By Rick Conlin
Acute healthcare is in a tough place right now. Managing COVID remains an enduring challenge for hospitals and hospital systems. Complicating matters, the financial and operational ripple effects caused by addressing the pandemic are only beginning to get felt. Though there feels like a light at the end of the tunnel for COVID, financial collapse coupled with a generational clinical labor crisis has many American hospitals on the very brink of collapse.
How bad is it? Hospitals are typically single digit margin businesses. They’ve recently lived through two straight years of double-digit revenue reduction. As damage control to a financially impossible situation, the government stepped in with Cares Act funding to alleviate the crunch of 20’/21’. Here we are two years later, and Federal funding is expiring, old debts are becoming due, surgical volume and revenue are still down. Mix in a historic labor crunch for clinical staff, and hospitals are now finding themselves digging a hole within a hole. Eventually, a hole deep enough will collapse. Hospitals are inches away from this point, rapid response is long past due.
Private Equity and Balance Sheet Ethos: A counter-intuitive savior
Private Equity’s industry reputation for a margin-centric ethos is hardly a new one. PE has spent decades honing and proving its ability to attack balance sheets and generate enhanced profit for their shareholders in multiple industries, including healthcare.
Provider healthcare is different than most industries. Patient outcomes will always mean more than profit to hospital C-suites, even the CFOs.
An industry once considered recession proof rarely stressed over immediate balance sheet pressure. For years hospitals have existed blissfully despite known operational inefficiencies in places like supply chain, procurement, and enterprise technology. Margin management was a taboo topic. COVID changed everything.
These times are different. Many hospitals currently in the red will not make it out. For those that do survive some will not be able to regain their previous clinical outcomes. Underperformers will go away or continue to be swallowed up by larger systems. Patient care will suffer in the churn.
Rapid cost reduction and margin management, despite being a necessity for survival, are still negative topics for most hospitals. No hospital wants to think about “doing things on the cheap” when it comes to caring for patients, Any rapid cost reduction effort must maintain a “patient-centric” ethos with utmost priority.
So how do hospitals defeat this two-headed monster? They do it by bringing the same balance sheet ethos into their system that private equity has brought in so many different industries, but they never lose their deep level of “patient-centric” sensibilities. Focus, diligence, and collaboration are all important elements of PE ethos, see below for how they translate in a “patient-centric” environment.
1. Focus: Finding the right priorities to execute, and the right tools to make them happen. Hospitals, consulting firms, and GPOs have spent over a decade chasing cost and margin urgency. Past efforts have been successful but largely dependent on broad commoditized “quick win” strategies of volume leveraging and unit price optimization. Results have been substantiated but were often underwhelming and hard to predict. Private equity ethos is much more focused than this scatter shot approach. Instead of running after everything, a hospital must be laser focused on a handful of meaningful spend categories to hit targets in a time sensitive way. Many of these categories are clinical, requiring strategies iteratively more complex than “quick wins” used in the past. Pragmatically executing progressive strategies mandates a specific capability standard. Often hospitals have to find/leverage this externally, with experts and technology solutions focused on the appropriate skill sets.
“Patient-centric” Sensibility: When clinical categories are on the table, hospitals must tackle them with deep business and clinical acumen, especially keeping in mind:
- What clinical requirements and outcomes are involved in the category?
- What service levels or outcomes are most important?
- What data and analytics are required to evaluate a category in a meaningful way?
- What is the clinical impact of clinical standardization and care variation reduction?
- How can the commercial market be leveraged to simultaneously get better clinical outcomes and reduce cost?
- Where to preserve (and perhaps invest in) supply chain resiliency?
2. Diligence: Driving results with meticulous accountability beyond a topline goal. Enterprise financial initiatives (especially rapid cost reduction) in hospitals rarely go as planned. Major financial re-alignments in hospitals are consistently unpredictable and underwhelming, often because the details are not managed closely nor proactively enough. GPOs in major hospital partnerships particularly struggle in this manner. Details being missed leads to slippage in magnitude and timing of results. There has long been an unhealthy reliance on over-generalized, non-functional benchmarking technology and “predicted outcomes”. PE “diligence” is more multi-faceted and minimizes guess work. It includes not just annual topline goals and milestone monitoring, but also understands the steps to get there within individual initiatives. Progress is monitored and managed at the topline, but is dynamically holistic, involving stakeholders at early progress points and warning signs up and down the chain of command. Lastly, PE diligence is enabled by actionable data, analytics, and dashboarding capabilities, able to quickly and accurately engage team members from the executive down to the tactical level.
“Patient-centric” Sensibility: Detailed due diligence in a large clinical “system” setting requires design that incorporates the real-time idiosyncrasies of a multi-hospital system, including consideration towards:
- What clinical data must be considered in addition to financial data in designing and managing dashboards?
- How will dashboards incorporate (and make useful) existing data/analysis already generated by major EHR/EMR and other Performance Technology investments?
- Where data (clinical and financial) is integration-ready and not?
- Where have annual benchmarks altered the most from COVID operations?
3. Collaboration: Engaging organizationally outside of Finance. In the hospital setting, early value analysis/management efforts were managed largely by supply chain with limited episodic engagement of financial and clinical leadership. As hospital systems matured in value management capability, they learned the importance of financial leadership and physician service line engagement/participation. PE ethos maintains a disciplined approach when managing change with leadership and requirements owners. A large part of PE ethos’ successful execution in value capture is in managing change in a rigorous way. Hospitals must not only bring financial and physician service line leadership iteratively into their value management process, but they must also know exactly who to engage, when to engage them, with what material, and how often. PEs understand how to involve the right people without wasting their time. They proactively communicate with disciplined consistency. They manage push back and doubt, and they build champions to ensure continued success.
“Patient-centric” Sensibility: When engaging physicians and service lines in a value management program, hospitals should consider:
- Which specific physicians line up with suggested cost reduction recommendations?
- Which physicians are fighting to preserve clinical variation ahead of group-based decision making?
- Which physicians champion recommendations ahead of group-based decision making?
- What data/analysis should be prioritized viewing given limited time/opportunities to meet with clinicians?
- What communication venues produce the best readership/attention?
There are strategies that are far more disruptive and innovative than simple cost reduction ethos in provider healthcare. Digitized health, artificial intelligence, value based care, population health, and the increased bandwidth of non-hospital (non-Acute) provider operations are all innovative/disruptive provider healthcare concepts that will one day grandly shape the future vision of healthcare. Until hospitals can dig out of their current financial predicament, their future potential will never be realized. If executed mindfully, Private Equity ethos might just be the temporary savior of Acute healthcare. If done less carefully, this same ethos could spell doom. Hospitals must know the difference, and they must figure it out quickly.
Want to learn more? Please contact Impendi and our cadre Healthcare experts.