Abby Burns (00:02):
From Advisory Board, we are bringing you a radio advisory, your weekly download on how to untangle healthcare's most pressing challenges. I'm Abby Burns.

(00:10):
Welcome back to the second part of our conversation around what CEOs need to know in 2025. Last week we talked about three arenas where we're seeing healthcare stakeholders actively pivot their strategies in response to growing pressures: network design, drug spend, and cyber resilience. We're going to continue that conversation today, but we're going to center it on the tensions and pressures impacting the core care delivery infrastructure moving forward.

(00:36):
We've been talking about the impact on hospitals and health systems a lot on Radio Advisory because it's perhaps the most important performance pivot to understand. I want to be clear, this pressure and pivot isn't something that only health systems should care about because the future power dynamic will impact every corner of healthcare business: the people who pay for care, who partner with health systems to provide it, and of course, all of us as individual patients who rely on that care delivery system every day.

(01:03):
And of course, when we're talking about 2025, we can't ignore the elephant in the room, pardon my pun, the policy landscape. That's why I'm bringing back Natalie Trebes and Max Hakanson to shed some light on the future of the care delivery system.

(01:17):
Hey, Max. Hey, Natalie.

Max Hakanson (01:19):
Hi there.

Abby Burns (01:21):
Natalie, Max, I'm going to just jump right into it today, and I'm going to start us off with a bit of a doozy. What is the state of the healthcare delivery system right now? And I ask because the title of the episode is what CEOs need to know. A lot of the industry is care delivery. A lot of the rest of the industry makes decisions based on what is going on with care delivery. So can you ground us in? It is the second week of January as of this recording, 2025. Give us the starting point for health systems in 2025.

Natalie Trebes (01:56):
Yeah, and I'm glad you focused on health systems because I think health systems that own hospitals, the center hospitals are where we're seeing the biggest stressors and pressures right now, and that cascades to the rest of the care delivery infrastructure organizations. They're entering 2025 in this moment of things are not as bad as they were in 2023 and 2022. 2024 was a healing year in some ways, kind of recapturing stability. However, everything about their business model is not looking good for the future.

Abby Burns (02:33):
Okay. Pause because those two sentences sound like they are directly at odds with each other. Last year was a healing year. Everything about the business model is potentially not viable.

Natalie Trebes (02:43):
Yeah, let's sit with that tension. I think systems have been seeing the signs, the writing on the wall for a very long time. We know that every year things get a little bit harder when it comes to subsidizing their costs with revenues from higher margin surgeries, with having the staffing levels that they need, with balancing inpatient and outpatient, with their payer partnerships. We talked about that before. So it's very easy to view this as kind of a frog in slowly boiling water situation.

(03:19):
I think the couple years we had of really dramatic swings in finances for systems have woken everyone up to how fragile things are. And so the underlying trends in demographics and payment and outpatient shift are all still there, but I think hospitals have seen how vulnerable they are and are ready to make dramatic changes and prioritize some sort of new strategy, new focus for the foreseeable future as they try to adapt to where the industry is headed.

Abby Burns (03:56):
What I mostly hear is we need to double down on very disciplined operations, which sounds good, sounds like something we've said a million times before. I think in the past, maybe the burning platform for a lot of systems was really more of a warm platform to get disciplined about operations, and now it's genuinely on fire is essentially what you're saying.

Natalie Trebes (04:17):
Yeah. Or they see the consequences of it being on fire. I think I have been surprised how much I am hearing, "We are doubling down on our focus on operational efficiency, on equipping the workforce, on prioritizing strategic initiatives, on thinking through what ambulatory assets we want to have." All of these components to operating a health system are now top of mind for health systems strategic leaders and executives in a way that I think previously it was more around, "What are our revenue streams? What are the purchasers doing? How can we navigate negotiating as an industry and advocacy for our payments?" It is attention on cost and operations instead of revenue and volumes in the way it has in the past.

Abby Burns (05:12):
I'm glad you mentioned advocacy as well because we're going to get to the policy landscape in a little bit, so I want to keep that in mind. But this is essentially, if we think of the framework we used in the previous conversation around pressure, performance pivot, power evolution, what I'm hearing is on the pressure side. And then the pivot is doubling down on operational efficiency across some of the domains that you listed out. And I think pivot is pretty apt language here because the important thing is not just to ride out this moment, this challenging moment in healthcare, but instead to get through this moment of the past few years in a way that sets you up for essentially the patients of the future.

(05:53):
This is a conversation we've started having on Radio Advisory, but I want to dig into this idea of the patient of the future because who is coming in the door of the hospitals of the health system matters a lot. Max, break it down for us a little bit. What can hospitals and health systems expect to see moving forward?

Max Hakanson (06:12):
We all know about the Silver Tsunami, but when you dig under the surface, what everyone needs to think about is that changing payer mix, and it's really a worsening payer mix for health systems. It's more government, more Medicare, Medicaid, lower rates versus that higher margin, higher rate commercial insurance landscape.

Abby Burns (06:31):
Yep. I think that's such a good point, Max, because a lot of times when we focus on the demographic shifts, we think about what type of care is going to be delivered, and that is certainly a huge part of it and I want to talk a little bit more about that, but what you're saying is it's not just what care is being delivered. It's what is your payer mix based on the demographic shift?

Max Hakanson (06:48):
Yeah, absolutely. Not only are we going to be seeing more older patients, we're going to be seeing more sick younger patients. This is the thing that's happening under the surface that's not getting nearly enough attention is we are seeing much higher cancer rates among people under the age of 50. We're seeing higher stroke rates, higher mental health issues, higher substance use issues. So under the surface, even though we're focused on that aging demographic, those younger folks are also getting sicker. That presents huge challenges to health systems.

Abby Burns (07:19):
Yeah. So if Natalie started us off with systems are really focused on how do we need to essentially tailor our operations. Based on these demographic shifts, patients of the future that you're describing, where do we see health systems needing to focus in order to design, redesign, maintain, operate a healthcare delivery system that meets those patient profiles?

Max Hakanson (07:48):
Yeah. For those younger patients, those 0-65, we're seeing a lot of growth in outpatient. That's where those high margin commercial pay procedures are going to be done. They're less complex. They're simpler. They're moving outpatient.

Abby Burns (08:02):
And I think when you say we're seeing more outpatient growth, we are seeing positive outpatient growth for that demographic in the next 10 years and we're seeing negative inpatient growth for the 0-65 population, right?

Max Hakanson (08:14):
Yeah. And then on the flip side, when you talk about those older folks, especially the old, old, that 75-plus population, this is what's really challenging for health systems. The inpatient is more complex, low margin, longer maintenance care covered by Medicare.

Natalie Trebes (08:31):
And what that means for hospitals is yes, they are fully capable of providing excellent care from a care model perspective and from a capabilities perspective. But that's a really difficult financial proposition for them because again, those are longer length of stay, takes up more resources, and does not pay as well relative to the costs that it incurs. And so if more and more of their inpatient business shifts to that, it's going to put more and more pressure on their overall margin model.

Abby Burns (09:04):
So I'm going to come back to the question I had before, which is how are they evolving their business model to accommodate this?

Natalie Trebes (09:12):
That's the million-dollar question or probably billion-dollar question, maybe trillion-dollar question. We see systems thinking about what are the set of ambulatory assets they have available to them and where do they want to make bets so that they can keep pace with this outpatient shift and with the case mix shift that they're going to see in the inpatient space.

Abby Burns (09:36):
And we're actually going to be talking about that in a couple of weeks with our team that is looking into health system ambulatory strategy.

Natalie Trebes (09:42):
Yeah. And then the other place we see a lot of activity is in systems trying to think about what service lines do they want to prioritize in the future because we'll see different inpatient outpatient growth in different service lines. And I think more than that, how do they define service lines? How do they think about the ways that service lines are connected to each other, reinforce each other, intersect, because increasingly populations of patients have overlapping conditions. And so navigating patients across multiple service lines will be more and more what systems need to do and do that in a way that is cost-effective.

Abby Burns (10:24):
So putting this together, hospitals are going to see fewer of the easier, faster, high margin commercial pay surgical procedures, more of the complex low margin, longer stay, Medicare/Medicaid covered kind of like maintenance medical care. And the ways that they're going to try and manage this change over time is looking at what is the right ambulatory network strategy for me to have as a health system to manage the care that can take place in the outpatient space, keep my inpatient operations moving, and ultimately find a way to create synergies across the different service lines that power my clinical enterprise.

Natalie Trebes (11:06):
Yeah, that's right.

Abby Burns (11:07):
No small feat.

Natalie Trebes (11:09):
No small feat. And we haven't even gotten into the really difficult position that I think most systems are in, which is running a business and also being their community's essential service provider. And that's fundamentally the evergreen problem that's getting harder and harder and not always met with the sympathy that systems would like and probably deserve from lawmakers and purchasers.

Abby Burns (11:33):
Well, Natalie, you mentioned lawmakers and that's actually where we're going to go next.

(13:16):
So this is obviously a very big year when we think about the political landscape. Earlier this week we saw Congress certify last year's election. There's potentially a lot of change ahead when we think about what we can expect from the new administration, the new healthcare leaders that are going to be in seat as of a few weeks and months from now. So patients and care delivery organizations, not just facing new business dynamics or challenging business dynamics, but a new policy environment, a new administration. How much change do we expect out of the incoming administration?

Natalie Trebes (13:52):
So I don't think degree of change is probably the most productive measurement because it really depends on the topic and the domain. We'll probably see a lot of attempts at change in some places and absolutely no change in other places, but I know that's what people are asking.

Abby Burns (14:10):
Yes, that's the question that I'm getting a lot.

Natalie Trebes (14:12):
I think it's probably worth, first of all, remembering Congress and this administration have all the same problems that existed last year, so this is not a blank slate. I think what's different with this new Congress and new administration is we have to rethink what right and left mean in terms of conservative and liberal. I think we're in a moment of restructuring ideologies in some respect in healthcare and health policies.

Abby Burns (14:40):
Tell me what you mean by that.

Natalie Trebes (14:41):
So I mean it's not easy to sort... Especially if you look at Trump's cabinet for example, the nominees that we're thinking about that are likely to go through, they have different opinions on a lot of key elements of healthcare and health policy perspectives and approach across an increasing array of things that I don't think we would've initially categorized as conservative.

Abby Burns (15:06):
In other words, Natalie, you're saying we can't just look at okay, what is a Republican standpoint on XYZ topic.

Natalie Trebes (15:12):
Exactly.

Abby Burns (15:12):
Instead it is a lot more individually based.

Max Hakanson (15:15):
But Natalie, there is a difference. In the past we had a split Congress. Now the House, the Senate, and the administration is all controlled by one party.

Abby Burns (15:24):
Yeah, I'm interested in how that... If we're saying that we need to look more at individuals than overall party, within the party if there are more divisions, what does that mean for decision-making?

Natalie Trebes (15:37):
I think it's still going to bring us a lot of gridlock when it's all said and done. I think it's going to be really difficult to reach consensus within the party. And first of all, yes, we have a trifecta, but the House margins actually shrunk, so policymaking in the House just got harder even though it is in Republican control.

(15:59):
So we'll see these inter-party divides and I think we've already seen difficulty with Speaker Johnson trying to hold the caucus together. He's got very thin margins. So ultimately between the debates within the Cabinet, likely nominees, and within the representatives in Congress, it's going to be difficult to see transformative action on healthcare. I don't mean that we won't see action, but I don't think major revolutionary action on healthcare provisions will happen.

(16:31):
The one or two exceptions is probably in the Medicare space, and there is a lot of talk about site-neutral payments for example. I think one element of the general incoming administration is a desire to cut costs anywhere they can so that they can fund some of their other big issues like tax cuts and immigration reform. And so there might be a little less sympathy for the healthcare industry and pursuit of cost-control measures.

Abby Burns (16:58):
Which I mean isn't that part of the idea of drug negotiations as well?

Natalie Trebes (17:01):
Yeah, exactly.

Abby Burns (17:02):
Which was obviously under the last administration. But what are some of the other specific areas where you're seeing maybe states in particular take more interest? Because I know that one of the things we've been saying is yes, federal level is important, but really state-level activism is also super important.

Max Hakanson (17:19):
Yeah. A majority of the states in our country right now have a government trifecta where the governorship, the state Senate, and the state House is all controlled by one party, so they're going to be able to operate more efficiently, more easily. Some areas we are definitely watching and are already starting to see action happen, prior auth in billing, AI oversight, data policies there.

(17:42):
Healthcare price and cost control is really interesting. California recently instituted a new policy here. That's something we're watching really closely. And then lastly, I want to end on state antitrust activity. This is an area we've seen over the last couple of years. I think we're going to continue to see focus here. Are they going to allow mergers and acquisitions within their state?

Abby Burns (18:04):
Yep. Yep. What is all of this state action, federal gridlock, what does it mean for healthcare CEOs? What are the messages that you all have for these leaders?

Natalie Trebes (18:17):
I mean, number one, I think it means increasing variation across the nation, across the different policy environments, which absolutely shape the operating environments for healthcare organizations in different markets.

Abby Burns (18:31):
So Natalie, basically you're saying if you run a multi-state organization or if you work with other stakeholders or partners across state lines, you're going to be navigating or you could be navigating increasingly different policy landscapes.

Natalie Trebes (18:43):
Yeah. You've got internally within your own organization if you are multi-state, you've got different operating environments. But also the way that we all relate to each other I think is going to increasingly change. So the ability to replicate a strategy that's successful in one area of the country may be harder or need to look different in others.

(19:05):
And I come back to the discussion we just had about health systems. As they think about their service lines they want to prioritize, we often hear they all want to prioritize the same exact service lines. As not just market demographics shift, but policy environments shift, I think that will increasingly create more and more variation. That means you should be thinking differently about what your infrastructure and strategic priorities look like depending on where you are. That's not novel per se, but I think this is where the degree will change a lot is that that variation will just get wider over time.

Abby Burns (19:41):
Max, what about you?

Max Hakanson (19:42):
We know last year the Supreme Court was very active. The Chevron decision is going to have huge ramifications on how federal agencies operate. That is something I am very focused on. There is a lot of litigation happening there. Are federal agencies, especially healthcare ones, going to be able to act the same way they have in the past? That's something that's going to continue to evolve, and I think a lot is going to happen in 2025 there.

Abby Burns (20:07):
So for CEOs, don't just watch what's happening in Congress or in your state Congress but also watch the courts because the judicial branch is going to hold a lot of sway in healthcare regulation.

Max Hakanson (20:18):
Absolutely.

Natalie Trebes (20:20):
And I think let's not forget that this is a moment to potentially reset and reintroduce yourself to incoming state officials, incoming federal officials.

Abby Burns (20:31):
Yes. I love this point.

Natalie Trebes (20:32):
And advocate for your system's perspective and your community's perspective. There's a lot of fresh officials in seat, and so this is a little bit of a moment of reset.

Abby Burns (20:44):
Natalie, what do you mean by fresh officials?

Natalie Trebes (20:47):
We've seen some turnover in Congress of those officials who were most focused on health policy innovation, there's kind of a departure of a number of them, including Kathy McMorris Rodgers. In the Cabinet, of course, the Trump Cabinet, there are a lot of different opinions as we've discussed around what even should happen in healthcare.

(21:09):
And so I think just taking the moment to reevaluate what your old assessment of the health policy landscape is and what your ideology and perspective is is productive so that you're not bringing old baggage into the conversation and you are introducing yourself to these incoming officials who are, as I said, fresh to healthcare and teaching them about your actual real needs that they do care about.

Abby Burns (21:37):
Yep. Natalie, Max, thinking back across our conversation today, our conversation last time, what is your final message to our listeners? What mindset should they be bringing into the year ahead?

Max Hakanson (21:51):
I would really say adaptability. We're seeing that shift from growth, growth, growth at all costs to sustainability and margin management. That's a trend we continue to see as rate pressures continue to happen, as volumes have rebounded and are back pressuring payers. So adaptability is really what I would focus on this year.

Natalie Trebes (22:13):
And I'm going to throw back to last episode. We talked about our girl Taylor Swift, and I'm going to bring that lesson back here, which is really knowing yourself and your strengths and your capabilities is going to help you prioritize. You need to know your identity and what your staff really anchors on, is motivated by, and is capable of, and that is going to help you get through this tumultuous future.

Abby Burns (22:41):
Well, Natalie, Max, thank you for coming on Radio Advisory.

Natalie Trebes (22:46):
Thank you for having us.

Max Hakanson (22:48):
Thanks for having us.

Abby Burns (22:51):
Well, despite the name, we didn't actually cover everything the CEOs need to know in 2025 in this two-part conversation. In fact, we barely scratched the surface. That's why Max, Natalie, and Advisory Board as a whole created a white paper by the same name: "What CEOs need to know in 2025." If you want a copy of the report, get in touch with us. And if you want to get in touch with our research team who is, believe it or not, is already developing our perspective on the state of the industry in 2026, email us at podcasts@advisory.com. Because remember, as always, we're here to help.

(23:59):
New episodes drop every Tuesday. If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts and leave a rating and a review.

(24:08):
Radio Advisory is a production of Advisory Board. This episode was produced by me, Abby Burns, as well as Rae Woods, Chloe Bakst, and Atticus Raasch. The episode was edited by Katy Anderson with technical support provided by Dan Tayag, Chris Phelps, and Joe Shrum. Additional support was provided by Leanne Elston and Erin Collins. Special thanks to Kennedy Goode, Kyra Caffrey, Sharon Yuen, Darby Sullivan and Prianca Pai. We'll see you next week.