Camille Baxter: Hello and welcome to Healthcare Insider, a sponsored content podcast series from Modern Healthcare Custom Media. I'm your host, Camille Baxter, and today we are speaking with Richard Bajner, partner and payer and provider leader of Guidehouse. Over his career, Rich has assisted hundreds of hospitals and health systems, payers and state health organizations with strategic decisions that achieve sustainable performance. This includes helping executive teams rethink and redesign go forward, business plans and operating models that optimize paths for their markets, organizations, and communities.
Before we dive in, we'd like to thank the sponsor of this episode: Guidehouse. Ranked Modern Healthcare's second-largest healthcare management consulting firm in 2022, Guidehouse includes 16,500 professionals providing management, IT, and risk capabilities to the public sector and commercial markets. A 4 time 2023 best in class winner Guidehouse's comprehensive suite of advisory, digital, and managed services help providers, payers and government agencies and life sciences and retail health organizations drive innovation, growth and resiliency. Today we are talking to Rich about how health systems can create sustainable financial growth amid current economic constraints, including rising expenses, shifting market dynamics, and deteriorating payer mix. Rich, thank you so much for being here today.
Richard Bajner: Camille, thank you for hosting this important conversation at a time when this topic is applicable and important to many health systems and their executive teams.
Camille Baxter: This is such a relevant topic right now for our audience. I'm looking forward to your insights. So let's jump in. Over the last 6 to 12 months, there's been a drumbeat of leading health systems reporting significant negative financial results. Why is that happening? What has changed? And what common themes can be gleaned as lessons learned for other systems
Richard Bajner: Camille, thank you for the question. I think there's three or four major things that have changed from pre-pandemic to pandemic to where they are today. First, revenue matters. A significant driver of revenue is a health system's inpatient utilization and volumes. For many markets across the country, in many of the health systems within those markets, health systems experienced a consistent half a point or so reduction in utilization within those markets for many years. Fast-forward to the pandemic and post pandemic and many health systems are now struggling where volumes, especially on the inpatient side, have reduced by 10, 15 or more percent in a very short period of time, and those health systems haven't been able to realign their operating model and cost structure to those reductions in volumes.
Camille Baxter: Let's dig into those decisions a little bit more. So with these changes in this environment, how are leaders responding to create an improved trajectory and find a sustainable path forward?
Richard Bajner: As we work with executive teams at large national health systems, big academic medical centers, or regional community health systems and hospitals, I think there's a relatively consistent framework that they're applying to their situations. First, they're trying to align their cost structures and really get a handle on what their future revenues are going to look like over the next 12, 18, 24 and beyond months or years. Once they understand what their revenues are looking like, they're sizing the gap in terms of cost, performance, revenue, performance and margin performance to set a short-term and long-term goal in order to achieve the sustainable financials that are important to responding to the needs of their community. In many instances, organizations need to do this in a very rapid manner, as they may have seen their days cash on hand and their balance sheet depleted over the last 12, 18, 24 months, which is risking tripping certain covenants. Other organizations that may have a healthier balance sheet though are still going through the same process but may have a little bit more time to respond.
As they're doing that, I find them asking themselves similar questions. One, where do we need to achieve labor costs as a percent of our overall revenue base or cost base? And how do we bend the trajectory of premium pay on labor, which is 50, 55, even 60% of some organizations cost base?
Two, I see larger organizations starting to rethink about decision rights and framework. How much centralization, how much standardization can they be in order to create savings around pharmacy, around supply chain?
Three, organizations are certainly thinking about corporate overhead and the expense base that is associated with providing overhead services or corporate services to local markets or to frontline staff.
And then four is how do I grow out of this? While growth may be challenging, it is necessary, and therefore executive teams are looking at different ways to grow, whether it may be around managed care rates, revenue cycle performance, improved capture of volumes within an attributed population, or rethinking the service lines that they are delivering in their network to ensure that their organizations are not only maintaining their market share, but growing market share. Increasingly, we're seeing clients not only talk about market share, but revenue share, capturing more revenue share going forward than they have in the past.
Camille Baxter: Those are important questions to think about Rich. As leaders are balancing short-term budget constraints, there are macro headwinds that need to be considered as part of long-range financial plans. For example, providers are facing shrinking commercial payer mix and new market entrants. How should these headwinds be considered as part of long-term financial planning?
Richard Bajner: Camille, a framework that we've been using with our clients are headwinds related to topics around demographics and changing in demographics. Two, competitive situation in a competitive market. Three, regulatory market and potential changes that may be coming down, whether it's from state agencies or federal agencies. And some of the variables that executive teams are thinking about on these levers are relatively predictable. Things like long-term demographic changes are relatively predictable for most of the country. However, changes around competitive environment or regulatory changes may be a little bit harder to predict and have more lasting consequence on business models of health systems, physician organizations, and other organizations. Within these macro headwinds, it has been our experience, at least from the provider setting, that headwinds around changes in demographics and aging population, service line changes, et cetera, has resulted in a 2 to 2.5% annual revenue headwind that organizations need to close the gap on operating performance through innovation or operational improvements to their cost structure or revenue base.
With changes post COVID, especially around labor costs, some of these headwinds are north of 2.5 to even 3 to 5%, or 5 to 7% headwind that organizations need to take into account into their future. When we're starting to see organizations with greater than 4 or 5, 6% headwind, we're starting to talk about really big foundational changes to the types of services that hospitals or health systems may offer, the markets that they may offer those services in and making decisions that could really change the trajectory of who they are as a health system within a local community.
Camille Baxter: So interesting. There's so much they're facing. While providers are managing performance improvement, other parts of the industry continue to grow profitably, such as PPMs, health plans and disruptive innovators. How should health system leaders think about the dichotomy between growing profitability and their day-to-day struggles?
Richard Bajner: Camille, I think it's a fair question and a good question that we're seeing executives teams ponder, and I think first they're asking themselves what parts of their margin are under risk that they've been able to rely on in the past. Things like HOPD pricing, hospital outpatient pricing, or 340B, and certainly there are risks associated with that.
Second, I see our health system clients thinking about what is driving profitability for health plans, PPMs or others. For example, it is well documented and well known that Medicare Advantage has been one of the largest growth markets in the industry over the last decade, and that Medicare Advantage has contributed to a significant proportion of the overall profits of health plans.
But health system leaders haven't been able to identify why that is or what they could do about it. I think we'll see as health executives are facing hard challenges, we'll see increased understanding around what drives margins in other parts of the ecosystem, so health system leaders can think about how do we partner with health plans differently? How do we partner with disruptors differently? How do we partner with new startups differently in a way to serve the population differently, but also to access those margin pools that have been out of reach in the recent past?
Camille Baxter: Talking more about those disruptors, disruptive innovators have captured a lot of headlines. What's the future of these innovators? Are they a threat to health systems? Are they friends or foes?
Richard Bajner: Camille, you took the words right out of my mouth, and I think for many health systems, ignoring the disruptors can be a bad strategy and make them a foe, but I think in many markets there is an opportunity to make some of these disruptors friends. Many of these disruptors, as we've noticed by recent acquisitions, mergers and headlines have created significant valuations and are creating value through the healthcare ecosystem, the healthcare value chain, but haven't proven to be profitable with some exceptions. And in many markets, these disruptors have been able to capture lives, have been able to capture payer contracts that are different and innovative, and have been able to translate that into a value proposition to consumers, health plans and purchasers of care.
And in those instances, I think there is an opportunity for health systems to think about their own value proposition relative to those disruptors and to think about ways to either compete with that value proposition and or create an alignment strategy where that disruptor's value proposition works in partnership with the service offerings that are being brought to market by the local health system. So I'm not sure that there's a one size fits all approach to thinking about those disruptors or innovators, but I do think that there is an approach that health system executives need to understand their value proposition of their own health system relative to the disruptors. They can think about how the two can come together in a more comprehensive set of solutions to consumers in the community and or how the health system needs to rethink its service offerings to compete more effectively with those disruptors.
Camille Baxter: Rich, this has been such an informative conversation. Any final thoughts or value propositions you'd like to add before we wrap up?
Richard Bajner: Over the next few quarters and next few years, decision making is going to be challenged, but it's going to require more precise information that executives could have at a quicker pace. Speed, agility, flexibility, all need to come into play in order to make better decisions faster. I think the opportunity for health systems to reinvent themselves, to reinvent their operating model, and to reinvent the value that they offer patients in the communities they serve is at an all-time high. However, executive teams need to manage the short-term challenges in order to earn the opportunity to serve the markets over the long-term. I believe that there's an important role for these health systems, I believe that there's a better process that executive teams will find, and certainly believe that the services that health systems offer their patients and communities are going to be valued and are important to maintaining and improving the health of populations across the country.
Camille Baxter: Rich, thanks so much for this high impact discussion. I appreciate your passion for what you do.
Richard Bajner: Thank you, Camille. Certainly appreciate the good work that you and the team does and the opportunity to talk about this topic today.
Camille Baxter: This has been a sponsored episode of Healthcare Insider, created in collaboration with Guidehouse. For more information about Guidehouse, please visit guidehouse.com. I'm your host, Camille Baxter. Look for more episodes of Healthcare Insider under the multimedia tab atmodernhealthcare.com or subscribe to your preferred pod catcher. Thanks for listening.