Why Sutter Health partners with other providers: 'We're not a believer that we have to do it all.'

This interview with Patrick Fry, CEO of Sutter Health, was conducted by Eric Larsen, managing partner, and Tom Cassels, executive director. It was condensed by Dan Diamond, executive editor.

Question: In other discussions, you've been really candid about what drew you to health care. It almost seemed as if it was sort of foreordained. Your brother is an orthopedic surgeon, your dad's an orthopedic surgeon, and your mom is a nurse.

Patrick Fry: When I grew up in Tahoe, I spent a lot of time with my father when he made rounds at the hospital. He was the first fellowship-trained surgeon in the entire Lake Tahoe basin. And back in those days, the population wasn't large enough to really support a full-time orthopedic surgeon.

So my father worked his tail off, and made a lot of visits to people's houses. He had an ability to see the personal impact that somebody in health care can have on an individual and on a family. That really resonated with me, and I wanted to become a physician too.

But that wasn't in the cards. Studying organic chemistry—it was the worst I ever did [at something].

And then my father said, hey, you ought to try health care administration. My uncle was a hospital CEO back in the Midwest, but I didn't know what the heck it was.

So I did an internship over at UC-Davis, and really enjoyed it. Consulted with the program at Berkeley and wrote my own major as an undergrad, and then went to graduate school and been in health care ever since.

It's been very, very rewarding.

Q: Who are the key mentors, within or outside of health care, that have been instrumental in your development? It sounds like your father is one.

Fry: He's definitely one. But I've had so many, working in health care. These are some of the most intelligent people in the world.

At one point in my career, I needed to learn about organizational dynamics. And so I sought out a mentor who was a leader in HR and spent a couple years working with that individual. I learned a tremendous amount from the CEO that preceded me, Van Johnson. He was a role model for personal ethics and how to treat people.

And I still reach out and meet with Pat Hayes, the original CEO of Sutter Health, every once in a while.

The reason I stayed in Sutter Health—you can always find somebody that knows more about something than you do. And if you're not bashful about asking, you can learn a lot.

It's been a continual learning experience for me over the last thirty-plus years.

Q: Someone like you—a leader who's been in health care for 30 years—obviously is driven by both the industry's "wow" moments, but also its challenges.

What is the one thing that you would change to have the biggest impact on how Sutter and other providers deliver care?

Fry: Have CMS run Medicare like a business, as opposed to an entitlement program.

If they would put an RFP out for cardiac care, orthopedic care, whatever the case may be. And basically get back into capitation or prepaid care. I think that's the only way the system can rationalize itself.

What I tell everybody what's different this time around—what's different than the other attempts to reform our industry—is that the safety net's gone. Whether you like the Affordable Care Act or not, I don't see any of those cuts being reversed. The federal budget can't take it.

The only thing that's predictable about the Affordable Care Act now is that for a decade in front of us, we have reductions in federal reimbursement. And the State of California is chronically broke. I don't see any relief on the Medi-Cal side.

Will everybody survive? Nope. I think the days of a hospital being on every corner are gone. It was just too darned expensive.

The push for population health

Q: As you're charting course for Sutter and thinking through the whole array of different strategic choices...

Fry: We're moving Sutter Health 100% in the direction of population management.

Q: It seems like you've made that commitment long ago.

Fry: I think history's repeating itself right now. Back in the 1990s, [systems] like ours started purchasing all these physician organizations—but when finances got really tough, 90% of the organizations basically cut loose their physician component.

We, on the other hand, had been investing in it since Palo Alto came into the system in 1993. And having doubled down on the integration aspect, it's really positioned us extremely well.

We're very, very fortunate.

If you look at all this M&A activity, it's about people positioning themselves for the future. But I'm not sure they want to be doing it. I think many of them are doing it out of survival.

And if a lot of those relationships, especially with physicians, are structured primarily around finances, they're not going to be durable. Because the financial situation is going to be stressed for the foreseeable future.

So we're very lucky that our motive for doing this was to provide integrative care. When Pat Hayes came to Sutter Health, he brought the belief that providing integrative care was the best way to provide care. I would subscribe to that.

Q: Tell me about your approach to integration.

Fry: We have close to 3,000 physicians today in our medical foundations, and we have another 3,000-plus that are in independent practice associations.

From a system perspective, we've been very agnostic. If you want to work in a multispecialty medical group structure, there are plenty of options within Sutter.

If you want to remain independent, then each one of the five regions within Sutter has an integrated relationship between the medical foundation and the IPA.

That's why I think we're really well-positioned to fulfill the underlying intent of the Affordable Care Act—to provide efficient, high-quality care. We don't have to make these very rushed decisions that you hear about people making all over the country.

We're feelin' pretty good.

Q: Historically, most health systems have been hospital companies—sometimes, hospital companies that own or partner with physician clinics—which means that "winning" is based on metrics like volume and profitability.

How do you think about defining the measures of winning for Sutter?

Fry: We're very different—and I try to tell people this. When people look at California, they look at our medical foundations and conclude that's an employment model. We say, no, that's not the way we're set up.

We want our medical groups to be self-governed. And then we have them make whatever rational decisions they'd need to make on behalf of the population. So our leadership at the regional level is not constrained by very narrowly defined income statements. There's a target for the region, and then the executives within the region, working with the physicians, figure out where to allocate that target.

And it has done us very well. The fastest-growing part of Sutter Health for the last four or five years has been in the ambulatory care area. We're growing close to double digits in that area.

You know, hospital utilization's gone down. But it really hasn't slowed us down much at all.

Q: So the definition of a win in the ambulatory setting is twofold: One, you're getting chosen by physicians who want a practice in that model, and then two, patients who want to be seen by physicians who are practicing in that model.

Fry: We're pretty basic. We're the largest Medi-Cal provider in Northern California, so we have a strong mission aspect of what we do.

So the wins for us are to continue to provide services to the Northern California community and be able to provide these communities with the resources they need to receive high quality, efficient care.

And majority of the care is delivered, which is not in hospitals. It's in the ambulatory setting. So there's a lot of growth opportunity out there. So I think, you know, the metrics are more around had we been able to successfully provide the services that are needed within a respective community.

System strategy

Q: Take me through your decision-making process on how Sutter sets system priorities.

Fry: We're not a believer that we have to do it all. For example, we could not provide dialysis care as well and as efficiently as Davita. That's all they do. So we basically said, hey, why don't you come and provide this service? And now it's a lot less expensive than it was before. Same thing in some of the other post-acute services.

But we're moving into new areas, too. Here's a great example. Last year we got one of the largest innovation grants, for a program called Advanced Illness Management. It's a complex disease program, but it has a huge component on palliative care.

So far, it's been a success. The savings from the program are $2,500 per member, per month. But all those savings are going back to the feds and going back to the insurance companies.

One of the reasons why we got back in the insurance business is that if we believe population management, you can't be so far downstream that you can't make investments like that.

Q: The health plan is an example of a place you're going to play in the continuum. But you mentioned dialysis, as an area that you'd rather outsource. How do you make those decisions on where you're going to play and where you're not going to play?

Fry: We want to keep to our core strengths. So you won't see us venturing into non-health-related activity. It's just not going to happen.

And we don't want to go be in a place that where we're there, and we're the number three or number four organization.

So unless we can be relevant, we're not going. We've turned down more organizations in the last two years than we've accepted.

Q: Why is that?

Fry: Primarily because if we can't have a relationship with somebody that has a philosophical belief that integrated care is the way to go, I don't want to bring on a collection of hospitals.

It doesn't fit the philosophy of our system.

On the other hand, if there was a like-minded organization that was putting together relationships with its physicians, it would resonate with us. We're going in the same direction.

But just growing to grow is not something that you'll see us do.

We do believe that there is some risk to being geographically concentrated in Northern California. California's not an easy state to work in.

That's why we have a diversification strategy that is targeted to generate about a quarter of a billion dollars in free cash flow from non-core assets. Because we believe, just because of what's going on with the reimbursement scheme, is that it's going to be a difficult market.

So we're on our way now, pursuing some of those opportunities. We still have a lot of opportunity to grow organically. But to get bigger just to get bigger is not on our agenda.

Q: Especially because as systems get bigger, it's harder to institute changes. How do you roll out reforms across such a large organization?

Fry: Let me give you an example. In 2006, we put together something we called "Blue Ribbon One." We weren't satisfied with the level of quality in our facilities across the system.

So Dr. [Gordon] Hunt, our CMO, put a group of doctors, nurses, and administrators together. And they visited 15 organizations throughout the U.S. that had qualitatively [terrific] quality, came back, and coalesced their recommendations. We called it "Six in '06."

We focused on those six initiatives system-wide. It wasn't an option. Everybody had to implement it. And our quality—we're now recognized as one of the highest-quality systems in the country. And it's due to that concept of dissemination.

Standardized workflows across the system produces real value.

From our archives: More about Sutter Health

Sutter hospital awarded Baldrige Award

Recruiting skilled staff in an era of shortage

A promising care model for patients with serious illnesses

Q: You mentioned you get to work in an organization with a bunch of brilliant people ... but with brilliance sometimes comes rigidity. How do you navigate the balance there?

Fry: I think health care's in the process of transitioning leadership to physicians. And to your point, the next huge transformation is going to come from how physicians actually practice medicine. It's not transforming the structure anymore. It's changing how they actually practice.

And only an MD or a clinician can lead that charge.

So we have a major leadership development program within our organization, working with doctors to try to get them into leadership positions, get them into paired leadership and really charged up about leading change. The Mayo Clinic's been doing this for forever.

That's what I think the secret sauce is. That's one of the reasons why we hired Dr. Don Wreden—the former head of the Sutter Medical Group—into his position to identify best practices in ambulatory care and rapidly adopt them.

We want him to help lead the transformation of how medicine is actually practiced.

Q: How would you characterize your own leadership approach? What's your management style?

Fry: One of the reasons I've stayed at Sutter for my entire career is because of the people I get to work with. Sutter's been blessed with leaders that always think long-term and position the organization for whatever was coming down the road.

These are some exceedingly intelligent people. And so I give very, very broad direction, and then try to get out of the way.

For instance, we put a half-a-billion dollars in our pension plan in 2008 because we thought it was the right thing to do for our employees. It was the philosophical belief of our CFO—that, you know, this is their money. We ought to plan for it.

And if you look at our retention rate and our turnover rate now, it's a fraction of what the state's is. Meanwhile, other [organizations] closed their pension plans down or are significantly underfunded today.

So back to your question. My leadership style is listen to my CFO—to understand where we need to go—and then get out of the way. Let him make the decisions that he needs to make to position us financially. And it's worked out beautifully.

Q: For this series, we've talked to many leaders who look for insight in other industries—the car companies, the IT sector. Here in Northern California, are they any out-of-industry lessons can you apply to health care?

Fry: I was thinking about how Apple transformed itself from basically a computer company to a communications company. And I think that there is a parallel there for health care.

Because I believe 10 years from now, systems like ours are going to look completely different. Completely different.

Q: So you have your strategy. Directionally you know where you want to go. Your team knows what they need to execute.

Take me to January of 2017—you're putting out a press release on what you accomplished. In one sentence, what does it say?

Fry: "Sutter successfully transformed how health care is delivered in Northern California from transactional medicine to population health."

We are truly large enough in Northern California to have a substantial impact on how health care is delivered. We have the physicians. We have the resources. We have the facilities.

Now it's on us to use those resources in the right way to help transform health care.

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