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Navigating the Downturn, Part II

June 2, 2008
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In this part of our interview, Krentz talks about how CEOs and CFOs can address the buy/build question.
Though some may debate the label to be placed on the current economic downturn, no one questions the fact that the country is certainly in the midst of one. And while the crisis was born of defaulting subprime mortgages in the financial markets, it has rippled into the rest of the American economy. Unfortunately, healthcare has not been spared the ill effects. To help hospital executives navigate these choppy waters, HRCM Editor-in-Chief Anthony Guerra recently talked with Susie Krentz, senior principal, strategy and planning national practice director, with the Noblis Center for Health Innovation.
Part I

AG: The Wall Street Journal recently wrote an article indicating there are have and have nots in healthcare; some hospitals are awash with cash and some are struggling. A colleague of mine on staff agrees. What are your thoughts?

SK: I think, as a general statement, I would agree with your colleague. It is not totally bimodal, but I think if you look at the graph of organizational health, there seems to be more of a spread, and those that are economically challenged are really getting economically challenged. And some of the successful organizations, for a variety of reasons, either because they’ve done great things with their clinical quality or they have communicated to the community what they do and how they do it and people want to go there, are very fortunate.

I think nothing is ever black and white and good articles, like the Wall Street Journal, is very compelling to read, things are always complicated as to why they look the way they do. I think one of the things to put in context is the numbers in terms of the hospitals’ bottom lines; how large they are. If you are a $1 billion healthcare enterprise with lots of hospitals, and if you don’t have a pretty robust spend, you won’t be able to reinvest to buy the next CT scanner or PET scanner or replace an old building.

Healthcare is a very capital-intensive and people-intensive industry. They invest a lot in facilities and equipment and the equipment is obsolete fast. State of the art in healthcare is a moving target because of all the wonderful advances. On the one hand, we expect healthcare organizations to be state of the art; no one wants to go to the old run down, old breaking-down-equipment hospital. At the same time, there is a sense of why should they be making all this money? They need to make all this money so that they can stay state of the art and reinvest.

Sometimes we focus on, in isolation, a bottom line number without thinking maybe they need that to meet the mission and to reinvest for the long term. These organizations are here, maybe have been here, for 100 years, and they plan to be here for another 100 years. It’s not like a restaurant that, if it fails, no big deal, another one will come in next week. So, there really is a very long-term view that organizations have to take. I think those that are fortunate enough to have, are going to have big demands on them in the future, when you think about all the healthcare needs we’re going to have. They’re going to have plenty of mission-driven reasons to use a lot of those resources and to stay financially healthy.

AG: Do you suspect that some of the well-to-do hospitals, the non-profits, have robust philanthropy programs in place?

SK: Clearly philanthropy has become a very important source of capital for hospitals, and some hospitals, for a variety of reasons, have been more successful in that dimension, either because of the programs they’re doing or the clinical research. A lot of times, the philanthropy supports not just a building but some research enterprise or teaching enterprise that takes a lot of resources. I think, in most communities, there’s often some organizations that seem to do a lot better job in the philanthropy arena than others, and often that’s the result of decades of philanthropic development by those healthcare organizations. That’s become a very important piece.

AG: Do you work with healthcare organizations on their philanthropy programs?

SK: Noblis has done some work in terms of what’s the need for philanthropy, and the role it plays. We help some foundations do some planning; but we aren’t philanthropy consultants. There are some consultants that specialize in philanthropy feasibility studies where they test the market and how much the donors can give. We don’t do that level of work. We would help if, for example, you have an initiative at your hospital, you want to develop some new capability and, to make it happen, you’re going to need to finance 30 percent by philanthropy. We help if you want to achieve a certain initiative and can’t do it out of operations. We help them figure out what they will need to communicate to the community in order to make something happen, to find out if the community wants it.

AG: So you help hospitals and healthcare organizations figure out the financing for projects they may want to execute?

SK: We’ll often do the feasibility, the overall feasibility study for a practice-driven initiative — with the money you have now, your capability, can you afford to do it or not? Someone may have a $300 million undertaking that they believe is needed and they only have the financial capability to do $200 million. Part of doing planning is identifying where the gaps are and saying, ‘There’s a $100 million gap there,’ which can either be closed in part by philanthropy, it could be closed by being innovative in how you operate, improving your cost structure, so that you can actually finance more than you think you can, based on current performance. So at Noblis, we have a performance innovation practice that will tackle how you optimize, make the experience great, but also help reduce the expenses so that you can actually finance these reinvestments that you need to do. So yes, we do that kind of work.

AG: In addition to that type of work, what might be some other common things that CEOs and CFOs consult with you on, some common problems they’re having that they look for outside help to solve?

SK: Noblis does strategy and planning, and a lot of times that talks about both revenue strategy, what services are we going to develop; where’s our growth plans? Understanding if you grow this service is it going to generate financial capability or is it actually one of those services that’s needed, but it’s going to need to be supported? We do a lot of physician-related strategy, which is a very important part in trying to figure markets — how do you relate to your physicians in a way that’s healthy? We do, as I said, a lot of that overall financial work.

Our performance innovation practice, I suggest it does things that really tackle at the operational level across a variety of dimensions, be it business operations or clinical operations to improve performance.

We have a facility practice that addresses one of the things you may have observed — all the building going on in healthcare. People are building new hospitals and new towers and new ambulatory space, and one of the things that we have been working on is what we call “concept of operations.” When you move into a new space, what many organizations end up doing by default is just taking what they do now and transporting over into some new space. And one of the opportunities organizations have with something new like that is to say, ‘How do we design the new space to actually execute what we do in a smarter way? How do we implement information management and technology to enable change? How do we decide to change the care processes, and how do we configure the space to enable that to happen so that it’s not just doing the same thing in a new building, it’s moving into a new space and doing what we do smarter and better for better quality outcomes and for lower cost.’ So all of those, I think, we do a number of different things that touch on either the revenue side or the expense side with our clients.

AG: How do CEOs and CFOs address the buy versus build decision when it’s time for expansion?

SK: One of the challenges of expanding with a new building is that you’re committed to it for 20 years. It’s not like, ‘Oh we built it, now we’ll just ignore it and do something else.’ You can be more nimble in some of the other strategies that you do. So I think one of the challenges with expansion is thinking about the time horizon. Are we thinking about what we need to do in the next five years, or are we trying to tackle what we need to do in the next 20 years? Which leads to, sometimes, a different path. If it’s a short-term five year plan, we have an issue that might lead you to build on the existing facility, as opposed to what you might plan for a longer horizon. You can’t predict the future with certainty, that’s one thing I’ve learned after all these years, no one can actually do it, even though sometimes they say they can. The important thing is to really take a disciplined look at the simple formula, starting with understanding the demographics of the community you want to serve, and not today’s, but really think, if we’re talking 20 years from now, you have to think out between now and the next 20 years what’s happening with the demographics. Really, no one knows for certain what the demand for healthcare services will be, both the inpatient and outpatient, for the different technologies.

If you put those two together, that tells you what the market is going to demand or need. You really have to do some sensitivity around that because, as I said, no one know for sure what the use rates will be or the population will be. The key is to try and understand what’s our margin of error, if things were off a little bit on these assumptions, does that tank our new hospital, does that make it 40 percent occupied instead of 70? And then the other dynamic is that if a hospital is going to build something brand new, it often triggers other providers in that geography to do something. So I think not only do you just build the building, the other thing that has to go along to be successful in that is what is the business strategy that’s going to make this new building successful? So, you can’t just say we built the new building, they will come; it’s what are we doing in this building that’s meeting a need in a way that’s different and appealing to people in the geography, so they will choose to use our facility as opposed to leaving this community to go somewhere else.

AG: Even beyond that, the key is to attract the physicians, rather than just the patients, correct?

SK: That’s part of the strategy we will use. It’s a little of both — some patients do end runs and decide, but physicians are important partners. Building is a lovely thing, but unless that building meets their needs as a work place and works for them and that’s where they would like to be loyal and bring patients, you won’t be successful. That’s as important as the bricks and mortar that you’re putting in place. Sometimes it’s very easy to get caught up in the bricks and mortar because it’s actually easier to build a building than focus on these other strategies that will make the building successful.

AG: So, you’re saying that sometimes doing a construction project is really the easy way out?

SK: It’s not a cop out. When you have a major construction project, it’s hugely time consuming at all levels of operation; so it actually requires a huge amount of energy. What happens is the project uses up so much energy of the organization to work on the physical plant. It’s very time consuming but, in a way, you can do a checklist and you’ll get there. So sometimes it takes an extra level of energy to make sure those other complementary business strategies are put in place, so that when the building is done, you’re ready to have a robust enterprise that’s going to use that space. Healthcare executives are pulled in 10,000 directions. and the key to success is always making sure that you don’t get consumed by the short-term issues, the crisis of the day, of which there are many, as well as the all-consuming effort it takes to build the building. But again, as I said, some of these other strategies are not as clear cut. You can come up with a work plan, even though it’s a huge amount of work, that will get you to the building. The other strategy is to bring in a little bit more art and some of that strategic science.

AG: As a final question, talk about how some of these hospitals are taking on the atmosphere of high-end hotels. Why is this happening?

SK: I think there’s no single dimension. One dimension is the physicians; so how will the hospital relate to its physicians on its medical staff and ensure that it’s healthy and constructive for both going forward? Regardless of if it’s a private staff or big groups or employed or whatever the combination. So, one whole dimension is going to be around that physician piece, and that’s a competitive dynamic. I think the reality is there is a level — and the word gets bandied about — of consumerism. There is more visible attention to the non-clinical quality aspects of the experience than we had previously in healthcare and, personally, as a user, I think that’s great. It doesn’t always have to be the Ritz, but it’s nice to have that as an option.

You know it can look like a hotel, but I think there’s the service part of the experience that just came out with Medicare releasing the results of the HCAPS, the patient satisfaction survey that was just released. You can go in and type in your hospital and see how they do on patient satisfaction related to non-physical things. It’s things like how are the communications, doctor communications, with the nurse, was my call button answered promptly, was my pain managed. Those are other areas of service, separate from the physical amenities. That’s another arena because in part, there’s just more attention on that, and it’s more public, that I think healthcare providers will really be saying, ‘How do we actually make sure that when people come through our organization, inpatient, outpatient, whatever may be, they leave and feel like it was great?’ A part of that is physical, the amenities, but part of it is the behavior and the systems that make it comfortable and people feel good about being a patient somewhere.

So I think that’s a dimension, and I think there will be, as you say, a fight for share, and I think there will be a lot of additional work on how to enhance the quality of what we do. How do we communicate to the public what we’re doing is really good, so you should come use us. And that’s the advertising piece but advertising people have different points of view. Part of it is, let’s say a hospital is doing great work and has advancing IT, how do they let people know? At some point, there has to be some external communication of, ‘Guess what, we did all this work and we’re following this evidence-based medicine and our outcomes are great.’ Communicating that is a form of advertising. Somehow as hospitals advance and really do a better job on some of these important areas — quality and outcomes and the experience — I think there will be an effort to figure out what’s the best way for the patient and for the physicians out there to know about it, which may take new forms that we haven’t seen before.


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