Dr. Gary Kaplan
Ketul J. Patel
Question: Across this series I’ve had the privilege to talk with a number of dyad CEOs about their newly merged entities—Bob Garrett and John Lloyd of Hackensack Meridian, Kevin Lofton and Lloyd Dean of CommonSpirit, and Nick Turkal and Jim Skogsbergh of Advocate Aurora, among others. When it comes to these big, complex and consequential mergers, my favorite place to start is to ask about the origins. Our friends Bob [Garrett] and John [Lloyd] came up with the Hackensack Meridian merger at a swim-up bar in Cancun—true story. When I shared that with Kevin [Lofton] and Lloyd [Dean], they were a little dispirited because their story wasn’t quite as cool…so the pressure is on guys. When, where, and how did this idea first take shape?
Kaplan: It all started when Ketul came to Seattle.
Patel: That’s right. When I was in Northern New Jersey at Hackensack, I was with an organization that was a clinical enterprise, a destination. And we actually raised the bar so much that we started competing against New York City hospitals, which was a big statement for us at the time. When I was recruited to this position, I started doing a lot more research. I knew about Catholic Health Initiatives (CHI), but I did not know a lot about CHI Franciscan. I knew the Seattle market mostly from the big names, but the biggest one was Virginia Mason Medical Center. Virginia Mason was well-known as a clinical enterprise, and of course for its production system. Gary built Virginia Mason’s reputation through his focus on quality. And when I came here, I felt very strongly that for CHI Franciscan to be a market mover, a destination system, we needed to have a partner like Virginia Mason.
Kaplan: One day, Ketul called me and suggested we get together. He came up to my office, and we just got to know each other. He talked about his vision for Franciscan. At the time, we were just coming off the Group Health departure and we were very focused on remaining independent. I told Ketul that the timing wasn’t right but we kept in touch and we began to discover that we had some things in common, and not the least of which was his brother being a professor at the University of Michigan Medical School where I have deep loyalties and also teach a course or two annually.
And so about a year and a half later, I reached out to Ketul. He had been exploring what CHI Franciscan was going to do in the Seattle market, and we had been looking at potential partners.
It turns out that as big as CHI Franciscan was, we only overlapped in two markets. And they were small markets relative to the big picture. So we were very complementary in our geographies and some of the services that we delivered. For example, we did transplants, they did not.
That lunch, four years ago, led to a clinical affiliation. We already had a long-standing partnership in radiation oncology. And then we put together an OB joint venture and began to explore this notion of creating more and more joint ventures.
But when you start to think about more and more joint ventures, it gets really complicated. Who do the doctors work for? Where does the capital come from? What are the complexities? And for each JV you have to answer those questions again and again. We concluded that was not really going to be the model for the future. And that was a seminal moment because we were investing in this partnership as part of our strategy to remain independent—all while Kaiser, Optum, Providence, the University were investing hundreds of millions, if not billions, of dollars into this market.
My board and I believe that Virginia Mason deserved better than hanging on by the skin of our teeth. Our board said, "We deserve better, including our doctors, our team members, and most importantly, our patients." So we dove in, rolled up our sleeves, signed a letter of intent. And COVID only reinforced it.
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Question: Let’s deconstruct some of this because it's an important answer you both gave. I’ll try to go through this sequentially.
Gary, Virginia Mason has this storied history going back almost exactly a century. You’ve been in the same headquarters since 1920. You’ve earned national and international preeminence for your pioneering quality work, you constructed a partnership with the NHS in the UK, and of course your pilgrimages to Japan are well-known. And Virginia Mason was always this fierce, almost iconoclastic, “stay independent” enterprise. You were a great exponent for that independence. Was there a moment, Gary, when you thought, "It's time?" And how did that evolution go through your mind to arrive at that decision?
Kaplan: Interestingly, Eric, Franciscan’s even older. St. Joe’s, their flagship, is 130 years old.
Question: I guess I didn’t realize that you and Virginia Mason were the new kids on the block, Gary. So it’s Ketul’s organization that’s got the storied history here.
Kaplan: Right! But to answer your question, I’m not sure there was a precise moment. We had been working on these joint ventures, and we realized that while they were working, they weren’t going to get us what we hoped for the long term. And I was thinking about the future after me. I’ve been CEO for 21 years. I’ve been at Virginia Mason for 43 of our 100 years. But I wanted to make a good decision, one whose business case was not fundamentally based on rates. If you go back to my history in my Modern Healthcare articles or interviews about independence, my basic belief was—and the data supported it—that much of the consolidation out there had the result of raising prices.
Question: That’s right.
Kaplan: I did not believe that was in the best interest of American healthcare, or the future. So we wanted a business model that wasn’t based on raising rates, which doesn’t mean that Virginia Mason Medical Center doesn’t want to be paid fairly—believe me, we do.
So in my discussions with my senior team, we came to the conclusion that we at least needed to explore this, and that CHI Franciscan was the right partner given our four-year partnership, my relationship with Ketul, and the board members’ relationships.
I’m going to let Ketul finish that thought while I take a couple of bites of my sandwich because I skipped breakfast. My 93-year-old mother visiting from Michigan made me a corned beef sandwich – with corned beef from Detroit – this morning.
Question: Your mom still makes you lunch. Gary, I like that.
Ketul, you have a different and complementary background, with a lot of experience in consolidation. You came from Hackensack Meridian when New Jersey was one of the fastest consolidating states in the union. You came to CHI Franciscan when CHI and Dignity were coming together to form CommonSpirit. What are your reflections on the aspirations for this merger?
Patel: Eric, I'll actually go back a little further. I did my administrative fellowship in my hometown with the CEO of a hospital where my father practiced. The CEO took me under his wing, and he had a vision of building Conemaugh Health System. He had mapped out every hospital in West Central Pennsylvania and how that was going to become part of Conemaugh Health. And in the midst of his plan, there was another hospital – Catholic hospital that was separated by a parking lot and a street to Conemaugh. The CEO and the CFO called him one day and said, "We want to meet, but nobody can know about it except the board chairs and us."
They used to have private meetings, and he invited me as an administrative fellow to join. My primary job was to be the bartender and serve drinks. But the secondary job was to listen and learn. And I was able to build relationships with both CEOs. I became the staffer for that merger. It was a very complicated, very political merger in that community. So I actually grew up in healthcare learning mergers, seeing what works, what doesn't work.
I'm a big believer in health systems, if you can turn the scale into a real advantage. When I came into the Pacific Northwest, I felt that we were missing something, a differentiator, which was the kind of quality, safety, patient experience, that Virginia Mason is internationally known for. And I was also enamored by the production system.
Question: That resonates. And I do believe that is a categorically distinct way of thinking about a merger of this size and significance. Touching back on your admiration for the production system, Gary, you’ve become one of the foremost evangelists in healthcare around this approach. Would you each take a moment and describe your annual journeys to Japan?
Kaplan: In the year 2000, we knew that we needed to change in a big way. We had new compacts with our doctors, and our leaders, and our board, but we didn't have a management system. It was like, "Okay. We want to be the quality leader. We want to change everything to design around the patients, not us, but how are we going to do that?" And I went looking at most of the usual suspects, Harvard, Mass General, Hopkins, Michigan, Stanford, University of Washington. Nobody had a management system.
That's when we learned from Boeing about what they had been doing, just a few miles down the road, to make the 737 better, faster, and more affordable. And we explored it. In December 2001, we took our executive team to a small company in Hartford, Connecticut and that blew us away. These factory workers were saying, "I can redesign my work. Let me show you my invention that makes these mistakes impossible to happen." And that's when the people at Boeing said, "If you are serious, you will go to Japan. You will go to the source. If this was a new medical procedure, you would learn it by going to where they invented it or where they do it the best. Go to Japan.”
So, we took our entire executive team to Japan. And we spent two weeks working in the factories, redesigning air conditioner assembly at Hitachi Air Conditioning, and spending time at Toyota. When we came home, we declared that this would be our management system. We go back almost every year, 18 times now. We’ve brought physicians, nurses, leaders and frontline staff. And it was a requirement that every board member in their first three-year term needed to go or they wouldn't be eligible for a second term. So, it was alignment from the boardroom to the frontlines. And on trips number 16, 17, and 18, we had Ketul and his leadership team, and CHI Franciscan physicians joining Virginia Mason colleagues.
Patel: Eric, Gary has such strong technical knowledge of the production system, having authored it for Virginia Mason. But here's something that I learned outside of what Gary said, and I think it's important. Even before Virginia Mason, CHI Franciscan had gone through mergers. We had brought in Harrison Medical Center and had brought in Highline Medical Center. But we weren't unified as one organization.
One day in 2017, when Gary and I were still getting to know each other, he invited us to come to a learning day for the Virginia Mason production system. It was myself, a few members of our executive team, and several of our board members. We went in wanting to learn, but there was also admittedly a healthy amount of skepticism. We saw the passion that Gary and Sarah Patterson and some of the other leaders had. But when it really hit me is when we actually went for a tour, and we went into the lab. I've rounded on many departments during my career. I know when people are just saying things and making things look good because the leader is there. But I saw something with the staff who embraced it, who lived it, who showed it in the outcomes or showed it in practice that I've never seen anywhere in my career.
I've always used this phrase: "People support what they help to create.” When you're part of the journey of Virginia Mason Medical Center, and you learn about the production system, and you help to create it, it is such a unifier. It's pretty amazing.
Kaplan: The Japan experience is a deep immersion in the culture. It takes people out of their comfort zone. And that's a good thing. That levels the hierarchy. I've had examples of a neurosurgeon asking a medical assistant to help him understand what he's actually seeing. People say, "That's impossible." But it's not. And that neurosurgeon comes home thinking differently.
Patel: It was eye-opening, Eric. But again, going back to your question, I grew up in health systems. I felt that health systems had the ability to do something special. Now we have created this new health system knowing full well that we want to scale the production system, we want to scale the quality and safety and patient experience outcomes that CHI Franciscan was building, and that Virginia Mason became legendary for.
Question: Let’s dive into that a bit. First, how importable is that model into the chassis that is CommonSpirit, and then specifically CHI Franciscan? Virginia Mason has this deeply- integrated model, which is difficult enough to replicate during a normal time.
And second, what are the implications for your physician groups? Given the upheaval in the physician marketplace – 25% of the nation’s 229,000 primary doctors above retirement age, major economic dislocation in the group ($15b lost over the past year), the capital markets falling in love with risk-bearing primary care (Oak Street, Cano, Alignment, etc.) – how is this merger likely to affect your physician strategy?
Patel: Eric, this is the principal part of our story and it's really important that we just reinforce it again. Early on, Gary and I decided that we didn't want to be just another merger. We didn't want to be just another two organizations coming together, focusing on all the buzzwords that everybody uses. We put together a blue-ribbon panel with prominent leaders, people that you would know, Jay Geller, Mark Smith, Don Berwick. We also chose a very prominent leader at Amazon, Beth Galetti, to really help define what success should look like. We went to large insurers in this region, and the CEO of Premera Blue Cross, the Optum regional market president, and then the Kaiser CEO, Susan Mullaney, who both Gary and I think really highly of, to help us shape what the future is going to be all about.
And they basically said three things. First, focus relentlessly on the consumer. Whatever you build, it has to be easy, it has to be accessible, it has to be digitized. Secondly, we have to focus on growth. It couldn't be about integration for its own sake. You bring two organizations together, you've got to integrate. But you also have to have a plan for growth. Third, build for the future. And that's a principal part of our journey. We have a very strong geographic presence. We have more care sites in the state of Washington than any other system in the state, over 300. CHI Franciscan was very strong in the South Sound and the peninsula. Virginia Mason, obviously, very strong in Seattle and in some of our suburban geographies. But there's an area along the I-5 corridor, South King County, that's just sitting there, that we just haven't touched.
And so when you look at our business case that we put together, yes, there are things to make sure the acute care enterprise is modernized, but our focus is ambulatory and the full continuum of care. We've got to get into new geographic locations. We've got to focus a lot more on telehealth and telemedicine, on building the health system of the future.
Kaplan: I think your question is a good one. Our culture evolved over 100 years, but I certainly think it is importable. Right now, Ketul and I are focused on building on our legacy organizations and really standing them up in order to establish the foundations for Virginia Mason Franciscan Health. I think in some ways we'll be a proof of concept for CommonSpirit. So, as we increasingly become more integrated, the evidence and the data will show that it creates new opportunities. It is a way to reduce redundancies. It's a way to get out of the siloed mindset.
Both Ketul and Ian Worden, our chief operating officer, in the first weeks of the merger, embedded themselves in what we call the bunker, which is the administrative offices of Virginia Mason Medical Center. They wanted to see it. They wanted to talk to the vice presidents and the department chairs who were partnering together, hand in glove, to execute day in and day out for our patients. And I think it was a very healthy exercise. It doesn't mean that we’re going to take the Virginia Mason model and just install it everywhere. Every one of our markets have unique attributes and unique communities. But I do believe that the model, if done right, can be spread, it can be scaled.
Patel: The other thing I will say that I learned in my career is that as systems grew, there was always a separation between the acute care enterprise and the physician enterprise. All health systems say they want to integrate, but then they end up creating more of a siloed structure. I was very enamored by the integration of Virginia Mason Medical Center and how it was structured, how it was built, how it was put into practice. As you can see, Gary and I are dyad partners. We wanted to model the behavior of real integration. That was a pretty significant desire of the legacy leadership at CHI Franciscan and what is now CommonSpirit.
Kaplan: There are still people who talk about the Virginia Mason Medical Group. And I say, "I'm not sure what you're talking about because there's no such thing." We don't have a Virginia Mason Medical Group that's separate from Virginia Mason Franciscan Health. Legacy Virginia Mason is possibly as highly integrated as any organization in the country. And we report it as a single bottom line.
Question: I can see the distinction between what you both are envisioning compared to a lot of the conventional M&A our industry has witnessed over the past decade. As we all know, our industry has been on a horizontal consolidation tear of late, with the top 100 health systems now controlling almost $850b out of our total $1.3t sector. And yet for all of this M&A, there is a lot of evidence it hasn’t converted to durable strategic or economic advantage to date.
Ketul, you were kind enough to reference our Advisory Board research in an earlier conversation, and my colleague, Dave Willis, who coined the term “SINO”—systems in name only. What the two of you are diagramming out is diametrically opposed to a SINO, and you are painting a picture of a vital and renewed health system. As you think forward, what are the key metrics? Are you thinking about percentage capitation, number of lives under some sort of risk arrangement, size of geography served?
Patel: Gary and I have talked a lot about what success looks like for Virginia Mason Franciscan Health. Remember, it starts with the consumer, the patient. We’ve got to scale what Virginia Mason Medical Center has done around quality, safety, and the patient experience. We not only need to protect that, but we need to expand it. To me, that is our first success. After that, yes, we're going to be focused on growth. And yes, we're going to be focused on financial performance. But quality, safety and the patient experience are first and foremost. Gary and I feel a personal obligation to make sure that those outcomes spread throughout Virginia Mason Franciscan Health because I think everybody is watching. You probably have seen, there's an article in Modern Healthcare that asks, “Can Virginia Mason's quality survive the merger?” That's the headline. And so Gary and I feel very passionately that we need to deliver..
Kaplan: In terms of growth, we think we are well prepared for risk. We don't have specific target percentages. Part of the reason we don't is because we are in a marketplace that has not necessarily wanted to go there. We have two major Blues plans. They've been heavily wedded to the status quo payment models, and they haven't been embracing risk, even though we would, obviously, at the right terms. Another thing I wanted to mention, and we've been quite public about this including in the Modern Healthcare article, is that we have designated three priority service lines – and they're just the first, not the last – that we want to build out across Virginia Mason Franciscan Health as destination service lines.
But your question about being a “system in name only” versus what we're trying to do really stimulated my thinking on this. One of the key attributes of these service lines is that we get patients to the right place at the right time for the right care that they want and that they need. And that means that we're not going to do everything at every single one of our 11 hospitals or our 300-group practice outlets. A lot of big organizations are “systems in name only” because they refuse to think systemically about rationalization. That's a good term, not a bad term, not "How do we do less?" but “How do we make sure that we are generating superb outcomes and superb patient experiences every day for every patient?” And that forces the question of, what do you do where? I think that makes for higher quality and lower total cost of care.
And I think that's a really important construct that we need more of across this country. There are things today where the outcomes are clearly correlated to volumes and to the commitment to a multidisciplinary team approach to care. We're very heavily committed to proceed in that fashion.
Question: Let me ask a little bit about the architecture of the merger. And about the dyad structure for the two of you, which I'm really keen to hear about because there's not a lot of precedent.
Kaplan: At Virginia Mason we've had a dyad leadership model essentially since day one in 1920. It’s deeply baked into our culture. And the role of physicians and physician leadership is core to us. In recent years at Virginia Mason, we had variations of that, but we had one CEO. The real dyads were beneath the level of the CEO. Ultimately, neither Ketul nor I believe that the best long-term model of leadership for an organization as complex as ours is to have dyad-CEOs in perpetuity. But we felt that for this period of time, that it was critically important that we both land this airplane, that we both execute, and get this new organization off on the right foot.
Patel: I'll add this. You can probably see the amount of really deep respect that Gary and I have for each other. I've known about Gary my entire career. I mean, if you're in healthcare, with everything he's done, how could you not? And I'd heard a lot of stories about Gary even when I came here, but I have gotten to know him so well and vice versa. And we've actually shared a lot of thoughts about what we think success looks like for Virginia Mason Franciscan Health and we're deeply committed to making sure that this organization does what we've set out to do. We think there's a very important obligation that we both have. Legacy, history, is really important, not because we want to live in history, but we want to use what has been successful to create Virginia Mason Franciscan Health.
Question: We only have a little bit of time left, and I want to tackle a couple of big themes. The first one is around your reflections on how the pandemic has structurally altered the industry. Things like site of care shift, top of license practice, home as an epicenter of care…are the volumes coming back and with what velocity? What do you both think are the real consequential shifts in our industry from the last 13 months?
Kaplan: It has accelerated a lot of the trends that were underway to begin with. You and your Advisory Board colleagues have been predicting certain things, and most of them happened, but they happen at varying pace. Some of them were going to happen “at our convenience,” so to speak. COVID has changed that and has forced things to move faster. The obvious one is telehealth. I mean, both of our organizations were dabbling in telehealth. But the ability to ramp up within a couple of weeks to thousands of telehealth visits for care that I never envisioned, like post-op visits, pre-op visits, is astounding.
But here's an interesting factoid. When we reopened, we thought it would be about 50/50 virtual and in-person. And it was actually 75/25 in-person because people had withdrawal from their relationships. Technology is here to stay, and we've got to be a relatively early adopter. But it doesn't put personal, face-to-face healthcare out of business. Relationships are still important, particularly for primary care physicians like me.
I think the other profound impact is going to be on our workforce. Today we are so way behind the curve in this country and in this market around staff. Whether it's people reluctant to or unable to leave their school-aged children, whatever the issues are, fear of COVID, we've got some real workforce issues. And the nature of work itself is changing, so that a lot of work that we used to build bricks and mortars for is now being done from home and will probably continue to be done from home permanently, which will change our capital spend long-term.
Patel: One of the other results of this is just a deeper understanding of our communities. Our Sisters came here over 130 years ago to take care of the poor and the vulnerable. And Virginia Mason Medical Center has a long history going back to the Spanish flu. So there's a rich history on both sides of our legacy organizations to care for those in need. But this pandemic, it's been staggering for me to see the gaps, when you start looking at access to care, and at how we started vaccinating people around the state. For all of us healthcare leaders, we have to start paying a lot more attention. It's not just about the bottom line. We've got to have more robust community partnerships to make sure that people are getting the care that they need, end of story.
Kaplan: From the legacy Virginia Mason standpoint, we always have believed in caring for the underserved, addressing social determinants, and health equity. That’s critically important to our team members and to me as well. But it isn’t something that a single hospital with a razor-thin margin can do well. So, I'm excited about our shared vision of caring for more people, particularly more people who need what we can do.
Question: I think that's deeply compelling and mission-oriented. Gentlemen, I'm going to ask one final question. Both of you have had outstanding careers and incredibly distinguished service. As you're entering this new chapter, I want to ask what are you each most grateful for?
Kaplan: Wow, if I had to choose one, the overarching concept is the people that enabled me to do what I do, that provided me the opportunities, and that has to start with my parents. They basically said, "You can do anything you want to do, be anything you want to be, and we're going to support you actively to do that." And I reflect on it now because I lost my father in December. He was 95 and just a giant inspiration in my life.
All along the way, there have been people like that. I came to Virginia Mason as an internal medicine intern. And people said to me then, "You can be anything you want to be. We want you to do it here." I didn't come to Seattle as an internal medicine intern and say, “I'm going to be CEO one day.” I wanted to become a good doctor and take good care of patients.
The last thing I'd say is I'm very, very grateful for my colleagues and for the patients that give us the privilege of being with them at their most vulnerable moments and giving us their trust. I think of it as a sacred trust, and I always will.
Patel: My story is similar, Eric. My parents moved here in 1979 from Kenya. My dad was a physician, my mom was a nurse. And at the age of 40, they picked up and moved with their kids across the world to a blue-collar town. Not a large Indian population in that community. It was a big change.
But what I deeply respect from that is the amount of sacrifice that my parents made to come here. If you think about it, at the age of 40, my father had to redo his internal medicine residency. I remember going to the residence hall to spend time with him. You just marvel at what your parents have sacrificed to give you these opportunities. The types of values that they instilled in me are ones I've hopefully been able to impress upon my son.
And just like Gary, I've had, even at a very young time in my career, some really great mentors. I have a deep respect for tenure and history, which is why I respect Gary so much. There's only so much you can learn unless you live through it. And I've just been very, very blessed that way.