A Note to Hospital and Health System CEOs and Boards

This is part III of a four-part blog series entitled, “The Time to Seriously Reevaluate Your Organization’s Strategy is Now.”

The health care delivery system in the U.S. is about to realign. The pandemic has likely accelerated alignment decisions that hospitals and physicians were already considering or would likely soon consider even if it were not for the coronavirus.

With all that has happened, do you remember back to last year and the year before? Do you remember the discussions from leaders all across the country that fee for service was the problem with the American health care system and value was the answer? Now, I should be clear. When I refer to value, I mean risk – downside risk. We won’t align incentives with pay for performance or upside only arrangements and shared savings arrangements are unlikely to work in the long-term, they haven’t so far.

While it seemed that health care leaders across the country and even CMS and HHS agreed that the answer was in moving to value, that was the easy part. The hard part is how? I will have more to say about this in Part IV.

But questions circulated as to how big do you have to be to take on risk? What is the role for a critical access hospital in a value world? What about an independent community hospital? What about independent physicians?

For small or independent hospitals, before the pandemic, the question of survival as an independent entity was largely a strategic one – a question that revolved around the world view of the board and CEO. How long would the world remain the same relative to health care? Could the hospital ride it out in fee for service and maintain its independence for the foreseeable future, or even if change was coming, could we ride it out for now, but still have time to make a different decision later if the world does change? For a number of these hospitals, the pandemic has stressed already challenging financials and now the question may be not only the strategic one, but one of financial survival.

For independent physicians, many may never have faced an existential financial threat to their practice before. The pandemic has likely financially impacted nearly every practice negatively. Unlike hospitals, physician practices do not ordinarily strive to have a significant number of days of cash on hand. They typically have few reserves for a situation like this. Most often, a significant cash flow event will cause physicians to make up for it by reducing expenses (lay off staff) and reducing their incomes, both of which are very unpleasant.

Even before coronavirus, many physicians were considering where health care was headed and what their best options would be. While physicians generally value independence and by nature, like to be the ones in charge and making decisions, independence comes at a cost. Practice expenses increase every year, but except for large groups or physicians in short supply, they often have little leverage with managed care companies and may not see revenues increase enough to cover the increasing expenses. Plus, regulations continue to become more burdensome, submitting claims and collecting payments has generally become more challenging given the number of insurers and the differing rules for each payer, and administration of the office continues to become more complicated and less fun.

After this pandemic, or even during it, many physicians may be rethinking their risk tolerance and may seek greater security and ease of practice administration through employment. Others may wish to remain independent, but may seek other revenue streams to provide greater protection, or at least more control, in anticipation of another disruption to their practice.

So, what does this all mean for health system leaders? First of all, open up your channels for communication. Smaller hospitals may want to have exploratory conversations. Even if your health system is not interested in acquiring that hospital, you will need to consider the implications if that hospital is acquired by one of your competitors.

The other thing is you need to begin conversations with your physicians – both employed and independent. You need to know how these physicians are doing, what they are feeling, what concerns they have and whether your relationship is secure.

One of the first questions is whether they felt supported and protected during the pandemic. Unfortunately, I have heard directly or indirectly from physicians across the country who did not feel supported. Physicians who did not feel cared for and did not feel that they had adequate protections. Unfortunately, there were some isolated instances where leaders did not respond productively to care givers’ concerns about safety. I cannot imagine that those physicians will feel any loyalty to those hospitals or those leaders, if they don’t feel respected and cared for.

Even if the physicians did feel respected and cared for, and I am sure that this is the case for the vast majority of hospitals and health systems, they may have concerns about the hospital’s finances and their long-term viability. They may be concerned that the path to financial recovery means cutting physician salaries, because this is exactly what would have happened in their private practice when they were independent when cash flow was impacted. In my experience, physicians are very unlikely to come to the leaders and express their concerns or worries directly. Instead, they may assume the worst and look for a more stable and secure arrangement. Therefore, you need to have these conversations with your physicians and be open and honest about your situation and your plans to recover.

And, even if the physicians felt respected and cared for, and even if they are not concerned about the financial viability of the hospital, you are unlikely to know who is meeting with your physicians and what they are offering. As I mentioned in Part II, private equity and venture capital firms will be looking for better returns than they can make in the bond or stock markets for the foreseeable future. Health care will be one of the opportunities they pursue. They already were prior to coronavirus. Plus, as I mentioned in that previous blog post, they can play off of patient fears about going to hospitals.

I mean no disrespect to physicians. They are brilliant people and amazing professionals who make tremendous sacrifices for their patients, often at the expense of their families and/or their own well-being. But, as brilliant as they are, they are often unsophisticated about business. These private equity and venture capital firms can make all kinds of representations about how much better life can be, how they will be in charge and making all the decisions, how they will have a seat at the table, how they will be far more secure, and the amazing returns they can expect. I haven’t seen one yet that was upfront with physicians and explained the risks and made clear that the way the firm would make more money is to become more efficient (i.e., staff reductions – all that control physicians thought they were going to have over staff and personnel matters – gone), more productive (i.e., all that control over your schedule and how often you would see patients – gone), add more services (i.e., drive more volume for higher revenue-generating services), and that in 3 – 5 years, when the cash flow and profit margin are increased, the firm plans to sell the practice (i.e., you will have a new owner and you don’t have a say in who that is, it will be whoever offers us the most money).

As part of your review of your strategy, you must reassess your physician relationships. Your strategy will do you no good if you do not have engaged physicians to drive the strategy forward.