Episode 79

How We Pay for Healthcare

with Keith Pitts

September 29, 2022

Keith Pitts
Operating Advisor to Clayton, Dubilier & Rice Funds

Keith Pitts is the Operating Advisor for Clayton Dubilier and Rice. Previously, he was the Vice Chairman of Tenet Healthcare Corporation and the Vice Chairman of Vanguard Health Systems. Prior to Vanguard Health Systems, Keith served as the Chairman and CEO of Mariner Post-Acute Network as well as the Executive Vice President and CFO for OrNda HealthCorp. He received a Bachelor’s in Business Administration from the University of Florida.


The only people that are really forces of transformation in the healthcare system will be consumers themselves.



[00:01:00] Dr. Gary Bisbee: Well, good morning Keith, and welcome.

[00:01:01] Keith Pitts: Thanks. Good to see you, Gary.

[00:01:03] Dr. Gary Bisbee: We’re pleased to have you at this microphone. This show is about leadership and how leaders pursue excellence. You’ve been a remarkably successful leader throughout your career, which we’ll dig into in a moment. You had a unique position in the sense that you’d spent a lot of time with not-for-profit hospitals. In your consulting days, and then here you were on the investor own side. So what did you see as the major opportunities that an investor own hospital system like Vanguard had with these not for profit systems?

[00:01:35] Keith Pitts: Well, a lot of times, you know when health systems start to get into a decline, a lot of times there are, Management issues. There’s a lot of turnover. They get in turnaround folks who really are looking for a very short term, solution. And they keep, I have a perennial problem recruiting the right leadership and talent, which ultimately means they have a governance problem at the end of the day because the boards don’t really understand and haven’t really committed to finding the right capital. They get tired and they get weary and they want a solution. And if we can build the trust with ’em in a lot of cases then we can become the solution. That was how we looked at that. and it’s all over the map when that happens. But, and then there’s sometimes once you’re in a market, There just may be a compelling, strategic reason why the organization should be in the same company. That happens after you enter a market, but a lot of times, when we picked up entire systems, it was because of kind of that pattern over time with some rare exceptions. And then there were those that. Like in Detroit probably the most memorable, the last big system into Vanguard. But the board there was very enlightened, but they had done a good job turning themselves around and staying in the game. With no capital. And they needed a significant amount of investment in, facilities and strategic areas and things like that. And they really didn’t have the capital access. And I think they actually spent a good bit of time going to all the not for profits and the for-profits didn’t wanna do anything with ’em. So then, they flipped to talking to the investor own. And that’s how we Got into there and started the dialogue with them.

[00:03:06] Dr. Gary Bisbee: So why don’t we turn to your view of the health system as a whole since you’re a student of of the trends and the relationships and the health system. You’ve always been that way. One of the more, one of the best thinkers around. So there’s a set of questions there, Keith. One of them is, how have the risks for health systems changed over the last 20 or 30 years?

[00:03:30] Keith Pitts: Question. Uh, 20 to 30 years has been interesting. So if you look at the fall of the HMOs at the end of the nineties, that really changed the course for a lot of things as you imagine. The payers, everything went back to ppo, of pricing went way up. The regional health systems got real strength. The payers started doing very physicians got the short shift on, on, in my view, over the last 20 something years. And then they started to, over time started to run into employ more employment models with health systems and those changes. And, know, I wasn’t used to that. I was just used to a different kind of model over time, but we shifted and changed like we needed to. But I think the health system went through this time where there really wasn’t any. It was a volume base and a pricing base system for a long time. And it’s interesting in 2011 or 20, maybe it was 2010 or 11, I did a conference and everybody felt like the ACA was transform healthcare and. I said it’s really acas really about not transformation, but around people and around trying to provide more coverage. I said the only people that’ll really force the transformation of the healthcare system will be consumers themselves, once they really take charge. And I think everybody looked at me like I was nuts because the ACA was about to come out and everybody’s gonna look at all this money coming in. And honestly, when you look back, People that did the best were people that got new coverage, but some of those couldn’t really afford their out of pockets. And then the other people that did really well were the payers during aca. I think everybody underestimated the real win, who was gonna be the real winner in the aca. And as you know, the health systems gave up money for the coverage. Then a lot of the states didn’t expand Medicaid, then a lot of things happened that weren’t anticipated at the time. So yeah, it’s a, it was very interesting. So it’s changed a lot. But then Covid came along and right when I got out of the health system business, , and I was moving to my next chapter, then all of a sudden what made me be one of the, was truly a sentinel event in the history of health systems. Covid happened and. I think that, some things are, we’re starting to see, you know, the lingering side of that where. First of all, value-based care has been picking up a lot. At the same time, there was a new investment and renewed investment around value-based care, particularly on the Medicare advantage side by a lot of folks. And it was starting to build up, but now you’re starting to see, a lot of. Pressure back for, different solutions. Consumers now are willing to accept virtual healthcare and versus necessarily being in person. And then of course, the we’re stating obviously a, an accelerating rise in value-based care and even some pressure and opportunity to go back into it on the commercial. As you know, the only place, most major place in the country where any groups of providers have been at commercial risk has really been in California. And it’s been that way for years. When the health systems dropped out of the risk game at the end of the nineties the innovative doctor groups picked it up and said, We can take the ball and do this. And they stayed in the business. So that’s why you have healthcare partners of the world and the monarchs of the world and the heritages of the world, and they’re, they in various forms of ownership. They’re all still in business, still successful today,

[00:06:34] Dr. Gary Bisbee: So Keith, the federal government is the largest payer and regulator of care. You made the point that through what we would call Medicare advantage, they’re getting into the value business. What do you think’s gonna happen for the rest of this decade? In terms of the government role? Are they going to continue? Grow and continue to influence care. Where does that leave the private sector?

[00:06:59] Keith Pitts: So I think the government is an elite of that. I don’t really see that changing, honestly. And when you think about the commercial payers the large guys, when they think about their book of business and opportunity that’s the biggest growth area they’ve got because as the traditional commercial is looks like a flat to down business over the next 10 years. And that’s a very high kegar. You have markets in this country where you have more migration of folks that are living, that are moving. At around the Medicare age that have well ended double digit expected growth in the MA book, in the Medicare Advantage book. When you think about that, it’s that’s gonna be a real shift in the change and so it’s changing, I think the landscape for doctors and the opportunity for them because, for them that becomes the potentially best business they have. And for the hospitals, the commercial business has always been the best business because chronic underpayment. And so it’s by the government side on that, so therefore on the commercial side. you know, That’s a big shift. I I think that’s, forging new relationships to, for everybody to understand. I think the best way to partner amongst players in the health system is to understand first, what are the things that really drive the business and the opportunity for your partner. How does that differ from what drives it for you and where can you find things in between that can create, win for both of you and it is a really good outcome for patients. So it’s really headed in that direction, in my view.

[00:08:19] Dr. Gary Bisbee: If we go to more value based care are the operating margins destined to be low single digits? And that’s it.

[00:08:26] Keith Pitts: I think they’re gonna have to, listen, cost is gonna be the game right now because, the elasticity and revenue is, other than market share is harder, is a harder game. I think that when I think about, what they’re gonna have to look at, I think, I think they can have better margins. I think they’re gonna have to be really smart in picking out what they do and how they do it. And not everybody can be everything to everybody. I think that’s another issue, being really focused and strategic on what you can do best and what you can. And then I think finding a way to work with your partners to. Whatever happens inside the hospital as efficient as possible. And that’s your physicians because? In effect a really well, a really good relationship between an at-risk physician group and a hospital can generate a really efficient, you know, a better margin on what I’ll call business that most folks don’t think is very high margin business because it’s more efficient. They’re not wasting resources in the hospital. They’re not leaving patients for extra days that don’t need to be there. They’re putting them into the right setting of care cuz they’re thinking about cuz they’re, they’re longitudinally. Responsible for those patients, all year long, every year. It’s not like a temporary or a transactional view. If you take a longitudinal view on it, then they can become very efficient. So I think it’s gonna require some sort of changing of mindsets to get those margins up.

[00:09:36] Dr. Gary Bisbee: The question is, will the governments. Attempt to get at costs through requiring hospitals to publish their rates, insurance company to publish their rates. Is that gonna do any good?

[00:09:48] Keith Pitts: I don’t know. So maybe let me ask you a hypothetical question. So you have hospital A and hospital B’s, the kingpin in the market and hospital A. In some markets in this country, there could be a three or 400% difference in a commercial. Payment for those two. There’s not much difference in Medicare other than extra payments like Dish and ime gme, which have a legitimate basis to ’em. Honestly, what does that mean? Do you say I don’t want to go now to hospital B I don’t want to go to the kingpin anymore. I wanna go to these guys because they’re cheaper. But does the plan design that you have for your plan really make it that much? and so I don’t know what happens. Does the variation compress and so do the, have nots become of better haves? But then what happens to the haves today if they go down? That’s really a hard time. It’s really hard to give up, price and revenue for those guys. So I’m not optimistic, but that’s gonna be transformational in itself. But, don’t count the employers out because that information may become, they’ve had a little bit of that information from their carriers, but not like that. That’s, and then, maybe they redesigned and a lot of them are not happy with. The kind of healthcare their employees are getting. And, the thing that we don’t really know about that is, what’s the workforce gonna look like and what are the, what’s the employment level gonna look like and the, and what’s the competition for talent gonna look like? Cause it’s starting, it is looking like it’s becoming an issue for a lot of organizations.

[00:11:12] Dr. Gary Bisbee: What about this trend where the insurance companies are acquiring doctors, basically? Or hiring doctors? What’s the natural extension of that? Is that going to continue over time or will that flatten out? What’s your feel about that, Keith?

[00:11:27] Keith Pitts: The leader, the market leader out there is so far ahead. I think everybody will be in some form through partnership, part partial ownership or full ownership. Try to be in the doctor business over the next several years. And, so if the value proposition for the insurance, the administrative margin, the margins on the insurance business even on the ASSO side, start to decline. they have a business model and particularly for the government business and finding people that’ll take those patients and manage those patients I think we’re gonna see more of that. And the question will be, what alternative models are out there for physicians to stay in some form of an independent practice?

[00:12:04] Dr. Gary Bisbee: Keith, this has been a terrific interview, is expected. I have two leadership questions to wrap. . One of them is we’ve been through the Covid we’re not through the Covid crisis yet, but we’ve certainly operated in the last couple years. In that you’ve been through other crisis in your careers. What are the main leadership characteristics that you like to see for a leader during a crisis?

[00:12:26] Keith Pitts: Well, The first thing is, never be a, never take a victim mentality when you’re leading other people. you know, take a mentality that this is what was, this was the hand that was dealt to us. And unless work together, To find the greatest solution and the best outcomes for the organization with whatever hand was dealt with. We can’t, whether, and some of that may be, know, you’re lobbying for something. It could always be that, but you can’t be, you can’t have a victim mentality and be a leader during a crisis. It just doesn’t work. The other thing is to stay calm. You’re gonna make, you’re gonna have to make decisions in a crisis that hurt. Whether it’s, initiatives that you really believed in, you can’t do anymore. You can’t fund people that you know you love, that you work for you that are great, and they’re, exceptional talent, but you can’t afford anymore. To run the business. I could go down a whole list of things. You gotta move. You have to make the right decisions, move on and make sure that you’re constantly reassuring those that are remaining. When you make those kind of decisions that how valuable they are and keeping the team together, it’s just a, it was a hard time to go through crises and you’ve gotta make a lot of difficult decisions, but that’s a time when leaders really do shine.

[00:13:31] Dr. Gary Bisbee: Yep.

[00:13:32] Keith Pitts: is during that time because you have to really be pretty selfless in those times because you don’t really have time and opportunity to be selfish. Because if you are, someone else will come in and fix the company. You won’t.

[00:13:45] Dr. Gary Bisbee: Final question, Keith. Since we have up and coming leaders involved as in our audience here what advice do you have for. An up and coming healthcare leader.

[00:13:56] Keith Pitts: A couple things. One is you really remember healthcare is the most personal of all service businesses. And so therefore, the power of relationship is extraordinary. And within the healthcare system, the power of relationships is extraordinary to get things done. Whether it’s with, other organizations, physicians, people in different sectors. So I think the Never Burn a Bridge, you’ve heard that from him before Gary, but never every Bernard Bridge in the business when you can help. It is really a, number one piece of advice for emerging leaders. I’m hoping the next set of leaders, we, we didn’t get it completely figured out in the last 20 or 30 years. I thought we’d get more of it figured out, but maybe the next set of leaders are gonna figure this out make it a better system.

[00:14:34] Dr. Gary Bisbee: I agree. We didn’t do as well as we thought we would in last 20, 30 years, but we did some good. Keith, I think.

[00:14:40] Keith Pitts: Oh, we did? Yeah. We absolutely did some good. I just think now, when you think about the individual and how complex the system is to access, sometimes I think we we have to take a real view of an inclusive view of healthcare find ways to make the system less complexity, less complex, and more accessible.

[00:14:58] Dr. Gary Bisbee: Keith, thanks so much. This is just terrific. Appreciate. And you’re still the brightest guy around. So our pleasure.

[00:15:05] Keith Pitts: Thanks, Gary. Nice to see you as always.

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