This interview with Ralph Muller, CEO of the University of Pennsylvania Health System, was conducted by Eric Larsen, managing partner, and Jessica Dasher, principal, and condensed by Amanda Wolfe, senior director.

Question: You worked on Medicaid in Massachusetts. You were a teaching fellow at Harvard. You did cross-country comparisons between the U.S. and U.K. for the King's Fund. Then, of course, you led the University of Chicago Hospitals and Health System for 16 years and now you've been CEO of the University of Pennsylvania Health System for almost 12 years. So to start off, I'd love for you to give some observations on your career path.

Ralph Muller: I started as a quantitative social scientist, both in economics and political science. Early in my career, my plan was to become an academic, but I realized I wanted to take a more active role in leadership. I was better at the execution of ideas than writing about them.

There was a big budget deficit in 1974-75, when Michael Dukakis first became governor of Massachusetts. The largest part of that deficit was entitlement programs like Medicaid and ADFC, which was the income maintenance program at the time. They had to file a budget, and they had seven days to figure that out. So they asked me to do it. When I was assigned the task, my response was "Well, you haven't figured it out in 10 years, and I have only seven days?"

So I developed some estimates as to what they were going to spend the next four or five years on ADFC and Medicaid. I guess they were happy with my work because they came back and asked, "You want to be a budget director?" I said, "Okay." Out of that opportunity, I became the budget director of the biggest state agency, which ran ADFC, Medicaid, and social services.

That's how I got into health care—basically by performing some estimates in a week. I tell my kids and other people, "When somebody asks you to do something, you've got to be ready for it and do it well, and all of a sudden, good things can happen."

By the time I moved into hospital administration, I had a deep understanding of how the Medicaid program operates. I also brought with me a number of skills from outside health care—handling the press, dealing with funding issues, managing finances, running information systems, and working with the government—that would all prove valuable as a leader in health care. I also understood the importance of identifying and surrounding myself with good people. I still argue that all of these skills are important to running a hospital.

The secrets of building—and managing—a great team

Q: You have 18,000 employees now. How are you reaching them in a personal way?

Muller: I try to interact with employees as often as possible. Last fall, we arranged over 25 talks with clinicians, managers, and staff to discuss our regional market strategy and how we are thinking about trends, like ACOs, bundled care, and changes in payment. I wanted to give them our take, my take, on these issues.

One of the most important parts of my job is to interpret signals from outside Penn Medicine, whether that's from CMS, commercial insurers, other parts of government, or trends like changes in technology. We don't tell people, "Go figure out what's happening on the Internet." We say, "Here are some of the changes we think are important for Penn, and this is how it changes your job as a nurse." The goal is to provide the framework to think about these issues and how we need to respond as an organization.

Another way we reach employees is through training. We have a training academy that acts as the operation arm to achieve our goals. Over 4,200 clinicians and staff have gone through the academy so far. We use the academy as a way of developing the Penn Medicine way of providing care for our patients. Our approach is: "We'll teach you on Saturday how to play on Monday."

One thing I learned is that you need to have a vehicle for transforming ideas into results. Ideas don't self-execute. My job is to ensure that the leadership and structure are in place so that we can realize our objectives.

Vince Lombardi was famous for having his running back run to daylight. Everybody ... run to daylight. Well, the point of running to daylight is you have to have these guys block this guy and block that guy, and you have to teach people how to block the right guy.

Along similar lines, we teach people exactly how to block this person or that person so you can run to daylight.

Q: Can you elaborate a little more on team-building? I imagine you get inundated by requests from either aspiring executives or your current team for guidance. How do you think about that?

Muller: Well, part of it I learned in graduate school from a professor, who had this great anecdote that Karl Marx was wrong on the facts, but he dominated economic debate for 100 years.

What I learned from that is: Being the person who shapes the ideas and shapes the framework for how we think about issues is critical. I always tell people, even around here, "Don't talk about how many people work for you or the size of your budget. Talk about whether you're shaping the agenda for the organization."

Q: What do you wish you knew 30 years ago when you were starting your career?

Muller: Most things are part of the normal process of maturing, which is that you don't know it all. You think, when you're 25 or 30, that you know everything, when in reality you really have to just learn to listen more to other people. I think that's a normal process that people go through.

Another thing I learned is that you can't always tell employees, "Here's how I would do this." If I think somebody is really going in the wrong direction, then I will step in and say, "Look, maybe you want to think about it this way," but you can't constantly go back to people and say, "Here's how I would do it." You have to let them do it their own way.

Over the longer term, even if you think someone is making a mistake, they learn from it and become better leaders, as well as part of a team. They also develop confidence in themselves. You don't want people constantly looking over their shoulder when they make a mistake.

Focusing on core service lines and executing a geographic approach

Q: Right now, it's a pretty turbulent time for academic medical centers. Many institutions are struggling. You, by contrast, are doing quite well. I think, if my memory is correct, in fiscal 2013, you had a 5.5% operating margin, and then it was 7.4% in FY 2014. I'd love to hear what's behind that.

Muller: Our financial success is largely a result of the strength of our clinical programs and the fiscal discipline of our management team. Another reason is we're not spending all our time on consolidation. One hospital joined our system last year and another hospital will join us this summer, but we are hesitant to grow too quickly.

Even if we had the capital to spare, there are academics here who would ask why we are spending resources to rescue a hospital rather than invest in our research and teaching missions. In both a financial and a political way, you don't want to divert your resources.

I say, "To budget is to choose." We make choices all the time. Budgeting is not a dry accounting process.  You have to have a fair process enforcing choice, and you want to make judgments that will drive the best outcomes.

Q: And how has that played out for you?

Muller: Given the geographic layout of the East Coast, the largest region that an integrated health system can effectively operate within is about 100 miles. We want to be the leading health care system within this 100-mile region.

Let me give you an example. I'm a sports fan. The New York Times has produced heat maps that display whether people in a geographic region are Yankee or Red Sox fans. Having grown up in New York and Boston, I always knew that Hartford, Connecticut, was the cutoff: people south of Hartford were Yankee fans and people north of Hartford were Red Sox fans.

Those heat maps of baseball loyalties are very consistent with referral patterns for medical care. People residing south of Hartford go to New York for health care and people residing north of Hartford go to Boston. Similarly in New Jersey, people residing north of Princeton seek health care in New York, while people residing south of Princeton come to Philadelphia for their care.

One of the first things I did when we started talking with Lancaster General Hospital about consolidation was to look at those heat maps to see if they rooted for the Phillies or the Orioles.

Q: So who do they root for?

Muller: The Phillies. That meant their cultural affinity is to Philadelphia rather than Baltimore.

Once we've defined our geography, the next question is, "How does someone become the leading health system in that geography?" You need to focus on strengths and not squander resources. We concentrate on the development of clinical programs where we think we have real competence.

I've learned that having really strong programs gives a halo effect to other programs. For example, we were able to put more resources into other programs, building up emergency medicine and dermatology.

Q: Getting back to consolidation, you have been notably disciplined on the M&A front. Your partnership with Lancaster General Health is a very interesting one. From an operating margin perspective, they've performed well. And yet they've allied with you on some strategic programmatic fronts. How do you make the case to a prospective partner that isn't in duress and doesn't need a partnership?

Muller: There has to be mutual advantage for consolidation to be successful.

I wanted to partner with Lancaster General Health because they are a very strong health system, both clinically and financially. We formed a strategic alliance about a year ago that allowed us to get to know one another and co-develop clinical programs. By the time the conversation about consolidation arose, we both felt we had a good idea about each other's priorities and direction.

From a geographic standpoint, I felt that Lancaster is as far west as we want to go. I learned from my time in Chicago that you don't want to own the hospital right next to you because you compete all the time. The location of Lancaster General Health both provides an anchor in that region and gives us a contiguous market presence from Philadelphia all the way to Lancaster.

Outpatient and inpatient investments

Q: Here in Philadelphia, you're embarking on a $1.5 billion project to build a facility that will house 700 beds and 50 ORs. Is it fair to say you're doubling down on acute care?

Muller: To put it in perspective, we're investing in both outpatient and inpatient facilities.

Our first big bet was to expand outpatient practices, but do it in the form of multi-specialty centers where we co-locate specialty services at a single site to make it more convenient for patients. CVS asked us a couple years ago to staff its clinics. I told them we weren't interested because we didn't want to get into that line of business. CVS, like Walgreens, is focused on selling medications. We are focused on providing care for complex and chronic diseases. If Penn has an extra 100 primary care physicians, they're going to be staffing our multi-specialty centers rather than staffing CVS or Walgreens.

On top of investments in outpatient care, you have to, at some point, renew your inpatient franchise.  The way I see it is we're going to be in the inpatient business for the foreseeable future and investments are needed to renew the facility. I see this as the cost of doing business for the next 75 years, and I'd rather do it now, when we have the resources to do it, than put it off.

Q: A business line some hospitals have been exploring is insurance. What's your take on hospitals owning and operating their own health plans?

Muller: Introducing an insurance product is a very market dependent decision. In Philadelphia, it's difficult to compete on that front. I wouldn't say "never" to starting a health plan, but I'd really want to make sure what I am getting involved in first.

Secondly,  we have 70 hospitals in the Philadelphia area. If you start a health plan, you suddenly have to start worrying about contracting with all those hospitals. I don't think that's our skill set. I have discussed taking some population-based risk with Blue Cross, but I want to take the risk in chronic diseases like cancer and heart failure.

I'm not against taking risks, but for now, I am against getting into a full-fledged health plan in Philadelphia.

Thinking about innovation and the future

Q: What's your approach to fostering innovation? It doesn't necessarily happen accidentally.

Muller: Going back to our earlier discussion, the key to fostering innovation is to energize really bright people. One of the keys to our success in innovation at Penn Medicine is Kevin Volpp, who has both an MD and a PhD in economics, and who co-directs our innovation center.

Four years ago, I said to Kevin, "Let's create an innovation center that allows us to start testing out more and more of your ideas. We'll fund it and let you bring in your own pool of young talent. On day one, you can start working on what you want to work on, but it has to be something that has operational impact and improves care."

As a CEO, my interest is to foster an environment to develop new products and ways of delivering care. One of my rules of thumb is to stay five years ahead of the other health systems.

The innovation center is just one of the many investments we are making to address the question: "How can we shape patient care right now?"

Doctors think systematically about disease, but they don't think systematically about patient populations. That skill set is closer to what economists and political scientists do, whether it's looking at heat maps or referral patterns. I believe in the value of bringing the social sciences and medicine together. The innovation center now has 15 young, bright faculty.

Q: Well, Ralph, let me ask one final question. Fast-forward to Jan. 1, 2018. What's the press release for Penn Medicine going to look like?

Muller: Penn Medicine will remain the leading health system in our region. By that time, we will have fully integrated Lancaster General Health into Penn Medicine and benefitted from our combined strengths in areas like population health to improve health care in our communities. While we will continue to move towards a more coordinated health system and become more accountable for our care, I suspect the changes will still be modest. Changes generally don't occur quickly in health care, in part because doctors and nurses are trained and incentivized to behave a certain way and getting them to behave differently through changes to their training and incentives has proven slow and challenging.

To me, the key question is who will change the frontline care of what doctors and nurses do? This is a theme I've been stressing for the last 40 years. If you teach them to practice in new ways—whether it's care pathways, disease teams, evidence-based medicine, all of which we're investing in—and incentivize them, then you'll change American health care.

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