Elizabeth Orr (00:01):
Health systems need to pursue differentiated growth. When everyone is running at the same slice of pie, it means that there's less for the winners to win, and the losers are going to be spending money to lose, and that isn't sustainable.

Abby Burns (00:18):
From Advisory Board, we are bringing you a Radio Advisory, your weekly download on how to untangle healthcare's most pressing challenges. I'm Abby Burns. Our episode today is the third and final installment in our series all about health system strategy. We've talked about the business case for environmental sustainability, healthcare's AI blind spots, and now there's no better way to close out the series than to look forward.

(00:45):
Today, we're going to talk about how health systems are thinking about growth for 2025 and beyond. Now, when we talk about health systems, it can sound like we're talking about them as a monolith, but in reality, we know that the 1.4 trillion dollar health system sector is made up of a pretty diverse range of systems. The question is, how do those differences translate to the ways systems are running at growth? To help us answer this question, I've invited Advisory Board experts, Elizabeth Orr and Marisa Nives. Elizabeth, Marisa, welcome to the podcast.

Elizabeth Orr (01:20):
Hi, Abby. Thanks.

Marisa Nives (01:22):
Hi, Abby, happy to be here.

Abby Burns (01:24):
You all have been researching health system growth, and it's worth noting that this is actually the first time that Advisory Board has taken a robust look at the state of health system growth since the pandemic, and the timing is important here.

(01:38):
We're at a time now when health systems are perhaps finally able to keep their heads above water after several years of really challenging, on this podcast, we've used the word dire, financial circumstances. You all have interviewed, at this point, dozens of health system leaders about how they are thinking about and approaching growth as they look to 2025 and beyond. So today, I'm hoping you can give our listeners a pulse on what you found.

Elizabeth Orr (02:06):
Looking forward to it.

Abby Burns (02:07):
To start us off, we asked the question earlier this year to our colleagues, Vidal Seegobin and Larry Watts. Is health system growth still possible based on your research? How would you all answer that question?

Elizabeth Orr (02:21):
Yes, it's still possible. It has to be, but it's going to look a little different. It's harder now. Growth is more expensive. The cost of construction, staff, entry-level costs to M&A. And then, as our health system folks know, the patients they're getting in are sicker, perhaps more government payer, so both sides of the growth equation are more challenging.

Marisa Nives (02:51):
I love that you said that, Elizabeth, that it has to be, right. It has to be possible, but at the same time, health systems are facing this really difficult and less accessible across-the-board levels of growth.

Abby Burns (03:05):
What do you mean by that?

Marisa Nives (03:06):
Yeah, I mean, we're seeing what has been called a trifurcation of health system fortunes. In layman's terms, health systems are falling into extreme ends of credit ratings, some being downgraded pretty significantly, others doing great, right. This is market by market, but it's also hospital by hospital.

Elizabeth Orr (03:28):
And put simply, I think we're headed into an era, what Marisa and I say, is of have and have nots with less health systems in between.

Abby Burns (03:37):
I think, given this degree of variability across health system experiences, it becomes that much more important that you all, in your interviews, really covered the whole breadth of the country. You were telling me you spoke with almost 50 systems from across 19 states. You spoke with folks in urban environments and rural environments and a lot of organizations that cut across both.

Elizabeth Orr (04:03):
Yeah, Abby, the biggest system we spoke with has about a thousand beds and is a bit shy of $20 billion in total revenue, whereas the smallest hospital we spoke with was a 25-bed critical access hospital running about 35 million in total revenue.

Abby Burns (04:25):
So huge variance in size as well.

Elizabeth Orr (04:28):
Yes.

Abby Burns (04:29):
That's a broad picture to cover in the next 25 or so minutes, but it does give you all a unique vantage point, and I think it's an important one. So, let's go ahead and dig in. And if we know that there is this wide variability across health system types and also health system experiences, when you think across your 50 or so interviews, what are some common themes that you were able to identify that cut across market type of system, et cetera, and how leaders are thinking about growth for 2025 and beyond?

Marisa Nives (05:03):
Yeah, sustainability is really the name of the game for growth. That's probably the overarching finding to take away from this. Across the range from safety nets to health systems with operating margins in the double digits, leaders are talking about sustainability. They're saying things like, "No mission without margin." They're saying things like, "Volume is no longer covering a multitude of sins."

Abby Burns (05:31):
Which feels like a departure from the mentality that we are used to, which is volume does cover a multitude of sins.

Marisa Nives (05:39):
Right. That's away from all growth is good growth to we need to be a little bit more intentional about how we're thinking about growth.

Elizabeth Orr (05:46):
Yeah. Bigger is not better is something else we've been hearing, and I think systems felt threatened. I know a phrase we've used internally is had to confront their own mortality when the pandemic happened, and I think they've realized that it's not just about revenue and size. It's about being able to show up in their communities and do what their mission says they should do and serve who they want to serve, and so sustainability gives them the longevity to do that.

Abby Burns (06:21):
Longevity is such a good way to think about it.

Marisa Nives (06:24):
I want to double-click on Elizabeth's point about that longevity piece, and it's about longevity in terms of showing up the way you want to show up for the next 50 years. It's not, "I want to show up with a different name or serving a different population." Those are things that health systems might be forced into. That's not the name of the game of sustainability.

Abby Burns (06:46):
How are systems actually translating that into practice?

Elizabeth Orr (06:49):
One of the things we heard almost universally is that operational excellence is at the forefront of systems minds. Dealing with throughput, making sure they are performing the way they want to perform really is the baseline for being able to pursue growth and be able to pursue sustainability today. So a message I would want systems to take away is operational excellence isn't a differentiator for growth anymore. It's a must-have-

Marisa Nives (07:19):
[inaudible 00:07:21].

Elizabeth Orr (07:21):
... to get to that sustainability.

Marisa Nives (07:23):
The theme that we've heard time and time again is something that we're calling a back-to-basics approach. Get your house in order before you grow. The basics are not new, but their urgency and context is new. I would say one piece this really plays out in is the workforce.

Abby Burns (07:40):
This is interesting because a lot of times when we talk about workforce, we talk about it very much from a workforce is super expensive, or we talk about it in terms of recruitment and retention. You're talking about workforce in the context of growth. How does workforce factor in when health systems are thinking about growth looking forward?

Elizabeth Orr (08:00):
Well, one of the things we've heard from systems is this idea of, "I could add the beds, but I don't have the staff for them." And so, how do you grow when you don't have the individuals you need to help you do that?

Abby Burns (08:17):
You all talked about how the cost of construction is a lot higher now. So the idea that you're hearing people say, "Yeah, I could get the money to build the buildings, but it's actually an option that's off the table because I don't have the people to staff the beds."

Marisa Nives (08:30):
Yeah. And if you talk about getting the money, workforce is one of the, and probably the number one factor impacting health system credit ratings. So it's not just a question of, "Can I staff my growth?" It's a question of, "How can I make sure that I can show my credit rating agencies that I have a workforce pipeline in order to improve my access capital?"

Elizabeth Orr (08:52):
And this is actually one... creating one of the interesting things we saw in our research, which is a continued allegiance between AMCs and community hospitals where AMCs continue to look for the medical education placements, community feeder points, a way to decant capacity and places for their medical education students.

Abby Burns (09:23):
Meaning basically residency placements, right?

Elizabeth Orr (09:25):
Yes.

Marisa Nives (09:26):
Yeah. And for community providers, this is a pretty good deal too. They want access to specialists for their communities. They want-

Abby Burns (09:32):
Right.

Marisa Nives (09:33):
... a reliable clinician pipeline like we just discussed, and they also want that brand halo effect. And I would say that they might have wanted these things in the past on both ends. I think, right now, community health systems are better poised to get what they want because of Elizabeth's point that AMCs are really in need of decanting some of these volumes.

Elizabeth Orr (09:53):
Yeah.

Abby Burns (09:54):
So I'm actually hearing a fair amount of overlap in what health systems are trying to do or achieve with their growth strategies, despite the fact that, as you all said, systems are living in pretty different realities depending on who you talk to. Let's talk about the other side of the coin. What looks different across different types of systems when we're looking at growth for 2025 and beyond?

Marisa Nives (10:20):
Yeah, I mean, on that operational efficiency piece, there are definitely differences. Just because everyone's running at it doesn't mean what everyone's going to get out of it is the same. The one thing we found that was that health systems in high-growth markets had historically been able to get away with a lot more.

Abby Burns (10:39):
Right. Makes sense.

Marisa Nives (10:41):
Yeah. What they're going to get for their squeeze is going to be a lot more juice.

Elizabeth Orr (10:46):
We actually had a system tell us they're in a growth market, they're a provider of choice. That if it weren't for their market, because of their operational excellence, they would be in dire circumstances.

Abby Burns (10:59):
Wow.

Elizabeth Orr (11:00):
And so, to Marisa's point, if you're not doing it now, as the patient of the future becomes sicker, becomes sicker, younger, all of these things, you're really setting yourself back on that journey to sustainable growth.

Abby Burns (11:15):
This is really interesting because what I'm hearing from you all is that for systems in growth markets, pursuing operational excellence is potentially a differentiator, right. Elizabeth, you said earlier operations can't really be a differentiator in the future, but in the present moment, for some of these systems doubling down on operational excellence before you absolutely have to could actually buy you some market advantage, whereas systems that are in maybe more stagnant markets, I'm thinking the Northeast, the Midwest-

Elizabeth Orr (11:48):
Yep.

Abby Burns (11:48):
... markets where operational excellence was already kind of table stakes five, 10 years ago, what doubling down on operations buys them is maybe just survival.

Elizabeth Orr (12:00):
Yep, absolutely. This is an essential point, Abby, that based on the market you are in and the internal dynamics of your system, the way you're going to weight your immediate margin versus your strategic goals is going to look different in order to pursue growth and health systems need to be considering both and understanding the trade-offs.

Marisa Nives (12:25):
That's absolutely the case, and I think another major theme that's coming into how health systems weight their growth is time, right. The urgency piece is going to vary depending on what your market is looking like.

Abby Burns (12:41):
Right.

Marisa Nives (12:42):
And I think that's coming out particularly when things like the site of care shift, right.

Abby Burns (12:47):
That's exactly where my mind went.

Marisa Nives (12:49):
Yeah. In some markets, that's urgent. That's right now. And if you haven't acted, you're too late, right. Whereas other markets are able to have a little bit more time to look into the future there.

Abby Burns (12:58):
Sebastian Beckmann was on the podcast a couple of weeks ago, sharing the update from his team's research over the past six months about site of carrier shift across different markets, and some of the statistics he shared in the episode were mind-blowing. We can share the link to the episode in the show notes.

(14:18):
We've talked about differences by market. We've talked about the time question, the temporal difference of investing for now versus later. What about different types of systems?

Elizabeth Orr (14:27):
I'm so glad you asked this question because we tried to structure our research to really get at this. So we did interviews by system type-

Abby Burns (14:38):
Oh.

Elizabeth Orr (14:38):
... looking at first only talking to regional not-for-profit providers, and we only talked to academic medical centers. And then we only talked to safety nets and critical access hospitals to really get at we say that agency is an important part of growth. These different system types are going to see what they want to achieve, what they want to do differently.

Abby Burns (15:03):
Okay, so you chunked your interviews out by regional not-for-profits, academic medical centers, and safety nets. Any themes that you would pull out for any of those specific system types?

Elizabeth Orr (15:14):
Absolutely. I'm going to jump to academic medical centers because I think they have a challenging discernment process ahead, but one with a lot of opportunities. AIMS academic medical centers, that model is built on inpatient care.

(15:33):
The campus is really important to that identity, and that is not a model for growth that is well aligned with what we're seeing in the future. So I think AIMCs have to ask themselves, "What really is our identity? Is it this specialty inpatient care model, or is it this community pillar that we are because we are both a university and a hospital system?"

Abby Burns (16:01):
And it sounds like there's room for both of those. It's a matter of figuring out, "Okay, what lane am I trying to play in?"

Elizabeth Orr (16:08):
Exactly. We've talked to academic medical centers who are really indexing on this inpatient specialty care because, at some point, you're going to need that quaternary care. They're going to be needed, and that's their lane.

Abby Burns (16:23):
Right. Someone's got to provide it.

Elizabeth Orr (16:25):
Exactly. And then we've had other systems say, "No, the future for us is access. It's about taking this knowledge that we have and diffusing it into our community to change lives, to change health, and create sustainable demand where we're getting in front of people before they need us so that we can really predict what will happen in the future" is kind of...

Abby Burns (16:47):
A little bit of self-interruption.

Elizabeth Orr (16:48):
Yeah, exactly.

Abby Burns (16:50):
Marisa, what about safety nets?

Marisa Nives (16:52):
Yeah, for safety nets, there's three sort of key things to take away. I think the first biggest thing is that safety nets are actually treating the patient of the future right now.

Elizabeth Orr (17:04):
Yep.

Abby Burns (17:06):
What do you mean by that?

Elizabeth Orr (17:08):
So the patient of the future is, from our research, sicker, more complex, and older, and on a government-payer mix. Those are all the types of patients that safety nets by their mandate or treating.

Abby Burns (17:22):
Interesting.

Marisa Nives (17:23):
Yeah. So they're potentially better set up than their peers to serve the patient of the future, right. Related to that, we're actually hearing a level of optimism from safety nets that I think we were maybe a little bit surprised to hear, given the headlines and all the sort of negative news that we've been hearing. Not that those challenges don't exist, but there's also this sort of opportunity that safety nets are coming up against. They're facing unprecedented demand for their services. Again, challenge but also an opportunity.

Abby Burns (17:55):
Right. If growth for safety nets is meeting community need. As community need grows, safety nets grow alongside of it.

Marisa Nives (18:03):
Absolutely. And to take advantage of this opportunity, safety nets are going through this shift that we've seen broadly across health system growth. For them, the shift towards sustainability is a shift from just surviving to really thriving because that's what they need to be able to exist into the future as an independent community pillar, right.

(18:24):
They don't want to be as hyper-reliant on government forces. They want to take control of their own destiny. Again, that's going to look different depending on market. But we've seen systems do some pretty innovative stuff, from diversifying revenue based on their population health capabilities to opening up Medicaid plans. So safety nets are here to stay. They're optimistic, and they're doing really innovative things that I think us... we were maybe a little bit surprised to hear about.

Elizabeth Orr (18:50):
Yeah. Just to jump in, we had one leader say to us, "We're already a low-cost provider. We know how to do this, so it's actually the regional, not-for-profits that can learn from us."

Abby Burns (19:02):
Which is not typically how we think in an honest moment about the role that safety nets play in the broader health system ecosystem.

Elizabeth Orr (19:10):
Absolutely.

Marisa Nives (19:11):
Yep, and I would add that, I mean, there's some regulatory changes that are making this even more possible. We've seen Medicaid expansion make things that were historically unprofitable more profitable. These systems are finally getting paid for the services they're providing, and that's really aiding their growth.

Abby Burns (19:28):
This is an interesting time because, obviously, Medicaid has been expanding for quite a while now, but we're still seeing systems. I know North Carolina passed it at the end of 2023.

Elizabeth Orr (19:35):
Yep.

Abby Burns (19:36):
We're still seeing systems benefit from that, so [inaudible 00:19:39] I think that's a good call out. Based on what you all have learned from your interviews and from your research, where do you think systems need to go moving forward? If you had to categorize how health systems should actually go about pursuing growth for 2025 and beyond, recognizing that it's more expensive, that they're really running after long-term sustainability as the end goal, what would you say?

Elizabeth Orr (20:07):
What we've really concluded is that health systems need to pursue differentiated growth, and this really means deciding who you are, picking your lane of competition, and pursuing that. One of the things we heard a lot in our research was systems saying that they were going to pursue the same three service lines for growth, oncology, cardiovascular, orthopedics.

Abby Burns (20:34):
Those would be the exact three I would've guessed you'd say.

Elizabeth Orr (20:36):
Yes. Well, and right. There's a reason the projection suggests that they're good for growth. But when everyone is running at the same slice of pie, it means that there's less for the winners to win, and the loser is going to be spending money to lose, and that isn't sustainable.

Marisa Nives (20:55):
Yeah. What this means for health systems is that they have to do some self-reflection, right, and it's self-reflection at the leadership level. You have to be aligned and move in lockstep, but it's also about cascading down and learning back up from your frontline staff.

Abby Burns (21:09):
So important. Yeah.

Elizabeth Orr (21:12):
And an important call-out about this, about choosing a lane of competition, is it means that you're going to have to say no to some things. You can't be everything to everyone, and there might be an area where, because of this, you seed ground, but I think it's important to say that, "Yeah, maybe you're seeding ground for the next few years, but you're picking a lane that you can continue on for the next 100," which is really what we mean when we say sustainable and differentiated growth.

Abby Burns (21:41):
What takeaway message do you want to leave listeners with?

Marisa Nives (21:45):
The playbook for growth is not some radically new thing that we've discovered across the last six months. The playbook for growth isn't something that's changed drastically. But it is about the execution of really good solid business practices and marrying that with a commitment to being a public, good and being who you want to be in your market.

Elizabeth Orr (22:11):
I think what Marisa said was perfect, and I just hope health systems are buoyed by the fact that we're hearing a lot of optimism in our interviews, and I hope they can run with that and enter this next chapter of growth.

Abby Burns (22:24):
Well, Marisa, Elizabeth, thank you for coming on Radio Advisory.

Marisa Nives (22:28):
Thanks for having us.

Elizabeth Orr (22:28):
Thanks, Abby.

Abby Burns (22:34):
What I heard from Marisa and Elizabeth is that while there's a lot of variability in how different types of health systems are experiencing this moment, there are some more or less universal truths about how they're thinking about growth moving forward. Primarily, the name of the game for growth is long-term sustainability, and there's actually a decent amount of optimism about the ability to achieve that goal. This is an area of research that feeds into a lot of other topics Advisory Board is following. What should your ambulatory strategy look like?

(23:05):
How can you improve operational efficiency? How should you think about service line planning? If these things are on your mind or the minds of your partners or clients, stay tuned for more from Advisory Board because remember, as always, we're here to help.

(23:47):
If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts, and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Abby Burns, as well as Chloe Bakst and Atticus Raasch. The episode was edited by Dan Tayag and Joe Shrum, with technical support provided by Katy Anderson and Chris Phelps. Additional support was provided by Carson Sisk, Leanne Elston, and Erin Collins. Special thanks to Vidal Seegobin. We'll see you next week.