As traditional healthcare business models become less profitable, more health systems are diversifying their revenue sources.
Sanford Health CEO Kelby Krabbenhoft told Modern Healthcare in a recent Q&A that he wants to get 25% of the South Dakota-based system's revenue from things like its ventures, its clinics abroad, medical devices and other sources.
Profile by Sanford, a weight-loss venture combining nutrition, exercise and lifestyle coaching, started as an idea cooked up by philanthropist Denny Sanford and Krabbenhoft six years ago when they were trying to shed some pounds. Today, it has 95 stores with about 500 in the pipeline.
“I just don't think the healthcare industry is going to be a healthy one when it only provides 2% margins or 3% margins,” Krabbenhoft said.
The weight-loss venture feeds well into Sanford's population health goals, said Micah Aberson, executive vice president at Sanford. If people are healthier, they require less treatment, which satisfies value-based payment models.
Sanford is also developing a business similar to Top Golf, which features three levels of hitting bays at a driving range in its sports complex. It also is partnering with biotech companies to develop stem cell treatments as alternatives for rotator-cuff surgery and knee replacements. The system also helped develop genetic screening technology. Sanford has implemented a 50-50 revenue split for its physicians who commercialize a new venture.
Many of Sanford's nontraditional revenue sources are vertically aligned; it would be remiss if it allowed its core operations to be distracted by those endeavors, Aberson said. Sanford hasn't yet run into a situation where a new venture conflicted with its core operations, he said.
“There is increasing pressure for organizations like ours to continue to pursue these types of nontraditional revenue sources,” Aberson said. “The alternative is to be victim to the increasing level of reimbursement pressures.”
What starts as an alternative revenue source can become the new norm, said Rob Thames, a consultant who has worked with Ascension and the former CEO of Northern Arizona Healthcare. Health systems need to adapt their service offerings of yesterday to align with non-acute services and value-based payments of tomorrow, he said.
“This is a natural stage of evolution for how we are systemizing healthcare,” Thames said. “It involves two things—integration, which is better for optimizing population health goals, and leadership, which builds capacity for those changes.”
Health systems face a new operating environment. They look to boost the pace of change and remove redundant leadership roles as margins narrow.
Big systems need to equip their local operators with the authority to make changes in real time, Thames said. Part of the motivation at Ascension is to transition from a top-down model to one where change is driven from the front lines, according to the memo.
Ascension shuffled executive responsibilities and split up the CEO and president role to facilitate that transition, similar to what took place at Baylor Scott & White Health in Texas.
Peter McCanna was named president in 2017 and assumed some of the responsibilities that were previously held by Jim Hinton, who dropped president from his title but retained CEO. In reverting to a co-leadership model put in place just after the organization's 2013 merger, the 49-hospital system could adapt quicker, Hinton said.
McCanna leads operations and finance, while Hinton takes on governance and reports to the board. In some instances, they are interchangeable, like when someone needs to speak on behalf of the organization or in merger discussions with Memorial Hermann Health System, Hinton said.
Baylor Scott & White has been making good progress on both strategic and operational initiatives, enabled by the CEO-president model, Hinton said, adding that employee engagement has gone up dramatically over the past year and a half.
“There is a need for agility in senior leadership,” Hinton said. “The world is changing more rapidly than ever before, and having talent play in different areas is key to our success.”
Healthcare stakeholders are migrating toward more of a diversified UnitedHealth Group approach, Pearl said. Nearly half of UnitedHealth's total revenue comes from Optum, which includes its pharmacy benefit management business; data and analytics company; and its care delivery unit that's pursuing DaVita Medical Group.
“Optum was a small part of its business a decade ago, now it is growing faster than its core business,” he said.
These types of endeavors present an opportunity to create high-margin businesses, Pearl said.
“They are responding to a fear that the hospital industry could become a commodity,” he said.