re going to see, and we’ve seen this already a widening of the gap between the haves and the have-nots. And so these market pressures just make it more and more difficult for small [00:07:30] systems to one weather, those losses, but to even emerge on the other side and be able to make the investments and the changes and the moves to digital that are needed to survive in this changing world. So I think it’s, unfortunately the large systems will figure things out. They will thrive, they will acquire entities that make sense geographically. But you’re gonna have an issue with rural areas with smaller health systems. And [00:08:00] unfortunately I think even the gap between commercially insured in terms of the services and the amenities that they have and the hospitals they can access.
[00:08:09] And those in Medicaid population and the uninsured, I think it’s in a way this widens the gap in terms of the level of care and the types of care available to the population.
[00:08:21]Bill Russell: [00:08:21] Well, we can, we can go down that road for awhile. Let me, let me pull back a little bit because you mentioned some acquisition things and we’re starting to see that come back online. That [00:08:30] really went by the wayside for the better part of 12 months if not 18 months. But we’re starting to see some of that come back. Beaumont, which is constantly being courted, but Beaumont and Spectrum, Oschner and Rush, LifePoint and Kendrick Health. Are these distinct deals or do they represent something, some larger trend that we’re going to see?
[00:08:50] Rob DeMichiei: [00:08:50] I think the larger trend are these systems, and this is on the acquiree side, really being, having proactive boards that [00:09:00] see the challenges in the future and are looking to protect health care in their areas. So I see the strategy from the acquired. And one of the things I’ve seen in a couple of these Bill is that they usually involve some massive IT transformation as part of the strategy.
[00:09:20] So I think it might’ve been the Oschner deal that was, there was an Epic install that, that happened prior to it or right along with it. And so this is a [00:09:30] smart move for these acquired systems when they need a digital transformation or they haven’t adopted Epic yet. And as part of that transaction, they’re able to acquire that guarantee that the acquiring entity is going to fund that it transformation.
[00:09:44] So I think you’re going to see a number of what I’ll call moderately successful mid-size health systems, where the boards are going to make strategic decisions to say, look, I’m looking 10 and 20 years into the future. And I want to [00:10:00] maintain healthcare in my region. And the best way to do that is to partner with a large strong national or super regional kind of entity to to, guarantee healthcare in the future.
[00:10:12] So I think that is, is part of what’s driving the strategy. It’s going to be difficult again for the systems that are already financially distressed to find a partner, right. Because why would a, why would a successful system, unless there is a great geographic growth play go after that [00:10:30] distressed system.
[00:10:30] So. I do see more of it. I see a world is going to be very difficult to survive with hyper-competition. And so M & A is the way to guarantee the future. Now for the acquiring entity, I think is where you have to question some of the strategy. I’ve personally never been a fan of this mega wide geography acquisitions.
[00:10:53] One of the biggest synergies of an acquisition is when there’s contiguous markets and you’re able to [00:11:00] leverage infrastructure easily, you’re able to leverage branding. You’re even able to leverage your physician population and your specialists by being able to have clinics in those areas. Now, some of that you could say telehealth will help with and maybe that, that the amount of distance has been narrowed or shorten because of the telehealth capabilities, but I think it’s a difficult play for some of these large dispersed systems to make a go of it financially.
[00:11:29] So I, [00:11:30] to me, the jury is still out on whether these make sense for the kind of national players.
[00:11:34] Bill Russell: [00:11:34] Plus the risk of acquiring a financially distressed organization. I would think we saw Hahnemann close. And there was so much ink around that and so much negative press around that. I mean, if you acquire a distressed hospital, one of the things you’re going to do is you’re going to look at the effectiveness and the geography and where they place things.
[00:11:56] And you’re going to say, Hey, you know what? We should close, these five things. [00:12:00] And bring the service lines together and do these kinds of things. But those kinds of moves become a lot harder in the public eye don’t they?
[00:12:06] Rob DeMichiei: [00:12:06] Well, those, that those deals usually don’t get done right. Where somebody comes in and as their entry to say, well, look, we’re going to affiliate with you.
[00:12:15] We’re also going to close five of your facilities. Deals tend to not get done Bill. Hahnemann. We could have a whole other session on that one and why it happened and what the true value is. But I think it is really about going in and [00:12:30] understanding that there’s some kind of a value in that acquired entity.
[00:12:35] And if they’re money losing today, can you do things in terms of, again, reducing costs, leveraging shared services, where you can flip them to positive. And there’s an opportunity with a national brand. Like a larger health system brings to make that a more attractive destination for patients.
[00:12:54] But again, these are, these are tough to turn around and that’s why I [00:13:00] don’t think you’ll see many of the distressed organizations Honamin was a different discussion entirely. I don’t know. We could debate whether there was ever an intention to turn it around.
[00:13:07] Bill Russell: [00:13:07] Right because it was private equity and the value of that real estate given the turnaround that was going on in center city, Philadelphia was pretty high. We covered that on today in health IT in a lot of detail.
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[00:14:26] Let me, let me go in a different direction with you. I think there could be an [00:14:30] IT motive and you sort of alluded to this. There could be an IT motive for mergers and acquisitions moving forward. You have these cyber attacks and some of these health systems are sort of just throwing up their hands at this point and saying, look, we can’t make the investments necessary to protect ourselves.
[00:14:43] We can’t make the necessary IT investments in the EHR infrastructure and the PAC systems. We can’t upgrade these things. It was one thing to put them all in place as a result of meaningful use cause you got dollars for it, but now we’re coming into that lifecycle point where we have to upgrade all these things [00:15:00] or enhance all these things.
[00:15:01] Plus we have to protect them from a cybersecurity standpoint. And do you think there’s a model other than an acquisition that health systems can put together or will put together where there’s a technology partnership, if you will, but not financial fiduciary responsibility for the health of that health system?
[00:15:20]Rob DeMichiei: [00:15:20] I’m not sure I could think of a model that would do that Bill because there’s got to be a financial benefit to the acquiring organization for that affiliation. And it’s, it’s [00:15:30] gotta be broader than just leveraging an IT spend. So it’s kind of like what is in it for them. It’s great for the acquired entity or for the the entity getting that management services agreement.
[00:15:41]It’s a broader discussion around where I think the nation’s headed with healthcare and we are headed towards having mega systems and super regionals because it’s, it is a high cost high fixed infrastructure business. Not just with IT which is ever growing with more and more [00:16:00] risks and more and more opportunities and capabilities with technology, but also with physical plant with patient amenities, with 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, which is we’re going to have these mega systems.
[00:16:25] And then the question is because again, healthcare is [00:16:30] essential for everyone. How are we going to deliver healthcare to these rural areas, to the areas that again aren’t well-served that don’t have acute and critical care nearby. And so is that again, this new model of tele-health with hub and spoke it, it needs a re-imagining of the delivery of healthcare.
[00:16:52] And the one thing that’s in the way is this, well, two things in a way is the current infrastructure of facilities and locations [00:17:00] where you have rural and small hospital. But you also have a situation where you have them being the largest employers in these neighborhoods and regions.
[00:17:12] And so now you’re talking the political discussion about losing jobs and in most of these neighborhoods and cities, they’re the largest employer. And so now you’re talking about job losses as well, to be able to create that new vision for the future. So it. I would say it’s [00:17:30] interesting times, if not scary times for healthcare, in terms of where it’s headed.
[00:17:35] The only thing I can predict is that it will not be the same that it was, it won’t stay the same Bill. This is 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.
[00:17:48]Bill Russell: [00:17:48] If you had a five-year plan in place, would you potentially be re-evaluating all of that right now in light of what’s going on. I would assume you would.
[00:17:56] Rob DeMichiei: [00:17:56] So if I’m a again, again, I think the conversation’s [00:18:00] nuance to am I a large system or medium or small size system.
[00:18:03]Bill Russell: [00:18:03] I would still think you’re having the conversation, even if you’re a small system, because it’s alignment, it’s who you’re going to partner with.
[00:18:10] It’s how you’re going to get access to resources and those kinds of things. If you’re a larger system aren’t you looking out five, it’s hard to look out 10 years, but looking out five years and saying, okay, as a result of the pandemic healthcare setting in this direction, as a result of new entrants,, as a result of of maybe some things that are going [00:18:30] to happen from a regulatory standpoint and new models of care that are going to come out from the government. We should be heading in this direction. I wouldn’t, in both cases, you’d be looking at potentially a significant, not a significant change in strategy. It may or may not be a significant change in strategy.
[00:18:47] Rob DeMichiei: [00:18:47] Absolutely. I think as a small to medium size healthcare delivery system, I’m looking at my future. I’m looking at the path forward and I have to be looking at who I’m going to be partnering with. [00:19:00] To think that you’re going to go it alone in that five-year ten-year period I think is ambitious and maybe naive.
[00:19:08] So it’s really about what is the path forward? How do I partner to benefit my community to keep healthcare? To keep as many services as possible close to home. Potentially inpatient capabilities, close to home. As a larger system what I’m thinking of is, and I don’t know that they all are, but the way I look at it Bill is that this is a battle [00:19:30] for being close to the patients or the member. And so let’s talk about the insurers. Who is going to own the relationship? Is the health system going to own the relationship, be close to the consumer? Or is the insurer going to own the relationship? And that starts with the digital front end. So as the patient begins to think about healthcare, do they think about the health system or do they think about the insurer owning end to end their healthcare experience?
[00:19:57] And the previous strategy for large health [00:20:00] systems is that look, I want to own pre acute post acute and everything in between. So it’s this broad spectrum. I want to own all the services and I want to, I’m going to control quality and costs by owning all these services in, in my home-based quickly.
[00:20:15] And it makes it easier to control and to improve. And so the battle now I think is with. Say the insurers are saying, look, we’ve got a better way. We actually own that life and to end, and we think we can provide a better way. So [00:20:30] we’re going to be closer to the consumer. We’re going to provide the digital front end and the relationship.
[00:20:35] And then we’re going to steer that patient to the. Lowest cost, highest quality areas and sites to get health care services. And so that’s a much different model. And so if I sit back as a traditional health system with the fixed costs, that span that entire pre-K pre acute to post acute, if I start losing volume, because somebody else is steering patients to other sites [00:21:00] that creates a real financial problem for me in terms of generating profitability.
[00:21:04] And to me, that is, again, this is the battle or the goliath that’s coming because the insurers continue and they’ve done this through the pandemic and they’re continuing at a very rapid pace to acquire provider capabilities. And it’s across the spectrum. Other than what I call quaternary ICU, they’re going to continue to rely on the health systems for those services, but everything else, bill, [00:21:30] they’re saying, look, we’re, we’re going to put our bet on, on another horse in terms of primary care and really owning the wellness of the patient and also owning that care path. Where the care is going to be delivered and who’s going to be delivering it. So long answer to your question as a board member of a large health system, I’ve got to think about that. Can I truly own the patient end to end? And 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 [00:22:00] area? To ensure that I can stay close to the patient and that my cost footprint after start rethinking, what assets am I going to own? What capabilities am I going to own? And does it look the same five year from now as it looks today?
[00:22:15] Bill Russell: [00:22:15] I love this discussion. I’m going to put this in the context of an article which I shared with you, which is a Harvard business review that just came out on the 5th of June. And it’s five questions boards should be asking about digital [00:22:30] transformation. I’m going to walk through these because I think it’s interesting.
[00:22:33] Cause in healthcare, these, if we are going to maintain the relationship with the patient and create that digital, not only the digital front door, but the digital experience. The entire continuum of care we have to think about digital transformation. We’ll be talking about that. And these five questions I think are a pretty good backdrop to that.
[00:22:56] The first question is, does the board understand the implications of digital [00:23:00] and technology well enough to provide valuable guidance? Now I would assume no. On your larger board. And those in major metros, you’re going to have some technology players on that board who have seen digital transformation than other industries, or are actively active participants in digital transformation from a technology perspective or data perspective and helping organizations to do that.
[00:23:26] But do a lot of, do boards have this level [00:23:30] of understanding of digital transformation and what it’s going to mean for the healthcare industry at this point.
[00:23:35] Rob DeMichiei: [00:23:35] Well, I think, again, it depends on probably the size of the health system, because it’s going to be correlated to the types of people that are on the board.
[00:23:44]Medium and small businesses. Yes. They have some transformation but you know, they’re usually later to the party on that. So you’re looking at people that have been on large corporations or large institutions, college and universities or other health systems where, because [00:24:00] of that size and the competitive markets they’re in, they will have been through some kind of a transformation, whether it be digital now or something that was considered a transformation 10 years ago.
[00:24:10] So I think it’s the experience of those board members. Not necessarily having an it background, but I think a business transformation background, or having come from. Through and from other industries that have had massive transformation and challenges. So it’s really about, I think the experience of those board members, both the industry [00:24:30] experience, but also there what kind of wars they’ve been through, so to speak in terms of transformation in their own industries, because there’s nothing better than experience. I think in these cases, 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. So it’s absolutely critical. Management is ultimately charged with the transformation, but I think the has got to provide that level of guidance and insight and expertise, frankly, to [00:25:00] to help management chart that path.
[00:25:03] Bill Russell: [00:25:03] The second question here is. It’s probably good for us to bat around a little bit is digital transformation, fundamentally changing how the business creates value and specifically how the business of healthcare creates value. And they cite one director who says the digital aspirations of the business are bold enough as this is often settled on aspirations that are based on last year performance plus or minus five to 10%.
[00:25:26] But the pandemic has shown up showing us that business can take [00:25:30] huge leaps when. They go on to say too many board conversations to fall to technology and how it can improve efficiency and costs. Investment Verizons at many companies tend to be too focused or short term. Amazon in contrast has had seven.
[00:25:45] It has a seven year horizon for its investments. So digital transformation. Is it going to be sort of table stakes moving forward for for health systems to compete with [00:26:00] the United healthcare and the Optums and the Aetna CVSs and the others who are trying to figure out how to get into that, that direct relationship with the patient?
[00:26:12] Rob DeMichiei: [00:26:12] I think it’s. There’s also a risk of kind of overshooting the target too, by being too bold. So I saw in the article where there was a mention that the dreams and aspirations aren’t large enough, but there’s real peril Bill and in aiming too far ahead and trying to be too predictive. [00:26:30] And then you end up with something that isn’t adopted by the patient or the consumer.
[00:26:33] So I think there’s a balance that you have to have. But to me, I like to think you want to focus your digital or your transformation on two things. One which is cost-effectiveness. So can that transformation substantially reduce costs or make you more productive? And secondly, what can it do to improve my relationship with my end customer?
[00:26:54] My end patient? Does it facilitate an interaction? Patient visits a consumer [00:27:00] experience. So you want it to me, that’s the twofold 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.
[00:27:18] And then does this make us more efficient, more effective? Does it reduce costs? And so to me, those are the two guide rails to face, as opposed to try to be too prescriptive or [00:27:30] predictive about what the world’s going to look like in seven years, because I would argue bill that there are as many wrong guesses as there were right guesses about the future.
[00:27:39] And so let’s go back, let’s go back five years and would we have guessed that we’d be where we are now. And it’s just tough to be in the prediction business as opposed to be in the value creation business. And again this is time tested improving the relationship with the customer slash patient and reducing [00:28:00] costs.
[00:28:00] Those are two winning formulas in business and there always have been, I think they always will be. So to me, that’s where the board and management need to focus
[00:28:08]Bill Russell: [00:28:08] Have the threats changed at all. Is it still payer provider potentially, and new entranct tech, startups and those kinds of things. Has the landscape changed at all?
[00:28:20]Rob DeMichiei: [00:28:20] I think it has, and I know I, I like to joke that we in healthcare and the provider side kind of celebrate every time we hear that Haven [00:28:30] has not been successful or that Apple’s retrenching or Google’s retrenching, but I don’t know that that actually again, you take these large entities and you instead disperse them into a bunch of smaller efforts.
[00:28:42] I think again, there is real peril ahead for health systems and the private equity money is there. They’re investing in digital healthcare. The insurers, I keep going back to them. They are, this is a battle for the future of healthcare. And [00:29:00] all I’d suggest for all of your listeners to just simply read the analysts reports and look at the investor presentations every quarter from the insurers, and it gives you a good guide, a good map of the strategy of the insurers and is absolutely to utilize their owned assets.
[00:29:19] It’s an aspiration. They lay out specifically the percentage of the round assets they’re using today for their members versus what they aspire to in the future. So it’s [00:29:30] absolutely has a bullseye on the traditional provider business. So to me, that is the, and I don’t, I wouldn’t even call it a threat. If we’re thinking of this as a consumer and patient as an employer.
[00:29:42]This competition is going to lead hopefully to better healthcare, better outlook on costs. The UWC outlook for this year had a 6.5% increase in costs this year. Again, unsustainable in terms of GDP for us to be happy, we’re [00:30:00] satisfied with a 6.5% increase in cost. In terms of a forecast.
[00:30:04] So I think th these startups and these investments attempting to disrupt will only accelerate, and this is really a, a battle for the future of healthcare. And, and the things that we say come out of it will lead to the way healthcare will look five and seven years from now.
[00:30:22] Bill Russell: [00:30:22] Yeah. So from time to time, I can come across articles and I set them aside so that I know that I’m going to be talking to you, and I want to cover them with [00:30:30] you.
[00:30:30] There was an Axios story about hospital billing and how top hospitals hound patients with predatory bill billing was the title. Now I think the title was a little unfair. I mean right in the middle of the first page of the article says 10 hospitals represent 97% of court actions against patients.
[00:30:49] So it’s not like it’s a common, widespread problem but there is, there is a perceived problem. And any time that happens, it gets national headlines [00:31:00] and it represents, it’s sort of reflects in the industry. But one of the things I liked about this article is they ranked the top 100 hospitals again, with help from Johns Hopkins on a five items, billing, quality score, predatory billing, grade hospital, safety grade charity care rating, and average bill markup are are five of the things they had it.
[00:31:23] And then the other thing they say is that private hospitals have significantly higher markups than government or non-profit [00:31:30] hospitals. And I just threw out a lot of stuff. And I’m not even sure. I want to form a question yet. I’d love to get your sort of reaction to that story and the things that they put out there.
[00:31:41] Rob DeMichiei: [00:31:41] I thought it was a good article. I mean, you could argue over the individual measures that were used and you’re right with the lawsuits. It’s literally, there were two hospitals in Virginia. I’m not sure about the state of Virginia and why they’re there’s so much litigation around patient bills, but so I don’t know that that’s a large issue in healthcare but it was thought [00:32:00] provoking and in really an area that I have not seen many articles in the past that dealt with the kind of measuring the quality of charity care and the mission of these hospitals. So I thought the measure on charity care was really interesting. And it’s probably an area where we should see more.
[00:32:18] And if you think of what it really did to me Bill was I thought about all the announcements that we see about new initiatives in healthcare. We hear about the new, big buildings that are going to be built. [00:32:30] We hear about the innovation centers and the investments that are being made in technology and startups to create new revenue streams.
[00:32:37] So we hear many of these business like investment initiatives. But what we don’t hear from a lot of the nonprofit hospitals are these bold initiatives around the mission and around the community and around charity care, right. Everybody reports in the 990 information but who is taking pride? [00:33:00] Who is 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 in charity care? And I can’t think of any that I’ve heard. Now, again, I’ll go back to the insurers. The insurers will talk about these things in terms of social determinants of health because they own the patient life from a broad standpoint.
[00:33:26] And so investing in these charitable type [00:33:30] things like housing and food security benefit them financially with lower medical expenses, but we don’t really see that level of investment from traditional fee for service non-profits. So to me, what the article represented was really the first time in awhile that a major publication has attempted one to quantify nationally the efforts of nonprofit hospitals, but really to me it was [00:34:00] thought-provoking and this is probably an area, if I’m a politician or a legislator, I may pick up on this to say, why isn’t this something that with that tax exemption that is studied more, that is assessed more and that hospitals are held accountable more for?
[00:34:16] So that I thought was the best part of the article. You can argue Bill, whether they’re all the right measures, but directionally, I thought it was a good first start in something that probably needs a broader discussion.
[00:34:28]Bill Russell: [00:34:28] Actually, as you bring that [00:34:30] up, I’m looking at the numbers and they’re sortable by charity care rating and those kinds of things. Do you think there’s a significant distinction between the nonprofits and the private, in terms of their charity care rating? I’m sort of scanning through this right now.
[00:34:45] Rob DeMichiei: [00:34:45] Well, I don’t know this article in particular. In the past, I’ve, I’ve read articles where they’ve said that some of the for-profit hospitals are delivering as much charity care as a percentage as the nonprofits are, which [00:35:00] is a bit of a startling statistic.
[00:35:03] But I just view that non-profit health systems haven’t. Charity care and these social programs front and center. Now there was some talk at JP Morgan. You heard more of that this year, especially in light of the last summer and the George Floyd situation. There was, I think, more talk at JP Morgan about that.
[00:35:25] And it takes times to translate these from ideas and board mandates [00:35:30] into action. So I think let’s see what happens going forward. But yeah, that in the past analysis that’s been done has said that some of the for-profits are rendering as much charity care as non-for-profits.
[00:35:43] Bill Russell: [00:35:43] Yeah. It’s interesting. So interesting article from that perspective, the other, one’s probably a little more down to earth, a little more pragmatic and that is, there’s a article here about denial rates. So research has shown that about 85% of denials [00:36:00] are preventable but successfully preventing them requires strength and leadership and improved skills of hospitals. Prevention and recovery teams, hospitals reimbursements reported a variety of high dollar concerns when it comes to the denials. 32% of respondents cited that they’re top concern is coding and they also cited necessity of acute IP. 20% cited front end, 18% cited, a clinical validation. And there’s some other things in there, but they’re saying it’s in the [00:36:30] danger zone in terms of somewhere north of 10% denial rates. Is this just basic blocking and tackling at this point?
[00:36:39] Rob DeMichiei: [00:36:39] I think part of it is and this goes to show the continuing importance of the revenue cycle. So th this could be a great pitch for Waystar but having that level of competency and excellence and process, and it’s not only systems, but it’s also people. People processing technology in the revenue cycle.
[00:37:00] [00:37:00] The way to avoid those denials is to have a world-class revenue cycle department. And so that’s really, to me, blocking and tackling that’s involved and we know that not all health systems do. So part of it is that, but you know, the other part of it is the cat and mouse game that has always been played between provider and insurer.
[00:37:18] And I know some of the the larger insurers are accused of just denying straight out of the bat, straight out of the box, basically as a way. Extend the payment cycle and [00:37:30] create a difficulty and friction in the payment process. So I think there’s some of that as well. And it has to deal with the relationship that the provider and the payer have.
[00:37:39] And it’s important to foster those relationships between the billing shop and then the disbursement shop on the insurer side. And then certainly with volumes being down the kind of ying yang, yin and yang is always when volumes go down, upcoding starts to. Rear its head. So some of this could be because of the pandemic and the volumes, [00:38:00] there’s either an assumption or there’s some truth to the fact that there may be some upcoding going on, on the part of the hospital.
[00:38:06] So I, I don’t, to me, this isn’t new news Bill, this happens is sort of an ebb and flow all the time with the interaction between the payer and the provider. But yeah. Back to again, there’s also a power dynamic as well. And as the if the provider in that region has more power in terms of their presence in the market, sometimes the friction reduces and [00:38:30] conversely, when the payer has more, more power in that region, sometimes these problems become more pronounced.
[00:38:36] Bill Russell: [00:38:36] So Rob to close out our time, I want to come back to the CIO CFO conversation. So we potentially have negative margins through the end of the year. My budget had gone pretty much a majority operating and less and less capital, especially after the big projects were done. But we’re still doing those big projects, right?
[00:38:55] So EHR migrations are a capital project. As our [00:39:00] ERP implementations and some of the larger systems so fall in that category, but there was a significant push at least within our health system to move everything, to operating as much as possible into the operating budget, which means that my conversation with you, I would project, if you and I were running a health system right now would be one around, okay, how can we be strategic around reducing our cost of running the IT asset year in and year out. So the things that we just need to do all the time, we have to figure out how to be [00:39:30] really hyper efficient. Use automation, use the new tools that are out there and use them to their fullest.
[00:39:35] Not necessarily looking for new tools, but using the ones that we have. So we’re going to be more efficient with what we have. But there, there could be a case where you’re coming to me saying, Hey, we need you to reduce some of your operating income. And if I haven’t planned effectively as a leader that usually means some what looks like sort of reactive cuts based on what’s going on in the market.
[00:40:00] [00:40:00] If that conversation is going on, how do I, as a CIO convince you as a CFO that, Hey, you know what, that’s, again, I believe that’s a true, what I would be saying to you is I believe that’s a short-term horizon that we’re looking at and we need to, we need to look out a little bit beyond that. Yes. I agree we need to cut our operating overhead of running our existing system. But we always need to be investing in what’s next in order to not fall behind, because eventually what that’s gonna mean is some significant capital outlay at some future [00:40:30] time. Is that the kind of thing that would resonate from a conversation standpoint with the CFO?
[00:40:35] Rob DeMichiei: [00:40:35] Well to me, the great CIOs realize that again, they’re not buying clinical capabilities to build an empire or for the benefit of the CIO. It’s for operations. It’s for the CMO. It’s for the hospital administration and the hospital president. So to me, the CIO becomes the facilitator and the translator to say, Hey, I’m going to bring operations to the [00:41:00] table. These are critical to operations in terms of how we’re leveraging, whether it’s Epic or Cerner or other clinical systems. And to me it’s a consumption discussion as well. If we’re investing in these new systems, are we actually consuming them efficiently or consuming their capabilities at all? Have we fully implemented it?
[00:41:20] And once we’ve implemented, are we actually leveraging the systems that we’ve purchased? So to me the great CIOs bring together the CFO and the operators to [00:41:30] say, hey, there there’s finite level of investment, whether it’s capital or operating. I think the good CFOs kind of look through that, this is, it’s still a cash flow investment, but is it necessary? What does it do to the clinical operations? How is it enhancing yet? Yes. We’re going to have patient safety investments that we need to make regardless, but for other systems in the clinical areas, is it somehow can we prove that it’s enhancing quality? That it’s improving [00:42:00] the productivity of the physicians.
[00:42:02] These are the questions that need to be answered. That’s the ultimate goal of the investment in that software. So to me it’s actually creating that communication between the operators and the CFO. So there is a, an ability to prioritize those investments and insurance. We’re going to make the right calls with finite dollars around the it investments that actually moved the needle in terms of the patient experience or the delivery of clinical [00:42:30] care.
[00:42:30] And I think we all know from past experiences, there are some systems that are absolutely critical to that. Right. Leveraged on a daily basis by all of our clinicians. And we know there are other systems which are more kind of a niche I’d call them and that maybe some of the physicians are using them or some of the specialists, but it isn’t something that has a demonstrable ROI.
[00:42:51] So to me, the CIO is, is the best ones are communicators that can tell, tell that story so that the executive team, [00:43:00] and I think team is the key word, financial technology and operations can make great decisions around those finite dollars.
[00:43:08] Bill Russell: [00:43:08] Yeah, it’s interesting. CHIME had their summer forum this past week. This’ll be aired a couple of weeks from now, but, but still the Aaron Miri who’s, the CIO at Dell Medical school and UT, university of Texas health system down there was talking about, they were getting back to their normal process of prioritizing things. And the [00:43:30] reason for that was during a pandemic, everything was sort of reactive.
[00:43:32] And we were sort of changing how we looked at things and it goes towards the end of the pandemic. When you have people saying, is we need to invest this, this, this, and this, and everything was sort of of highest importance. And he said, we need to get back to those conversations where everyone’s sitting at the table.
[00:43:47] And, and yes, we do. We now have rational conversations around the budget and the budget being applied. Effectively to the resources to meet our mission and meet our objective and having those [00:44:00] conversations. I mean, you said you really can’t get back to that soon enough, that rational conversation of are our investments actually delivering on our mission and objective.
[00:44:11] And not that all of these investments aren’t good, but some are going to move those moves the needle further than others. And that’s the conversation that we were returning to post pandemic.
[00:44:21] Rob DeMichiei: [00:44:21] And Bill, frankly, there’s still a lot of systems. We’ll keep an IT budget centrally. And so they’ll call that a corporate expense. it IT’s a corporate [00:44:30] expense and I would argue, conversely, it’s actually very little as a corporate expense. You’re going to have an ERP system and HR system, and you can call that corporate if you will. But what we’ve found is, and again, go back to the earlier discussion. But this expanse I have of, I mean, every business I’m in pre acute businesses, I’m in post acute and I’m in every specialty.
[00:44:49] Well, there are in many cases, software packages that are supporting those individual lines of business. And there’s a, there’s an EHR that’s supporting your clinical business. So when I talk [00:45:00] about, and we’ve done this in the past about service line profitability. True business profitability, having that visibility in terms of, again, activity-based costing and knowing that if I’ve got a, a cardiology it system, I need to burden my cardiology, service line P and L with the cost of that it system not call it a corporate expense.
[00:45:20] And so to me again, it’s understanding that cost of IT. It’s a cost of operations and making sure it’s in the right bucket so that I’m assessing the [00:45:30] relative profitability of all of these different pieces of business that I’m managing.
[00:45:34] Bill Russell: [00:45:34] So you probably hear this a lot because I’ve taken the conversations we’ve had on the show and I’ve had conversations with CIOs and some other executives, and they just look at me and go, that’s too hard. What you’re saying is too hard. It’s too much. Too heavy of a lift. Have we gotten better at it and have the systems gotten better? Have the processes got, gotten more baked that it’s not as heavy a lift as it, as it once was?
[00:45:56] Rob DeMichiei: [00:45:56] Absolutely that’s healthcare from 25 years ago talking. [00:46:00] Frankly, it’s a losing mentality to say that there aren’t, I mean, the, this I’d say this is easy. I mean, there are systems I’m not going to name them. There are systems that are IT specific. And we used one at UPMC and during my tenure, that was IT specific that helped us to allocate those costs to the actual consumers of the IT infrastructure. And we also even went into the the servers who was consuming the computing capability. Right. Because [00:46:30] it matters. And so it’s not too hard. That’s a cop-out. It’s actually relatively easy if you’ve got a committed management team and a committed finance team, and it’s, it’s actually extremely insightful. There are learnings that come out of that consumption analysis that really changed the way that you think about the different businesses that you’re operating in.
[00:46:52] Bill Russell: [00:46:52] Because it’s pretty easy to run a profitable business if you strip out these significant costs isn’t it?
[00:46:58] Rob DeMichiei: [00:46:58] I laugh when you see these [00:47:00] even on the external financial statements, you’ll see a line called corporate and it’s a very large line item of expenses. And again, there are some truly corporate expenses your C-suite and in some areas which are strictly overhead, but a majority of your costs are related to your clinical delivery.
[00:47:21] And those need to be burdened on the clinical P&L or on the service line P&L. It it’s actually far from being too hard. It’s [00:47:30] actually to me, it’s, it’s quite straightforward.
[00:47:32]Bill Russell: [00:47:32] And part of it is the 80 20 rule. Right. Don’t get bogged down in the 20, just let’s, let’s take the easy one. The EHR shouldn’t be that hard to split that across. You get usage reports that are coming in almost on a, on a minute by minute basis of the system, you can do it to that granular level, or you just say, Hey, here’s the process of running the EHR for the year and divide it out based on, based on any number of factors.
[00:47:57] Rob DeMichiei: [00:47:57] Absolutely. The greatest thing about it is it [00:48:00] makes the P&L owner accountable for the IT spend and why, why shouldn’t they be right? Because if the CIO is accountable for the IT spend and, and I’m the clinical leader, I’ll take everything. I’ll take the Cadillac and I’ll take more because it’s actually not in my budget.
[00:48:17] You want to create a culture of accountability so that clinical leader, and you want to empower them to say, well, look, I really think this is critical to my success. So I’m going to invest you give me a number of dollars that I’m going to [00:48:30] spend, and then let me make decisions around what the priorities are.
[00:48:33] So I am going to invest in these three things and I’m not going to invest in these three things. And when the budget is. Somewhere else. It becomes really difficult to do because again, then it’s his or her problem, not my problem because they’re the CIO and they have the budget too. No, the CIO budget should actually be very, very small.
[00:48:52] Bill Russell: [00:48:52] Well that’s yeah
[00:48:54] Rob DeMichiei: [00:48:54] But not the IT spend. Not the IT spend no corporate budget.
[00:48:58] Bill Russell: [00:48:58] Yeah, no, I get [00:49:00] that. Where does the investment in the future go? Where does the new digital tools, the new AI and machine learning, the new data and analytics tools where we’re trying to transform how healthcare is delivered with data, where does that future investment go?
[00:49:15] Rob DeMichiei: [00:49:15] As an executive or as a CIO CEO, what I would say is cause I could answer to you like put it in clinical, if it’s a clinical investment, put it in clinical. But I think from a CEO thinking about this, I wouldn’t want to stifle innovation [00:49:30] and maybe it wouldn’t want to box them into my current results to make them less able or likely to make an investment in the future.
[00:49:38] Bill Russell: [00:49:38] So it’s an R&D budget?
[00:49:39] Rob DeMichiei: [00:49:39] For that I would create, I would likely create a separate R&D budget and innovation budget to allow us to experiment and to do innovative things without the burden of the current day P&L if you will. So that’s innovation, sometimes an area you want to seed in another P&L and not have the constraints of the day-to-day profitability [00:50:00] that’s on the rest of the business.
[00:50:01] Bill Russell: [00:50:01] And then you just have to be careful whenever you create those pools of money, people tend to find them and somehow pull them into operations and pull them out somehow.
[00:50:10] Rob DeMichiei: [00:50:10] Or, or use them as a dumping ground basically. Right. But it all gets back to good management and good oversight. And if you have those, you, you can do this stuff successfully.
[00:50:20] Bill Russell: [00:50:20] Rob, always a great opportunity, and I appreciate you coming on the show. Great to have this level of conversation with someone with your experience.
[00:50:28] Rob DeMichiei: [00:50:28] Great bill always [00:50:30] enjoy our conversations. So thanks.
[00:50:31]Bill Russell: [00:50:31] What a great 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 every one of my team members listening to this show. It’s conference level value every week. They can subscribe on our website thisweekhealth.com or they can go wherever you listen to podcasts, Apple, Google, Overcast, which is what I use, Spotify, Stitcher. You name it. We’re out there. They can find us. [00:51:00] Go ahead. Subscribe today. Send a note to someone and have them subscribe as well. 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, StarBridge Advisers, Aruba and McAfee. Thanks for listening. That’s all for now.