Rae Woods (00:02):
From Advisory Board, we are 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.

(00:15):
It's a new year and we've got the same problems. Look, the market is not letting up on health systems, and it's getting harder and harder for leaders to develop and implement growth strategies. That's why I invited two healthcare strategy experts today. We've got Colin Gelbaugh and Vidal Seegobin, and they're going to talk about how health systems' growth strategies have shifted, and what leaders can do to improve their organization's trajectories, even if today, folks are only in survival mode.

(00:51):
Hey, Colin. Hey, Vidal. Welcome back to Radio Advisory.

Vidal Seegobin (00:55):
Thanks.

Colin Gelbaugh (00:56):
Hi, Rae.

Rae Woods (00:57):
You're going to have to pardon my voice. It's January, it's flu season. We're all battling a thousand different bugs, and I am still recovering from one, so bear with me as we make it through this conversation.

Vidal Seegobin (01:09):
I think you sound fine. In fact, I think a little bit of graveliness to the voice adds an air of mystery to it.

Rae Woods (01:28):
Let me take us back to warmer times, times in which we weren't in the middle of battling one flu, one cold after another, and that was when the two of you actually did a survey to try to understand the provider landscape, and specifically what they were thinking in terms of their growth outlook. What were the results then?

Vidal Seegobin (01:49):
So I have to give Colin more credit than I'm going to take, although I'm going to describe what our findings were. I was curious back in the middle of last year to understand where do different health systems fall out when it comes to their posture for growth? And when you look at a couple of key questions, most specifically where they were looking to retrench, and where they were going to be spending more investment dollars, what we found was that there was four major camps where they fell out with relative proportions.

(02:19):
A small proportion, or about 7%, we characterized as being in survival mode. So these are basically health systems doing everything that they can to stay financially above water. You've got 34% at what we call the regimented focus, who articulated no immediate intention to buy, or acquire, or make large investments, and were largely focused on network integrity and top of funnel referral patterns for their patients. You had 54%, which is the majority, at what we would call cautious expansion. And these are health systems that have probably pulled back some of their investment ambitions, but are still looking to acquire either physician practices, primary care practices of the like to increasingly grow their footprint. And then finally, at the minority, at 5%, a small number are the group that we called new pastors, who basically described an ambition to both acquire and grow and look for new non-traditional revenue opportunities as a way of bolstering their bottom line.

Rae Woods (03:22):
So we've got this nice pretty bell curve. On the one hand we've got folks that are really struggling in this survival mode. On the other hand, you've got folks truly growing into new pastures, and the majority falling somewhere in between. But as I said, this survey was done a couple of months ago, and we know that today things look different. The economy, the market looks different and frankly more difficult than it did a couple of months ago. Inflation is up, the cost of borrowing has increased considerably, non-operating income from investments tanking. Would you change how you categorize these growth archetypes?

Colin Gelbaugh (03:59):
I would say that the desire to grow hasn't changed across our respondents, but their capacity to grow has changed. So they might be more towards the financial challenges. Let's get on stable footing before we're going to be diversifying and trying new pastures that we don't have experience with.

Vidal Seegobin (04:21):
And the only thing else I'd call out is in surveys like this, you're talking about expressed versus revealed preferences. There was every reason to believe in May of 2022 that there was going to be a significant rebound in the inpatient volume and that we had kind of [inaudible 00:04:39] behind us. So there was reason to imagine you might be optimistic at that point, but I think now, Rae, to the points that you mentioned earlier, the economic headwinds, the battle for talent, I think makes it a lot harder for us to justify maybe those distributions, even if the four camps I think still remain pretty much accurate.

Rae Woods (04:59):
But at the same time, to Colin's point, everybody wants to grow. Everybody always wants to grow. That is the goal for healthcare leaders, even if they find themselves in, let's say, maybe more cautious circumstances. My question is if you fall into those circumstances, what does growth even look like, knowing that that is the universal desire?

Vidal Seegobin (05:21):
So Colin and I have had conversations about this, and I think in some ways it's important to remember even if the ambition for growth has not changed, there are headwinds and it requires us to focus on some of the fundamentals, that when you're non-operating income was really, really strong and you were basically starting to see kind of grow through all the inadvertent means, that things are now harder. Well, I think a lot about network integrity, referrals, productivity as being the key levers that most health systems have to ensure that they are putting at the very, very top of their agenda board for things that they have to work on in order to make it through what I think will be persistent headwinds economically.

Colin Gelbaugh (06:08):
Yeah, I think the key for health systems right now is to remove obstacles to capturing the demand that's out there. And that includes improving awareness, improving access in the short term, and then long term, addressing preference for your product and being able to ultimately grow stronger in your marketplace.

Rae Woods (06:29):
Where do you put classic M&A, mergers and acquisitions, on the growth opportunities for today's organizations?

Colin Gelbaugh (06:36):
So M&A did not rank highly in our survey this year in terms of likelihood to engage in M&A activity. That doesn't mean that we won't see M&A activity this year. When we look at trends, we see a smaller deal number and bigger deal value, and the recent mergers that we are following are the ones that are non contiguous in nature. And what we're really tracking there is are health systems that aren't located geographically next to each other able to create different synergies together and unlock those system benefits that have been elusive for some organizations?

Rae Woods (07:20):
Let me try to kind of repeat that back. So it sounds like first of all, health leaders are saying that M&A is not at the top of their growth priorities, and that is reflective of the patterns that we've been tracking over the last couple of years when it comes to what we would consider kind of a classic growth path. That doesn't mean that M&A is not happening, it's just happening with folks that, back to the bell curve, were maybe on the right side, focused more on growing into new pastures, more significantly changing their geographic footprint, et cetera. Is that correct?

Colin Gelbaugh (07:55):
Correct.

Vidal Seegobin (07:56):
The one thing I would also add is that starts our conversation is that you can't really paint a pretty broad brushstroke for the different kinds of health systems that we're talking about. You do have some health systems that are still sitting on pretty large amounts of cash and are thinking about their ambitions to be wider than a region. So for them, M&A still probably has to be part and parcel their growth trajectory, and I think accounts for the reason why the deal amounts are increasing, even if the total number of deals themselves are staying flat.

Rae Woods (08:29):
Ah.

Vidal Seegobin (08:30):
Then there's a second, which I think you would think about as your survivalists or survival mode. These are not for profit hospitals who might be operating in localities where the economy is either flat or declining as well. And that, in and of itself, is going to create structural headwinds that become even more difficult to try to navigate, that buying your way out or M&A probably is just not your path forward.

Rae Woods (08:54):
Yeah, that's right. And it sounds like regardless of where you fall, there is ... I mean, is it an immediate need, a universal need for everybody to get back to basics growth?

Colin Gelbaugh (09:07):
I think so. I think if you forget where your business is coming from and how to appeal to the preferences of your end users, you leave yourself open to disruption, and ultimately you need to be constantly improving your core product and service. And without that, you can't venture out into new businesses.

Rae Woods (10:44):
Let's talk about disruption, because while on the one hand it makes intellectual sense that everyone focus on this back to basics growth strategy, there's also the other end of the bell curve that has money that is able to invest in bigger M&A. There are leaders that we haven't even talked about or organizations that we haven't even talked about in this conversation that don't fall into the classic incumbent health system category that we've talked about ad nauseum on this podcast are making huge moves in healthcare, disruptive moves in healthcare. So how do we square this kind of need to focus on your classic book of business while also preparing for a world where this disruption is coming?

Colin Gelbaugh (11:28):
Disruptors to me are just another form of competition, and what I suggest our members take from them is understanding how these new competitors are raising standards of competition and changing the expectation from your patients. They'll make growth harder to come by, but if you view it in the lens of opportunities, you can find opportunities to create a better product for your patients.

Rae Woods (12:00):
When are these third parties a helpful push for leaders and when is disruption and red herring when it comes to growth?

Vidal Seegobin (12:12):
I do not want to underestimate the structural advantage that certain non-incumbents have when it comes to healthcare. Actually, I'll even broaden that. I think certain payers have a structural advantage they have accrued over the last couple of years and -

Rae Woods (12:27):
Oh yeah.

Vidal Seegobin (12:28):
- sitting on capital that they are looking to deploy. You can't presume that access to capital is sufficient in order to win whatever healthcare game you're trying to compete in, but it is clearly an advantage. So Rae, your question, I think there are payers. I think that there are private equity groups that are still sitting on a lot of investible capital that are going to be looking for places to park their money and grow. And for health systems, who we are also committed to trying to help navigate, that is going to close doors and options and opportunities for them in the immediate term because they are simply retrenching into the back to basics function that we described earlier. I don't think it means that it is done in one game, but I do think it means that for the moment right now, if I'm a health system, I'm probably going to be seeing more of these private equity deals happening over the next two years, and I'm going to have to be thinking about is that closing opportunities and avenues for growth for me in my market?

Rae Woods (13:29):
Yeah.

Colin Gelbaugh (13:30):
I think I agree with that, Vidal. I would just remind people that healthcare is not a shrinking market, it's a shifting market, and you have to be able to adapt to the shifts that are happening. Most of the time, the organizations that are going to be disrupted are those that don't build a strong network, don't build a broad base of partnerships, and don't maintain channel relationships to your business. So looking upstream, that's a lot of times where looking through the lens of disruption can be helpful. If you're a hospital-based business, a lot of times you're not tracking what's happening in the primary care realm. So understanding what's happening upstream is very important to sum up businesses.

Rae Woods (14:16):
What is also very important to underscore for our audience is while networks, partnerships, and relationships are all part of the classic health system business, I think we would all agree that they're not necessarily things that health systems excel on across the board, which also invites disruptors and third parties to come in and say, "We can do these things better," which is a reason to, again, focus on the core business, but that doesn't mean necessarily going back to old ways. There are still ways to innovate and grow and push your business while still focusing on things that you might place at the core of what health systems do.

Colin Gelbaugh (14:59):
Right. You can't compensate for poor products, but long term, if you keep delivering a poor product, that's going to not set you up well for success. And at the end of the day, disruptors will have a market opportunity as long as there are unsatisfied end users, which in the case of health systems are consumers and physicians.

Rae Woods (15:19):
Can I argue with myself for a minute?

Vidal Seegobin (15:21):
Sure.

Rae Woods (15:22):
The context of our conversation is about growth, and so far we've talked about how the majority of the market needs to focus on back to basics growth, but isn't that a story we've heard before, where the incumbent has not actually been successful? Think about every business school style case study we've read on Blockbuster and on Kodak, and every single one of our listeners is going, "Uh-huh, heard that before," to the upteenth time. "You don't need to tell me again about that story, Rae," but it is a question in my mind of if we're saying retrench and focus on your core product. Are health system's just going to fall into the same traps of not thinking innovative enough or growing enough, like the outcome that we've seen for the Blockbusters and the Kodaks of the world?

Vidal Seegobin (16:10):
So where I tend to fall out on that bigger question is around concept versus execution. So I think a lot of different investors in healthcare have a pretty good paper-based thesis for what it takes to disrupt healthcare, but time and time again, we have seen that the execution is far more important than when the deal is signed and the dollar amounts are kind of transacted. So I oftentimes am curious about ... I mean one thing I will say that is probably pretty true over the last investment cycle is that those who were tourists into healthcare found that it was a lot harder than they were expecting, which I think puts a little bit of a balanced scale towards the health systems, or at least on the incumbent side, who understand the nuances, the complexities, the interplay of factors that are all weighing into how we deliver care effectively. So I would point to there's some clear advantages for those who understand the nuances of healthcare. I just would caution to not let it always be the case that this is the way that the world has always been, so this is the way it will always be.

Rae Woods (17:21):
I love tourists and healthcare as a concept. I think that phrase will resonate with a lot of incumbents who, if I can turn up the heat a little bit more, say, "Yeah, bring it. You try to make it in my business. I actually know how hard it is." And we should clarify that we are, to your point, Vidal, making some generalizations around health systems who are finding themselves in this back to basics growth strategy, but that's not the case for all incumbents and all health systems. There are certainly some that are still pushing the boundaries and growing at a quicker pace or looking for radical opportunities, discontinuous opportunities to grow and reinvent themselves, just like some of the disruptors that we've been talking about. We just might not be hearing about those necessarily as much because they do represent a smaller proportion of the population, which is exactly what our survey showed.

Vidal Seegobin (18:11):
The other element that I would just talk about, which is a little less sexy than growth, per se, is just general margin management. So when we're talking about the competition for workforce, when we're talking about supply contracts, when we're talking about productivity and operating theater productivity, what we're really talking about is making sure that we're making our costs go as far as possible.

Rae Woods (18:35):
Yeah.

Vidal Seegobin (18:36):
And I think one of the underwriting the elements is the growth story for 2023 may be not super sexy. And part of that is because it's going to be a lot of margin management, making sure that all of the i's are dotted and the t's are crossed when it comes to just operating the enterprises as effectively as possible.

Rae Woods (18:54):
What do you want leaders then to prioritize? If we don't want them to get distracted by the shiny object and focus on the not super sexy stuff, how do you recommend that leaders prioritize what they should focus on in their growth strategy in 2023?

Colin Gelbaugh (19:08):
I think the challenge for leadership is making growth something that the whole organization pursues together, and that it doesn't live in just the marketing department or just the planning department. It's something that everyone contributes to and contributes to in different ways. So some might attach to the concept of specialization. Some might attach to the concept of expanding access. So you have to deliver this message in different ways and bring it all together at a corporate level to say how it contributes to the growth of the organization.

Rae Woods (19:44):
And then to put an even finer point on it before we end today's episode, is there one thing that you want all health system leaders to do right now to advance their growth story?

Vidal Seegobin (19:56):
I'll take the risk of stepping, Rae, into your expertise, as well as Sarah Hostetter. I feel like the other element that crosscuts, whether or not you are a hospital or health system incumbent or a disruptor looking to stand up a new model, is you need clinical deciders and clinicians, particularly doctors, to make your business model run, however you've conceived that to be. And now as we're taping this podcast, we're talking about release from non-competes that might impact physicians, so if 2023 turns out to be an additional or an escalation in the competition for physician talent, then I think that most of the models that we're talking about when it comes to referral as well as running the inpatient enterprise or outpatient enterprise, that all has to come down to making sure that the doctors are happy, so my guess might be that that is probably one thing that a lot of health systems are going to have to make sure their physician relationships and partnerships have to be top-notch going forward into 2023.

Rae Woods (20:58):
And by the way, what a perfect example of an evolution on a back to basic strategy. Health systems have owned physician relationships for so long. It's just that those physician relationships weren't necessarily loyal, they weren't necessarily deep, and they were oftentimes tied to something like a W2 with a non-compete, to your point. So if those structures start to fall, what does a physician health system or a physician employer relationship look like in general? That's clearly an area for innovation, even if we would consider that a classic health system strategy. Colin, what's your one thing?

Colin Gelbaugh (21:35):
I'm going to have to say two things that we haven't really talked about as much as maybe we should have. And that's just to clarify your purpose and vision as a company. You can't underscore the importance of that as a back to basics strategy. And then two is improving ambulatory access to care. That's by far the most prevalent strategy that we're seeing today and is where most of the growth will come from. So keeping that front center is very important.

Rae Woods (22:03):
Well, Collin, Vidal, thanks for coming on Radio Advisory.

Colin Gelbaugh (22:06):
Thanks.

Vidal Seegobin (22:07):
Thanks. I hope you feel better.

Rae Woods (22:09):
Thank you. We're talking about back to basic growth strategies, and Vidal even mentioned back to basic cost strategies. So this is probably a good time to remind you that this podcast and that advisory board is powered by 40 years of research, meaning we have decades worth of research and materials and deliverables to help you with your growth strategy and your cost strategy and all of the things that are on your plate for 2023, because remember, as always, we are here to help.

(22:50):
If you want to learn more about the forces shaping health systems' futures, I want you to go back and listen to a couple of episodes we did at the end of 2022. We did a two-part series on the hospital of the future, which dives into the state of hospital finances and what leaders can do to right size their organizations. Look for episode 142 and 143 in our feed. And if you like Radio Advisory, 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 Katy Anderson and Kristin Myers. The episode was edited by Dan Tayag, with technical support by Chris Phelps and Joe Shrum. Additional support was provided by Carson Sisk, Leanne Elston, and Nicole Addy. Thanks for listening.