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Global Healthcare Perspectives

Filtering by Tag: 2013

Five questions that health system executives should answer for boards and their organizations

Daniel Zismer, Ph.D.

  1. If we had to employ all the physicians required for our mission, market strategy, clinical programming and financial well-being by tomorrow, how many would there be (including their specialty FTE and location)? 
  2. What is the “delta” between the number we employ today and the number forecasted in the preceding question?
  3. What would be the total cost of the efforts required to achieve the task described in #2?
  4. Would the task be affordable given the financial condition of our organization today?
  5. What would you do to optimize the full potential of the strategy?

Five simple questions I have asked of hundreds of well-experienced and seasoned healthcare executives. None have ever argued the utility of the questions and none have had the answers at-the-ready.

In an era where the interests of physicians in private practice is waning (especially for those emerging from training) the five questions, as presented, are pertinent, and the answers don’t need high levels of precision to be useful.

A few executives have responded with, “doesn’t apply to me, our market is different from others, we’ll never need to employ them all”. Maybe so, but any sufficiently sophisticated health system board should hold the CEO accountable for the answers to 1-5 above.

Answers to these questions have profound implications for health system: strategy, balance sheet condition, clinical models and organizational politics.


:  How the fully integrated model permits strategies that are unavailable or inefficient with the independent, affiliated medical staff model.

Balance Sheet

:  Effects related to balance sheet liquidity, especially; including the need to finance a comprehensive physician strategy to full fruition and productivity. 

Clinical Models:

  Areas of focus include: clinical service line strategies, use of physician extenders and other licensed professionals, and application of evidence-based best practices and total cost of care strategies.

Organizational Politics:

  Management of the reaction of independent physicians as the organization pursues employment and integration of physicians.

New competency requirements for community health systems

Daniel Zismer, Ph.D.

In an article published in July, 2013 (a) I argued for the need for new management competencies for community health systems; competencies that derive largely from the disciplines of public health practice:

  • the epidemiology of specific populations and how that epidemiology interacts with know best clinical practices to affect outcomes;
  • total cost of care management; managing total costs of care, overtime, for specific clinical populations;
  • creating and managing effective health behavior intervention programs for specific populations, including primary and secondary prevention programming;
  • health risk surveillance, assessment and cost and resource consumption forecasting;
  • use of social media to affect health services use rates;
  • financial risk modeling for specific populations attributed to community health systems;
  • effective use of interprofessional teams; and
  • health behaviors pattern recognition; the ability to use electronic health record information to recognize: health risks, patterns of use (or non-use) and failed or inefficient clinical strategies within populations.

If the argument for 1-8 above holds water, how do community health systems acquire and apply there competencies affordably?

Several health system CEO’s consulted on this topic believe there isn’t sufficient time or money to develop these competencies internally. They’ll need to acquire from qualified providers by purchase or partnership.

Reference: (a) An Argument for The Integration of Healthcare Management with Public Health Practice; Zismer, D.K., J. Healthcare Management, PP 253, Vol. 58, Number 4, July/August 2013

The anatomy of the revenues in integrated health systems (IHS)

Daniel Zismer, Ph.D.

In fully integrated health systems (i.e. those that employ most, if not all, providers required for missions, clinical programming, strategy and financial requirements) the majority of net operating revenues will be generated in outpatient service arenas.

Even the larger IHS’, serving populations of higher clinical acuity, are principally in the outpatient business. Discussions with larger, integrated health system show that inpatient care many account for as low as 27% of all operating revenues. The combination of outpatient diagnostics and therapeutics together with outpatient professional fees are likely to account for in excess of 55-60% of net operating revenues.

IHS strategists are bending toward fewer larger, multispecialty ambulatory facilities to deliver outpatient services (typically 50,000-250,000 sq. ft.).  These facilities are branded with the IHS name and designed to accommodate evolving clinical care models (see

Frauenshuh HealthCare Real Estate Solutions

for examples and related case studies).

Financial officers in organizations moving to more integrated models typically report under-investments in the right type of outpatient care environments. Many also report the need to expand outpatient facilities at the same time inpatient facilities require upgrades and renovations. Financing rapid expansions of outpatient centers will remain a challenge well into the future.

There are growing arguments for the application of alternative financings for strategic facilities for IHS’. CEOs and financial offers should examine critically the true weighted average cost of capital as it relates to tax exempt financings as compared with alternative financing models. Not-for-profit, tax-exempt organizations may “tip” too quickly to tax-exempt bonding strategies based upon traditional thinking as it relates to WACC analyses; especially to extent that credit agency ratings and bond covenant requirements cause capital to be “locked-up” within health system balance sheets; e.g. debt-to-capital, debt coverage ratios, equity and liquidity ratio requirements cause capital to be trapped in health system balance sheets when traditional tax-exempt bonding is the preferred route for asset financings. 

"Scalability" at the point of health delivery

Daniel Zismer, Ph.D.

While health systems in the U.S. strive for operating economics through scalability, the concept of “scale” is often reserved to corporate services and operating infrastructures, it is rarely a concept applied to the “point of service”. The question is “does scalability apply to caring for patients one at a time?”  

Opinions differ. One health economist views health care providers as a “trade guild”. They do what they do, how they do it, based upon how they were taught to do it by those who learned from those who came before them.

Not an altogether bad model for the professions, but this approach may explain why known best clinical practices take upwards of ___ years to find their way into accepted, common practice .

Interprofessional team care is often professed as a means of achieving improving scale in clinical care (producing an equally beneficial unit of service at a measurably reduced rate of production cost).

Clinicians apply interprofessional teams variously to patient care. In a study conducted by colleagues and myself physician specialists did a better job of leveraging their time with the use of licensed extenders (improving the productivity of their available time) while primary care physicians who worked alongside extenders were, for the most, doing the same jobs as the extenders (an 88% overlap in clinical output of physician and non-physician providers).

At least three questions are of consequence here:
  • if total costs of care are to be managed to lower levels, with outcomes held to the highest standards, how much non-justifiable variation in clinical approach is tolerable;
  • who in healthcare organizations will have the principal responsibilities for pursuing “scale” at the points of health services manufacturing; and
  • what skills/competencies are required that are not resident with health systems today; e.g. rapid acquisition and deployment of efficacious health services delivery innovations (home-grown or those derivative of others’ work)?

When lightning strikes private practices

Daniel Zismer, Ph.D.

Today there are far fewer private cardiology practices in the U.S. Why – health reform? No, much simpler; the vulnerability of the independent medical practice business model to “lightning strikes”; especially those with “high voltage” financial effects. 

Interviews of physician leaders of private cardiology practices revealed a business model vulnerability that is not reserved to cardiology alone. A number of the practices that decided for sell and integrate demonstrated common business model characteristics, such as:
  • a high percentage of W-2 income available to the physician, derivative of office-based imaging diagnostics (e.g. nuclear imaging). One cardiology practice reported that 23% of physicians’ take-home pay was from the margins on these services.
  • a high percentage of operating revenue to cardiology practices come from Medicare. When CMS and other payers reduced utilization and revenues for office-based imaging, cardiology practices reported high five-figure reductions in physician income, all at a time when hospitals were accelerating upward the compensation rate for employed cardiologists; especially the interventional subspecialists. Result, sale of practices to hospitals in exchange for higher, more secure incomes; at least for a while.
Other clinical subspecialties vulnerable to lightning strikes (i.e. those accustomed to high-margin ancillaries):

  • Urology
  • GI
  • Orthopedics
  • Others?
Hospital and health system CEOs that depend upon the private practice model of physician services supply, should critically evaluate the vulnerabilities of the model across clinical specialties of high-importance to their strategies. 

Healthcare - Riyadh, KSA: Maybe not so different from the U.S.

Daniel Zismer, Ph.D.

Descriptive characteristics:

  1. Much of healthcare delivery is controlled by the Ministry of health (MOH). Saudi Nationals are provided healthcare by the MOH.
  2. Non-Saudi’s working in the KSA must be provided health insurance coverage by their employer.
  3. Upwards of 35% of the population of Riyadh are non-Saudi Nationals.
  4. The MOH is very sensitive to the care provided to Saudi Nationals; especially access to care and such events as premature discharges from hospitals.
  5. Upwards of 25% of Saudi’s are hypertensive and it is projected that nearly 50% of the population could be diabetic by 2025 due principally to life style issues, including obesity.
  6. Referral care is provided by multiple large, 1000 bed + regional tertiary centers referred to as “medical cities”. These medical cities provide highly sophisticated, subspecialized medical care by referral or access through emergency departments. Discharges from a medical city is challenging as many patients prefer to receive ongoing care following critical care treatments.
  7. Primary care is available from 2100 + regionally – positioned primary care centers. Much of the care is episodic; access for ongoing care for chronic conditions is a challenge. There is little integration or coordination of care with the Medical Cities.
  8. There is a growing private health insurance market and a growing market for private hospitals and related healthcare providers.
  9. Population growth is creating demand for health services that is rapidly outstripping supply.
  10. Much of the nursing support is provided by expatriates, including those from the Philippines.
  11. Post-graduate, specialty education for physicians is limited. Many physician specialists do their training in Europe and Canada.
  12. The city of Riyadh is less than 70 years old. The youngest medical city is about 10 years old. A new one is under construction now.
  13. Health care costs as a percentage of GDP is less than 6% due, in part, to the proportion of revenues derived from oil trade.
  14. Healthcare is considered to be as important corner stone in the foundation of the KSA’s responsibility to the population. Articles on health and health care are prominent in print media daily.
  15. Physicians employed by the medical cities are compensated on the basis of salary.
  16. Rural areas remain under-served according to experts consulted.
  17. Males and females occupy clinical and management positions within the Medical Cities.

The Twin Cities healthcare marketplace: All look alike, results differ

Daniel Zismer, Ph.D.

The Twin Cities Healthcare landscape can be summarized as highly consolidated, ostensibly integrated and, at some level, all systems of care look pretty much alike.

Five large care systems of varying size dominate the market. There are four non-governmental payers of varying size with three owning most of the commercial health insurance market. One provider system has an integrated health plan with an excess of one million enrollees.

All health systems employ physicians across the spectrum of clinical specialties. All boast high quality and given the nature of the marketplace, pricing (or at least reimbursements) is comparable across health systems. Physicians who are not employed by a integrated health system are, for the most part members of large, single-specialty group practices with most dedicating a high-proportion of available clinical capacity to one (or perhaps two) health systems.

Every large commercial payer (health plan) is important to all the health systems. No health system has committed to one payer. Even the health system that owns and controls an HMO has a provider system that “plays” in all health plans. To the average person “on the street” health care in the Twin Cities is a commodity; i.e. all are “high quality” and actual out-of-pocket financial exposures are pretty much the same across provider systems. An interesting strategic challenge is how a health system differentiate itself under such market conditions?

Reimbursement as an Experimental Science

Daniel Zismer, Ph.D.

The fog of healthcare reform has left healthcare leaders confused regarding the future of third party reimbursement; governmental and commercial. The guessing game is in full swing:
  • Fee-for-service?
  • Capitation?
  • Bundled payments?
  • Episode-of-care-payments?
  • Other?

The smart money should be on “all of the above”. My take is reimbursement to providers will be an “experimental science” for the foreseeable future. It is unlikely that the payer markets will flip a switch and convert largely from a fee-for-service world to a neat, clean and understandable new world of health services pricing and payments.

The less integrated community health systems are scrambling. There seems to be a return to the behaviors of the late 1980’ and early 90’s; the “PHO” era. Independent physicians and community hospitals are quickly forming enterprises to “accept financial risk”. The Pioneer ACO experiment is underway. By all accounts, some are making progress. Others have already dropped out.

The more integrated health systems with years of experience under their belts seem comparatively unconcerned; “accountable care organization? We’ve been that for decades. We can contract for, accept and manage payments in any form. It is more important that we get paid, and less how we’re paid”.

Structural design of provider systems will need to accommodate reimbursements in multiple forms. It follows then that the more integrated health systems should be best positioned to convert various forms of “risk payments” to profitable financial performance as a result of the characteristics of the integrated health system design; especially the ability to control or sufficiently influence the totality of the required operating expense and capital structures including clinical models, provider productivity and related compensation.

The more integrated health systems typically place “accept financial risk from payers” high on the list of market tactics. Why? Because they know many of their competitors can’t.

Accepting contracted financial risk is only step 1. Organizations must internalize the competencies to manage that risk to sufficient profitability.

This brings us to the last and perhaps most counter-intuitive point. The market cycle we’re in now may be the most profitable for the more integrated health systems ready and able to accept and manage financial risk. Why? It is highly likely that the health insurance premium inflation curve (governmental and commercial) will remain on a less steep, but positive slope going forward.

Consequently, financial risk transfer inflation curves for providers are likely to remain positive as well, but at a lesser slope grade. The provider systems that are able to reduce total costs of care, while maintaining quality will benefit from a widening differential between realized reimbursement rates and total costs of care through the cycle (however long it lasts).

So, health systems prepared to pursue financial risk contracting as a principal strategy and are also prepared to reduce total costs of care at a rate that exceeds downward pressures on volumes and costs will benefit disproportionately to those who are unable to function this way; at least for a while.  

What is the real cost of capital for not-for-profit community health systems?

Daniel Zismer, Ph.D.

Historically, calculating cost of capital for asset-based financing for not-for-profit community health systems was relatively straightforward. The tax-exempt debt markets set the index rate and all other forms of capital were comparatively more or less expensive based upon simple and straight forward calculations of differential cost-to-borrow rates. A ten dollar calculator and one introductory finance course was all that was required. Furthermore, U.S. accounting standards favored long-term, tax-exempt debt over “more expensive” alternative capital access options such as third-party leasing.

Health care leaders, strategists and finance officers are challenged to broaden their perspectives on the consideration related to cost-of-capital evaluations.
Consideration such as:

1.    U.S. accounting standards are likely to move closer to the international standards. As a consequence, the comparative differences between the accounted costs of tax-exempt debt-financed facility assets and the accounted costs of leased-financed facility assets will change, making the lease option arguably more attractive than in the past (a).
2.    Speed to geographic targets becomes strategically useful, especially as it relates to staking-out key markets with larger, more sophisticated outpatient service sites. What is the real cost of losing a market, because tax-exempt debt capacity was constrained when the opportunity presented?
3.    What is “long-term” when considering the useful life of an expensive facility asset? Is every location a 25-30 year strategy? What value is there in preserving the right (by lease) to exit an unproductive market (and facility asset) by way of favorable lease termination rights?
4.    What is the value of preserving balance sheet liquidity for tactical opportunities such as mergers, acquisitions and physician integrations?
5.    How useful are historic standards of financial strength based upon scaled metric comparisons among peers e.g. “we are at the 70th percentile for days cash-on-hand within our peer group”. Absolute cash liquidity is most important; especially if many in the peer group are sinking.
6.    What is the real weighted average cost of capital (WACC) when bond covenants and bond rating agencies require significant levels of capital “lock-ups” to satisfy the risk requirements of tax-exempt debt sold to markets expecting stable, low-risk, tax-free returns.

Realistic evaluations of balance sheet positions and true costs of capital in the healthcare markets ahead are not simple math problems anymore. And, timely execution of strategic asset development and deployment will require health system leaders to step out of their hard asset financing comfort zones.  

(a)  Zismer, D.K., Fox J., Torgerson, P.; “financing strategic healthcare facilities – the growing attraction of alternative capital”; hfm, May 2013

"Speed to Target"

Daniel Zismer, Ph.D.

Military assets hold great tactical potential for strategy, but if not deployed to targets at the right time may be of little or no value.

During a conversation with a senior financial officer of a very large health system in the U.S. the topic of “speed-to-target” was raised as an element of health system strategy. The response to the related question was,

            “We don’t think like that”.

This was a very candid and honest response, not an indictment of the concept.

The point is, speed-to-target is an important element of any strategy, the assumption is the right tactic deployed at the wrong time (or too late) may be a waste of time, resources and opportunity.

To illustrate, a piece of “real estate” (geographic market) may hold great value for a strategic ambulatory center until a competitor ties up the property or beats you to the location with a competing strategy. Or:

  • a strategic independent medical group is purchased by a competitor; or
  • a competitor executes a targeted market launch of a new clinical service line, or
  • an organization puts-off a major facilities expansion as it builds its balance sheet capacity for a future institutional debt offering

New facilities strategies, especially, require long lead-times; frequently from 3-4 years from start to ribbon cutting, depending upon land acquisition and prep requirements and design, engineering and construction challenges.

As consolidation of the U.S. healthcare market place proceeds apace, health system leaders will need to consider speed to targets, among other important elements of effective strategic plans, and strategic critical thinking. The right solution a day late may be worth zero (or less). 

Converting collections of employed physicians to organized, coordinated and collaborative clinical service lines

Daniel Zismer, Ph.D.

In a survey conducted by Zismer and Wegmiller (a) 85% of 40 health systems reported being in the clinical service line business or are heading in that direction. While definitions of clinical service line design and management differ across healthcare organizations, common characteristics are emerging:
  1. the focus is typically on higher-profile and strategically valuable clinical programs such as: cardiovascular, cancer care, orthopaedics, women’s health, etc.;
  2. consistency of standards of access, clinical practice, outcomes management and approaches to ongoing care are maintained across participating sites;
  3. clinicians and managers collaborate to identify, adopt and adapt best practices across sites;
  4. a common performance scorecard is used;
  5. a common brand strategy is deployed;
  6. patients can expect a well-coordinated and seamless experience when cared for across sites;
  7. service lines are typically led by using a “dyad model” (a lead clinician working with a lead administrative partner); and
  8. financial, operating and strategic performance is evaluated at the site and service line level.
The brand promise for patients is the expectation of “best practices delivered consistently from provider-to-provider and site-to-site”.

So, what are the challenges with implementation (especially when physicians are independent members of an affiliated hospital medical staff)? Discussions with health system leaders surfaced a number:
  1. Health systems formed largely by community hospital affiliations have, historically been under-girded by a “promise” that challenges a basic clinical service line design tenet; “when you join our system, the design and delivery of clinical care will be kept local, after all you know best what your community needs”.
  2. If physicians are independent (not integrated by employment) their approach to clinical care within their specialty is self-directed, and while quality of care may be sufficient, it’s challenging to present a well-coordinated care experience, especially if a team approach is required to optimize care over time.
  3. Absent full integration of all components of a clinical service line across multiple sites, it is challenging to execute on direct contracting strategies with payers; especially contracts where the health system assumes financial risk for chronic conditions for defined populations.
  4. Clinical service lines require a modified approach to accounting; an approach that sufficiently captures operating revenues and direct operating expenses within and across participating sites.
  5. Health systems operating larger-scale, geographically distributed clinical service lines need to be tolerant of a matrix-like management model led by the “dyads” as cited. Dyads must interact successfully with site leaders (e.g. CEOs of hospitals that host service lines) and be sensitive to the “local” cultures and other clinical services and programs operating. 
Clinical service lines can create psychological stress within sites. One CEO wondered whether he had become the “hotel manager”; operating the house where clinical service lines (led by others) lived.

So, from the perspective of the patient point of view, clinical service line models as described here seem to make sense. For the classically trained hospital leaders and the traditional hospital-centric organizational structures, they can prove to be a shock to “the system”.  

(a) Zismer, D.K., Wegmiller, D.C.; “Clinical Service Lines: Mapping the Future of Community Health”; Monograph Published by C-Suite Resources, 2011, Mpls., MN 

Physician leaders need to learn the language of C-Suite

Daniel Zismer, Ph.D.

Physician leaders I know who are willing to lay their souls bare will admit that they don’t feel comfortable in the C-Suite (or near the C-Suite for that matter). One principal reason reported by physicians is:

“I don’t understand their language and they know that.”

Just as the typical CFO will not know the language of the surgery suite in action, physicians are often intimidated by C-Suite environment; its culture, cadence and language. Much of the apparent psychological distress stems from the language of finance. It could be a discussion of weighted average cost of capital (WACC) or returns on assets, strategic project financing options or contribution margin analyses. Some physician leaders will be lost at sea with such discussions and they may never catch-up.

So what’s the treatment for the disease? Two paths are possible. The first is go learn the “stuff”; growing proportion of practicing physicians (and other clinicians for that matter) are seeking graduate-level training in the business of healthcare or business in general. The second pathway is physicians bringing unique value to the C-Suite:

  • the science, art and language of continuous quality improvement;
  • the science, art and language of total cost of care management;
  • the science, art and language of population health;
  • the science, art and language of clinical service line management;
  • the science, art and language of adoption of evidence-based clinical best practices, and
  • the science, art and language of clinical services process improvement.

Physician (clinician) leaders should be expected to bring new, and perhaps unique, value to the C-Suite. Their value is not in providing more of what is already there.  

Considerations that may be underappreciated by U.S. health system CEOs: A baker's dozen

Daniel Zismer, Ph.D.

  1. Downward pressures on inpatient demand are sustaining. Inpatient demand is “morphing” to outpatient service demand. Is your health system’s strategy designed to “re-capture” the shift?
  2. Health systems are not likely to have internalized the operating competencies required for the road ahead; especially competencies that are more “public health practice” in nature; e.g. total cost of care evaluations, epidemiology of  populations, the science of health behavior interventions, interprofessional team care and others.
  3. Physicians looking for private practice investment opportunities are a dying breed.
  4. The movement of U.S. accounting methods closer to international standards will favor applications of alternative financing methods; especially facilities. Alternative financing models will provide for enhanced strategy flexibilities.
  5.  Third party reimbursement methods will be an “experimental science” for years to come. The system’s financial structure must accommodate multiple payment options, including payments for physician services.
  6.  Operative physician compensation models may not square well with the need to deliver care from interprofessional, collaborative teams. Health systems will need to re-define “compensable productivity”.
  7. There are no published best practices on interprofessional team care. Models are idiosyncratic and often driven by philosophies and goals that misalign internal incentives.
  8. Hard asset capital structures have not advanced as fast as care models; e.g. 60% clinical care delivery in the outpatient arenas with 70% of hard asset investments on the inpatient side.
  9. Most I.T. platforms cannot readily recognize, evaluate and report total costs of care for defined clinical populations, nor are they geared to evaluate the performance of care teams over time.
  10. Care manufacturing and delivery models rarely consider scalability at the point of service. “Scalability” is typically a consideration for “corporate services” support only.
  11.  “Speed to market” will become an increasingly important factor in strategy; especially ambulatory care services.
  12. Collections of “doctor deals” won’t serve health systems well into the future; well-organized, well-led and well-incented professional services platforms are required.
  13. Physician leadership is an under-developed asset for many health systems.