Health systems work to balance core operations with new ventures

Healthcare providers—and all businesses for that matter—constantly debate whether to make short-term investments to maintain their core business or to put profits toward alternative revenue sources that hold potential long-term returns.

Those questions are even more pressing as health systems' expenses climb and revenue falls. They're also grappling with the reality of the hospital's diminishing role as care—and revenue—shift to the ambulatory space. Investment income is keeping hospitals viable while operating margins wane, but spinning off new ventures can also be a potential buffer.

Ascension has made a concerted effort to build out its subsidiaries as it incrementally restructures. In its latest reorganization, the largest Catholic health system in the country eliminated its “healthcare” and “solutions” divisions, as well as a few leadership positions. It also split the president and CEO role.

“This is a core problem for very successful organizations,” said Dr. Robert Pearl, a lecturer in organizational behavior at the Stanford Graduate School of Business and former executive director and CEO of the Permanente Medical Group. “How do you move to the next level? It can't stay where it is. You can shrink down and reduce costs and be a leader in the old industry or get into the new industry. This is a key process in healthcare.”

Ascension's recent redirection follows an announcement last year that it will reduce its hospital footprint—currently 151 facilities in 22 states—and instead look to expand its urgent-care, skilled-nursing, home health and telemedicine service lines. It pledged to grow and commercialize more of its subsidiaries, ranging from its automation technology to venture capital management. Ascension's ancillary businesses earned about $150 million in revenue in 2017.

In a memo sent last week to Ascension employees and obtained exclusively by Modern Healthcare, Anthony Tersigni, who now carries only the CEO title, said those subsidiaries “will be brought together to optimize and enable their abilities to go to market,” with those efforts overseen by Joe Impicciche in the new role as Ascension president and chief operating officer. Although it aims to commercialize the ventures, the new structure will ensure they remain focused on Ascension, according to the memo.

Dividing the organization stunted collaboration and created “unintended hierarchy and silos,” Tersigni wrote. The reorganization aims to delegate decisionmaking appropriately as Ascension looks to become more agile.

Merging hospital operations and ancillary businesses creates a unique dynamic: If a health system wants to test a new venture to determine its viability, would that mean the organization would use it more in its day-to-day operations?

“Taking an entrepreneurial business and investing in it inside of a legacy business is a difficult thing to do,” Pearl said. “The people who pull it off are superb, but as many fail as those who succeed.”

Ascension said in prepared remarks that its dual transformation entails “transforming its core healthcare operations while at the same time creating new models that extend our reach and provide the engine for growing its ministry and its impact.”

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.