Dan Michelson is CEO of Strata Decision Technology of Chicago, IL.
Tell me about yourself and the company.
Strata has been around for 20 years. We work with roughly one-fifth of the hospitals in the country, 185 healthcare delivery systems. The focus of the company is to help healthcare providers drive margin to fuel their mission. We do that with a cloud-based platform that hospitals deploy on top of their ERP and EHR. That platform becomes essentially a Microsoft Office for the finance team.
The other day someone used the analogy that we are kind of the Intuit for the healthcare space and that’s a good way to think of it. Health systems use our application for financial planning — including their long-range financial plan, operating budget, and capital budget — as well as their cost accounting, where we are #1 in KLAS. Also payer contract modeling, so they can understand their true cost and true margins as they negotiate bundled care contracts.
We have algorithms that identify opportunities to reduce cost by eliminating waste, reducing unnecessary variation, and reducing the cost of harm events. Then we provide the workflow for managing that cost out. What many companies have done over the last 50 years in revenue cycle management, we’re now doing around margin management in healthcare. A typical Strata client is billion-dollar healthcare system with eight hospitals, so the opportunity to make an impact is significant.
Do hospitals accept responsibility for their significant role in ever-rising healthcare costs?
They do now. They didn’t three years ago. The world has changed.
Cost accounting has become a required core system on the financial side to prepare for a value-based world, just as population health has become on the clinical side. People need to know their cost to negotiate bundled care contracts. Not their charge-based cost, but their true cost and their true margins. Even if they’re going to be losing money in that contract, they need to know the levers that they can pull to drive margin over time to be profitable.
That’s in the fee-for-value world, but it’s also a requirement in the fee-for-service world. Over the last three years, the average reduction in inpatient admissions nationally is 2.2 percent per year. Couple that with the fact that hospitals are operating at 2 percent margins and one-third of them are unprofitable and that’s a pretty scary future.
With that kind of pressure on the top and bottom line, the one thing that they know they need to focus on is their cost. But it’s not about just taking 5 percent or 10 percent of their cost out and then moving on. We did some research and talked to 100 different organizations. Eighty-eight percent them had a cost reduction initiative in place. The range they were looking to take out was between $50 million and $400 million, but only 17 percent of them were successful in hitting that target.
For all the automation and technology that we have around revenue cycle, it is missing on cost and margin. To make this point, I often tell people that focusing more on revenue cycle is like trying to squeeze a raisin for a little bit more juice. Cost is a like squeezing a grape — there is a lot of opportunity right now.
We have clients with 600 people in their revenue cycle organization, but only six people who are involved with performance improvement and cost. Clearly that’s going to change now that the reimbursement structure has changed and risk-based contracts are coming into the mix. Roughly 80 percent of large health systems either have a health plan or are building one. Clearly they are going to be taking on risk. The only way they can manage it long term is to understand their return.
Hospitals I’ve worked in are careful about supply costs, but not so good at managing the big-ticket items of labor management and utilization management. How are hospitals approaching cost reductions?
The state of the art for what you just described is PowerPoint and Excel. The level of sophistication is completely absent.
People approach those problems that you mentioned — managing the cost of labor, supplies, and purchased services — episodically. They go after it at one point in time with one initiative. Contrast that approach with revenue cycle, which they are looking at every hour, every day, every week.
The best organizations are approaching it now as a continuous process. They’re not approaching it as, we’ve got take out 5 percent or 10 percent of cost. They’re saying, where do we need to eliminate waste? Where do we need to eliminate variation, or at least reduce variation, or reduce unnecessary variation? Where are we doing things, like harm events, that are making matters worse?
For example, Yale New Haven Health saved $150 million taking a quality-first approach and then tying cost to it via our cost accounting solution. If they have a harm event, a PSI, or HAC, they know exactly what that’s costing them on a macro level, or even with that individual incident. They know exactly what it’s costing them. They’ve created what they called Quality Variation Indicators, QVIs, and we’ve married cost accounting data to that. They went to their clinicians, and in a very integrative fashion between physicians and finance, they’ve had conversations about cost, resources, and waste.
They’ve done two things on top of that are interesting. One is there’s some gain-sharing. If the physicians are doing better and they’re managing their resources more effectively, the physicians have some upside. Then, they’ve embedded cost within order sets, so that when a physician is placing an order within Epic, they have the cost information and are aware of it.
When you took a flight to Las Vegas, you looked up the cost on a website. There’s no such thing for somebody who works in a healthcare institution. Where would you even go to find information on cost? Two issues are holding back that scenario. The information is not accessible. Even if it may exist somewhere, people can’t get it. Second, no one is accountable. If you’re paying for a flight, regardless of work or personal, you’re going to look at that cost and look at the alternatives. We haven’t done that for clinicians.
Opening up that conversation is an enormous opportunity, especially when you understand that 80 percent of the costs in healthcare are driven by physicians and their decisions. To not provide them that information and make it accessible is crazy.
Are hospitals more freely telling physicians exactly what their true incremental cost is if they order a given test, procedure, or drug?
They’re starting. Johns Hopkins embedded costs within order sets and they drove down volume by 10 percent. University of Miami showed physicians phlebotomy costs retrospectively, and just by sharing data, they were able to drive down volume by 25 percent. We’re in the early innings of that game, but take these examples and stitch them together and you can see a path.
In 2002, people said doctors weren’t adopting EHRs because they were technophobic. It’s not like we solved technophobia in the last 14 years — it turns out that that premise was never actually correct. Then once EHRs started getting used and people saw order sets, the reaction of physicians was that it was cookbook medicine. Now you’re telling me what to do? It’s pre-prescribed? Now, when is the last time you heard the term cookbook medicine? It’s been absent for the last three or four years. That premise was wrong as well.
Now we’re operating on the third premise –that doctors don’t know and don’t care about cost. Data proves that’s not the case. A study surveyed 503 orthopedic surgeons and gave them a simple challenge. Here’s 13 commonly used implantables — guess the cost. All you have to do is get within 20 percent. The got it right 20 percent of the time. This was at Stanford, Mayo … six academic centers.
Then they asked those same physicians, if you had the cost, would you incorporate the information in your selection of a device? Eighty percent said yes. That’s two out of 10 who get the information or could guess it correctly, and eight out of 10 would use it if they had it. That gap is an enormous opportunity.
We see that conversation changing, but it’s in the early innings. People are uncomfortable at first. If they approach it as a witch hunt and a condemnation — you’re an outlier, you spend too much, there’s got to be a problem — the clinicians will say, "My patients are sicker," and then obviously, “They’re more complex and they get better outcomes.”
You have to weave together the clinical and financial, which is starting to happen now, in order to make this work. The chief medical officer at Yale, Dr. Tom Balcezak, also calls himself the medical director of finance. We’re seeing that woven together more often in more places.
As people go after value, if the top part of the value equation is quality — and quality is defined as not only clinical outcomes, but also obviously the experience of care — and the bottom part of that equation is cost, how do you deliver value if you don’t know your cost?
Here’s the problem. Even for the organizations in the past that have provided cost information, it was done on a ratio of cost to charges. It was based on the charge master, which is fiction, then taking a percentage of that, which is a made-up amount. You’re taking fiction based on fiction. It’s no wonder that nobody, including doctors, really trusted the information.
The cost accounting process historically has been run two or three times a year. It only had inpatient information, not ambulatory or outpatient information. The actionability, the accuracy, the accessibility of the data just wasn’t there.
Strata has grown rapidly and was acquired a year ago by Roper Technologies. What has changed most in the company?
Let me first talk about Roper. Roper is a publicly traded holding company that operates very similar to Berkshire Hathaway. They make investments in companies, but they let them operate independently. Roper has been around for 110 years and they own 49 companies. I believe they’ve sold one company in that history of 110 years.
The acquisition gave us the opportunity to continue down the path we were on, but with a permanent home and even more support. They don’t get involved in operational or budgeting decisions. There’s no revenue synergy or cost synergy target. There was no integration team or transition team.
It was 14 months ago when we became part of Roper and it has been everything they promised and more. It really is an amazing place to bring your company if you want to have it have permanence and continue down the path that you’re on. It’s a perfect partnership we have with Roper. I mean that sincerely.
The biggest thing that’s changed in the company is the acceleration of decision support — which is the combination of cost accounting and payer contract modeling — and the movement of the product into becoming more of a platform. What Epic or another EHR is on the clinical side, we have become on the financial side – a single database solution for all of the core operations and analytics in finance and operations. For a CFO, it’s their financial planning, budgeting, and control system. It’s their cost accounting and decision support. It’s their cost and performance management application.
We added about two years ago what we call continuous improvement, which is the ability to not only identify cost reduction opportunities or ways to use your resources more effectively, but then also the project management on top of that. We have automated cost and margin management. Because of that, the company is seen as a strategic platform versus a tactical tool set, which is how it used to be seen.
Do you have any final thoughts?
There’s an opportunity to do a tremendous amount of good here by opening up this conversation in healthcare around understanding cost and how resources are used, providing a level of sophistication around it that has been largely absent. The last 10 years of healthcare IT has been focused on the clinical side of the house and we’ve received a great benefit from that. Now we can do things that we couldn’t do before, not only sharing information, but being able to look at quality.
Clearly there’s more work to be done on the clinical side, but the missing piece is now the financial side of the house. While we’ve had all this innovation on the clinical side, we’ve fallen behind on the financial side. Now is the time to address that. Many good things will come from us all collectively doing this work.