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The Keckley Report

Hospital Boards are Not Prepared for the Future

By May 15, 2023No Comments

While Congressional leaders play chicken with the debt ceiling this week, antipathy toward hospitals is mounting. To be fair, hospitals are not alone: drug companies and PBMs share the distinction while health insurers, device companies, medical groups and long-term care providers enjoy less attention…for now.

Hospitals are soft targets. They’re also vulnerable. They operate in a sector that’s labor intense, capital intense and highly regulated by federal, state and local governments. They’re high profile: many advertise regionally/nationally, all claim unparalleled clinical excellence and unfair treatment by health insurers.

Hospitals operate locally, so storylines like these get attention

  • In Minnesota, Mississippi and Pennsylvania, hospitals are in court alleging under-payments and/or adverse coverage policies by dominant insurers in their markets.
  • In NC, the state treasurer and others are challenging a unanimous State Senate vote last week granting the UNC Health System a waiver from antitrust concerns as it builds out its system.
  • In CA, nurses are striking for higher wages, improved work conditions in 5 HCA hospitals.
  • And in Nashville today, private equity-owned Envision will declare bankruptcy throwing its emergency room staffing contracts with hospitals into limbo.

The future for hospitals is unclear. Inpatient demand is shrinking/shifting. Outpatient, virtual, and in-home services demand is growing. Discontent among workers and employed physicians is palpable. Labor and supply chain costs wipe-out operating margins and price sensitivity among consumers and employers is soaring. Most are trying to survive any way they can. Some won’t.

Per Syntellis’ latest analysis, the tide may be turning:

  • Total hospital expenses rose for an 11th consecutive month, but growth in labor expenses slowed for the first three months of 2023; Total Expense rose 4.7% YOY for the month while Total Non-Labor Expense rose 5.5% YOY due to higher costs for drugs, supplies, and purchased services. Total Labor Expense was up 1.8% YOY — a slight uptick after YOY labor expense increases eased to less than 1% in January and February.
  • Hospital margins remained extremely narrow but inched back into the black for the first time in 15 months as revenue growth outpaced expense increases. The median, actual year-to-date Operating Margin was 0.4% for March, up from -1.1% in February.
  • Surgery expenses increased despite lower volumes, while levels of patient care remained relatively steady.

Syntellis March Performance Report performance_trends_april_hc.1105.05.23.pdf (

But no one knows for sure how long a full recovery will take, how debt ceiling negotiations will impact payments by Medicaid or Medicare or how court and antitrust actions by the DOJ will impact hospitals in the future.

What we know with a fair amount of confidence is this:

  • Bigger organizations in each sector—hospitals, drug & device manufacturers, medical groups, and health insurers—will have advantages others don’t.
  • Private equity will play a bigger role in the delivery and financing of care through strategic investments that drive low cost, high value alternatives for consumers and employers.
  • Regulators will enact selective price controls in targeted domains of the health system.
  • Large self-insured employers will be the primary catalyst for transformative changes.
  • Inpatient demand will shrink and tertiary services will be centralized in regulated hubs.
  • Structural remedies—convergence of social services and health systems, integration of financing and delivering care and direct alignment of insurer and provider incentives—will be key features of systemness choices to consumers and purchasing groups.

Most hospital boards of directors, especially not-for-profit organizations, are not prepared to calibrate the pace of these changes nor active in developing scenario possibilities for their future. That’s the place to start.

Post-pandemic recovery is not a technology-empowered 2.0 version of hospital operations: it is a fundamentally different business model based on new assumptions and bold leadership.



Re: physician education: “… if doctors — the very people tasked with making every major healthcare decision and driving costs for patients and the system — lack a clear understanding of the business of health and the basics of economics and financial incentives, we end up with a bifurcated system opens in a new tab or window wherein doctors sit at the children’s table while the non-clinician big boys and girls are seated at the boardroom table. For the health of patients, the system, and the future of health, they must sit at the same table.”

Adam Brown, MD, MBA, is a practicing emergency medicine physician, founder of ABIG Health , and a professor of practice at the University of North Carolina’s Kenan-Flagler Business School Dear Medical Schools, Educate Students on the Business of Medicine” MedPage May 13, 2023

Re: future state for hospitals and health systems: “It has become clear that astute healthcare companies—especially hospitals and health systems—are reading the room, as they say, and harbor no such illusions the industry will revert to its pre-pandemic ways.

Front-line workers, overworked, underpaid and in harm’s way during a pandemic marked by a shortage of PPE, demand better. The federal funds that helped hospitals have dried up, leaving behind a murky financial picture and more conversations about affiliations, mergers and acquisitions. Rural hospitals, with little chance of finding partners, are just trying to hold on.

While health systems were grappling with cases of the disease, retailers and others sensed opportunity to upset the status quo. As a result, patients will benefit from more choices in where and how they receive care—good for the consumer, not so good for traditional providers…

The care, delivery and payment models lasted for so long because they didn’t need to change. Those days are gone. We look forward to reporting on how you handle your evolution. “

Mary Ellen Podmolik, Editor” End of public health emergency marks an inflection point Modern Healthcare”  May 15, 2023

Re: homelessness, social determinants of health: “The homeless are just the most graphic example of how health care spending rises through holes in the safety net. The daily lives of the homeless make them more prone to substance abuse and mental disorders. They are more likely to suffer from poorly treated or untreated diabetes, cancers and heart diseases, and wind up in the most expensive place imaginable – the hospital – when those conditions reach crisis stages…Yet, despite its highest-in-the-world health care spending and a growing base of research showing investment in social services could lower those costs, the U.S. remains the least generous country in the developed world in providing the social services that would create a kinder society…”

Merrill Goozner “Housing is Health Care”  GoozNews May 12, 2023

Re: Gen Z is different: Per Oliver Wyman: “A common objection to Gen Z research is that these teens and young adults will become like their parents as they age. Yes, they will change, especially as they earn more, have families, or buy homes, but this generation is different. “

We’re talking, of course, about Generation Z, also known as Gen Z, Gen Edge, iGen, the post-millennials, and the New Greatest Generation. Born between 1997 and 2012, they represent 25% of the world’s population and $7 trillion or more in purchasing influence, and will comprise 27% of the workforce by 2025. They are the first digital natives and were impacted by COVID-19, social upheaval, and other trauma at a much more impressionable age than older generations. As a result, they are exhibiting certain behaviors that other generations didn’t, even at the same age. For example, Gen Zers in the United States are 45% more likely to invest than millennials were at age 21, and 2.2 times and 4 times more likely to invest than Gen Xers and boomers were at this age, respectively, according to our surveys.

Gen Zers also are the most educated generation, so far. They are 10% more likely to attend college than millennials and 33% more likely than Gen Xers were at the same age, according to the Pew Research Center. These and other behaviors will remain different over time and could have an enormous impact on the financial well-being of Generation Z.”

Three Misconceptions About Gen Z Research Debunked Oliver Wyman  May 5, 2023

Re: pharmaceutical manufacturers’ taxation: “The industry’s average effective tax rate is an
astonishingly low 11.6 % – a 40% decrease from years prior to the 2017 Republican (2017) tax law.”

American Patients, American Companies, Offshore Profits
Senate Finance Committee Democratic Staff Memorandum, May 11, 2023

Healthcare Investing

Re: 1Q 2023 private equity investing in health services: PE healthcare services investment declined for the fifth straight quarter to 200 deals in Q1 2023—21.5% off the pace set in 2021 but still 20.4% higher than the average quarter in 2018-2019. The industry is settling into a new normal of higher interest rates, lower multiples, and slower, more proprietary deal processes. In most categories, multiples are landing a couple of turns lower than where they sat in 2021, or approximately at 2018-2019 levels, with some exceptions (e.g., mental health). This is in part a function of reduced leverage; rather than 6x, lenders are willing to underwrite 4x or 5x, or slightly higher for a very high-quality business.

PE investors are also pursuing buyouts and platform creations with groups that have not yet taken institutional funding, and we expect to see more such deals announced in coming quarters. Given rising costs, cash-pay categories such as medspa, veterinary, and private duty home care, and specialties with significant cash pay ancillaries, such as dentistry, are seeing increased sponsor interest. The obvious risk here is a significant hit to consumer discretionary spending if the US enters a moderate-to-deep recession.”

Pitchbook 1Q PR Investing

CB Insights: Generative AI investing down: “Global AI funding fell to $5.4B in 2023, a drop of 43% QoQ. This is the lowest quarterly total since Q1’18. Three of the top 5 largest funding rounds this quarter went to generative AI companies — a signal that generative AI excitement is translating into real funding momentum. However, it may take longer for the growing genAI demand to make up for the decline in broader AI funding.”

  • Global AI venture funding plunged in Q1’23; US AI funding falls by 27% quarter-over-quarter (QoQ), but Silicon Valley sees AI investments rebound
  • AI unicorn births held steady at 5 — including 3 generative AI companies raising at $1B+ valuations
  • Median late-stage deal size nosedives in Q1’23 to $25M, significantly below even pre-pandemic levels
  • M&A deals increased by 12% QoQ, but public exits remain subdued

State of AI Q1’23 Report CB Insights May 11, 2023

Pitchbook: 1Q 2023 VC market slowed: Per Pitchbook’s recap of venture funding in 1Q 2023:

  • The median seed pre-money valuation continued its growth trajectory since Q1 2020, reaching $12.9 million in Q1 2023.
  • The median deal size fell to its lowest level since Q2 2017. The demand for capital at the late stage is outstripping supply, with a capital- demand-to-supply ratio of 3.24x.
  • The median late-stage valuation in Q1 2023 decreased by 8.3% from Q4 2022, while the median late-stage VVC fell to $9.0 million, marking the first time it has dipped below $10.0 million since 2018
  • The Q1 2023 median venture growth pre-money valuation fell to $90.0 million, a dramatic decline from the 2021 full-year record figure of $355.0 Concurrently, the median deal size shrunk to just $7.0 million as investor appetite and risk tolerance for these types of deals waned. CVCs remain the exception to this narrative, notching a record participation rate on a deal count basis
    of 26.5% in Q1 2023.
  • The dire state of public exits has continued through Q1 2023, during which only eight companies managed to exit via IPO. Despite a 42.3% quarterly increase in the median public listing VC exit valuation in Q1 2023, this figure is merely a fraction of that of the mid-2021 market exuberance. Healthcare startups made up half of public exits in Q1, and we expect to see a rebound in exit valuation when the public market warms to tech IPOs, which tend to generate outsized exit value.

VC Valuations 1Q 2023 Pitchbook May 10, 2023

Public Health

Re: Pandemic preparedness: “Our public health infrastructure, vital to outbreak preparedness and response, continues to be ignored. Even before 2020, the public health workforce had shrunk by more than 15 percent; COVID-19 caused even more attrition from pandemic-related burnout and resignations, as public health professionals were politicized, and pilloried, as never before. Our data and surveillance systems are in serious need of investment: much of the knowledge gained during the pandemic emerged from abroad, ranging from Israel on vaccine effectiveness to South Africa discovering and genetically sequencing the omicron variant. We blamed ourselves in 2020 for the serious lack of investment in public health that left us so unprepared. But now the emergency is ending without significant new investments in the Centers for Disease Control and Prevention, surveillance technology, or local public health infrastructure. In many ways, with public trust in science plummeting, we are even less prepared than we were in 2020.”

Abbe R. Gluck , Lawrence O. Gostin  “Why The End Of The Public Health Emergency Really Matters” Health Affairs May 11, 2023 /


Re: HHS OIG audit on psychotherapy improper billings: From March 2020 through February 2021(audit period), Medicare Part B paid $1 billion for psychotherapy services, including telehealth services, provided to Medicare enrollees nationwide. Prior OIG audits of four psychotherapy providers identified high improper payment rates for psychotherapy services furnished before the PHE…Our audit covered approximately$1 billion in Part B payments for more than 13.5 million psychotherapy services provided during our audit period. We selected two stratified random samples of psychotherapy services: one sample consisted of 111 enrollee days for telehealth services, and the other consisted of 105 enrollee days for non-telehealth services (i.e., provided in person)…Based on our sample results, we estimated that of the $1 billion that Medicare paid for psychotherapy services, providers received $580 million in improper payments for services that did not comply with Medicare requirements, consisting of $348 million for telehealth services and $232 million for non-telehealth services.”

“Medicare Improperly Paid Providers for Some Psychotherapy Services, Including Those Provided via Telehealth, During the First Year of the COVID-19 Public Health Emergency” OIG May 2023

NC Senate passes antitrust deal for UNC Health: Last week, the North Carolina state Senate passed a bill (SB 743) 48-0 that exempts the UNC Health Care System from federal and state antitrust laws. Aside from exempting UNC Health from antitrust policies, the proposal would also change the system’s leadership structure and allow it to shift employees from state health insurance and retirement plans to a new benefits package. The state employee’s association and the state’s treasurer oppose the bill, but the Senate held almost no debate on the policy.

“Proposed bill could give UNC Health a green light to expand without as much oversight”

FDA approves OTC Birth control pill: A panel of FDA advisers unanimously voted Wednesday that the benefits outweigh the risks of making an OTC birth control pill available, signifying a momentous step in the multidecade effort to make oral contraception accessible without a prescription in the United States. If the FDA approves OTC sales of the norgestrel (Opill) pill this summer, it could considerably expand contraceptive access. However, FDA scientists raised concerns about whether women with medical conditions that should preclude them from taking the pill would follow warnings and avoid the drug.

FDA Advisors Recommend Over-the-Counter Birth Control Pill for the First Time Very Well Health May 11, 2023 FDA Advisors Recommend Over-the-Counter Birth Control Pill for the First Time (

Senate Finance Committee secret shopper survey finds MA provider directories incomplete: The committee majority staff analyzed provider directories from 12 Medicare Advantage plans in 6 states and found that more than 80% of mental health provider listings were incomplete/unavailable. Staff called 10 providers from each plan with the aim of obtaining an appointment for an older adult family member with depression. Of the 120 total listings contacted, 33% were found to be inaccurate, non-working numbers, or unreturned calls. Appointments could only be made 18% of the time and rates varied by plan and state, from 0% in Oregon to 50% in Colorado.

“Senate Hearing Highlights Problems with Medicare Advantage Directories and Networks” Medicare Rights Center May 11, 2023

Health Insurance

KFF: Medicaid work requirement: “On April 26, 2023, the House of Representatives passed a Republican debt ceiling bill (HR 2811, the Limit, Save, Grow Act of 2023) that includes a requirement for states to implement work requirements for certain Medicaid enrollees. Data show that 91% of non-elderly Medicaid enrollees who are not on Supplemental Security Income or Medicare are working or face barriers to work. We estimate that if the proposal were fully implemented in 2024 and the rate of Medicaid eligibility loss was as the Congressional Budget Office (CBO) estimated, then 1.7 million enrollees would not meet work or reporting requirements and potentially face disenrollment in that year. States could continue to provide Medicaid to those enrollees but would not receive federal matching funds for doing so.”

“Tough Tradeoffs Under Republican Work Requirement Plan: Some People Lose Medicaid or States Could Pay to Maintain Coverage” KFF May 5, 2023


AHA: Not-for-profit hospitals’ dependence on non-operating income: “Not-for-profit hospitals and health systems have essentially two sources of funding: they either earn revenue from operations and investments (providing patient services makes up most of this revenue) or they borrow funds through issuance of debt in the bond markets or other forms of borrowing (e.g., bank lines of credit). Unlike for-profit organizations, they do not have access to equity markets. Also, unlike for-profit organizations, they are not obligated to shareholders who expect that excess funds will be distributed as dividends. Instead, not-for-profit hospitals and health systems have an obligation to their mission and the communities they serve, and strong financial reserves help ensure that they can meet this obligation even in times of operational disruption and financial distress.”

The Essential Role of Financial Reserves in Not-for-Profit Healthcare AHA April 2023


Study: EHR documentation time: On January 1, 2021, the US Centers for Medicare & Medicaid Services (CMS) modified outpatient evaluation and management (E/M) coding requirements, including the elimination of history and physical examination documentation. Centers for Medicare & Medicaid Services sought to reduce physician documentation burden1 by reducing electronic health record (EHR) documentation time. This study assesses changes in outpatient physician documentation time after these changes.

Methods: “The national sample included all health care organizations using the Cerner Lights on Network (Oracle) EHR (n = 196) from September 2020 through December 2021. We limited analyses to 4 specialties with varied E/M volume: family medicine (high volume), internal medicine (high), cardiology (moderate), and orthopedics (low).” Researchers analyzed changes in documentation time before the CMS E/M directive in 2020 and immediately after among 18,832 practices.

Findings: “Documentation time was decreasing slightly before the E/M changes, and this trend continued after the changes. In periods 1 and 2, internal medicine, cardiology, and orthopedic physicians had no change in mean documentation time, while family medicine physician documentation time increased by 4.8 seconds.). When we compared periods 1 and 3, mean documentation time was significantly lower for all 4 specialties: internal medicine (16.2 seconds), family medicine (13.8 seconds), cardiology (12.6 seconds), and orthopedics (6.6 seconds). Controlling for visit volume, for all specialties, there was a significant increase in documentation time per visit from periods 1 to 2, and a significant (but smaller magnitude) decrease from periods 1 to 3.

Finally, as for physician-level variability in documentation time from periods 1 to 3, 56.7% of family medicine physicians, 54.9% of internal medicine physicians, 56.9% of cardiology physicians, and 53.9% of orthopedic physicians decreased documentation time per visit…Across the 2 largest EHR vendors in the US, this study, along with that of Apathy et al, found small reductions in documentation time following the changes in CMS E/M coding requirements, but not at clinically meaningful levels. “

Maisal et al Physician Electronic Health Record Use After Changes in US Centers for Medicare & Medicaid Services Documentation Requirements JAMA Health Forum May 12, 2023; ;4(5):e230984. doi:10.1001/jamahealthforum.2023.0984

AMA Report: Medical liability claims down from 2018: Findings of AMA’s analysis of liability claims between 2018 and 2022: Excerpts”

  • “The risk of being sued over a short period of time among all physicians is generally low. In 2022, 1.8% of physicians reported they had been sued in the previous year–down from 2.4 % in 2018 and 2.1% in 2020.
  • In 2022, 31.2% of physicians had been sued during their careers to
  • In both the short and longer term, the widest variation in liability risk comes from specialty. Among the strongest and most consistent results is that OB/GYNs, general surgeons, orthopedic surgeons and other surgeons have a much higher incidence of claims. Of OB/GYNs, 62.4% have been sued in their careers, followed by 59.3% of general Controlling for other factors, OB/GYNs and general surgeons are 33.6 and 28.6 percentage points more likely than general internists to have ever been sued.”

“Medical Liability Claim Frequency Among U.S. Physicians” American Medical Association Economic and Health Policy Research, April 2023

Envision files for bankruptcy: Envision Healthcare Corp and its wholly owned subsidiaries filed for Chapter 11 bankruptcy protection on Monday. Envision Healthcare, a private equity-backed physician services company and ambulatory surgery center operator filed for Chapter 11 bankruptcy today. It comes on the heels of a favorable settlement with UnitedHealthcare, netting Envision $91 million in damages.

The move was prompted by continued litigation with UHC and its inability to restructure its $7.7B of long-term debt after being acquired by NYC-based KKR ‘s Americas Fund in a $9.8 billion deal that took the company private in 2018.

The company said that it entered into a restructuring support agreement for debt obligations of about $7.7 billion under which its unit AMSURG which manages ambulatory surgery centers and Envision Physician Services will be separately owned.

“When KKR in 2018 paid $5.5 billion to become the fourth major private equity firm to own Envision, the company was seen as a money-printing machine—albeit one whose quarter-billion dollars in annual interest payments wiped out all the operating profit the company generated in 2017. But when the federal No Surprises Act reined in the profit margins emergency rooms were allowed to rake in on surprise bills, KKR took measures to bail itself out by dubiously ring-fencing the company’s still-lucrative ambulatory surgery business and turning the core ER business into what is colloquially known as a “ShitCo,” whose bonds last week traded at pennies on the dollar.”

KKR-backed Envision Healthcare files for bankruptcy Reuters May 12, 2023 /

“So Long but Not Farewell to Envision” Prospect Health May 12, 2023