Rae Woods (00:02):
From Advisory Board, we are bringing you a Radio Advisory. My name is Rachel Woods. You can call me Rae. In last week's episode, we talked about the frankly dire state of hospital finances and we talked about how organizations are tightening their belts but there's another side to this story. We know that hospitals can't trim costs forever, and at a certain point, leaders have to start thinking about what the next path forward is for hospitals. That's what I want to talk about in today's episode. So I've brought Dr. Jim Bonnette, he's an executive vice president for Optum Advisory Services, and he's been thinking a lot about what hospitals can do to ensure a more stable future. Hey Jim, welcome to Radio Advisory.

Dr. Jim Bonnette (00:55):
Hey Rae. Thank you.

Rae Woods (00:57):
I was trying to think about how to quantify the impact that you've had on healthcare, and I promise I am not going to do it in years. I am not going to age you. But can you give me an estimate of how many healthcare organizations you've worked with in your tenure?

Dr. Jim Bonnette (01:16):
I would say at least 50. It's between 50 and 100 globally cause I have worked with a number of hospital systems outside the United States, both national and private healthcare systems outside the United States.

Rae Woods (01:46):
So you bring a ton of experience to this conversation. I know we spent an entire episode talking about the state of hospital finances last week, but I do want to hear directly from you. How would you categorize the state of hospitals from a business perspective and maybe what are you hearing from leaders themselves?

Dr. Jim Bonnette (02:03):
Well, Rae, what I hear mostly is worry. Things haven't gone back to like they were in 2019. Volumes have evaporated, and I think a lot of the hospitals were expecting the volumes to come back. They have not, and in my view, they're not going to, at least not the surgical volumes. And so business is going to be different in the future.

Rae Woods (02:25):
And we are here to talk about that future. In fact, when I talk about hospitals of the future, I think it's very easy for folks to think about something that feels very futuristic, the Jetsons, Star Trek, pick your example here. But you have a very different take when it comes to the hospital, the future, and it's one that's perhaps a lot more streamlined than even the hospitals that we have today. Why is that your take?

Dr. Jim Bonnette (02:50):
My concern about hospital future is that when people think about the technology side of it, they forget that there's no technology that I can name that has lowered healthcare costs that's been implemented in a hospital. Everything I can think of has increased costs and I don't think that's sustainable for the future. And so looking at how hospitals have to function, I think the things that hospitals do that should no longer be in the hospital need to move out and they need to move out now. I think that there are a large number of procedures that could safely and easily be done in a lower cost setting, in ASC as an example, that is still done in hospitals because we still pay for them that way. I'm not sure that's going to continue.

Rae Woods (03:36):
And to be honest, we've talked about that shift, I think about the outpatient shift. We've been talking about that for several years but you just said the change needs to happen now. Why is the impotence for this change very different today than maybe it was 2, 3, 4, 5 years ago? Why is this change going to be frankly forced upon hospitals in the very near future, if not already?

Dr. Jim Bonnette (03:59):
Part of the explanation is regarding the issues that have been pushed regarding price transparency. So if employers can see the difference between the charges for an ASC and an HOPD department, which are often quite dramatic, they're going to be looking to say to their brokers, "Well, what's the network that involves ASCs and not hospitals?" And that data hasn't been so easily available in the past, and I think economic times are different now. We're not in a hyper growth phase, we're not where the economy's performing super at the moment and if interest rates keep going up, things are going to slow down more. So I think employers are going to become more sensitized to prices that they haven't been in the past. Regardless of the requirements under the Consolidated Appropriations Act, which require employers to know the costs, which they didn't have to know before. They're just going to more sensitive to price.

Rae Woods (05:04):
I completely agree with you by the way, that employers are a key catalyst here and we've certainly seen a few very active employers and some that are very passive and I too am interested to see what role they play or do they all take much more of an active role. And I think some people would be surprised that it's not necessarily consumers themselves that are the big catalyst for change on where they're going to get care, how they want to receive care. It's the employers that are going to be making those decisions as purchasers themselves.

Dr. Jim Bonnette (05:33):
I agree and they're the ultimate payers. For most commercial insurance employers are the ultimate payers, not the insurance companies. And it's a cost of care share for patients, but the majority of the money comes from the employers. So it's basically cutting into their profits.

Rae Woods (05:51):
We are on the same page, but I'm going to be honest, I'm not sure that all of our listeners are right. We're talking about why these changes could happen soon, but when I have conversations with folks, they still think about a future of a more consolidated hospital, a more outpatient focused practice is something that is coming but is still far enough in the future that there's some time to prepare for. I guess my question is what do you say to that pushback? And are there any inflection points that you're watching for that would really need to hit for this kind of change to hit all hospitals, to be something that we see across the industry?

Dr. Jim Bonnette (06:29):
So when I look at hospitals in general, I don't see them as much different than they were 20 years ago. We have talked about this movement for a long time, but hospitals are dragging their feet and realistically it's because they still get paid the same way until we start thinking about how we pay differently or refuse to pay for certain kinds of things in a hospital setting, the inertia is such that they're going to keep doing it. Again, I think the push from employers and most likely the brokers are going to force this change sooner rather than later, but that's still probably between three and five years because there's so much inertia in healthcare. On the other hand, we are hitting sort of an unsustainable phase of cost. The other thing that people don't talk about very much that I think is important is there's only so many dollars that are going to healthcare.

(07:24):
And if you look at the last 10 years, the growth in pharmaceutical spend has to eat into the dollars available for everybody else. So a pharmaceutical spend is growing much faster than anything else, the dollars are going to come out of somebody's hide and then next logical target is the hospital.

Rae Woods (07:42):
And we talked last week about how slim hospital margins are, how many of them are actually negative. And what we didn't mention that is top of mind for me after we just come out of this election is that there's actually not a lot of appetite for the government to step in and shore up hospitals. There's a lot of feeling that they've done their due diligence, they stepped in when they needed to at the beginning of the COVID crisis and they shouldn't need to again. That kind of savior is probably not their outside of very specific circumstances.

Dr. Jim Bonnette (08:13):
I agree. I think it's highly unlikely that the government is going to step in to rescue hospitals. And part of that comes from the perception about pricing, which I'm sure Congress gets lots of complaints about the prices from hospitals. And in addition, you'll notice that the for-profit hospitals don't have negative margins. They may not be quite as good as they were before, but they're not negative, which tells me there's an operational inefficiency in the not for-profit hospitals that doesn't exist in the for-profits.

Rae Woods (08:48):
This is where I wanted to go next. So let's say that a hospital, a health system decides the new path forward is to become smaller, to become cheaper, to become more streamlined, and to decide what specifically needs to happen in the hospital versus elsewhere in our organization. Maybe I know where you're going next, but do you have an example of an organization who has had this success already that we can learn from?

Dr. Jim Bonnette (09:14):
Not in the not-for-profit section, no. In the for-profits, yes, because they have already started moving into ambulatory surgery centers. So Tenet has a huge practice of ambulatory surgery centers. It generates high margins. So I used to run ambulatory surgery centers in a for-profit system. And so think about ASCs get paid half as much as a hospital for a procedure, and my margin on that business in those ASCs was 40% to 50%. Whereas in the hospital the margin was about 7% and so even though the total dollars were less, my margin was higher because it's so much more efficient. And the for-profits already recognize this.

Rae Woods (09:57):
And I'm guessing you're going to tell me you want to see not-for-profit hospitals make these moves too? Or is there a different move that they should be making?

Dr. Jim Bonnette (10:03):
No, I think they have to. I think there are things beyond just ASCs though, for example, medical patients who can be treated at home should not be in the hospital. Most not-for-profits lose money on every medical admission. Now, when I worked for a for-profit, I didn't lose money on every Medicare patient that was a medical patient. We had a 7% margin so it's doable. Again, it's efficiency of care delivery and it's attention to detail, which sometimes in a not-for-profit friends, that just doesn't happen.

Rae Woods (10:44):
If I think about for-profits and not-for-profits, we're still talking about somewhat large health systems. Maybe they are dispersed across multiple states, multiple regions. Maybe they're just in one locality, but outside of their tax status and maybe their business mindset, they tend to operate in kind of similar ways. And that is not the same for all hospitals if we look here in the United States. So I want to talk about how different kinds of hospitals might go forth and think about streamlining their business. My first example that I want to ask you about is the community hospital, not a large health system. I'm talking about a place that's maybe more rural and in many ways is the lifeline for a given community. What is their path forward?

Dr. Jim Bonnette (12:37):
If we specifically talk about rural, their path is probably the most difficult. They face several kinds of things. One, there's really no other provider of care in their community. And so they tend to wind up with a very wide assortment of kinds of patients who show up who are quite ill and they're not reimbursed in a way that actually makes that a money making enterprise to be able to invest in the facility. And so that's why you've seen a lot of facilities close. I think unfortunately, it's going to be a radical shift in rural care to where you provide very minimal inpatient care, very minimal surgical care. You provide emergency care and transport to a major facility. The reality is that doctors and nurses don't want to live rural and so you're never ever, ever going to have enough medical providers. It's hard enough in cities to get enough medical providers; in rural, it's not going to happen.

Rae Woods (13:42):
But how do you square that with the very real challenge around health equity, especially when we know that rural America is getting older and sicker. They're struggling with fragmented care delivery already. I don't think you'll find much disagreement, if any, that community hospitals are not economically stable or that they're not necessarily in desirable places to live. But is there anything that organizations can do to mitigate the consequences of these populations if they need to drastically restructure their hospital?

Dr. Jim Bonnette (14:13):
There's an underlying fallacy in your statement. So health equity doesn't have to get worse just because I can't stick you in the hospital. Maybe what I can think about is what kind of services can I do at home? What kind of services can I partner with retailers to make available to you in a rural community? What kind of services can I provide via telemedicine and delivery of medications? How can I interact with you in a different way than I used to? Typically, people then say, "Well, high speed access outside major urban areas is just really poor." And that's just really a pathetic excuse. Virtually everybody has a smartphone and a cell connection, and so they have access and you can use the phone, not a computer, to interact with them.

(15:06):
And you can get delivery of pretty much every kind of thing that you need from medications to physical devices and you can interact on an iPad or your phone with a provider directly. So I think we have to reevaluate what has to be done in a hospital in a rural setting. Again, the reality is if I'm a newly minted doctor, I've got $250,000 in debt. I can't work in rural.

Rae Woods (15:37):
You're reminding me of two stories, one of which is very old. I'm going to pull out from the back of my head and the other happened to me actually very recently. The old story is honestly from when I first started at Advisory Board eight years ago. There was an organization in Alaska that in 2014 was one of the first to really stand up heavily telehealth because for their community in Alaska, the closest specialist was in Seattle. So they had no choice but to set up this kind of technological infrastructure to connect those patients to the closest physician or care team.

Dr. Jim Bonnette (16:15):
Was that [inaudible 00:16:16]?

Rae Woods (16:16):
It was, yes, exactly. And again, this was a time when telehealth was something that was still a dream in people's mind and this is an organization that, out of necessity, had to do this. And the other example that I'm not going to say the name of is a very recent example of an organization that merged and in their decision to merge, which was the economical decision that they had to make, they decided to downsize one hospital to close a NICU and to do a couple of other kind of moves that weren't celebrated by the community even though they were doing all of these other things that you are talking about. And the reality for that organization, even though it was the right business move, even though it's the right move for the community long term, they actually had protestors outside for almost a year. So that just kind of speaks to the very hard decisions that leaders are going to have to make even as they try to protect equity in a better way than having a hospital and match the demands of the economy at this moment.

Dr. Jim Bonnette (17:23):
Virtually every hospital I've seen that's gone radical restructuring has had protestors. Hospitals are generally the largest employer in a community and that kind of radical change to a hospital affects lots of things in the community and so it's never popular. But then again, how many communities vote for a tax base to support the hospital? So you can complain all you want, but if you're not willing to pay for it, something has to change.

Rae Woods (17:54):
I want to move to our next category of hospitals, which is the academic medical center. How does the AMC need to evolve for the future?

Dr. Jim Bonnette (18:05):
This is a bit of a different story. So AMCs still do a lot of everything including the things that are done by general hospitals, but they generally ask a premium over a general hospital to do those things. I'm not sure that's a sustainable business model because as an insurer I wouldn't pay for that. I would be willing to pay you the general hospital rate for the basic stuff that everybody can do. I might be willing to give you a significant premium for the really specialized things that you do, but I'm not going to pay you those extra large fees for everything that you do. And there are examples, I'm not going to name them because they're quite controversial where this has happened, I personally negotiated one of these contracts in a large metropolitan area with a children's hospital. And in the end, the children's hospital had to give up those extra large fees for regular cases that they did and they got premium payments for the very specialized care, but that wasn't the majority of care that they were doing.

(19:15):
So I think there's some risk to academic medical centers. And then the other question is how do they partner with the general hospitals that surround them and work with them to move the regular ordinary cases that can be done at the hospital out into the community and keep the specialized stuff coming into their major downtown, usually facilities. The other question is they face the same thing that other hospitals do, which is don't be doing outpatient services on an inpatient basis. I've personally had this happen where I couldn't convince the hospital that it was crazy to make me an inpatient when it should be an outpatient procedure, but it was an academic medical center. It's like I could talk till I was blue in the face and they said, "Well, but that's the way we do it here."

(20:04):
It's like, "Well you're going to lose money because I'm a Medicare patient." If you do this as an outpatient, I can tell you in advance what your margin will be, but if you admit me to a main hospital, I could tell you what your negative margin is going to be as well, cause I know what Medicare is going to pay.

Rae Woods (20:19):
But that doesn't get a lot more complicated when you're talking about an AMC that is going to be sending a patient to an organization that is not under their umbrella, that's going to be sending them to a partner and not necessarily a different facility under that academic medical center. Or maybe they are and it's kind of a similar calculus to the traditional health system.

Dr. Jim Bonnette (20:39):
I think it's a different kind of partnership. They either have a partnership with specific physicians that they work with, with this other center, or they actually have their surgeons working in the general hospital, which I've seen as well. There's going to be a range of partnerships. But again, why should an employer pay a premium for things that could be done in a simpler circumstance safely and effectively?

Rae Woods (21:10):
And you mentioned children's hospitals kind of in passing. They're another category that, generally speaking, I tend to think fall into some of the same characteristics and same solutions sets of the other kinds of hospitals that we've been talking about. But I'm curious if you have any specific advice for the kind of standalone children's hospitals that are across the country.

Dr. Jim Bonnette (21:31):
You're right, they are a special case. I think that, again, same issue if it is a procedure that could be done anywhere, let's say an appendectomy. So what's the reason I should be paying a premium for a simple appendectomy to a children's hospital versus a community hospital? The results are going to be relatively the same and I don't see that in the end that employers are probably going to be willing to pay that premium. Now if it's cancer care or specialized surgery, I think there's a premium to be expected to be paid for those kinds of conditions where there's very specialized care available, but not for everything. The other thing that comes up, Rae, that I think is important to think about is cancer centers. So cancer centers realistically because this is a growing expense especially on the pharmaceutical side, does it need to be attached to a hospital? Why does it need to be attached to a hospital?

(22:33):
Is it less expensive to have the equivalent of an ASC cancer center that does chemotherapy and minor procedures or some surgical procedures that are lower cost, that can be safely done. And I think this is going to be an area of change. Realistically, continuing to pay HOPD pricing for delivery of pharmaceuticals for cancer care is probably completely unacceptable given the prices involved, which can be hundreds of thousands if not millions of dollars.

Rae Woods (23:08):
We've been talking about the hospital of the future as one that is much more streamlined, one that has taken a hard look at their fixed costs and restructured, has taken a hard look at what needs to be done within the four walls of the hospital and what should be done outside of it, including at home. That is probably something that's hard for our listeners to hear. But my question for you is, can this actually be a new growth path for hospitals?

Dr. Jim Bonnette (23:36):
I believe it can. So I get calls from hospitals to stand up ASCs now, where they realize that they can't run it as a division of the main OR, and they need help to be able to set up an ASC and function on its own. Again, as I mentioned previously, things that might have a seven to 10% margin on an inpatient basis may have a 40% margin on a lower payment and lower cost structure in an ASC. So although the dollars involved may go down, your margin may go up rather significantly. I get probably a call a week from not for profit hospitals asking to have someone help them set up an ASC.

Rae Woods (24:23):
And I hope that gives our listeners a lot of hope for what is kind of a hard conversation that we've had across the last couple of weeks. But it doesn't change the fact that today's health leaders are going to have to confront some very real fears and make some very hard decisions and maybe even have to deal with protestors like we talked about. The last question I want to ask you is what advice do you have for those healthcare leaders?

Dr. Jim Bonnette (24:48):
Well, I think you have to take a look at the realities of the larger economic picture right now, and given the changes that are going on and the lack of sympathy from the federal side to be supportive of larger payments and frankly the lack of sympathy from employers to have larger payments. You need to rethink your cost structure and you need to think about where you could deliver care much more cost effectively rather than just continuing the same thing you've done for the last 20 or 30 years. There has been very little evolution in hospital care in the last 20 to 30 years. I would say longer, but I don't want to embarrass anybody.

Rae Woods (25:31):
Well, Jim, thanks so much for coming on Radio Advisory.

Dr. Jim Bonnette (25:35):
Thanks, Rae. It was fun. Hopefully, we'll be able to talk more in the future.

Rae Woods (25:44):
In reflecting on these last two episodes, I actually went back to some of the very first episodes that we've ever done on Radio Advisory, and literally episode number seven was the start of a series about the financial impact of the COVID-19 crisis. We are still dealing with the financial impact of that crisis and the economic realities of what it means to operate in healthcare today. On the one hand, that can make you pretty pessimistic about the future. On the other hand, it is a reason to act. So remember, Advisory Board is here to help.

(26:27):
If you want to take a deeper dive into the forces shaping the future of healthcare, we have an entire playlist about strategy that you can check out. And by the way, you can go back to those episodes about the state of hospital finances and [inaudible 00:26:42] finances and ASC finances and reflect on how far we've come or maybe how far we haven't. You can find links to those episodes in the show notes. If you like Radio Advisory, please share it with your networks. Subscribe wherever you get your podcast 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, Alice Lee and Nicole Addy. I also want to thank Sarah Hostetter, John League, Colin Gelbaugh, Vidal Seegobin, and Natalie Trebes for their insights on this episode. Thanks for listening.