The Four Challenges Keeping Hospital CEOs Awake at Night

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 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.

Paul

PS: The horrifics around the massacre of 58 innocents and wounding of more than 500 in Las Vegas has prompted renewed discussion about gun control. Most of us had never heard of bump stocks before last week. And we were reminded again of recent incidents in Aurora, Sandy Hook, Charleston and Orlando where 96 others lost their lives senselessly to gun violence. I am not smart enough to know the solution: it’s complicated involving access to firearms, mental health, laws and much more. What I do know is that doctors, nurses, hospital personnel and emergency responders have been there each time.  And I know the public’s health and safety is endangered as funding cuts take precedent over prevention and preparedness. The public’s health is about more than gun control—it’s about the 64,000 overdose deaths last year—up 22% from 2015, it’s about pandemics in mental health, obesity and more. Let’s get serious about public health.