Expert Insight

Advocate Health's CEOs on how achieving scale unlocks innovation

Advisory Board President Eric Larsen sat down with Advocate Health CEOs Jim Skogsbergh and Gene Woods to discuss why geographic contiguity is not a prerequisite for integration, why they're banking on their synergies unlocking billions, and how investment income advances — rather than contradicts — the not-for-profit mission.

Eric Larsen: First off, congratulations on the finalization of the merger. You're officially 150 days in, after a bit of a protracted process in consummating what is now the fifth-largest health system in the country — a 150,000-teammate, 21,000-physician, 42,000-nurse, $27 billion enterprise reaching nearly six million people at more than 1,000 sites of care across six states. Just a massive health system enterprise by any measure. I'm excited to dive into the "why" and the "how," but before I do, let's make sure I got the "what" correct — any key assets I left out in terms of describing the combined entity?

Gene Woods: Well, we're also building a state-of-the-art, net-zero carbon medical school in Charlotte, the biggest city in the U.S. without a four-year medical school, and we have one of the largest graduate medical education programs in the country focused on training the next generation of outstanding clinicians. What else would you say, Jim?

Jim Skogsbergh: I'd add that we spend $5 billion annually in community benefit, we're aiming to achieve carbon neutrality by 2030, and we have a number of additional ambitions I'm sure we'll get into. But overall, Eric, I think you captured it.

Eric: Give us a sense for the aspiration here in creating Advocate Health. Obviously, this has been just a brutal period for hospitals — arguably the worst 24 months on record. On the demand side, as of last year hospital volumes nationally still hadn't bounced back, with inpatient admissions down 9% compared to early 2020 and operating room minutes — which of course cross-subsidize everything else — down 4.3%; on the supply side, costs keep rising inexorably — collectively hospitals spent $125 billion more on labor last year than in 2019, supply chains are still snarled, etc.  And most concerningly, our frontline clinicians and administrators are exhausted after three years of firefighting.

In short, a deeply stressful time for our entire sector. And yet, compared to some of the catastrophic, multi-billion-dollar losses reported from other non-profit health systems (Kaiser, Providence, Mass General Brigham, etc.), Atrium and Advocate Aurora performed quite well, with comparatively minor operating losses. In other words, your organizations — independently — were strong, self-sufficient systems. Give us some insight into the "why" behind the combination — and why now?

Gene: Eric, for many mergers it's often easier to make a move like this when there's an urgent, burning platform, like significant financial issues. But for us, as two strong, AA-rated health systems, it was all about our compelling shared vision. Namely, that we could thrive better together in a future that was changing at a faster pace than anyone could have possibly imagined. It was a both-and, not either-or; we recognized that we had to respond to the COVID-19 crisis at hand and simultaneously think five, ten, fifteen years down the road and plan for the future.

Jim: In our industry — maybe in any industry — there's a tendency to seek comfort or homeostasis. But I think the future requires us to seek discomfort. And that's hard to do, it's not a natural tendency to say, "Hey, let's go get uncomfortable." But as you said, health systems are facing major challenges. We need to lean into discomfort to effectively respond to these challenges and transform.

Eric: Well said. You're referencing this theme of "self-disruption," Jim, that you and I have discussed in past conversations and is a signpost of prescient leadership. Still, this move isn't without risk. You've each had successes — and some reversals — with structuring health system mergers over the years. What's different this time?

Gene: Eric, you're right — we both have track records of successful combinations and we've also learned lots from the negotiations that didn't go well. Advocate Aurora was a successful merger of equals; Atrium has been integrating Wake Forest University School of Medicine to become an academic health system. We've also studied what hasn't worked given that the field is littered with failed mergers — usually the result of misaligned cultures and vision. So, both the successes and failures have been instructive.

Jim: The criticism against horizontal mergers comes down to organizations not realizing the benefits of scale. Both of our organizations have benefited from scale in the past because we've executed well. Advocate Aurora came together and now we have better outcomes, better services to reach more patients, better safety numbers, and better financial performance. That kind of track record confirmed our belief that if you scale properly, your organization gets stronger, and you're better able to serve your patients, your own teammates, and your communities.

And Gene and I can speak honestly with each other. There's a lot of trust. That's important.

Gene: Right. Oftentimes when systems come together under a co-CEO model, it's a bit of an arranged marriage. But Jim and I have been friends and colleagues for years. We sat at the American Hospital Association table together, working to solve big policy issues, so we have that type of "in the trenches" relationship. And given the complexity of today's environment, I find that two heads are better than one. We ask different questions and are learning from each other's perspective along the way.

Leveraging scale as an instrument for innovation

Eric: Let's talk about scale. We've already seen rampant horizontal consolidation in our industry — in our $1.4 trillion hospital sector, the top 100 health systems comprise almost $900 billion in revenue. And yet, many of the forecasted benefits of consolidation (cost rationalization, growth, innovation, etc.) have proven elusive — or at a minimum hard to quantify.

Both of you have constructed large, sophisticated, multi-geography, AA-rated health systems in your own right. And each of your legacy health systems brings its own proprietary strengths and assets, many of which can help cross-pollinate the other: Advocate Aurora's experience in structuring capitated partnerships with payers, and Atrium's depth and breadth around graduate medical education, are two examples that jump to mind. So, with this "complementarity" of strengths and assets, what's the overarching ambition for the merger — what can the two of you do together, that you couldn't achieve on your own?

Jim: We're going to generate capital at a faster pace together than we did separately, which opens up options — and we like having options. More doors are available to us as a $27 billion, going on to be $30 billion system than as a $9 billion or $14 billion system. It doesn't mean you have to walk through every door, but it puts us in places we couldn't get to as Advocate Aurora or Atrium, alone.

Otherwise, I think the list of what we can do is just about the same — it's more that our effectiveness and reach is better.

Gene: There are so many examples of how our scale enables us to have a greater impact. You mentioned a couple, Eric. Let me add a couple others — research and innovation. We believe that our research platform will be different from any other institution's research platform in the country. Atrium is one of the leaders in regenerative medicine with the Wake Forest Institute for Regenerative Medicine, for example, and we're in the top five for Alzheimer's and dementia research. We are exploring all kinds of opportunities like brain health centers to translate our research directly into practice across our system.

And our philosophy is "bedside to bench to bedside" — in other words, rather than trying to find problems for solutions created in a lab, our clinical teams share their most pressing clinical challenges, and then our researchers work with them on solutions that can be delivered to patients quickly, irrespective of location.

We're also launching an innovation district in Charlotte, North Carolina called The Pearl that will extend our innovation platform, together with our Innovation Quarter in Winston-Salem, to the whole system. The Pearl will include a U.S. headquarters for IRCAD, a world-renowned surgical training institute that trains surgeons in minimally invasive techniques using AI and robotics. That will ultimately bring 7,000 surgeons from around the world to Charlotte to train on the latest in medical devices and augmented reality and virtual reality technology…all of it.

We just announced that Siemens will be a partner with us and are in active negotiations with other major companies who will have a presence at The Pearl. So, imagine medical students, innovators, scientists, top-tier clinicians and entrepreneurs all on the same campus working together to find new cures. And one system-wide Advocate Institutional Review Board will help centralize and spread research and innovation through our 67 hospitals and 1000+ care sites. The possibilities are incredibly exciting.

Eric: So the aspiration here revolves not just around back-office cost rationalization, but around cracking the code on leveraging scale for growth and innovation. And coming together to form a $27 billion system, you're certainly a giant, compared to many of your health system peers. But while health systems do have a lot of gravitational pull — 6% of the U.S. GDP, employing 17 million people — when we place the health system sector in the context of the broader US healthcare ecosystem, suddenly things look different. For example, the seven publicly-traded managed care companies total approximately $1 trillion in market cap on their own; individually they're each anywhere from 6-16x larger than Advocate. Big Tech — with Microsoft, Meta, Amazon, Google and Apple each advancing its own healthcare ambitions — collectively boast an $8.2 trillion market cap — which, by the way, would make them the third largest economy in the world, if they were a standalone country. So, when we put $27 billion in context, maybe it isn't so big after all.

How do you think about the competitive — and potentially collaborative — dynamics with some of these behemoths? How does your relative size play into the equation?

Gene: Those comparisons are sobering. And yes, we are very open to working with companies that have a true spirit of partnership — and in fact, we have a track record for doing so. But the threshold question for me is: do they share our priority for caring for all of our communities, not just those that have insurance and can pay?

The concern we have is it that many players have strategies that are disaggregating care versus creating a true holistic care model — and we don't think that's good for patients. And there are those that are just focused on the most profitable segments of our services that are critically important to our overall economic model, while seeming uninterested in rural health, behavioral health, or underserved urban communities, for example. Our scale makes us much better equipped to compete with these companies.

Jim: Right. I'm not sure the majority of organizations are genuinely interested in win-win arrangements. And if I don't have your best interest in mind, as my partner, and you don't have mine, that's a relationship that's doomed.

Eric, you mentioned we're one of the largest health systems in the industry — from my perspective, that's interesting as a fact, and that's where it ends. To your point, the folks that we're working and competing with, especially in the ambulatory and home space, are 10, 20, 100 times bigger than we are — we've got to be careful about that.

Gene: I do find it interesting that people often ask provider organizations, "How big is too big?" but that question isn't always asked of companies that are 20 or 30 times our size. To me, the question is what type of national health delivery network organization, with which types of differentiating capabilities, and at what size and scale, is best equipped to serve our communities in a comprehensive way, for decades to come.

We are firm believers that the answer lies in connecting large regionally dense, integrated health systems because we have a demonstrated track record of driving better performance across the spectrum. And we see many opportunities to work with other, like-minded organizations in the months and years ahead as we continue on this path.

Defense against health system disintermediation: consumer-connection

Eric: I also know that you've each structured productive partnerships across the industry — Gene, I'm thinking of the new partnership you architected with Best Buy to drive more care into the home; Jim, you've been an early mover in aligning with payers and sharing risk — Advocate Aurora jointly operates at least three health plans, two with BCBS Illinois and one with Quartz in Wisconsin.

What do you think Advocate needs to do to best position itself as a partner, and/or guard against 'disintermediation' by some of the non-traditional actors we just mentioned? Or at least ensure mutually beneficial partnerships?

Gene: It's a great question. There was an AHA board retreat six or seven years ago where we brought in a bunch of entrepreneurial disruptors to speak with us and asked them, "Tell us how you can disrupt us, tell us where we're weak, tell us where you think you want to partner." And we had a really open, honest dialogue. It's one of those conversations that sticks with you.

And I came away with the one insight that maybe should be obvious. They said, "We want to partner with you if you maintain your customer intimacy. Once you lose that connection to your patient, then it's easier and better for us to disrupt you than partner with you."

So, the key for us is to really act as a single unified system and stay close to our patients. And our consumer teams are working together with new fervor on cracking the code for maintaining the customer intimacy — or as others call it, "brand love," — because it will make us better partners and a better system.

Jim: And to put the nail on the head, those are some of the conversations where our scale allows us to occupy a different space in the conversation. Being $27 billion, having six million patients that we know — it definitely changes the conversation.

Geographic contiguity isn't a prerequisite for integration or achieving scale

Eric: Jim, I remember when I sat down with you and [former Advocate Aurora co-CEO] Nick Turkal in 2018 one month before the Advocate Aurora merger, I committed the faux pas of calling that a "non-contiguous" merger. And you guys gently corrected me and said, no, it's actually kind of contiguous — a 93-mile "conurbation" between Milwaukee and Chicago that is largely filled-in. Well, this time I triple checked and there are 755 miles between Charlotte and Chicago — so this one is definitely non-contiguous.

Kidding aside, you could each extract certain synergies from other recent mergers given relative contiguity. How do you think about contiguity and non-contiguity in this case?

Jim: Especially after being on Zoom for three years now, we do realize that it's important for us as leaders to come together physically when we can, but in terms of realizing synergies, I think contiguity is pretty much immaterial. Operating as a unified system is about mindset; it's about values. It's not about geography.

When we were merging Advocate Aurora, our success had very little to do with being contiguous, and that's why I think the same logic applies here. Whether we're 70 miles away or over 700 miles away, when we think about back-office optimization, for example, it doesn't matter.

Eric: I think it's a persuasive point that contiguity is sort of an irrelevancy if you do the hard, disciplined work of rationalizing non-clinical and clinical infrastructure like rev cycle, analytics, the EHR, etc. But so few not-for-profit health systems actually achieve this. In fact, quite the opposite — we see this "Noah's Ark" phenomenon of "two of everything" (two headquarters, revenue cycle management systems, administrative functions, etc.) with very little elimination of duplicate services, at least compared to mergers in other industries. Knowing you both, I expect this merger is intended to be different. Have you set a number on what the cost synergy is?

Gene: I can definitely tell you there's no Noah's Ark approach here. We are standardizing and integrating all of our platforms under a unified umbrella — one EHR, one ERP, one rev cycle and supply chain operation, etc. A large percentage of our integration synergies are predicated on this type of operating model — over $1 billion in the next 36 months. That said, we believe that care is delivered locally so we are getting direct input from all of our care site's stakeholders as we design our system strategies.

Eric: But organizations do struggle to act as true operating companies, rather than holding companies, especially post-merger. Advocate Aurora has done it more effectively than most — but they also had the benefit of proximity. Beyond back-office cost synergies, how else are you thinking of this question of contiguity?

Gene: We've been thinking about this question around being non-contiguous a lot, so let's break down why it might not matter, beyond the back office.

I brought up research and innovation. As I mentioned, we are in the process of having a single IRB for all 67 hospitals and 1,000 sites of care. That will mean that a patient can benefit from a system clinical trial from Milwaukee, Wisconsin to Chicago, Illinois, to Winston-Salem, North Carolina, to Charlotte, North Carolina, to Macon, Georgia — with a single sign off. We will have the largest clinical research delivery platform in the nation. And so to your question, you don't need to be contiguous for that, right?

The hypothesis we have — and that our clinicians are hard at work at testing — is that we can leverage digital and virtual platforms to create a nationally integrated delivery system, regardless of geography. For example, if we have a world-renowned clinical leader in a certain practice at one of our care sites, our goal is to leverage that expertise across the Advocate system, ensuring all our patients have access to their expertise.

Jim: I'd also add that both Gene and I believe that the challenges we're facing in health care are not local challenges, but national challenges. We're looking at a healthcare landscape that is increasingly focused on a national scale. So, it makes sense that a national solution might be appropriate to respond to national problems.

A healthy dose of 'contempt for authority'

Eric: Let me ask something of a philosophical question. You two have talked about the need for unconventional solutions to the current healthcare dilemma. And yet so many of our CEO colleagues seem to still be waiting for a "return to normalcy" — some mythological, pre-COVID period of greater stability, predictability, perhaps even "safety." That's just not going to happen — things have structurally and irreversibly shifted in healthcare. We talked about the sluggish volume levels; the advent of well-capitalized, non-acute care competitors accelerating site-of-care shift; the worsening economic macroenvironment with brinksmanship on the debt ceiling, persistent 5% inflation and an improbability of any fiscal bailout from the government, etc.

You talked earlier about how "embracing discomfort" led you to the merger. How do you think about moving forward as a combined entity and resisting the inclination to resort to status quo?

Jim: I just reread a book by Stephen Ambrose called Nothing Like it in the World about the building of the transcontinental railroad in the US — arguably the greatest global engineering feat in the 19th century. His conclusion, as an esteemed historian, is that one of the most significant factors in our ability to build a railroad through mountains, around canyons, etc. etc., was a "contempt for authority." Those were the words he used. Because engineering gurus around the world said, "You can't build a railroad that goes up more than 1,000 feet per mile," and "You can't go through rock that is X inches thick." But they did it anyway.

I'm obviously far from an anarchist, but I do think we might need an element of that contempt to truly transform the industry. In order to push back on the notion that, for example, "This is what a nurse does," "This is what a primary care doc does," "This is what if phlebotomist does."

Gene: The way I think about it is a "contempt for the way things have been done."

Jim: That's probably the more acceptable way to say it. Gene is a diplomatic guy.

Gene: It's easy to say, much harder to do, and we're only 150 days in, but we're starting the journey.

One of the core realizations that we're acting on — and it's an idea that we've been talking about since the beginning of our careers — is that we have to redesign how our clinicians work. Eric, you talked about the labor crisis, and you mentioned up front that we employ more than 40,000 nurses. "Net-net" for the system, this year we are up 1,000 nurses, so we are beginning to make progress. And we believe that's partly because we're developing new ways to be a nurse in our system.

If you were a nurse that worked 30 years in the ICU and you've gone through the exhaustion of COVID, you might be saying, "That's it. I'm done." The conversation we're now having is, "Are you sure you're done? Or would you be open to using your talents in a telehealth ICU nursing role, helping to train the next generation of critical care nurses, even if it's part-time?" So, we're actively working to create a lot more options and pathways for our people.

Eric: I love this point, and it's so important when we think about the fact that 75% of a nurse's day is spent on "administrivia" rather than on direct patient care and, at the same time, we're running head-on into this "experience-complexity gap," with veteran nurses retiring and being backfilled by less tenured nurses or temporary premium labor. And it's not just nurses, right? The average physician spends four to six hours per day fighting with the EMR.

I want to double click on this, because you are the fifth largest employer among health systems — 150,000 teammates — so your approach to workforce echoes across the industry. It strikes me that ours is the only industry in the US economy to experience negative productivity growth in the last couple decades and, at the same time, has been the slowest to embrace technological advances in how we think about improving workforce productivity. I don't think that's a coincidence.

How are you leveraging technology in this quest to redesign clinical work and to hold productive "contempt for authority" or tradition?

Jim: This is an area we're actively working on, but we also have to acknowledge that despite what we have done, our progress is woefully inadequate. We talked about running to discomfort — well, we're certainly uncomfortable with the degree of progress that we're collectively making here. But it starts there, with acknowledging it, and acting on it.

Gene: We've launched what we call the Best Place to Care, which is a systematic way of working with doctors across the system to embed technology into their day-to-day to make their workflows better and address their frustrations with the EHR.

Jim: And it's so hard to transform from within the industry. I really think you need somebody from outside to come in with a fresh set of eyes and say, "Why do you do that? Why do you do it this way? What if you did it another way?"

Big Tech advancements will be revolutionary — but come with questions, risks

Eric: Let's talk about Big Tech for a moment. I've been an avowed skeptic of Big Tech in healthcare and referred to these companies as "paper tigers" in past writings — lots of flash, bottomless buckets of capital, but I can't point to too many examples of things they've done that have meaningfully disintermediated or really threatened incumbent healthcare players, let alone revolutionized the industry. We'll see how generative AI might change this — and I'd like to ask you about this in a moment — but before we go there, I want to ask more broadly — how do you evaluate the status of Big Tech in healthcare today?

Jim: I've always been, not fearful, but certainly watchful of Big Tech. We've all seen the series of starts and failures, and we tend to say "Oh, they're not going to get healthcare, they can't get healthcare. We're unique" -- that kind of thing. But we have to realize, they're learning with all of those failures.

I think the best analogy for Big Tech is looking at two phenomena that influence the physical map of our world: earthquakes and glaciers. Earthquakes bring massive change. Buildings fall, roads are uprooted, there's big upheaval. But the next month, we rebuild. With glaciers, you don't see it, you don't feel it, it only moves an inch every year, but it changes the landscape forever.

We're more afraid of earthquakes, but glaciers are more transformative. I think Big Tech has been more of a glacier.

Eric: I would argue that November 30th of last year — the day OpenAI released ChatGPT — may prove to be one of the most consequential moments in the history of tech. With the mainstreaming of generative AI, suddenly everyone is obsessing about the implications of large language models (LLMs) and GPTs on healthcare.

Personally, I believe generative AI can and will profoundly change the way the healthcare industry operates — mitigating the roughly $400B wasted annually on administrative friction; unburdening clinicians of the four-plus hours of their day spent trapped in the EMR; and augmenting clinical decision capabilities. I would venture to say it's already happening, if we look at the pilot going on with Nuance DAX helping write progress notes, for example. It's a complex moment for human-technology interfaces.

How are you thinking about the implications of AI and generative AI for the industry?

Gene: I think this is the start of a new version of the Industrial Revolution; I'm totally in the camp of "This is going to change everything we do," and it's going to happen faster than we're ready for, as a society.

It's worth noting, the Industrial Revolution did ultimately benefit humankind. With generative AI, I think it can extend a limited workforce in incredible ways; it has enormous potential for solving some of the toughest medical questions and clinical questions that we've had. And while there are significant challenges and big watchouts to work through, it's something we will be embracing as a system.

Eric: Are you doing any work to leverage this at Advocate, yet?

Gene: Well, I already talked about some of the work we're doing around Best Place to Care. The other place we're focusing, which I'm really excited about, is reimagining the medical education curriculum.

We have two nursing schools, we're building a second medical school — all told, we have 3,000 learners right now. So, there is active dialogue and work around how to account for the fact that the clinician of tomorrow is going to be completely different from the clinician our medical education systems and curricula are built for. I mentioned the work we're doing with IRCAD — you can use this training platform to really train clinicians differently. I believe cadavers are going to be a thing of the past, for example, replaced by virtual reality or augmented reality. And AI is going to be part of these clinicians' clinical practice, so we believe it should be part of their education as well.

Eric: Yes. Exactly.

Gene: The question is what does that actually look like in practice? So, we are thinking through a short, mid, and longer-term plan, but it's work we've already launched.

Eric: I think that's such important work. Not to get too much on a soapbox, but I believe it's a shortcoming of our industry that we still operate a medical education curriculum that is based off the 1910 Flexner Report, which is fundamentally indexed on rote memorization. We test, train, and reward clinicians for memorization. But when everyone has access to the entire corpus of human knowledge on a supercomputer in their pocket, that no longer makes sense. And now with GPT and on-demand access to large language models that can tap into that knowledge in a user-friendly way, memorization en masse becomes even more obsolete.

Gene: I totally agree, and that's why it is part of our strategy. But one of the key challenges is that type of future-oriented strategy can be a bit foreign to existing accrediting and oversight bodies. It's all new and they are trying to figure out how to keep up with developments, such as AI in medical education or clinical practice. So, going back to what Jim says, it's about challenging the status quo because many of the oversight and regulatory bodies are just reinforcing traditional structures that are rapidly becoming outdated.

And to pull on another theme that we've talked about, this is another place where we benefit from having scale as a unified Advocate Health. We believe we can have different conversations with these bodies because we represent a cross-section of every delivery approach in the nation. So, we can say, "Hey, how are you thinking about the future? Because if we just continue on the paths that already exist, we're perpetuating more of the same." So, how do we work together to redesign what the important standards should be?

Jim: And more of the same doesn't cut it.

Gene: Exactly. And by the way, this is just part of a broader conversation and challenge, which is, who is going to regulate AI in healthcare, overall?

The FDA? CMS? CDC? These are really, really important questions. As a society, we're still trying to figure out how to regulate social media. And we don't even have the faintest clue on how to regulate ChatGPT-type platforms to maximize their potential benefit and minimize their potential harm. The bottom line is that we are in a completely new technological era and our regulatory, political, and economic structures need to evolve… and evolve quickly.

Jim: I totally agree. We've got to embrace generative AI and other emerging technologies. But boy, that notion of "Use it for the good," and then the question of, "Well, who defines the good? And who regulates the good? And who's going to protect it from being abused and misused?" Those are definitely questions on our radar.

Health systems serve a public good — but that requires investable capital

Eric: Let's switch gears for a moment and talk about a key funding mechanism for health systems to invest in innovation, tech advancement, etc. — non-operating income, or proceeds from investments. I don't think this topic gets nearly enough airtime. And, Gene, I have to take advantage of being in the room with the former Chair of the Federal Reserve in Richmond and ask about macroeconomics. (Editor's note: Gene served on the board of the Federal Reserve in Richmond, Va., concluding his term in December 2023.)

Perhaps underappreciated by the public at large, health systems rely heavily on investment portfolios to drive total margin. And that worked great during the uninterrupted bull market of the past 14 years — 0% interest rates, expansionary monetary and fiscal policies, and a post-Global Financial Crisis rebound that drove US economic expansion. Everything was 'up and to the right,' with public equities — S&P 500 notching almost 15% returns annually — and private equity reporting record returns.  Hospitals benefited enormously from this — as of November 2021, the top 25 U.S. health systems had almost $500B in assets on their balance sheets.

Now the air is out of the balloon — the Fed has hiked interest rates 10 times in a row, the economy is sputtering, and recession is in the air. And with that contraction, hospitals have been hit hard — Kaiser Permanente lost $4.5 billion last year, predominantly from investment losses; Mass General Brigham lost nearly $2.3 billion; Cleveland Clinic down $1.2 billion. I know Advocate Aurora and Atrium had similar experiences, with investment losses contributing about 90% to your respective losses of $1 billion and $754 million on the year last year.

So, my question goes as follows — are hospitals too dependent on non-operating income? Or is this an over-reaction, and should we just ride out the storm and get back to equilibrium?

Gene: It is an important point you're making, Eric. And I'll offer some perspective — we've always been focused on operating margin and EBIDTA as the key metrics of financial performance, not just total margin.

But to your question, not-for-profit healthcare is an essential part of the fabric of how care is delivered in this nation, and when it comes down to it, the national public health infrastructure overall — and the reality is, it's in perilous financial jeopardy, as you laid out, Eric. So, we look to our non-operating income as a vehicle to enable us to fill those gaps and invest in forward-leaning strategies or important services that aren't yet reimbursed — in addition to having to play an outsized role in public health, as we have during the pandemic.

Eric: Can you share examples of what that looks like in practice?

Gene: Sure. On the public health side, we were two organizations that didn't lay off or furlough employees during the pandemic and that our communities relied on to be there for them, 24/7, throughout the crisis. As alluded to, if we didn't have some financial reserves, we wouldn't have been able to absorb the public health function like that.

In terms of placing bets irrespective of reimbursement, I'll give you an example from Atrium, before my time. About 15 years ago, leadership at Atrium asked themselves, "When we look to the future, independent of reimbursement, what will we have regretted not investing in?" Their answer was virtual care. They were at least a decade ahead of the curve. Fast forward, I was sitting with my head of cardiology when I first got to the system and they told me that in the prior month, virtual cardiac services had saved our patients 100 miles, on average, of driving to and from Charlotte. So, not only was virtual care already up and running, it was already baked into clinical operations and improving access for our patients.

Eric: Both examples you've just shared are highly people- and patient-centric uses of non-operating income. And yet this is an area where not-for-profit hospitals in particular get heavily criticized in the press. How do you reconcile that?

Jim: Something I'm just now starting to appreciate is that collectively, not-for-profit health systems haven't done a good job of publicly reconciling how our ability to generate non-operating income allows us to fulfill our mission. People look at that income and say, "You're not not-for-profit," but they don't reconcile the numbers with the reality of not-for-profit healthcare. And we don't help them to, either.

Gene: That's such a good point. Jim is right; we have to reconcile, "Yes, there's cash reserves," with the reality that at the end of the day, in the best of years, not-for-profit health systems have less than three cents on the dollar in operating margin, after paying for labor, medicine, supplies, etc., which they use to reinvest in new services. That is an extraordinarily thin margin. On top of that, without a rainy-day fund to weather storms, our communities could be left without the essential care they need, when they need it most.

Eric: This is enlightening.  You're essentially talking about stewardship here, saying "okay, if we're operationally a 'super proficient system', we have three cents at the end of every dollar to reinvest in our community." And that's not even accounting for the fact that depreciation is probably in the 5% range.

Gene: Exactly. To bring it back to the public health side of things, we're investing in areas that a lot of the investor-owned, for-profit companies stay away from. By design, most are looking to maximize shareholder returns, whereas we're looking to provide a public good. That's not a value judgment; we just have different core missions. And if not-for-profit health delivery systems don't bind together tightly, I have serious concerns about access, rural care, behavioral health and equity initiatives going forward. In short, we will have a more uneven and less equitable healthcare system in this country.

Progress requires progressive governance — and we can only run as fast as our talent allows

Eric: We've covered a lot of ground. Any final reflections on how you've been able to chart such a forward-looking course at Advocate so far?

Gene: We haven't talked a lot about talent, and I couldn't be more excited about our new, combined team and the level of commitment and phenomenal expertise that we now collectively have — especially in the midst of national talent wars. There is a very genuine and palpable excitement among the team about our vision and our future together.

Jim: Absolutely. And related, we can't understate the role of governance in helping us see our way through what is and will continue to be a very challenging time. There's a lot of parochialism in our industry and it's not just in the management suites, it's in the boardrooms. We're blessed to have governance leaders who see the value of evolving, of scale and of looking the industry squarely in the eye and realizing that that we need to do some things differently.

Gene: I've said a number of times, you can only go as far as the board can see and as fast as the talent on your team can run. Part of our role as leaders is to believe in the power of possibility and stay optimistic — not in a Pollyanna way, but in a way that demonstrates confidence that we can find a way, no matter the challenge. And then it's about having a board that can see further too. And we are blessed to have those type of people as part of our guiding coalition.


Eric: Gentlemen, thank you. Last question — as you look at your careers so far, what are you most grateful for?

Jim: I'm grateful for mentors — people who took me aside and had enough interest in me to help me and teach me and scold me and pick me up and dust me off and help me get back in the fight.

Gene: When I first got to Atrium, I did what new CEOs do, which is go on a 120-day listening tour. And I brought a little book and I would write down themes and impressions of our organizational culture. That's where the idea of our mission being to improve health, elevate hope, and advance healing for all originated. And that mission still resonates profoundly with me. The bottom line is that I'm really grateful to lead an organization with teammates whose values so aligned around that mission. And I couldn't think of a better or more fulfilling profession to be in.

Jim: That's so well said. We're not making widgets. Other than maybe someone's faith journey, there's nothing more personal than health. It's gratifying to be able to work in a field where you're really contributing to the fundamental good.


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