The Four Things Keeping Hospital CEOs Awake at Night This Year (Hint: Donald Trump Isn’t One of Them)

The Center for Medicare and Medicaid Innovation released a Request for Information (RFI) last week– “New Direction for the CMS Innovation Center.” It’s the latest chapter in the unfolding policy framework that will govern the health system for at least the next 3 years.

The RFI, which doubles down on value-based alternative payment models and consumer directed care, coupled with a proposed rule to cancel mandatory bundles by former HHS Secretary Price, the administration’s actions last week to weaken contraceptive coverage requirements in employer-sponsored health plans and Congress’ FY18 federal budget that include cuts in Medicare and Medicaid funding provide a sobering context for hospital and health system strategic planning. But hospital CEOs have adapted to the new normal from DC: uncertainty about the laws governing our health system is standard fare.

Last month, I interviewed 13 hospital CEO’s in preparation for their upcoming Board-Management strategic planning retreats. They lead organizations in 11 states with substantial differences in the scale, scope and strength of their operations and the dynamics in their markets. Two are academic medical centers, six are independent multi-hospital systems and five operate in multiple markets. When I asked “what’s keeping you awake at night” their answers were the same.

The second wave of cost reduction: All recognize that reducing costs is imperative: there’s recognition that the low-cost position in their market is a huge competitive advantage. They made cuts in their supply chains and modified their contracts with suppliers. They tackled their revenue cycle by leveraging technologies and, in some cases, outsourcing to improve cash flow. They trimmed labor costs, improved productivity and eliminated positions. And they streamlined their clinical portfolio, centralizing programs where possible and applying lean management techniques across service lines. But CEOs see these as defensive strategies—necessary to stay in the game but insufficient to position their organizations for long-term success. They foresee even greater pressure on their cost structure as employers and consumers force price transparency, insurers flex their muscles demanding deeper discounts, the government cuts reimbursement and uncompensated care increases as the ranks of the uninsured and under-insured swell. The academics see cuts in funding for research and education, and all expect labor costs to grow annually. And all are hopeful FDA Director Scott Gottlieb’s efforts to constrain drug costs will be successful, but fearful it won’t. (Gottlieb’s focus is streamlining the approval process so high-priced drugs face more competition. This year, the FDA has approved 34 new drugs vs. 22 at this point last year and 73 applicants for generic approvals vs. 57 last year. He’s won accolades from both parties and is rumored to be the front runner to succeed Dr. Price as HHS Secretary). CEOs are focused on the next wave of costs and recognize it means saying no to projects and investments they’d ordinarily support.

Affordable quality: CEOs see what many overlook: ‘quality of care’ is pass/fail to purchasers and policymakers. You either hit the mark or suffer penalties from payers (including the government) or reputation risk at the hands of competitors. It’s increasingly complicated– more than 500 public measures accessible to competitors, media and the public. It’s report cards that pit clinical programs side by side with competitors alongside costs. It’s not just process measures in their control: it’s outcomes including those many patients themselves control. Exceptional performance on quality means access to cheaper capital from lenders and but only if costs are also low. CEOs see quality of care as highly variable between hospitals, operationally intense and costly. How populations are diagnosed, treated and managed optimizing the interaction of people, process and technologies and evidence-based care ruffles feathers, disrupts routines and causes friction. The public’s keen to know who gets the best results: more than 800 hospitals can lay claim to being among America’s best, based on which clinical program is measured, the metrics used and the list sponsors’ methodology. What keeps CEOs awake is recognition that optimizing quality of care is not a guarantee of financial success or long-term sustainability. It’s a necessary focus that’s getting more complicated and expensive.

Opportunistic growth to achieve optimal scale: CEOs recognize value-based purchasing and alternative payment programs are here to stay. They see lenders and investors making bets in profitable niches once their domain. The bond market is tightening and margins in their core operations—acute and outpatient services—are shrinking. But demand in healthcare is increasing! For CEOs, there is recognition that the scale and scope of their enterprises must expand if they are to remain relevant. But that carries risk: if capital is invested outside the core, will physicians and the board be supportive and will community leaders understand? Is the management team capable and competent to manage business units outside their experiences? How will partners be vetted? How should the current infrastructure change? And what’s the optimal scale and scope of their organization’s long-term? CEOs recognize the economics of ‘going big or getting out’ work in most industries: they sense the same in healthcare.

Board readiness: CEOs worry about their boards. Many think their trustees are not fully prepared for the expanded challenges ahead. Owning the issue of affordability in their market, operating in a model in which revenues are at risk based on value, and expanding their enterprises regionally in social services, retail, digital, financial domains are not fully grasped. Applying evidence to care aggressively, immersing the organization in data-driven decision-making, moving services into homes, schools and workplaces, and building population health capabilities are daunting imperatives. And informed vigilance about expanding regulations and encroachment by non-traditional competitors require more time invested in board education and deliberation. CEOs see functions like physician leadership, advocacy, regulatory compliance, philanthropy, analytics, capital planning, reputation management and planning taking on added significance as they equip their boards for the new normal.

I believe hospitals are at a crossroad. The sector cannot content itself that its clinical innovation and local economic impact guarantee a sustainable future void of major change. The public thinks them unwieldy and expensive. Employers think they’re costly and inefficient. Physicians believe they’re dabbling in areas they should otherwise avoid. And policymakers expect them to do more with less while also handling the public’s health.

For hospital CEOs, it’s hard to get a good night’s sleep.

19 replies »

  1. Thanks Steve. It seems that your hospital would benefit if more insurers offered tiered insurance networks with enough difference in higher copays to go to a non-preferred hospital to get patients’ attention. I don’t know if the premium difference would be sufficient to move the needle at the population level and employers’ desire to keep their employees happy as it relates to health insurance works against tiered networks.

    Your hospital would also presumably benefit from reference pricing for services, tests and procedures that lend themselves to that concept, wouldn’t it?

  2. Can we imagine the money that flows through health care? …way more than our military and infrastructure budgets and any other sector! Can you imagine the numbers of folks who are doing very well under our system? Anyone would be a fool to try to change this system. Who would be stupid enough to express what the patients feel? Who would actually be dumb enough to try to change this Eldorado?

  3. If everything is paid for by insurance and all insurers want to get larger and have more money go through them—because they want to become more important and have greater market share—how can we ever get prices down?

    We have to have some incentive somewhere to lower prices.

  4. Steve, I agree with you that we should encourage new ideas to improve quality and lower costs, but that should be performed in a more organic fashion than having the government passing policies forcing the public and the healthcare sector to things one way and one way only.

    It is easy to say that your hospital cut costs and raised quality, but from what you have told us all those numbers might be selective along with the variables. I don’t know why, if your hospital is actually doing better than most, you don’t share which one it is. There are experts on this blog that perhaps should take a look at the hospital and see what is reproducible. Why you wish to keep the name hidden while promoting how good it is is not something easy to understand.

  5. But we’re the “Greatest Nation in the World”!!! How dare the NFL dishonor our present “paradigm paralysis” by kneeling. But the irony is those players represent the 1% of income earners with great health care.

  6. When I discovered one hospital system was 20% less expensive I talked with their senior management, telling them I wanted to get our insurer to customize our employee insurance plan to provide an incentive for use of the low cost facility….(lower copays etc). I was surprised they were strangely reticent. I think they were afraid the non profit health insurance ceo would not be happy and retaliate in some way…..as the non profit insurer was really the regional health care czar ( they had 60-70% market share). Having said that, you might want to make sure that any major employers in your area are aware of your cost advantage and see if you might instigate them to put pressure on the insurers to develop a plan with incentives for their employees to use your system….just a thought.

  7. Barry- Our marketing people tell us that if we had more artwork, etc it would probably help increase market share since consumers like that stuff. However, we have made a long term commitment to lower costs and higher quality thinking that in the long run that will work for the best. We have a pretty lean management structure with relatively little micromanaging. If you come up with a way to improve quality and/or cut costs you are encouraged to try and not punished for failure, unless it is repetitive. However, as Paul notes above, it just doesn’t seem to make that much difference with insurers or patients. It has a little bit as over the past 3-4 years we have seen some shifts (just had a lengthy meeting where reviewed numbers and it is a bit better than I thought) but 20% seems like a big difference to me (I would love to cut the costs for my corporation by 20%).


  8. We should all realize that the Leadership of many large institutional enterprises live in a world that has a very low connection with their community’s Common Good and its attendant Social Capital. For instance, my State’s Blue Cross insurer operated its own private jet for the use of its Executives for several years, recently terminated. We tend to forget that the BLUES are a national franchise arrangement that was initiated by each State’s legislature many years ago as non-profit institutions, i.e., the Blue Cross/Blue Shield Laws.
    As studies of social mobility continue to demonstrate, the economically privileged citizens have steadily become a smaller portion of our economy with much higher incomes, and the citizens that live in poverty are increasingly associated with much lower social mobility. The underlying economics for our nation’s health spending represents just one of many examples of this fundamental economic trend underlying our nation’s pervasive SOCIAL DILEMMA. For today, its expressed by the irony of the person who is our Nation’s President, a movie producer who has troubles with honoring HUMAN DIGNITY, and an advertisement in today’s WSJ for a woman’s purse priced at $2,200. NOTE: My print subscription to the WSJ ends soon, renewal in jeopardy.
    Meanwhile, the cost and quality problems of our nation’s healthcare continues unabated by its underlying Paradigm Paralysis.

  9. Cannot argue with what Paul said CEOs told him ’cause he talked to them, I didn’t. But pj’s comment about their concerns being the same as ten years ago is dead on right. It’s also mostly the same people, despite a changing world, which should tell you something about their Boards.

    Several factual issues: except for the five quarters after the 2014 coverage expansion, demand for hospitals’ core inpatient admissions have been declining for the last eight years! The last two years are a steady 1% decline quarter over quarter. Also, physician office visits declined by almost 200 million (!) from 2009-2011, and have recovered perhaps 50m since. Not sure what Paul means by “demand for healthcare is increasing”.

    On scale, it sure hasn’t helped the second and third largest investor owned chains,Tenet and Community Health Systems, product of roll ups that got them to near $20 billion in annual revenues. They are being cut up for scrap under pressure from activist shareholders. They “got big” and are now “getting out”. Except for Ascension, which continues steaming along with near HCA performance numbers, the big Catholic systems are also really struggling, despite being $!2-20 billion on revs. Lots of big actors that absolutely dominate their local markets- Sutter, NorthWell, UnityPoint (in midwest)- saw earnings plummet this year despite unchallengeable scale. There are no economies of scale in this field, and the economies of intimidation no longer produce reliable earnings.

    Wake up, Paul. It is management, and operational discipline, not scale, that matters.

  10. Steve2, I’m curious how your hospital achieves its 20% cost advantage. Is it lower compensation and benefits for staff, more use of double rooms vs. single rooms, fewer frills like artwork, waterfalls and piano players in the lobby, or operating efficiencies like a higher average occupancy rate and fewer people per licensed bed in administrative roles including IT?

  11. Additionally Steve, why should the patient care that there is a 20% discount at one hospital when he doesn’t pay and can’t even choose his insurer or incentivize his insurer to lower premiums should he use the less expensive hospital.

  12. While in a pretty long stint as VPHR I assumed our non profit insurer acted as an agent of their customers….employers and patients. But when we ran a data mining pilot project that analyzed our employee insurance claims we found out that of the two hospital systems in the region one charged on average procedure 20% less than the other one. I would have thought our insurer would have let me know that. They didn’t. I started the process of trying to get a redesign of our employee coverage to offer our employees an incentive to use the lower priced hospital system and met resistance. But I think I could have gotten it done, except I left that company for another one in a different region.

  13. Our costs run about 20% below that of our main competitor. Hasn’t shifted market share much if any.


  14. “No, I think market consolidation and monopoly is the advantage they work for. “Competitive” is not in a hospital’s DNA.”

    Peter, it is amazing how much we agree on this point.

  15. “All recognize that reducing costs is imperative: there’s recognition that the low-cost position in their market is a huge competitive advantage.”

    No, I think market consolidation and monopoly is the advantage they work for. “Competitive” is not in a hospital’s DNA.

  16. I’ll start with a request to the author for a re-write/edit of the second paragraph. It reads like something that I have been known to write.
    Of course, the degree of apparent unity among the C-suite folks is odd and seems to say what they might have said 5-10 years ago. Unfortunately, they ought to be worried about the attributes of our nation’s healthcare that control its cost and quality problems, but are currently unrecognized. Secondly, I perceive a possibly disingenuous focus on the current major levers in place for healthcare reform. Given my view that the economic stability of the large health enterprises is more unstable than is currently acknowledged, the CEOs also lack a willingness to acknowledge that a true recession is still possible in the next few years. Unfortunately, our nation’s turmoil, on many levels, is so widely wedded to the hopefulness of just one person’s mercurial personality. Mostly, this post seems to validate the odd confluence of national trends and traditions that is stirred up and re-configured almost daily.

  17. Paul, thank you for sharing this. Most interesting: “All recognize that reducing costs is imperative: there’s recognition that the low-cost position in their market is a huge competitive advantage.” I hope that is accurate, but I can’t get past all the soaring glass and marble buildings and acquisitions of doctor practices..is it me, or do those things not jibe with cost reduction/efficiency improvement?