Welcome to the "Lessons from the C-suite" series, featuring Advisory Board President Eric Larsen's conversations with the most influential leaders in health care.
In this edition, Dr. Rod Hochman, president and CEO of Providence, talks with Eric about Covid-19 index case number one, responding to a prescient prediction about everything going digital, and how data can—and will—save lives.
[Edited by Dave Willis, Vice President, Health System Strategy, at Advisory Board.]
Q: Rod, there’s really only one place to start this conversation, and that’s with the pandemic. Let’s rewind back to January 20, 2020, when the very first case of Covid-19 was diagnosed in the U.S. at one of your Providence hospitals. A patient who had been traveling in Wuhan came home and one of your physicians, Dr. Diaz—who had worked on the Ebola crisis in Africa—detected something anomalous in the diagnostics, acted quickly in isolating the patient, and immediately engaged the CDC. And on top of that he gave the patient Remdesivir, because they had been using that to fight Ebola, and consequently saved the patient’s life.
So here we are 15 months later, and while we are slowly pulling out of the crisis – and we might debate how proximate that endpoint is – but it feels like a good moment to pause and ask about your reflections from the past year.
Hochman: Eric, when I talk to anyone about last year, it’s amazing that we got through it. I think back to that January day and am reminded of how fortunate that patient was to be treated by Dr. Diaz—who is forever and a day one of our heroes at Providence. When it's index case number one, it's hard to know how to do things the right way. But he saved that patient's life.
Right after that first case, our doctors and clinicians from our seven states were on the phone to China and Italy and saying, "Okay. What did you guys do and what do we need to know really quickly?" So, out of dark moments you see the light. It was great to see how the clinicians and scientists didn't care about politics, they were just singularly focused on how they were going to take care of this disease.
But roll the tape forward; you know what happened. In March we closed everything down. We were bringing in no revenue. And yet still paying out what for our health system is close to half a billion dollars a week in expenses. We didn’t know whether there would be a CARES Bill or anything else, so every night I’d go home and call our CFO up at 11:30 at night saying, "How long can we last?"
Our team in finance was looking at cash flow and reserves and where are we going to get lines of credit, how are we going to work with the government. One of the things that we're proudest of is that we kept all 120,000 people on board even though many of our services were closed. I've never been prouder of our organization, the way everyone pulled together. Supply chain, doctors, nurses, everyone dug in and it was problem-solving. “OK, what’s the problem today? No masks or gloves. Okay. How are we going to solve that?”
So I do think it was the hardest year, and I would also say it was our finest year. When people ask me what I worry about most, I say it is our 120,000 caregivers on the front line, and their health, mental status, and well-being. Because we’re not out of this yet.
As you know, Eric, I trained as an immunologist and rheumatologist. Never did I think I would actually need to teach so many people about T cells and B cells and everything else. There's not going to be one moment when we say, "Gosh, the pandemic is over." It's not going to be like that. I talk about three phases: BC, DC and AC. Before Covid, During Covid, and After Covid. Right now we’re still DC, During Covid, and I think the AC world is not going to look the same as the BC world.
The three phases of the pandemic
Q: Your retrospective on the past year is fascinating, and I think something of a microcosm for the country’s broader experience – especially around those three phases you list – BC, DC and AC. I’ll admit that on my bad days I worry that there may not be an AC at all. You know well, Rod, especially wearing your immunologist hat, just how vulnerable we are to these animal-to-human pathogen transmissions. And as we look around the globe and witness accelerating urbanization, continued encroachment on animals’ natural habitats, and increasing meat consumption in developing countries – there is a case to be made that we need to gird ourselves for future battles – that Covid-19 may indeed prove to be a ‘starter pandemic’. So your comments about the ‘AC world not looking like the BC world’ may be prophetic.
Hochman: I have to agree with you Eric. Name a pathogen that we've ever completely eradicated. We’re very fortunate in the United States, but if you live in other parts of the world, there are still episodes of the bubonic plague. Or smallpox, typhus, malaria. So when we say "eradicated," what we mean is that it's so controlled that it is no longer a real issue as it relates to mortality and morbidity. Not that it’s gone for good. That’s what viruses do, they survive and they mutate.
But the United States is going to do a really good job of vaccination. Probably by July, we'll be as fully vaccinated as you can be. Then we're going to have to turn our attention to the rest of the world.
You know, I gave a talk about four years ago in which I said, I was worried about two viruses. The first was cyber viruses and everyone nodded their heads. The second one sounded like a full thud in the room—I said RNA viruses, and in a crowd of 500 people, everyone just had a blank stare. So I talked about SARS, and I went through the other examples that have been out there. So to your point, Eric, there will be more of these.
But the good thing is that we understand much, much more about how to create new vaccines. And we've learned a lot about how to treat people with respiratory viral illnesses. We’ve learned that we need a good source of protective equipment in our country. And we’ve learned a lot about preventing the spread of illness. There was really no flu season this year, fewer common colds. So hopefully we can learn from all that.
Q: Let’s zoom out and speculate a bit on what the “AC” era will be like. How are you thinking about this next chapter and specifically the structural changes the pandemic has caused? What are some of the economic, political and societal evolutions that the pandemic either altered or accelerated?
Hochman: There are five major systemic factors that have been accelerated, or spotlighted, by everything that happened in 2020. Number one is biologic instability. Viruses and other diseases can really destabilize the whole world.
The second is social inequity, especially in terms of race and ethnicity. We’ve been staring at healthcare inequities for decades. That one finally is front and center because of everything we saw during 2020.
Third is financial instability. The chasm between those who have a lot and those who have not enough has really grown. And that instability is a consequence for healthcare, for any industry really.
Fourth is political instability and polarization like we've never seen. It has been trending for a while, but 2020 put the exclamation point on it.
And then the fifth that doesn't get enough attention is environmental instability. Just this past year alone, we saw the worst wildfire season on record in the Western United States. There was cataclysmic flooding in the Southeast and freezing in Texas. I always say any time Bill Gates and Pope Francis agree on an issue, it's probably important. For those of us in healthcare, look at the health effects of what happened on the West Coast with the fires, the pulmonary instability. What happened to the hospitals in Texas when there was no power? We can no longer ignore the fact that environmental instability is going to be with us. So I call those the five mega factors, and if you wanted to add a sixth, it’s cyber insecurity.
Tectonic shifts in healthcare
Q: Rod, I like that construct – your five societal megatrends – and how all of these phenomena either were deepened or accelerated over the past year. Let’s apply that framework specifically to healthcare, and how the topography of our industry may (or may not) be permanently reshaped. Lots of speculation on some of the big, tectonic shifts – site-of-care shift, top of license practice, home as an epicenter, digital and omnichannel front door, etc. One thing that a lot of these secular changes have in common is that they can be, by and large, disadvantageous to incumbent health systems, if we aren’t agile and quick to adapt. Your mention a moment ago of the half a billion dollars a week obligation that Providence has – with or without patients – is a good example of how we as health systems might not be able to switch on a dime to capitalize on and respond to some of these trends. How are you thinking about this? Both the potential pandemic-induced changes, and Providence’s ability to adapt?
Hochman: Overall, I think there are three issues that every healthcare system needs to solve for. First, there needs to be a payer strategy, because if you're not getting closer to the premium dollar, you're in trouble. Second area is physician strategy. If you don't have a doctor strategy, I'm worried about you. And number three is what's your everywhere-but-the-hospital strategy? Ambulatory, urgent care, home care, hospital at home. If you can't articulate for me how you're setting up your markets that way, I'm worried.
Those three things the “what” of your strategy. Now let’s talk about the “how.” I call these the three Ds: diversifying, deconstructing, and digitizing.
We’re diversifying our portfolio so it's not just about acute care. It's about being a services company. It's about being an ambulatory surgery company. It's about partnering with a grocery store. It's about thinking differently about what you are so that you don’t become the next Kodak, the next Blockbuster.
The second D, which got my board members more agitated than the first is deconstruction. I’ve been at this for 42 years since I graduated from med school. So before, what would happen if I was a CEO of a big medical center? I would do everything. Finance, acute care, ambulatory, all of it. I don't think you can remain competitive in this world if you can be a generalist and try to do everything yourself. So we've created a home and community services division. It's a billion and a half dollars. We have a population health division that has our health plan and everything that we're doing on value-based care. We have an acute care division. We have an ambulatory care division. We have a medical group division. We have people that wake up every day worrying about that business. And that's the only way you compete because that's what the rest of the world is doing. Competing with each of those businesses.
And the third D, which you could predict, is digitization. Eight or ten years ago I was with Ram Charan who's a brilliant thinker but is a man of few words. And we were sitting in a conference room. He said, “Rod, take out a pencil.” I replied, “Ram, I don’t think I have a pencil.” And he said, “Take one out, Rod. Write this down. Everything is going to go digital.” This was eight or nine years ago. It’s like that famous line from the movie—
Q: --“Just one word: plastics.”
Hochman: Plastics! Right. So it was digital. And that’s when we hired Aaron Martin. We didn't quite know what we needed to do, but when Ram Charan tells you it's all going digital, it's all going digital. And look where we are now. In 2019, we did 70,000 tele-visits at Providence. In 2020, we did 1.7 million. So yes, you’re exactly right, Eric – there was indeed a tectonic shift in the way healthcare is delivered. We all discovered how much healthcare could be delivered remotely, and we’re moving fast to adapt.
Q: I like your delineation of the issues, and those ‘must have’ strategies. Let’s take it a step further.You mentioned, Rod, three imperatives in the strategy: get closer to the premium dollar, have a compelling physician strategy, and figure out the ‘everywhere but the hospital’ question.
To me, the first one is determinative. I worry there may be an insurmountable divide between payers and providers, despite the rhetoric of collaboration and the stated good intentions of each side. The average health system in the country, when you strip away shared savings and other non-delegated risk, has something like 2% capitation. The academic literature suggests you need between 23% and 29% capitation in order to practice true population (and ‘demand-destructive’) healthcare and make the economics work. Where is Providence on that journey?
Hochman: Including everything, the health plan, Southern California? Twenty-five percent.
Q: So 25% of your $26 billion in revenue is capitated? That’s a big number. Bigger than I would have guessed.
Hochman: Remember, we've had a health plan for almost 40 years. We have about a million members. And we have the foundation model in Southern California. But see, that’s why you need all three parts of the strategy. Just getting closer to the premium dollar isn’t enough. So one of the things that we started to push at Providence—and as chair of AHA, we're going to push this a little bit harder—is that all of primary care, regardless of whether it was commercial, Medicaid or Medicare, should be capitated. And we have risk-adjusted all primary care patients into high risk, medium and low risk. So that a primary care doctor knows what their panel was on day one, January 1st, and they had a check for doing that. And then they were going to either get a bonus or not based on how well they took care of those 2,000 patients. So what do you immediately do? You revolutionize primary care overnight. Bang. You start hiring an army of great nurses, social workers, behavioral health specialists.
It works. We know it works. Now for the insurers and for the government, primary care is what? 10 to 12 dollars per member per month? So it's not a lot of money. If I was going to solve the healthcare problems for the country, I'd go primary care full cap. And for specialty care, I'm a believer in bundling. What happens with bundling is it forces people around a disease entity to really work together. And they tend to be more economical. Let's say if we bundled prostate cancer. Today you can cut it out, you can slice, dice it, proton it and everything else. The range in cost is dramatic in prostate cancer. And the outcomes are pretty much the same. Under a bundle, you force people into doing the things that actually are scientifically proven to make a difference.
The evolution of volumes
Q: Well said. I agree that bundles are a promising (and currently under-deployed) tactic. And your primary care cap model is so important – not only will it help manage care longitudinally and close gaps in care, but it will also help traditional players manage this conversion from volume to value. Which will be even more important post-pandemic, depending on how inpatient volumes evolve – will they come back in a ‘V-shaped’ recovery? Or will there be a structural decline as patients embrace new modalities of care (lower-acuity settings including the home, as well as virtualization of a certain percentage of our care). Inpatient admissions have always been an imperfect measure of relevancy, especially in a value-oriented framework, but given the dependency of many incumbent health systems on this metric, I have concerns.
Hochman: So do I. It goes to what I think is our biggest problem. The worst measure for a health system, as you indirectly point out, is acute care admissions. What I want to know is how many new customers have come to Providence this month, regardless of the door of entry, whether through digital or ambulatory or whatever? Second question. How long are we keeping those folks with us? So this concept of customers, customer acquisition and customer longevity, those are the metrics that I think are critical to a health system. The rest of it will work its way out, because if I have you for life, I'm going to get you a colonoscopy when you need it. But most health systems aren't keeping an eye on that. and if they keep a myopic view on their acute care admissions, one day they're going to walk in and those admissions are gone. And you won’t know why. I’m going to know because I'm watching it all.
Q: I think that is a smart and enlightened way to think about it. And what I'm hearing you say, Rod, is that even if the volumes are coming back with resiliency, that's not the point. The real math is in the denominator of ‘covered lives’, of omni-channel patient acquisition and retention. Which goes to those three Ds—the diversification, deconstruction, and digitization. How'd I do?
Hochman: You got it, well done. And there’s another problem with focusing on admissions. The demographic of this country. How many seniors are we adding a day?
Q: Ten thousand plus.
Hochman: Right. That demographic is shifting over, and there's no question that those folks require more services. I would ask what does the hospital of the future look like, because we’re really good at acute care, but we’re really bad at the front end of care. And we’re horrible at the back end of care, end of life. I want to reengineer the front and back end.
Q: Let’s pause on that comment for a moment. You’ve always been a prominent and thoughtful advocate of living wills, and of protecting against over-intervention and over-treatment in the last six months of life.
And I think we can agree that both the front end and the back end of the healthcare system require an active and engaged primary care physician base. So let’s dive a little more into the physician part of your strategy. You talked about full primary care cap. Today there are 229,000 primaries in the country. Twenty five percent of them are over the age of 65.
Hochman: Right, and 80% are depressed.
Q: 80% are depressed. And not only caused by that the stress and exhaustion of the past year, but by the economics – this group collectively lost $15 billion across the year.
Tally this all up, and factor in the capital allocators’ sudden fascination with primary care (PE-backed and publicly traded PCP companies like Oak Street, ChenMed, VillageMD, Aledade…you name it). So at precisely the same moment that you and I are talking about this set of issues from a health system point of view, we have a feeding frenzy of interest in primary care from all across the ecosystem.
Hochman: Yeah. And it's all bad. I lived through the '90s.
Q: PhyCor, MedPartners.
Hochman: Oh, my goodness. Right?
Q: It certainly didn’t end well.
Hochman: Disaster. Tell me why this isn't a disaster also? Here's the problem. The motivations are all wrong. So my motivation, is the health of the communities that we're serving. Yeah, I think we will hold cost down. I think that will be a byproduct, but my real motivation is can I make this community healthier. Even before Covid-19, the United States has one of the highest maternal morbidity and mortality rates in the world. We should be embarrassed about that.
I'll just be blunt with you. The shareholders don't care. You know, I'm a big proponent of capitalism. But I think we need more of a German-style capitalism where it's not only shareholder value. It's shareholder value plus common good. And the problem in the United States is it's not about common good. It's about how do I make more money, how do I sell it off and when do I do it. And my problem is where I'm sitting is I have to really worry about what is happening in these communities. And that's why I will go to a cap model, because it's going to be better healthcare for 330 million Americans and their doctors.
Q: Yes, the conventional three- to five-year PE time horizon sounds antithetical to what you’re doing. Health systems generally have the right motivation. It's community good. But that doesn't change the fact that a lot of these private competitors are taking supply off the market. There just aren't that many primaries available anymore.
Dr. Hochman: You know, we went through it in the '90s. Initially, everyone's happy. At least the partners are. You just handed them a check. But if I'm one of the junior partners that came in before the payout, I’m not as happy, and I want to know where you’re going to be in three to five years. Having worked with doctors all of my life, I can tell you they don't want to be widgets. They don't want a big corporation telling them what to do. What motivates them is they want to work in a world where they can practice their skillset at the top of their license and deliver great care.
Truveta and the power of data
Q: I think that's a great insight. So, let’s shift to the next part of your strategy, the diversification.Talk about Truveta. What was the animating principle?
Hochman: It was one founding idea: Health systems should join together to solve a common problem. We've been so independent, and mergers are too costly and take too much time. But why not come together around some of the big-ticket items? Everyone has talked about data forever, why don’t we solve it? What happens if ten or fifteen of the largest health systems in United States come together to create their own data organization?
That's kind of the vision statement of Truveta. Data saves lives. I look at data the way I look at the Hubble Telescope. All of a sudden, the galaxies make sense once you put the telescope out there. But the problem with data is that you need massive scale. Databases need to be incredibly wide horizontally and vertically. Take the CMS database. It's really wide, but not too deep. It’s just claims data. Whereas if you or I went and we had our genome sequenced, we would have deep data, but so what? We’re two guys, but there's 330 million Americans and seven billion people in the world. So great databases have to be very wide horizontally and deep vertically, and they have to be incredibly diverse. Most databases are great for white suburbanites. So these were all principles that went into my head when we were approaching people about Truveta.
So we were going to create our own data company. And what do you do with any startup, right? You find a great CEO. So we found Terry Myerson. Terry ran Windows for Microsoft. He ran Xbox and he's been in technology all of his life. We hired Terry, and he's been putting together some of the best technologists in the country.
So it’s a technology company and a health care company. You have to marry the two to do this the right way. If you're just a technology company and you have a couple of boutique doctors that are running around, that won’t work. We're talking about fourteen health systems locked up with some of the best technologists in the country. That's how you're going to get this done. And every one of those health systems put this through a rigorous test of: is this the right thing to do, how do we do it, and how do we make it all happen?
Which reminds me. You know early on, Terry and I had a conversation and he asked me, "Rod, what keeps you awake at night?" I said, "The technology involved in putting all these disparate databases together in a unified fashion to make sense and to make information readily retrievable." He said, "I'm not worried about that at all. I've got some of the best technologists." And I said, "Well, Terry, what worries you?" "It's having fourteen CEOs like you as my boss." And I said, "I'll take care of that." So we went on a tour and started seeing who could we get to join us. So who did we get? We got Northwell. We got Trinity. We got Tenet. We got Common Spirit. We got Baptist down in Florida.
And what’s interesting about that is the diversity of our data set right from the starting point. We represented almost every state in the United States, and we’ve got Pacific islanders and Aleutians up in Kodiak, Alaska. If you look at the diversity of the database, we've got LA and we've got the middle of the country. We’ve got 13% of all the acute admissions in the country, and it's incredibly diverse.
Q: Nobody better than you and Providence to conceptualize this because you all are in the epicenter of the tech/healthcare convergence on the West Coast. And you’ve personally been an evangelist here – you brought in Aaron Martin, you partnered with Microsoft, you’ve incubated tech companies through your venture capital group.
Hochman: Here’s how we think about it. First, recognize that it's a long-term play. If you worked at Amazon with Jeff Bezos when he was in the basement of a building in Pioneer Square with a bunch of books piled on tables…to think where he was. But all that Jeff did, it was all a long-term play. If you think about Amazon today, obviously they're retailers. But they probably are the largest data company in the world. And they know more about the two of us as consumers than we'll ever know about ourselves. So they're a data company. They're a retail company. They're a hardware company, right. They create a lot of devices and everything else. Think about the different businesses that they're in. They're now going to be one of the best supply chain companies in the world, because they're taking over malls and creating distribution centers. But how long did it take Amazon to turn a profit? Really long time. So this is a long-term play.
But you have to fundamentally believe that data is oil. It’s a gem.
One, it's going to answer a lot of questions. If I'm a drug company trying to figure out stage three small cell cancer and I have to find people that fit a profile genetically, taking into account diversity and everything else, I'm going with Truveta to help me find those people.
And it's a two-way street because for the consumer, if I am a cancer patient and my data's in Truveta, I want to know what’s the next thing for me. Am I eligible for a trial? Who has the most expertise in my specific type of cancer? So Truveta can also inform the consumer as well as the guy that wants to pay to get people into a protocol. The federal government might be one of the biggest payers to Truveta, because when this database is as mature and smart as it is, when the next Covid-19 hits, Truveta can be such an early warning system for the whole country. Or if we want to solve this issue of healthcare inequity? Well, if I had a Truveta database, I could quickly see where the gaps are.
Q: Are you visualizing this more as a ‘utility’ like CivicaRx or are you visualizing it as potentially a standalone capital-backed, high-growth company with a standalone business proposition outside of its sponsors? In other words, can you commercialize this?
Hochman: Both. We have not accepted a nickel of outside money at this time. Potentially, Truveta could have tons of partners out there. But the question is how do you do this in a way that is true to its founding principles? On the other hand, we have to create money for the founders. You know, "nonprofit healthcare" is a misnomer. It's tax-exempt healthcare. It still makes profits, because last time I looked, whether it's Providence, Trinity or Tenet or any of us, my shareholders are my community. I can't lose their money, but I can’t take the money and run, either. So every dollar we make is going to go right back into Seattle, Portland, Los Angeles, Alaska and Montana.
Q: That’s a great example of your diversification.Why don't you tell us about Tegria next?
Hochman: Tegria is our services company. I brought Wasif Rasheed over from Microsoft and I said, "I need a billion-dollar company with a 20% to 30% EBITDA to support our Mission. It will be an important source of revenue that will allow us to extend our healing ministry to more people in need.”
Q: That's the equivalent of a $10 billion health system.
Hochman: Exactly. I have to see a lot of patients to make that kind of margin. So we created Tegria to be a service company that serves the rest of the industry. I think what UnitedHealth Group did with creating Optum was one of the most brilliant things it's done. [Editor’s Note: The Daily Briefing is published by the Advisory Board, a subsidiary of Optum and UnitedHealth Group.] But we set a smaller scale. We're never going to be that size but we are the largest provider of Epic installations and Epic optimization in the country. We also do nanotech and we do revenue cycle. We acquired Lumedic which is a blockchain company for data security. We’ve taken all our telehealth business and put it inside Tegria. So Tegria today is about $450 million company. It's hitting its numbers.
One final tech question as we start to wrap up. Given your privileged position in the healthcare/tech ecosystem, I’d love to hear your take on these gigantic, multitrillion-dollar market cap tech companies? What is their ambition and ultimate future in healthcare?
Hochman: Well, first of all, humility is not a trait that I've seen in technology companies at all. But I would say of that the group, the one that we're closest to is Microsoft. I was in Satya (Nadella)’s office two years ago when he said to me, "Rod, we don't want to do healthcare. We want to make healthcare better." And that to me is a really important statement. We see them as a partner going forward, not a competitor. Because we've been around for 170 years, Eric. A $26 billion company, started by the Sisters of Providence and the Sisters of St. Joseph. It's not a bad track record, right?
So when we look at tech companies, we are looking for partners. We have an obligation to match our quest for change with who we are as a faith-based organization. I always say that Providence exists at the intersection of innovation and compassion. And that's a cool place to be. Because if you’re a patient, you want both. You don’t want to go to a health system that doesn't have compassion. But at the same time, you want to go to a place that's cutting edge.
Q: That's right.
Hochman: So I think that's a good focus for us to have. High on the innovation curve, high on the compassion curve and put those two things together. That's it.
Q: You and Providence have a ton going on. So much so that here we are, an hour or so into the conversation, and we haven’t yet touched on your other full-time job – Chairman of the American Hospital Association. So let’s close our discussion with your reflections on leading AHA during the past year.
Hochman: It’s been terrific, despite the current circumstances. Mindy Estes was the previous chair. But, for me, this is my fifth year on the AHA board. I'll have one more year next year. It's just a pleasure to work with Rick (Pollack), the entire team at AHA, my board colleagues and all our members. They're fantastic and, I try to be a good chair, Eric, because one thing all CEOs know is they know how not to be a bad chair. Rick and I work very well together. We both grew up in Brooklyn, probably six blocks away from each other.
This past year, the agenda obviously started out as Covid-19, Covid-19, Covid-19. But that really reinforced the next priority on the agenda, which is securing financial stability of provider healthcare. And as I mentioned, we're pushing primary care for all, we're talking about what we're doing with insurers. And another big thing on the list is rural healthcare. How do we make sure that's sustainable? How do we make it attractive for doctors to be part of those health systems? And of course Wright (Lassiter, CEO of Henry Ford) is next in line and he’s going to be great.