Rae Woods (00:02): From Advisory Board, we're bringing you a Radio Advisory, your weekly download on how to untangle healthcare's most pressing challenges. My name is Rachel Woods. You can call me Rae. (00:14): It's the start of the year, and everybody is thinking about 2024 and the future. But if I reflect on the recent past, we all remember that 2022 and 2023 were some of the worst years for hospitals and health systems. At least, in terms of their financial outlook. As I think about here and now, yes the tides seem to be turning, at least a little bit. But does that mean that health systems are out of the woods? Does it mean that the future outlook is purely optimistic? I'm not so sure. (00:48): That's why, today, I want to talk about the growth path for hospitals and health systems. I want to warn you that we're going to be introducing an idea that might seem counterintuitive. We're going to be talking about the fact that the future and growth might actually require health systems to shrink. To talk about what all of that means, I've invited two Advisory Board experts. First, we have Vidal Seegobin. He's the director of health system research at Advisory Board. Joining him is Lawrence Watts, who's one of Advisory Board's quantitative insights experts. (01:23): Larry, Vidal, welcome to Radio Advisory. Larry Watts (01:27): Thanks for having me. Vidal Seegobin (01:28): Hey, Rae, how's it going? Rae Woods (01:31): It's going. It's January. I feel like my motivation for the start of the year has already faded and that is not helped by the fact that it is freezing outside. Vidal Seegobin (01:42): It's very pretty from my window, though. You can see some white, and kids are sledding down the hill. It cuts both ways. Rae Woods (01:51): Oh, no. I feel like we've already gotten into the fact that perhaps you're going to be a little bit more optimistic than I am in this very conversation. It's not just about January, and the cold, and the snow. But we're going to talk about a topic that has been on folks' minds for a long time, which is the financial state of hospitals and health systems. (02:14): If I talk about being pessimistic, over the last few months, last few years, we've been talking about how bad that landscape is specifically for hospitals and health systems. In fact, I don't think that we've really been able to talk about growth, we've been talking about lifelines. If I remember the last episode we did on this, which we can put in the show notes, the specific word we used to describe the state of hospitals was dire. (02:40): First question. Would you use that word today? Where do things stand? Are they looking better or are they still dire? Vidal Seegobin (02:51): I'd say, if you're talking about hospitals' fortunes financially, it's no longer dire. At least, it's not dire for more than half of the health systems across the country. You've seen improvement in margin, you've seen an improvement in financial position, both operating and non-operating income. I would probably retract the statement dire, from at least a financial perspective. (03:18): Operationally though, I think it still feels very high pressure. You're seeing more volume come through the emergency department than we've seen historically. In addition to that, we're experiencing pretty sizeable bottlenecks in post-acute discharge. So if you're thinking about it from an operations or a chief operation officer's perspective, I don't think that dire is out of your vocabulary yet. Rae Woods (03:42): Oh, wow. Okay, so better but certainly not out of the woods. I like that you're talking about different kind of factors here. (03:50): I want to talk about what's changed, and acknowledge the fact that you, Vidal, and you, Larry, bring very different perspectives to the table. Vidal, you're actually talking to health system leaders and executives every day. You're starting to get into to what might be their mood, their demeanor. What does the ground look like, when you have conversations with these folks? Vidal Seegobin (04:14): It's hard to talk about today without indexing at the very beginning of the pandemic. If you were a clinical leader or a clinical expert, you're probably indexing your experience at the very beginning of the pandemic, when we had very little information. We were very scared about what safety could mean, both for patients and for our staff. So thinking about where we were then and where we are now, I think things feel a lot more predictable. Or at least, things feel a lot more well understood. (04:45): From the finances' perspective, the story might start more closely to 2022, when we were expecting to see a snap back in volume. Rae Woods (04:53): That's right. Vidal Seegobin (04:53): We understood that, I know a vaccine was now available, we had latent demand that needed to be treated. Our hope was we would see more patients return. That didn't happen in 2022. Rae Woods (05:05): It didn't happen at all! Vidal Seegobin (05:07): No. This financial story for 2022 was actually quite bad for hospitals and health systems. But now, second half of 2023, it feels like, at least if you're looking at your balance sheets, they are in a better spot than they were when we start that story. I think the vibe for at least the finance executives and the strategists is that they can take a little bit of a breath of relief. Rae Woods (05:30): I appreciate you talking about volumes, which is going to be a big thing that we touch on in today's conversation. But, volumes aren't the only metric we should be looking at when we're determining the state of things, and also tracking what's changed over the last four years, right? Vidal Seegobin (05:45): Yeah, that's right. I would say two other things stand out to my mind. Average length of stay across the pandemic and post-pandemic period has not seen a measurable decline. If anything, it's probably stayed flat. That's not good because we know we've seen more patients now coming through to the emergency department. We want to be able to treat these patients faster. The second probably has to do with just operating room time and turnaround. That's the major revenue generating activity for most hospitals and health systems. It still over runs, still blocks running longer than expected, and that is a key concern for hospitals and health systems right now. Rae Woods (06:31): Larry, you bring a slightly different perspective because you work on Advisory Board's data team, our quantitative insights team. You're the one who's actually managing and updating tools that help us forecast and look at performance. Are the actual numbers telling a similar story to what Vidal is hearing from finance leaders and operators on the ground? Larry Watts (06:55): Right, yeah. We are the group of data nerds, looking at numbers constantly. The data analysis the team, we've been doing, is updating a lot of flagship tools is it's telling a similar story. You just have to be careful when you look at numbers, because it can tell an overarching theme but it may be different for specific health systems and markets. (07:19): We've been specifically looking at those trends around inpatient volumes. It seems, in order to generate some of those larger margins, health systems are going to have to look across different care settings instead of relying just on that inpatient growth because it's not there. The data is showing it's not going to come back. But like I said, it does vary across services and across markets, too. Rae Woods (07:44): You're starting to tease the fact that the future needs to look different than it does now, and certainly, than it does in the past. (07:52): I'll be honest, I'm struggling to characterize this moment in time. Because on the one hand, it's true that there is a sense of relief that I think a lot of leaders are feeling. Part of that, I guess I want to say, happened naturally. Some volumes came back, even though it's not quite what we expected. The clinical scenario looks certainly different than it has. But the other part is this relentless focus on operations. It is doubling down on the basic efficiencies of running a hospital, which are incredibly hard, and take so much work and focus, which also probably is not sustainable. (08:35): Let's start to talk about the future. Should health systems feel optimistic? Or should they still feel, maybe the word I want to use is scared, tenuous about the future? Vidal Seegobin (08:50): Can I be annoying and say both? Because I think the dynamic you're describing right now is ... If you're running a long race, and you've just finished your uphill climb, even something flat is going to feel relatively easier than what you just accomplished. If you think about the story we just talked about, starting back to 2022 at least from the financial perspective, there is a whole host of reasons why our balance sheets feel like they've got a little bit more slack. (09:16): We talked about this offline, about the non-operating income situation. Which if you're tracking the S&P 500 or just looking at the stock market, it's done better across the second half of 2023. Rae Woods (09:29): Which again, is that natural relief that we are starting to feel. Vidal Seegobin (09:33): Exactly, exactly. I think another thing that I'd mentioned earlier is that the operating story across 2023 has been largely successful through sheer grit and determination from hospitals and health systems. They were just putting pedal to the floor, making sure that operating rooms were staffed, perhaps overtime staffed and run as efficiently as they could with the staffing compliment that they have. They've seen that reflected in the margin performance nationally, across the culmination of 2023. (10:07): That said, I think for a whole host of structural reasons, the story is going to get more challenging, from a hospital and health systems' perspective, into the future. We've talked about the site of care shift and where people access care. I know Larry's team has seen volumes that have just completely gone away and have not returned. Then, there's the third area, which is we've learned that you can talk about hospital and health system capacity from a bed perspective, but it really has to be with a staff perspective. If our waterline for staffing is lower than we were before the pandemic, then that's structurally something different, is proving that you can't throw money after it to try to solve. Rae Woods (10:52): Yeah. Larry, what's the data showing when it comes to not the here-and-now, but the future outlook? Larry Watts (10:58): Right. It's been interesting to look at, all of our new modeling. We're approaching a big update on of our flagship tools, that Market Scenario Planner, that really shows utilizing trends across time. We do five and 10-year projections. We've been tracking that kind of shift from inpatient to outpatient. I think it's been a main topic of conversation for multiple years. Then, of course it increased dramatically during COVID, and then alongside our demographic shifts of an aging population, that's also going to require more care. It's looking a bit different. (11:37): Last year, we were a little bit less aggressive in our five-year outlooks. We only, I think, 1% decrease over five years on our inpatient care. It's going to look a little bit different this year. Rae Woods (11:50): And by different you mean worse? Larry Watts (11:54): Yeah. It's not going to be as aggressive. We're going to see some higher increases, very likely. When we're looking at it more granularly, I think it's been interesting to see that that shift has been reaching services that historically were seen as core profit drivers for hospitals, like joint replacements, spine and [inaudible 00:12:18] care, and those are shifting almost completely outpatient. Rae Woods (12:21): Wow. Larry Watts (12:23): Those profit drivers may not be there in the same way they had, historically speaking. Rae Woods (12:27): Traditional profit drivers aren't going to be there. Traditional margin recovery tactics are only going to get harder. Yes, there is this sense of relief. But the biggest thing that I'm hearing is this is not the time to get complacent. (12:38): I actually really like, Vidal, your analogy of you're running a race. The time that you want to make sure you're focused is not actually when you're charging up the hill. Charging up the hill is about putting one step forward and not losing a ton of ground. Now, you might be on a flat road, more of a flat road. This is the time where you need to think about the second half of the race. What's going to happen next? What's going to happen next? (13:03): Which brings me to growth. The overwhelming thing that I'm hearing from you all is that growth is going to look very, very different in 2024, in 2025, in 2026 than what it looked like five or 10 years ago. Is that right? Vidal Seegobin (13:19): I have a hard time envisioning a world where that's not the case. I think if you're a little skeptical you'd say well, the Advisory Board has been talking about the declining volume through inpatient, the structural challenges that they'll be facing. The need to run on break even, or Medicare break even for a number of years. What feels different about this situation compared to other periods of time? (13:46): A couple of factors, I'd say, is that everything we had itemized back into 2019, and 2018, even earlier, are still true. COVID-19 was accelerant to a lot of those reasons or those factors. Site or care shift, all the reasons that Lawrence mentioned earlier about the shift to outpatient. We've seen a pretty stark increase, particularly across 2023 there, that even surprised some payers who have an advantage from that. Then, we've also seen the same thing we had mentioned earlier, about the structural workforce waterline that is different. (14:22): In addition, at the state level it's going to be different, but federally, probably it's unlikely that there's going to be another financial bailout for hospitals and health systems. Rae Woods (14:31): Right. Vidal Seegobin (14:31): When I think about growth and what does that mean into the future, I think that the growth story has to include deeper focus on margin. That is going to come through thinking about how you index your cost structure on your, perhaps, dominant public payer. That is going to be able how you are making the pieces of your system that you've acquired over years, perhaps without an overarching thesis, work more synergistically or in harmony with each other, as opposed to in opposition or just independently. Rae Woods (15:06): Yeah. Vidal Seegobin (15:06): I think there's going to be a lot more focus on how you think about the leveraging of technology to fill structural gaps in workflow and workforce. Because I don't think the theory about throwing more people at the problem is going to be the way that you succeed in the future. Rae Woods (15:27): I appreciate that you are starting to get more specific on what the hell we actually mean when we talk about the future. I want to be really explicit here, because I do worry that growth strategy, just the word growth can be thrown away as a buzzword. When we talk about the tactics of the past, it's not going to be focusing on your high profit service lines, like Larry just talked about. It's not going to be doubling down on cardiac, ortho, et cetera, et cetera, because that's where we're seeing a lot of the volume going away. It may not be, "Oh, let's get into a new market. Let's merge with another hospital or health system. Let's focus on getting more patients, more volumes in the door." Those are some examples of classic growth strategies. (16:09): how would you characterize this new era, this new phase of what growth needs to look like for hospitals and health systems? Vidal Seegobin (16:20): The overarching take that we have that we're running at, from the research perspective, is that we think hospitals and health systems need to shrink in order to grow. Part of that reflects what I mentioned earlier, about an acquisition model where everything just needed to be individually profitable but didn't necessarily have to work as a whole. This term that we've often times coined as systemis. Part of that is going to be how you pare down the assets you've got under management, and then how you make them work more holistically. (16:53): I think that's the only way, then to my mind, that we can find a way to work smarter not harder. Because that's generally how I would describe how health systems have been able to see the modest rebound in margin, is through harder work not necessarily smarter work. Rae Woods (17:11): This is counterintuitive. This is probably not the overwhelmingly hopeful statement that our listeners were wanting to hear in today's episode, when it comes to growth. Can you give me some examples of what an individual organization might take to shrink in order to grow? Is anyone actually doing this well? Have folks really acknowledged that this is the reality for them? Vidal Seegobin (17:37): Yes. In the middle of 2023, so the summer of 2023, we conducted our annual strategic planner survey. We've been running that for the last four years, asking largely the same sets of questions. Most health systems said, in 2022, is that they had no intention of reducing their staff on the clinical side, but probably had intentions to reduce their staff on the administrative side. Rae Woods (18:03): Part of that was the reflection of the moment in time with COVID, RSV, the triple threat that was happening. Vidal Seegobin (18:10): It did not make any sense whatsoever to ratchet down more clinical expertise in a moment where there was so much uncertainty and probably predicted volume to come back. When you're looking for the reduction in terms of force, you look very clearly at your administrative staff. I've seen and I've heard more health systems think about the number of people that they have in their administrative ranks, and whether or not that makes sense for the future. That often times has, at least conceptually, less impact on direct patient care. I think that that's part of where health systems are saying to themselves, "This is probably where we need to shrink down our compliment." (18:51): The second is just a recognition that most health systems in the United States do not have accurate cost accounting. Rae Woods (18:58): Yeah. That's an understatement. Vidal Seegobin (19:03): Yeah. What they unfortunately have to do is just true up at the end of the year, what their revenues were, and then what their expenses were. For that reason, they don't have necessarily the most discernible ability to figure out which units, facilities, wards or services are not profitable. Instead, what you tend to find is service rationalization from just general, "We know we don't make enough money on the services." Which is, often times, where you saw the two culprits which are maternity and birthing services, as well as behavioral health get the cut very quickly. Whether or not that makes sense, it is determined or shown in any kind of accurate cost accounting for most hospital and health systems. Rae Woods (19:48): If we don't have accurate cost accounting, and we default to shrinking the same areas over and over again, but we know that we need to really look hard at our fixed costs rationalization, how do leaders appropriately make these decisions? Vidal Seegobin (20:06): When we've spoken to health systems who do not have a robust cost accounting system, what they've largely told us is the place to start is to figure out who your dominant payer is and what the contribution to your cost structure would be from the services that they pay for. If you think about that as your waterline for expenses, you use that as the marker that you try to engineer your costs around. (20:34): Of course, from the research perspective, it's very easy for me to say that that's what you should do. The actual operations, politics, culture, change management about doing that is incredibly difficult. But historically, over the last five, six years that we've been looking at this specific question, you figure out who your dominant payer is and you index your cost structure based on that. Rae Woods (21:01): Which, by the way, I don't want to discount the things that come after making an appropriate business decision. We can maybe put in a link to an episode in the show notes that we did with Ballad Health, which was created through the merging of two major health systems in rural areas. It involved hard decisions about what would they keep, what would they shut down. All of the things that we're actually talking about in this episode were decisions that this organization made. They were met with backlash. They were met with literal protesters for almost a year, outside of their hospital. In that episode, we spent most of our time talking about what that meant for the actual leaders, the humans that were out there trying to run teams and continue doing the change management. Maybe we can add that episode to the show notes. Vidal Seegobin (21:49): I would also say the one thing I did start with, which may not be where a chief executive would start. I started with the finances and how you build your cost structure. But I think there's another question, Rae, you and I have talked about this before. Which is what is your identity and role as a health system operating within the wider health ecosystem? Rae Woods (22:10): Yes. Vidal Seegobin (22:11): Maybe, there's a question to answer about who are we, and what do we do, and what kind of services do we provide? If that is crystal clear, and often times underappreciated because you're a health system, you've always been a health system, you will always be a health system. Maybe that needs to be reevaluated. If that is super solid, I would imagine a lot of the other questions about what do we keep, what do we sunset, what do we partner with become a lot easier. Rae Woods (22:37): Yes. Vidal Seegobin (22:37): Because who you are and what you do is so much more clear to the market and the teams. Rae Woods (23:39): Vidal, you're making me think about a different question, which is is the shrink to go strategy right for everyone? Or is it only right for certain identities of health systems, certain health systems that are really feeling the financial or operational crunch right now? Who are we actually talking about? Who should actually consider the shrink to go strategy? Vidal Seegobin (23:59): I would say that there's ... I'll start with a bigger, more amorphous answer, and then I'll try to get more specific. (24:05): I think the more amorphous answer are health systems who have acquired a lot of assets or chased revenue because the individual business opportunity made sense, so you could imagine that I could survive or succeed as a holding company. Just a whole bunch of different individually profitable services. I don't think that that is going to be what makes you successful into the future. If you have a sense that you've built your institution based on the holding company mindset, I think you have to consider shrink to grow as the story you're going to have to tell your community, your leaders and how you're going to define that, what guardrails you're going to put around that for your success into the future. Rae Woods (24:53): Give me a ballpark. How many do you think we're talking about fit into that category? Vidal Seegobin (24:58): I'd say our historical review has been that 20% of health systems are those that would be able to say that they are highly reliable, highly effective, well performing health systems. I don't know if that leaves 80% of health systems nationally that have to say to themselves, "Hey, we have to think about some way of shrinking in order to grow." Rae Woods (25:21): We're talking about the majority. Vidal Seegobin (25:22): Yeah. Rae Woods (25:23): This is not a story for a few. This is not a single case study about Ballad Health. This is actually what most hospitals and health systems need to be at least considering, as we think about 2024. (25:35): My sense from the two of you is that CFOs maybe get that. Vidal Seegobin (25:39): I would agree, I would agree. They see the numbers, they see how much money has gone out the door, particularly to staff awards over the last year. They have a very clear sense that it's not sustainable into the future. Rae Woods (25:50): But we started off this conversation talking about how it's not just the financial outlook, it's also the operational reality. What does the COO say to this story? Vidal Seegobin (25:59): The COOs are telling us very clearly, "You need to grow." They need to find additional capacity. That may have to come from either partners or within the health system itself. (26:11): The two points that I'd mentioned earlier, which are the two clinic clear bottlenecks that are coming through, at least in terms of the operating environment right now, is the emergency department and the discharge process. There's not staffed beds that patients can be discharged to, even though their episode of care is completed in the hospital and health system. That is a clear bottleneck that's having impact throughout the health system. Then, we're just seeing more patients show up to the emergency department, in part because they can't get a primary care visit. But also, in part because they have conditions that they've delayed over the last couple of years that need to be treated. Rae Woods (26:50): We started off this conversation with a bit of hope. I'm not sure that our listeners still feel that way, at this point in the episode. But I want to get a little bit practical with them. My last question for the two of you is if shrink to grow is the reality, where should leaders start that journey? And where is this story going to end? What's the ultimate endpoint going to look like for health systems in the United States? Larry Watts (27:18): I think really where you should start, if you can, go look at some of our Advisory Board flagship tools. Know your demographic, you know your market. How is that going to change over time? Are you in a market that's going to be able to take advantage of inpatient growth because it's older, it's sicker? You're going to see those volumes. Or are you not, and you have to change that. Rae Woods (27:43): Then, where does it end, Larry? Larry Watts (27:48): That can be the real question. We can look five and 10 years out, but healthcare is a constantly changing environment. We can make these projections. Make sure that you are investing in outpatient services because that's where the growth is. Rae Woods (28:08): Vidal? Vidal Seegobin (28:09): Rae, you know I come from the international side of the world, where bed occupancy rate for your average publicly funded health system is at 100, 101 percent bed occupancy rate. The United States, what, between 59 and 64 on average? Then, the heuristic is 75% bed occupancy rate is probably the safe sweet spot. We're over bedded. Rae Woods (28:34): Yes. Vidal Seegobin (28:34): I think that there's some rational expectation that we're going to have to pull out some of that fixed cost from the health system, and that's going to have to be done over a number of years. It'll either be done adversarially, through the market forces that we have used to operate our system here in the United States. Or, you could have health systems who take that charge themselves and say, "We're going to be the ones that govern our future. We're going to be the ones that are going to set the pace ourselves," to figure out where those fixed costs need to be pulled out. (29:06): Where I think it starts is something that we've largely haven't had to worry about, because of this slack in our bed capacity. That is on round operations, logistics and flow. Rae Woods (29:19): Yeah. Vidal Seegobin (29:20): In 2024, I think every health system leader in the country needs to be thinking about patient flow, operations and efficiency, because that is the way in which you're going to get the pieces to work more holistically with each other. It is also the place where you're going to be able to probably alleviate some of the pressure that we're putting on our staff. I think that's the story that I'd be talking about, where they start to build this story and in their favor. (29:50): In the future, I'm still optimistic about the potential for technology, particularly artificial intelligence, to be applied in some of these routine spaces and activities, where we could imagine they never actually have to be done by a person again. We can have a highly reliable experience that is augmented through technology, where clinicians are able to do the human-centric work that they came into practice for, but are supported by a technology suite that makes that easier and more effective for them to do day-to-day. Rae Woods (30:24): Well, Vidal, Larry, wherever the future takes us, wherever 2024 takes us, I appreciate you coming on Radio Advisory. Vidal Seegobin (30:32): Thanks, Rae. Larry Watts (30:33): Really appreciate you having us. Rae Woods (30:40): Look, I know we focused this entire conversation on hospitals and health systems, those incumbent leaders that are trying to figure out what to do next. But I want to remind you all that every other stakeholder in our business is impacted by what happens to this group. As you think about your journey in 2024, I want you to think about what your message is to hospital and health system leaders. How are you helping them work smarter and not harder? How are you adjusting your products to the financial reality, to the operational reality on the ground? How are you ultimately helping, not just health systems, but patients, communities, everyone that we serve, chart the path forward? Please remember, as always, we're here to help. (31:33): If you like Radio Advisory, please share it with your networks. Subscribe wherever you get your podcasts, and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Rae Woods. As well as Abby Burns, Kristin Myers and Atticus Raasch. The episode was edited by Katy Anderson, with technical support provided by Dan Tayag, Chris Phelps and Joe Shrum. Additional support was provided by Carson Sisk, Leanne Elston and Erin Collins. Thanks for listening.