The Hospital Finance Podcast: The Cost of Healthcare
November 16, 2022
Highlights of this episode include:
- Core challenges organizations face in reducing healthcare costs
- How CFOs and CIOs can collaborate
- Adjustments hospitals can make to address the rising costs
- How organizations can handle uncontrollable external factors
- EPM, ERP, and EHR solutions
Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome Steve Lefar, Strata Decision Technology’s Chief Strategy Officer overseeing overall strategy, product, solutions strategy, data science, and the EPSI unit. He joined Strata Decision Technology in 2018 as Executive Director of Strata Data Science and Stratasphere, Strata’s collaborative data initiative. Stratasphere leverages the healthcare costs of over 200 health systems that partner with Strata, amounting to nearly 600 billion per year. Steve is a three-time CEO with nearly 30 years of experience in healthcare with expertise in strategy, analytics, and software. He is also a board member of several venture-backed companies, including Evive and Wildflower Health. Steve earned a bachelor’s degree in economics from the University of Michigan in 1988. In this episode, Steve will discuss the cost of healthcare. Thank you for joining us today, Steve.
Steve Lefar: Thanks, Kelly. It’s a pleasure to be here.
Kelly: Well, let’s just get to it, shall we? What core challenges do organizations face in terms of reducing healthcare costs?
Steve: We probably should start by defining healthcare costs. In our world at Strata, we work with the large health systems across the United States and cost is the true cost of care when we talk about payers. It may be the claim cost that is typically what the insurance company sees. But in our world, we think about the actual cost of delivering healthcare and the challenges go deep right now. We all read the headlines about labor supply and things like that, but it’s generally an issue that input costs are up across the board whether it be labor, whether it be supply costs, fuel, all those kinds of things that go into literally keeping the lights on in an organization. But we also have relatively flat reimbursement. Contrary to many of the great attention-getting headlines out there, most organizations are price-constrained, not price-setters in their market on the health system side. And they’re also seeing a huge shift.
You look at areas like orthopedics and spine and other large-margin areas, and those are starting to drift away, whether it be private equity-backed organizations, steerage away. And so not only is there a cost problem for these enterprises, there’s actually a margin problem. And we need to think about it in a more sophisticated way than just thinking about the costs of care itself. But there’s, like all parts of the economy right now, wage inflation. For the hospitals, to be specific, we’ve seen wages rise about 35% over 2019. Supply costs are up double digits over 2019. And this is continuing beyond the COVID pandemic now that we’re mostly through it. So, there’s no signs of an abatement of this. And I, for one, don’t see major rescue plans coming in terms of price improvement. Again, contrary to some of the headlines, a third of the health systems in this country are losing money and about a half or break even at best. So it is a world of have and have-nots right now.
Kelly: Yes, that makes a lot of sense. And how can CFOs and CIOs collaborate to improve the cost of healthcare?
Steve: It’s a great question, and I’m glad you asked about this internal collaboration and probably expand it beyond CFOs and CIOs to the CNOs, the CMOS, the COOs. Everybody owns some of the issues about what I’m going to say. It’s a lot of little things, but there are a couple of big ones. In my mind, it’s really about building the infrastructure of the future for these organizations to drive data-informed decisions, but also creating the workforce and supporting the workforce of the future. We typically think about workforce development as something the HR people do or the heads of talent do. And it’s much broader than that. And the CFOs and CIOs can drive a lot of it. It’s about funding education and creating the kind of programs that are needed to create the next generation of nurses. It’s creating proficiency through training in using information to make decisions. So, if they’re finance people, they need to understand how clinical people think. If they’re clinical people, they need to understand how the finance people do things. Because as a sister once told me at a health system, “No margin, no mission.” We’ve all heard that phrase before. And really creating this literacy in the use of information.
Another part of that, when I think about the infrastructure for the future, it’s teaching people how to work side by side with automation and information. Healthcare as an industry, if you actually look at the data – and Accenture put some things out on this – 99%, literally, of the improvements in healthcare productivity have been about labor. It’s the only industry that sees that. In other industries, it’s about 25%. So whether it be robotics, whether it be automation, it’s not about getting rid of people. It’s about helping people do their work more effectively. Whether it be meal delivery, whether it be the way we monitor in rooms the use of telehealth, creating that workforce of the future and investing in it, it is the only way we’re going to address the healthcare cost curve in terms of CFO, CIO.
I would add one other point on that, is that the CIOs and CFOs really need to come together around a smart data strategy. And again, this is where the CMOS and CNOs need to come in. There’s a theory that we need to get everything, all the data, into one place and create this huge big bang theory of it. And it’s really not the case. There’s a Venn diagram – I call it a federated model – of the information people really need. And that’s where they can come together to make really smart investments in the infrastructure that provides information for better decision-making. So, a little bit of a technical discussion there if we wanted to dive deeper, but it goes back to really creating the infrastructure for the future and the workforce of the future.
Kelly: Those are some great insights. Thank you. And with inflation becoming more present today, what adjustments can hospitals make to address the rising cost of healthcare?
Steve: Yeah, so I mentioned it a second ago or a moment ago about this idea of margin, not cost. And in some circles, people find talking about margin or making money in healthcare an anathema to why we do this. But just the simple fact of the matter is you can’t have unlimited healthcare if you have unlimited costs. It’s just not going to happen. So when I think about margin – and again, this is where the CFOs need to be working with the rest of the organization -there are so many kinds of cases and instances where patients shouldn’t even be in the institution, where we’ve got frequent flyers to the ED, we’ve got all sorts of mental health issues coming into the institutions. And if you really look at those cases, folks are losing a ton of money on them.
I look at a specific example like Medicare maternity care. If someone can deliver a healthy normal delivery versus a C-section or get preeclampsia or something like that, we learn that moving those cases out or making a mom healthy so they can bring to a normal delivery, it costs way less, which in turn means you’re going to have either a smaller loss or better margin. So we need to think very differently than just cutting cost. It’s about figuring out ways to look at where we aren’t able to get margin that at least breaks even. It gets into social determinants kinds of issues. So, it’s actually far better for the patients and the communities as well. So, it’s one of these everybody wins kind of situations. But I just keep emphasizing, working and looking at margin because costs are going to be somewhat out of your own control for a while.
Kelly: And how can a continuous improvement model help healthcare organizations handle uncontrollable external factors?
Steve: Yeah, we call it continuous improvement, but it’s process improvement. It’s process design. There’s all sorts of terms for it. But continuous improvement as a mindset recognizes there’s no magic potion. It also recognizes that what we’ve done in the past may not work going forward. This is the first time in my career in probably 33 years I’ve been in healthcare, we’ve shifted from a demand-driven market where it was about scaling up to take on demand and merging to take on-demand to, really, a supply-driven market. People are at capacity because they don’t have a supply of labor. They don’t have supply of materials. And it requires some different thinking and it requires being able to look at scenarios of how we’re going to organize and run. We’re going to have to have the really significant discussions about where do we offer services? Where do we not offer services? What service lines are we going to be in? What service lines are we going to exit? And that’s a really difficult discussion for health systems and their communities and it goes very, very deep.
It’s looking at unwarranted variants and using new kinds of analytical tools and algorithms, machine learning, clustering technology and capability. I will not use the word artificial intelligence because almost none of this is artificial intelligence, but it’s finding that variance with good information, helping clinicians make better decisions, helping people in revenue cycle, in supply chain use information to get a little better every day. We studied a book here at Strata about a down syndrome triathlete called 1% Better and it’s actually a wonderful book because it talks about getting 1% better every day. And that’s really part of the message of continuous improvement. There isn’t a big bang that’s going to solve it. Simply saying we’re high or low versus a benchmark– you got to be willing to dive in. You’ve got to tear the process apart. You’ve got to look at what works for you but knowing where to look is important. And so it’s a combination of those things but there’s no magic potion. It’s getting a little better every day.
Kelly: Very interesting. Thank you. And how can EPM, ERP, and EHR solutions work together to reduce the cost of care? Well, we love our acronyms in health care, don’t we?
Steve: We love our acronyms, and I’ll try and simplify it because if it’s not three letters, it can’t be a healthcare term. So, we think about EPM as Enterprise Performance Management, ERP, Enterprise Resource Planning, and EHR, Electronic Health Record or Enterprise Health Record, depending on who you talk to these days. We’ve done an amazing job as an industry. You’ve got companies like Epic and Cerner and Meditech that have basically automated the Electronic Health Record and data capture. We could have a long discussion about what’s working there and what’s not, not for today’s conversation. Enterprise Resource Planning, all the logistics, supply chain, all that beneath it. Enterprise Performance Management is really the amalgamation of bringing all that information together. If you look at Strata and our Strata data, we’re at a few hundred health systems now, 400, and it’s the platform for finance. It’s the Epic of the finance side. But we’re all in silos a little bit if we’re honest with ourselves.
And so we view this as the next evolution, which is bringing all this information together, the appropriate parts, this idea of the Venn diagram that I talked about, to drive better decisions. When we bring together the true cost of care with the true clinical understanding of that care, with the logistics, with the revenue cycle, and all the information, we can begin to really manage as an enterprise the way a large global Fortune 50 company would, and automation and technology can really drive that and that’s what Strata is about. We’ve really done quite well, as have others in their spaces at automating this idea of the financial platform. And now, we’ve got to take it to the next step and really make all that information into action so that people make better decisions.
Kelly: That sounds very good. And what benefits do EPM and ERP resources provide to hospitals and health systems?
Steve: Yeah, we like to talk about source truth. And when you have hundreds of point solutions in there, some of them are very valuable and solve very specific problems. But if you don’t have source truth, you spend more of your time arguing about the information and more of your time debating whether or not what’s right, what’s accurate, coming to consensus, versus everybody stepping in with agreement. We’ve got source truth, we can make decisions. Let’s do the right analysis. And it’ll shave literally years off of the time to make decisions and a lot of aggravation, a lot of infighting, a lot of political nonsense just arguing over what’s right. And that’s where we see it as being so important as having source truth.
Kelly: Definitely. And how can these resources help them plan for the future?
Steve: When you actually have source truth information, you can begin to model scenarios because you’ve got good information, you’ve got good workflow tools to be able to manage when you make decisions and track whether or not what you’ve said is going to happen, is happening. Healthcare is notorious for that issue, which is the best-laid plans sort of kind of get implemented but don’t get tracked or managed and followed up. That’s a lot of what we do with our continuous improvement is making sure that all these decisions get baked into budgets, get baked into plans or rolling forecasting models where it’s too hard to forecast these days. So, people can do it based on more variable approaches but it gets down to being able to drive scenarios.
What is your future going to look like? What do you think is going to happen in your market? What do you think is going to happen with your workforce? What are the various things that you might have at your discretion to make decisions about? Do we buy more practices? Do we do an acquisition? When you have good source truth data, you can model out scenarios. No one, and if they are, they’re fooling themselves, can truly predict what’s going to happen in this healthcare economy, in this healthcare world. Scientific breakthroughs, the shift to outpatient of certain things, the inpatient-only rule and what’s going to happen there, these are things that all can be modeled out. And when you have these kinds of systems in place, you can do great scenario planning across the organization, and we think that’s critical.
Kelly: Such great insights. Thank you, Steve, and thank you so much for joining us today.
Steve: Oh, it’s fantastic. Anytime. Really appreciate what you’re doing to help educate and drive research out into the industry. Thank you.
Kelly: Well, thank you. And if listeners want to learn more, what’s the best way to reach you and/or your company?
Steve: Yeah, best way to reach us is to go to stratadecision.com. And I’m always happy to engage in conversations or do presentations, share data, and you can reach me at slefar, S-L-E-F-A-R, at stratadecision.com.
Kelly: Great. And thanks again, Steve, for sharing your knowledge on this very important topic with us today. And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time.
[music] This concludes today’s episode of the Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.com/podcasts. The Hospital Finance Podcast is a production of BESLER, SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.