The Hospital Finance Podcast: Value-based Care and How it Impacts Financial Planning Models

May 3, 2023

Originally posted on Besler.com

Highlights of this episode include:

  • What is Strata?
  • Value-based care
  • What effects value-based care has on financial planning models
  • Continuous improvement model
  • How to improve clinician labor shortages
  • Prepare for future financial turbulence
  • Rolling forecasting


Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome Liz Kirk, senior vice president of market intelligence and strategic growth as Strata Decision Technology. With over 20 years of experience working with healthcare providers as a software executive, hospital administrator, and a consultant, Liz has recently been recognized by Becker’s Healthcare as one of the top female health IT leaders to know and was one of the top female vendor financial management leaders to know in 2018. Prior to joining Strata, Liz was responsible for cost reduction and revenue improvement at Northwestern Memorial Hospital in Chicago where she successfully led an enterprise-wide initiative to reduce operating expense by 15% while improving clinical performance. Liz is a certified lean six sigma black belt and a master change agent. She earned an MBA and MHA at the University of Minnesota, and a BS in finance at Trinity University in Texas. In this episode, Liz will discuss value-based care and how it impacts financial planning models. Thank you for joining us today, Liz.

Liz Kirk: Absolutely, Kelly. Thank you for having me. And thanks for that great introduction.

Kelly: Yes, it’s very impressive. Let’s go ahead and jump in. So can you tell us a little bit about Strata?

Liz: Yeah, absolutely. So, Strata is an enterprise performance management company. And we have software in services that really help CFOs and finance teams understand their financial performance and be able to run their financial management processes much more efficiently. We work with about 400 health systems across the country. And more and more, we’re starting to work with some of the PE-backed surgical and physician practice management group. We, essentially, do four things. One, we really help health systems run a very data-driven efficient financial planning and budgeting process. Two, we enable health systems to do complex financial analysis by way of having really detailed and accurate cost data, margin data, and top line net revenue data. Third, we help health systems identify and quantify opportunities for cost reduction and revenue improvement, both through using algorithms to kind of dig through their data and identify these opportunities as well as enabling health systems to compare themselves with other participants in what we call StrataSphere which is our data sharing product where we have the cost data and the financial data for over 200 health systems across the country. And then finally, and arguably the most important part of this, we really help system health systems drive accountability for producing the necessary results on their key initiatives.

Kelly: How is your organization contributing to value-based care?

Liz: Yeah. So, the key thing with value-based care is that it is intended to reduce the cost of care to improve the quality of care, which means patient outcomes as well as, of course, reducing hospital acquired quality issues. And then be able to do that with a high degree of patient satisfaction. So, the biggest thing that our company does as related to value-based care is we really help organizations understand their cost to provide care, at a detailed level. So, they can look at cost all the way down to the specific service level or the specific service that is provided to a patient. So how much does it cost to them to do an MRI of the head and neck? How much does it cost to do a hip replacement with all of the supplies and the drugs and the labor that goes into that? So, with that deep understanding of cost, they can also understand their margin.

With that level of granularity in their data, that allows them to do scenario modeling and financial analysis to understand what it will really take for them to reduce the cost of care or to be successful in a value-based care arrangement where perhaps they’re taking risk to provide care to a population of patients within a set revenue number. So, with the data that we provide and the tools that we provide to be able to analyze that data, and quickly do analytics, we’re really able to help organizations understand the impact that value-based care has on their organization.

Kelly: Where do you see the U.S. being with value-based care in 5, 10, even 20 years?

Liz: That’s a good question. And it is something that everybody is talking about. Some people really take a cynical, skeptical view of this. We started talking about HMOs in the ’70s. When I was in grad school in the ’90s, we were talking about HMO and capitation and that this would be the right model to align incentives among healthcare providers and patients. And here we are, almost 30 years later, talking about managed care now as value-based care. I’m not as skeptical as most people are in this space. I’ve seen a couple of things change even just over the last couple of years that makes me think that five years from now and 10 years from now, we are really going to be in a place where providing the highest value care to a patient at the lowest cost, which means in the right setting, the most efficacious therapies that are available is really going to become a reality.

Some of the things that make me think this. One of them is earlier this year. I was at the JPMorgan Healthcare Conference in San Francisco. And I attended about 20, actually all of them, of the healthcare provider presentations. So, in this setting, the CEO, and the CFO, and sometimes several other folks from the C suite of health systems do a presentation on kind of the key things that they are focusing on in their organization as well as their financial performance, and what the key drivers are of their financial performance. The thing that was incredibly striking to me in that conference was, of the 20 or so health systems that presented, there were about a third of the health systems that had outsized margins for what we see within healthcare providers within health systems. Their margins were 6, 7, 9, 10, some of them 12, 13 percent. And the thing that all of those health systems had in common was that they either owned a health plan, or they had gone big into risk, meaning that they were taking a set amount of money from health plans and providing care to a population of patients within that set amount of money. And they were very actively using tools and different types of positions than what we have differently seen health systems use, to provide care in the lowest cost setting for their patients, and which, oftentimes, means at home.

As we looked at kind of the two-thirds, minus a few, that were presenting, they had your typical healthcare margins, kind of the grocery store margins, the one, two, three percent margins. And every single one of those health systems said, “We are focused on getting ready for risk. We have to be risk-ready.” And they all believed that by being risk-ready, they would be prepared to take on these new payer arrangements where they are responsible for, again, providing care to a population, of payment within a set dollar amount. And then you even saw some of the really large multi-state organizations that, frankly, are having a very hard time with their margins, right now, have large negative margins and large cost-takeout programs going on. They’re even saying, “We have to figure out how to do risk in the markets that we serve.” And there was a distinct thread that ran through all of the presentations. One of them was risk gives us freedom by giving us the money to take care of these patients. We can do the right thing for the patients, which doesn’t necessarily mean care for them in the hospital. It may mean connecting them with food sources. It may mean connecting them with housing. It may mean connecting them with outpatient mental health so that they can avoid having to come to the hospital.

One of the other things that was common among these organizations was that they had invested heavily in the technology infrastructure that would enable them to interface with their patients, often by telemedicine, so that the patients didn’t have to be inconvenienced with coming into the doctors’ office when they had a sore throat and felt like they needed antibiotics, or whatever the case may be. So, as you look at those things, as you look at what the health systems are saying, they understand that taking risk allows them to really improve the health of their patients. Certainly, some of them are still struggling with, “But I still have a lot of fee-for-service contracts. So how do I balance that?” I do think that we will see, over the next several years, that as they get their infrastructure in place, they will be more comfortable and confident that they can take risks and do well financially in doing that. So, I think we’ll see a natural shift towards that.

The other thing that is very different now than it was even five years ago is that the tools and technology that are needed to really make risk something that’s operationally feasible are now available. So, if you think about kind of the core premise that is, what do we need to do for our patient population to keep them healthy and to keep them out of the hospital? It is we need to be able to interface with these patients, and understand their health status, and understand when they are potentially starting to go downhill and towards an acute episode. Or they have just come out of an acute episode in a hospital or outpatient care center. And now, we need to make sure we’re keeping them healthy and not coming back to the hospital, not re-admitting.

It used to be that data was really hard to get. You would have to wait, sometimes 12, 18, 24 months to be able to get the adjudicated claims for all of the patients that you are responsible for caring for. And in doing that, you could only look at that data, and then take action based on that data, and hope you’re kind of addressing the right things. Now, that data can almost be available not exactly instantaneously, but within days of patients receiving that care. So now, a provider in a physician visit or a PA visit or an NP visit can actually see all of the care that their patients have been receiving, not just within their practice, not just with their health system, but throughout the healthcare landscape, and now can start to see where there are overlaps in care, or where they’re gaps in care. And then take the right actions to get the patients kind of back to that highly coordinated path of care that’s going to keep them healthier, going to keep them from readmitting, going to keep them from having acute episodes. So that’s a big change. It’s just the availability of data and the curation of data to getting it to the physician or the care coordinator at the point in time where they actually need that.

The last thing is there are so many new technologies now, whether it’s wearables and telemedicine and really, again, being able to curate that data. So, physicians, providers can see in real time, the health status of their patients, and intervene with that patient when they start to see something going in the wrong direction. And those things just simply weren’t available, at least not available on scale and at the right price even five years ago. Whereas they are very available now. I was just at the HIMSS conference. And certainly enabling value-based care through AI, through machine learning, through wearables, through curation of data, that’s the name of the game. That’s what everybody was talking about.

Kelly: Definitely, that’s all great information. What effects does value-based care have on the financial planning models that companies like Strata provide?

Liz: Yeah. So, for us, any time there is uncertainty or turbulence or change in the broader healthcare market, particularly with payer models, that is actually very good for us. We can see very clearly kind of when there is change turbulence, different payer models that are really gaining momentum. We see an uptick in the level of interest from health systems that want to have much more data-driven financial planning processes. They really want to be able to do deeper analytics, really understand their cost at a facility level, a physician level, a patient level, a service line level, a procedure level. We often see them wanting to move on to our platform around that time. Also, it means that we need to be ahead of the curve in making sure that our tools offer that functionality that can accommodate these new models of care that are coming out.

So, one of the things that has been incredibly helpful, I would say, for Strata over the last five years or so in helping us to get ahead of this curve is our partnership with Kaiser Permanente. So, we have worked with Kaiser to build out the cost accounting and financial analytics for their health system part of their– or their hospital part of their organization, for the physician group part of their organization, and their payer group part of their organization. So, in doing that, and now working with a number of other health systems that have the physicians, the hospitals, certainly the ancillaries. But that payer piece that really enables the rest of our client base to start to take advantage of the new models and the nuances that need to be considered as they are looking to analyze the impact of different payer models. And think through how they should be adapting their financial planning to take into account these changes.

Kelly: Sounds good. And so how can a continuous improvement model help healthcare organizations handle the current healthcare landscape?

Liz: Yeah, absolutely. So, with change means that you continuously need to be improving. Certainly, the thing I would say that drives continuous improvement type of initiatives and processes and teams within health systems is that the top line, or the revenue that health systems receive from payers, is always under threat in some way. It may be that the payers are reducing the rates that they’re paying to health systems. Or they are changing the terms that the health systems need to abide by in order to be able to get paid well. Or in this case, they may be completely changing the model for how health systems are paid, so moving away from the first service to bundles or to more value-based care for episodes of care. And doing that, health systems have to really understand what the impact will be to their business, and then understand what their levers are to be able to reduce cost or to be able to treat patients in a different and better way so that they can, hopefully, maintain that top-line revenue that they have.

And so if you talk with any senior leader in healthcare, at any given time, they probably have between, I would say, 50 and 300, 400 kind of depending on the size of the health system, initiatives in place to specifically look at how can we reduce cost? In many cases, that may be how do we negotiate better with vendors and suppliers? It may be running a value analysis committee where they’re looking at drugs, and devices, and care practices, and really trying to understand what the cost benefit is of those if there is a cost and clinical benefit. Oftentimes, you see that there are new drugs introduced, new devices introduced that are much higher than the current state. But they don’t really deliver on the promise of whether it’s better clinical outcomes or reducing length of stay, etc. So really, kind of having that ongoing vigilance about all of these opportunities to spend more money on, but to really make sure that they’re driving clinical outcomes is really important for health systems to do.

The other thing to think about is payment models are changing. That also means that the care models need to change as well. So, as you think about what has happened over the last several years, that many, many of the high-margin types of surgeries that had been inpatient surgeries for many years are now starting to move to the outpatient setting. And so in the inpatient setting, hospitals could vary carefully, easy, and then nature of their business, monitor these patients for two days, three days, four days after surgery. Make sure that they weren’t getting infections, that they were getting up out of bed. They were starting to walk, so on and so forth. But as you move them to the outpatient setting, there’s still concerns with re-admissions. And you still have to think about how do we keep patients recovering quickly, staying out of the hospital with re-admissions? But how do we do that in a totally different model? They’re out of our control. They’re at home now. And so those types of kind of bigger initiatives change and care models have to come as well. And the drum never stops beating with change in health systems.

Kelly: That’s for sure. And so what do you think organizations should focus on to improve clinician labor shortages?

Liz: That is definitely the hot button issue, top of mind for leaders in healthcare right now. Going back to the JPMorgan conference…one of the things that I heard several times in the presentation was we will never have enough people to provide the care that we need to provide, and to do the things that we need to do to run our health system. We will never have enough people. So, I think health systems are very much recognizing this now. Some of the things that I think that they can do and should focus on if they’re not already. One of them is really working to automate low-value work. A good example of this is being able to use AI, being able to use telemedicine to do some of the work that is not necessarily focused on advancing the health of a particular patient.

One of the things, for example, that’s very labor intensive for nursing staff is to admit a new patient to the unit. It can take an hour, sometimes, to gather all of the information to enter that into the medical record so that they have a good foundation to care for that patient going forward. A number of hospitals have started to do that centrally either within their health system or outsourcing that. So, they’ll have a screen on the wall that shows a picture of a nurse or shows a live interaction with a nurse. And then they’re filming the patient. So, they’re basically doing that admission process over video. And then the nurse can come into the room to take the vitals and to record those. But it’s really just kind of coming in for a small piece of that rather than the very long question and answer that goes back and forth oftentimes at the admitting process. So really looking for those opportunities. And there are hundreds of them to be able to automate some of the lower value work so that the staff that they do have can really work at the top of their license which, of course, helps with burnout with engagement, etc.

One of the other things that health systems can be doing is really looking at training. How do they upskill their labor force, and how do they recruit people to come into their health system to provide care? So, I was just talking to someone from a health system the other day. And they have rolled out a $10,000 per year, per employee education grant with the intention of helping people to build skills towards jobs that they have needs in. So, they’re encouraging medical assistance to become RNs. They’re encouraging analysts to become good at machine-learning so that they can do more of the deeper analytics that are really needed in healthcare. And then the third thing, I think, is partnerships. Health systems, for many years, have really had the belief of it providing the care to the patient. It certainly is their role in their core competence. And so they would build the programs, and build the functions, and build the teams to be able to do that. Well, when there aren’t enough of the people available to be able to do this, then it starts to make sense to look at outsourcing. So back to the example I gave of the admitting, in some cases, the nurse who is admitting those patients doesn’t necessarily work for the hospital. They may work for a service. They may sit in a centralized location. But they are interacting with patients at that site, documenting in their medical record. And it feels very transparent to a patient. It feels like they are working with a nurse who works for that hospital. The job is getting done. The nurses who are on the floor are now able to do the things that they really need to be doing for the patients that are on the floor.

Kelly: That makes a lot of sense. And so how can hospitals best allocate their resources to prepare for future financial turbulence?

Liz: One of the things that I think is a very important investment for health systems is to really invest in getting very good, accurate, trusted data, and to have that data and analytics infrastructure so that they can understand what’s happening within their health systems. And they can get at those answers. And putting that time and energy into getting the data to be, one, trusted. And then, two, accessible, easily. So, you can pull things together, look at challenges with different lenses and different perspectives and different scenarios. I think doing that really gives people who are leading the organization, and the operational leaders, the insights that they need to make better decisions. And having that data infrastructure will really allow them to respond to whatever challenge may come their way, whether it is value-based care or payment models, or whether it is – I hate to say it – another pandemic, or a C diff outbreak, for example, in their health system. Really, having that data can help them pinpoint what the problems are and where they need to take action. I think that is absolutely core.

The other thing that I think is important, though, I’ve talked about a couple of times on this, is really looking to where they can, one, upskill resources so that they could be providing a higher level of service, whether it’s service to patients or service to the health system. Having that ability to automate work that is rote, that’s repetitive, that is not advancing the health of patients or advancing the ability of the health system to deliver that high-quality care are things that they should really look at. How do we just automate it, or how do we partner with organizations to be able to do that well?

Kelly: Those are some great tips. Thank you very much. And so why is rolling forecasting better than other models for financial management?

Liz: Yeah. That is something that we have been helping organizations make that transition to a rolling forecast, or what we might call a dynamic planning approach. For many years, actually, if you think about how planning is done in many health systems today and how it has been done for many, many years, is that it’s kind of like a six-month process every year that health systems go through. So, they gather all the data six to nine months before the beginning of their new fiscal year. They start to do their projections of what they may see coming, whether it’s with payer models, with growth, or shrinkage. Sometimes, in their market area, new services. They’re thinking about bringing on and growing, etc. And then they ask for input from all of the operators throughout the hospital on how they are going to respond, whether they’re going to need to staff up, staff down. How they’re going to think about supplies. All of this six to nine months in advance of when they’re actually going to start their fiscal year.

And if we learned anything during COVID, which we certainly learned a lot, but it was that things can change quickly. And so what we saw even before COVID is that after the six to nine month period– now, they start their new fiscal year, oftentimes, within the first month or two that their one-time-of-year budget was out of date. And so now, for the next 10, 11 months, every time they’re having a– let’s call it a monthly business review to understand their performance towards their plan, it’s like, “Well, our plan is out of date. And this is how we’re performing.” And there was just a lot of time and energy spent. One, in creating this Taj Mahal of a financial plan. And then, two, lots of time spent explaining why it was wrong.

With a rolling forecast approach, with a more dynamic planning approach, it allows those variables that are happening real-time to be incorporated into the plan, the expectations you’re setting for the different operating units. And allows them then to make decisions on how they are going to operate based on the actual environment that they’re seeing at that time. At the end of the day, what this truly does is it enables health systems to promote much more accountability for results from their operational leaders than it did when they were constantly working with a budget that was out of date. So, two big things come out of that for sure. Less time that’s required that goes into creating this fabulous once a year budget. And then, two, that accountability. And we see when organizations adopt a more dynamic planning approach, it changes how those organizations operate. There is much more accountability. There’s a much stronger focus on taking action to respond to what’s going on now in the environment to make sure that cost, and revenue, and operations, and wait time, and people, really all stay in balance together.

Kelly: Sounds great. Well, thank you so much for joining us today, Liz, and for sharing all of this valuable information with us.

Liz: Absolutely. Thank you so much for having me.

Kelly: And if listeners want to contact you to learn more or discuss this topic, how best can they do that?

Liz: Yeah, absolutely. So, I’m on LinkedIn, Liz Stuller Kirk. And you can also shoot me an email. It’s [email protected].

Kelly: Sounds great. 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.