Steel: Part 1 (The Business We Are In)             May
16, 2013

By Leonard Zwelling

            The
President sent out an email that should send a chill down the spine of every
faculty member. In essence it says we are losing money from operations, have
stayed in the black due to the performance of our investments and the
generosity of those who donate to us, and our costs are still too high. He
proposed a series of what can only be called tweaks (1% cut in employee
numbers?) to improve things.

            In
this and the next post, I will be outlining why this memo should cause such
concern and how we might take a far more proactive approach to what is
obviously a worsening dilemma.

            Let’s
take the high road first by reviewing the dynamics of the businesses that we
are in.

            Business
1 through 10 is patient care. It accounts for 82% of our revenue. As the
President points out, however, the revenue stream from our core business is
very much up in the air as the full effects of the ACA, Medicaid expansion (yes
or no?) in Texas, not to mention what will surely be ever increasing pressure
from the insurance industry to do more for less and with better outcomes (we
might actually have to PROVE we are number one).  All of these factors threaten to erode our margins further.
Without an electronic medical record in the foreseeable future, clear
indications that faculty are LTL (looking to leave) and the regularity of full
capacity in the hospital, it seems very unwise to suppose that we will see a 6%
increase in new patients next year. To be blunt, why should we? We have more
competition than ever in this regard. Besides sticking our index fingers in the
air and saying “we’re number one”, what will we do to assess the economic
factors that will drive more clinical business to our doors?

            Research
is not one of our core businesses. We don’t really make any money on research
although I believe the President proposed to do just that as his
differentiating ability that got him his job. The first test of his abilities
with Aveo didn’t work out so well. Research is our mission, it is not how we
make money and that too is unlikely to change.

            Philanthropy
is terrific and essential to our progress and mission, but very hard to predict
and even in the best of years probably well under 20% of the budget. A sudden
down turn in the financial markets (i.e., as in 2008) could damage our
non-operating revenue again if this philanthropy drops significantly from
factors having nothing to do with what’s in the Houston Chronicle or Cancer
Letter.

            Ladies
and gentleman, welcome to the steel business. We have a huge fixed cost in
buildings and people (costs that do not vary with the volume of our business).
The people component does not have to be a fixed cost but we have always
treated it as such, particularly at the faculty level. The only real variable
cost (a cost that wavers up and down with the volume of business) is probably
drugs, bandages and IV poles. We are a very intensive “hard asset plus
personnel” operation.

            We
have nothing but variable revenues. How do I know? Because what we get paid for
is what we do clinically and that remuneration is highly variable and virtually
capped by the contracts we have with the insurance companies, or the US
government. It is also highly dependent on our payer mix as we make far more
from a self-pay or privately insured patient than we make from a Medicare
patient. (That’s why the leadership wants to increase the number of patients.
They cannot increase the price to get the needed cash, especially when so many
of our patients are over 65 and on Medicare).

            Our
prices (revenues per patient actually) are all over the place thus causing the
variable revenues and they are not calculated on a cost plus basis, but rather
pretty much on what the market will bear. Consider that the “market” could
change dramatically as the ACA, insurance exchanges and the Medicaid expansion
come on line. It is likely that we will make less per patient encounter after
2014 as these newly insured crowd out the more traditionally insured and pay
lower rates of revenue to us.

            In
fact, the only thing we can really control is our costs. Of course, to do so
would necessitate knowing what they are, but since our prices and revenues are
unrelated to our costs, we probably don’t really know what they are. We know
our expenses and these need to come under control as the President points out.

            So
what do we do?

            First,
we need to identify clearly and dispassionately what business we are in. Wish
all you want that we will produce an intellectual property windfall in the lab,
but the drug companies are way better at this than we will ever be and they are
doing just OK right now.  We make
money by caring for cancer patients.

            Thus
we need more cancer patients if we are going to stay this big and make less per
unit of work OR, we need to alter the profile of the work we do. That would
necessitate strategic planning, something some of us have been trying to get
done for 20 years—without success.

            Perhaps
the simplest definition of strategic planning is “tell me what you are NOT
going to do”. Given that we, a cancer hospital, now do the full range of
clinical care, every conceivable type of radiotherapy, chemotherapy and surgery
and have a list of clinical trials a mile long, I haven’t seen any evidence
that we have decided what we are NOT going to do. I don’t think we have a
strategic plan, and never have since 1993 at least when I started my
administrative career fresh out of business school.

            What
if we said, we will only see patients at 1515 Holcombe who we can uniquely help
or who could uniquely help us by going on a clinical trial? What if we had real
doctors manning the front door and deciding who needs to come to 1515 and who
can be seen at a regional center or, better yet, at a large accountable care organization
with whom we decide to partner (we do all their cancer and they do the rest)?
We could rapidly right size our facilities and staff at 1515, grow those in the
community and offload a ton of costs.

            This
is just one idea. I am sure you have many and should take the President up on
his offer to help. Let’s hope this time he and his team are willing to listen
for the team that gave us the troubles of 2008-2009 is still in place and that
team still seems to be genetically predisposed to express few receptors for
ideas other than the ones they hatch. They should have to demonstrate clearly
why they are getting a second bite at this apple at ever-increasing salaries with
so much at stake.

            My
next post will review the actual email from Dr. DePinho et al and see if there
is any evidence that this crew gets it now.