In this episode of Fireside Chat, we sat down with Peter McCanna, President, Baylor Scott & White Health System to discuss dual transformation for a large health system, the fundamentals of a health system business model, how to think about an asset-light structure and its relationship to the health continuum, digitization, and how to attract top-tier talent.

Please note: The number of COVID-19 cases and the situation referenced in this episode were based on reported data at the time of the interview and are subject to change.

Transcription

Peter McCanna 0:01
We have to be much more nimble. Our new competitors are coming into parts of that care continuum, and really going after the profit pools and the patients within them. And we’ve either got to partner with them or we’ve got to be as nimble as they are.

Gary Bisbee 0:16
That was Pete McKenna, President Baylor Scott and White health system, speaking about competitors attacking Baylor along the health and care continuum. I’m Gary Bisbee. And this is Fireside Chat. In our conversation, Pete gave one of the best descriptions of dual transformation for a large health system that I’ve heard. He outlined the requirements for the legacy health system business to compete, and he explored the three sources of capital for the new transformational business. Pete reviewed the fundamentals of a health system business model, how to think about an asset-light structure, and its relationship to the health continuum. What role digitization plays in Baylor’s strategy and how to attract top tier talent including from outside healthcare. Stay tuned for Pete’s description of his background and where he developed the foundation for leadership. Let’s welcome Pete McCanna to the show. Welcome Pete, great to have you on the podcast today.

Peter McCanna 1:11
Great to be on the podcast, Gary.

Gary Bisbee 1:12
We were chatting before of course we’re early stages of the Coronavirus pandemic. And we were chatting about what you’re doing at Baylor Scott and White, which I found particularly interesting. If you don’t mind, let’s cover that a bit before we get into our discussion about the business model. But one of the things we were chatting about is where you actually are digging up information. Right now, where do you go for information about the coronavirus pandemic?

Peter McCanna 1:42
What I try to do is have a diversity of sources. Obviously, the clinicians within our organization are really up to speed. I turn to our vendors, particularly vendors in the supply chain because some of the difficulty we’re going to have is going to be around the availability of supplies. Professionals in other markets that have been hit early with the virus, namely the Seattle Washington area would be an example of that. I read all the sources New York Times, Wall Street Journal. Particularly focusing on countries like Italy, what are some of the questions we need to be asking ourselves. And then some of the podcasts, Wall Street Journal, The Daily, those things that had some really good coverage, a little bit more in-depth coverage on it, but really taking that all in as a way to help educate me on it.

Gary Bisbee 2:32
You also said you reached out to the various health insurers to try to get their view of how they were proceeding and thinking about it.

Peter McCanna 2:39
Yeah, we want to understand how they’re thinking about it because we’re going to have a large number of patients and really understanding how to treat them is what the coverage will be so that there are no barriers to people seeking care is a really important component of this.

Gary Bisbee 2:56
Assuming that the surge begins in Dallas, How are you thinking about testing?

Peter McCanna 3:02
On testing, which is really a key component nationwide, we’ve developed a capability and a capacity to do a certain amount of testing per day. And what we’re trying to do is for those potential patients that they suspect that they’ve been infected, we’re trying to avoid having them come into our emergency rooms, hospitals or clinics, and finding a way for them to be evaluated and tested so that they’re not infecting others in the process. So what we’ve done is really utilized our app. And on our app, we have a fully automated way that you answer a series of questions. And then the app would classify you as a patient whether you’re a patient who needs to be further evaluated. If you are in that cohort, you are offered an E-visit or virtual visit or phone line that you can call. Then if the clinician upon that evaluation determines you need to be tested, then you’re routed to pre-established testing sites or I should be more specific specimen collection site. And when you’re routed there, you’ve registered already. And you show up there and your automobile and we will come out to you and swab you and get your test results that same day, about five to six hours later. We’re slated to get that up and running actually in a few days. But that’s really important for us, so that at least we have organized testing, and that people are staying in self-quarantine and not getting out in the community if they’re potentially infected.

Gary Bisbee 4:42
Sounds very efficient as well. What about acquiring surge capacity? You mentioned that you were thinking about that.

Peter McCanna 4:49
I mentioned looking at the lessons from some other areas and really looking at what happened in Italy and is happening in Italy they faced a surge pretty quickly. We’ve seen so many estimates on the academy’s call. We received some estimates that said that hospital beds at some potential surge levels will be utilized, the demand will be two times the availability as an example. So, what we’ve done is established a couple of our leaders who are solely responsible for acquiring surge capacity and acquiring search capacity in all of its forms. Physical beds, maybe through specialized tents. What are the staffing issues we need to work through per search capacity? An example would be, in a surge likely all the schools will be closed, and our staff will need daycare. So can we pre-acquire and pre-commit daycare capability and then clearly, some of the core supplies and equipment we’re going to need at surge. surge scenarios have very different characteristics than where we are right now. And we want to make sure we’re out in front of it.

Gary Bisbee 6:00
Well, it’s a confidence builder to have you describe how you’re thinking through this and being prepared. Why don’t we use that as a springboard into Baylor Scott and White Health? For our listeners that aren’t that familiar with Baylor Scott and White. Could you give us a quick description, Pete?

Peter McCanna 6:17
Baylor Scott & White actually is the combined organization. It’s about six years old. It is the product of the merger of the Baylor healthcare system in DFW and the Scott & White Clinic in Central Texas. We’re the largest not for profit health system in Texas. We have 52 hospitals, about 1000 ambulatory sites, 1.2 million digital users of our app, and about 50,000 employees, and we’re in Dallas Fort Worth, College Station, Austin, and sort of everywhere in between Dallas Fort Worth and Austin along the I-35 corridor. And I think what’s a unique aspect of the system is we’ve got every piece of the care continuum. Plus we’ve got a large ACO and we’ve got health plans. So we’ve got the financing arm as well as the delivery arm.

Gary Bisbee 7:07
Of course, Baylor is a terrific name and Scott and White brought the health plan. Did Baylor have a health plan before Scott and white?

Peter McCanna 7:15
No, Baylor had an ACO but did not have a health plan. So Scott & White brought into the system. The health plan is one of the things that they brought in.

Gary Bisbee 7:24
Looking at your personal background, which has been interesting. Notice the University of Michigan BA in English Language and Literature. You ended up as a CFO and now the president of a multi-billion dollar health system.

Peter McCanna 7:39
Yeah, I was a CFO at a pretty young age and in undergrad, I had one accounting course and I think I had one math course. So go figure. Actually, I think that training was probably the best training for me as a leader. My dad spent much of his career in Jesuit universities as an administrator and he impressed upon us the importance of a liberal arts education. And boy, the study of the humanities and history and all those things that I spent my undergraduate years on, are really important. You got to understand human nature and you got to understand people and history, and that’s been very valuable to me. And I’ve picked up the other skills along the way in graduate school and the like. So rest assured anyone who’s listening to this, I do understand numbers and find it and other things other than Shakespeare.

Gary Bisbee 8:30
Was Presbyterian in Albuquerque your first health system job?

Peter McCanna 8:35
Yeah, I think so. I was the CFO at University of Colorado Hospital. At the time it was after Clinton healthcare reform and systems were just emerging. I had a great opportunity to come down to New Mexico and work in a fully integrated system with a provider-owned health plans. So that’s what that move was, was to be able to do that.

Gary Bisbee 8:55
Yeah, which was a terrific background and then up to the Midwest to Northwestern. You went as CFO and then ended up as Chief Operating Officer before you came to Baylor.

Peter McCanna 9:06
Yes, yeah, at Northwestern was Northwestern was a great opportunity to really come to an organization that had the geography, the talent, both administrative and physician and the resources to be really an exceptional top 10 Health System. I mean, it was a great opportunity. And I think the 15 years I was there were just fabulous. We grew from under a billion to over 5 billion. We achieved our goal of being in the top 10. And it was a fabulous experience, just a fabulous place, high-quality great people.

Gary Bisbee 9:45
You’ve really prepared for the requirements for leadership today with your health plan, Community Health System background at Presbyterian and your academic medical center background at Northwestern with all the growth that you made reference to came in about two and a half years ago to Baylor Scott and White as the president. So what are your responsibilities as President?

Peter McCanna 10:08
When I came down here, I worked for Jim Hinton, who is our CEO, and Jim was the CEO at Presbyterian, now almost 20 years ago when I worked for him in New Mexico. And basically, we took the organization and we said, Listen, let’s form a partnership, to run this thing and to plan and Jim, because of experience at Presbyterian, has taken all of the managed care at-risk parts. So the health plan, the ACO, and then some of the more classic CEO roles around human resources and marketing and strategy. Then I’ve taken the operations of the hospitals and the clinics and many of the shared services because of my experience as a chief administrative officer and a CFO, so I’ve taken those as well and really taken a big complex organization and really split it up and then are 100% aligned on what we’re trying to achieve. It’s been a really effective model for us to move very quickly in achieving our goal.

Gary Bisbee 11:13
Well, it’s springboards into the next topic I’d like to cover in January at our trustees’ summit, you lead a discussion. It was just terrific talking about the business model of our large health systems and how it needs to evolve or transform. And I wondered if we could spend some time on that today. You’ve obviously done a lot of thinking about that. But could you just give us a background on business models of our large health systems and why they need to evolve and then perhaps we could dig into some of the lessons that you’ve learned and what you’re doing at Baylor, Scott, and White?

Peter McCanna 11:52
Happy to do that. I think the starting point on thinking about the business model is stepping back and saying What’s our view of the future? Or what are some of the trends that are occurring today that we as a health system need to operate within to achieve our goals? And in my view, there are six fundamental trends. And a couple of them are really unprecedented in terms of their magnitude and their effect on us. You know, trend number one is consumerism. It’s really the expectation of every consumer or customer to have their services customized to them. Precision Medicine is related to the scientific breakthroughs in genomics and 3d printing you name it. Again, make us much more personalized to the individual digitization, we probably are in the midst, I think many would agree it is the largest revolution in business. And I would say social structures driven by digitization, and we need to recognize that as a health system, and what do we do about that? Cost pressures are pushing value-based care if you really listen to virtually every private equity funded startup, they are pivoting to value because they see that and I think we as health systems need to do that. And then consolidation and new entrants are at unprecedented levels in our society so you take those six factors and you really step back and say, Okay, what do we need to do as a health system? And one is we’ve got to move from a wholesale business to a retail business, we’ve got to become less inpatient focused and more outpatient focused, we have to move and shift from analog to digital, not only internally with our administrative functions, but a digital interaction with our patients. And we have to be much more nimble. Our new competitors are coming into parts of that care continuum, and really going after the profit pools and the patients within them. We’ve either got to partner with them, or we’ve got to be as nimble as they are. So the new competitive basis in this new environment is really now around access, convenience, affordability, and loyalty. And it really causes us to say, how are we going to get there? And that leads to this concept. It’s really an academic concept. There’s a lot of research on it, but how do you apply the concept of a dual transformation to a healthcare system and a dual transformation meaning we’ve got a legacy business and that legacy business particularly in the not for profit world, the earnings off of that legacy business fund the future. Call that transformation A. That transformation we have got to make the legacy business hum. And it’s got to be at the top of its game in order to serve patients today. But also generate the capital to fund what we would call transformation B, which is the development of new services, products and so on that are personalized and that are responding to consumerism and digitization. The “A” the legacy business is different. It requires high reliability, predictability, and so on. But transformation B really needs to accept failure a little bit more, experimentation and has to move at a pace that is much faster than what the legacy business can do. So the operating model says, “you’ve got to do both at once.” To do both at once, they’re going to be distinct differences in how you manage those transformations. Because if you don’t do it that way, a lot of the history of large businesses has shown that legacy business that has tried to transform the legacy business snuff out new product development and this is set up in a way that really tries to avoid that from happening.

Gary Bisbee 16:05
Right. That’s the Kodak story with digital, isn’t it? One of the things you talked about before we got into the dual transformation was wholesale versus retail. Could you spend a little bit more time on that? What does that actually mean? In the context of our large health systems?

Peter McCanna 16:23
When we say wholesale, we’re saying that the channels of how we say it in crude business terms how we “acquire” business or “acquire patients or members. They’re done by talking and negotiating and satisfying brokers or payers. And when we do that, we get large books of business, right? So it’s a different Marketing Challenge. It’s a different business challenge, to go ahead and do a Blue Cross contract. Or to add our health plan side, sign up a large employer, you’re dealing in a wholesale way and pricing at wholesale. And responding to the customer who’s fundamentally the person making the choice is the person representing the payer, or the employer, right? In the New World, and how we acquire now increasingly everything that we get in terms of products and services, is that the discussion is with the individual. So let’s take Medicare Advantage. Up until this point Medicare fee for service wholesale, you get Medicare patients a lot through your relationship with physicians and your network of physicians in your emergency room. And now under Medicare Advantage, I’ve got to sell my product one by one to every Medicare patient. Therefore, I have to customize my benefit design to address their needs. I’ve got to be high touch in terms of customer satisfaction. As the baby boomer generation moves into Medicare, I’m going to have to digitize fully digitized and satisfy them. So that’s an example of the difference where we’re moving from wholesale to more retail, which is customer by customer.

Gary Bisbee 18:15
Back to dual transformation, then we’ve got this transformation A, which is the legacy group, and B is the go-forward or future side. What’s your thinking about how to fund both of those right now? The legacy business is a very intensive capital business. How can we generate enough earnings off the legacy business to fund this new go-forward business?

Peter McCanna 18:41
Three funding streams come to mind. First, obviously, achieving healthy operating cash flow in the legacy business. So you’ve got to be a highly productive highly efficient business with good growth prospects, organic growth prospects, number two way that we can create funding is through partnerships. So I think it’s safe to say that in many cases, we simply don’t have the capability but by bringing a partner in, you’re much more capital efficient. We’ve done that here at Baylor Scott and White. Over the years, we have a very large partnership portfolio. We’re the original joint venture in the creation of USPI, around ambulatory surgery, we have our patient imaging partners, outpatient rehab, and physical therapy. So those businesses can be highly capital efficient when you bring a partner in. And then the third, which not for profit health systems really, really struggle with is reducing their capital profile of the legacy business. That is, pruning programs and assets in the legacy business in order to free up capital because if we’re going to really pivot to value and pivot to digitization, we’re going to need to allocate more capital to that and prune assets within the core business. But those are the three examples of what’s necessary in the capital.

Gary Bisbee 20:07
When you think about digitization, clearly the legacy part of it, transformation A, needs to be highly digitized move in that direction, think precision medicine, for example. And yet that digitalization is going to underlie the go forward part to transformation B. So what’s the thinking? Do you try to use the funds flow from the legacy business to finance that digitization? Or is that picked up through the transformation be?

Peter McCanna 20:40
Well, I think there’s a couple of things when we say digitization, digitization will drive efficiencies in transformation a, if not for profit tale systems apply techniques on digitization that are done in fortune 500 companies, they’re still in our estimation 100 to 200 basis points. of earnings that could be wrung out of the legacy business. That’s one way to do it. There are some digitization applications in terms of new products that actually will have an earnings stream attached to them being smart and placing bets in areas where you can actually get self-funding products and services out of that. But yes, in the early stages, capital from A is going to need to be seed capital to do transformation B, I think in many respects.

Gary Bisbee 21:30
It sounds like the legacy business needs to grow in order to fund or at least be one of the ways you can fund the go-forward business. How are you thinking about that at Baylor Scott and White?

Peter McCanna 21:43
The need for growth, and really, for scale, has a lot of dimensions to it that are important for the business. And you touched on one of them, it’s to generate capital. As you get larger, you’re diversifying your risk, you’re able to take value-based risk. You’re able to create synergies on the margins. So those are all classic things that come from scale. The other things that come from scale, though, and this leads maybe to another topic is how important scale is talent really to do transformation A, and in particular transformation B the analytics talent, the digital talent, they’re going to be attracted to the large organizations and you’ll be able to get the best talent in the country. I think as you have a larger scale, getting back to this issue of partnership, you’re going to be an attractive partner. Because you’re going to have millions of customers that look to your brand and the brand strength, it’s I think that’s really important too. Big data will be important. The larger you get, the deeper the pools, and the diversification of your data gets stronger. So your product development gets better, you’re able to spread the cost of some of these technology investments that you’re putting together. Scale I think becomes crucially important. doing it the right way, though, when you’re not adding too much leverage to the organization. But I think scale becomes really important in this transformation journey.

Gary Bisbee 23:05
Following up on your comments about talent sounds like, we need to go outside traditional healthcare channels for talent particularly and well, you mentioned analytics, digitization, and so on, but also in the development of transformation B the go forward part. How are you thinking about that at Baylor Scott and White?

Peter McCanna 23:25
I think it’s really important. I mean, we’re a unique, complex business. So historically, there hasn’t been a whole lot of crossover between industries. But as we think about transformation B, we’ve gone outside of healthcare for our supply chain leader, we actually hired someone out of the military who did logistics and supply chain for the military, which the skills transferred really well. I do think in human resources and talent development. Going outside healthcare can have its advantages. I’ve been really impressed with how some private equity firms have actually particularly focused on integration and acquisition, how they apply rigorous approaches to talent evaluation and talent development. We need to learn from some of the best practices outside of healthcare to really make the pivot and think all those things are fair game to evaluate to see how we can be best in class that way.

Gary Bisbee 24:22
Yeah, but think located where you are with a presence in Austin, which has become more and more of a tech hub that might be a great place to look for analytical talent, digital talent.

Peter McCanna 24:33
Yeah, it has. And actually, Dallas has become the central location for a lot of healthcare firms. Both geographies have been great from that standpoint.

Gary Bisbee 24:43
Pete, there’s a lot of talk about “asset-light” approaches to our legacy businesses. By that trying to lower dependence on facilities. How do you think about that at Baylor Scott and White

Peter McCanna 24:56
Asset light really gets back to this capital issue, and it really asks the question, how do you get there? I do think in order for a legacy business to achieve an asset-light profile, you have to have a certain number of customers and a certain brand strength in order to partner with others or to rent their capacity. So if you imagine a market where you don’t want to build a tertiary or quaternary capability, which are really asset-heavy, you’ve got to have something that you bring to the table with those that have legacy assets, there. The other way to look at it is as you begin to grow and focus your growth efforts, that you really focus on the asset-light parts of the care continuum. So you do focus on areas like outpatient services that historically are less capital intensive. The digital investment money if you can really scale them are very, very efficient from a capital standpoint. So, I think it leads you in those directions. I don’t think you can avoid that journey to try to make this all work. Again, I don’t think you can avoid evaluating some of your legacy assets and making some tough decisions. We’ve had to make some tough decisions. we exited a large joint venture that was fundamentally a hospital joint venture. We’ve had to close a couple facilities that had severe demand issues, capacity issues, and those communities frankly, have been better off because there were more than enough inpatient services in the community to serve them. They needed more access to outpatient services. So we felt good about those decisions, but those are decisions that actually make you a little bit more asset-light.

Gary Bisbee 26:49
Well, rationalization of our bed supply is important then as we move to become more asset-light, just thinking about the Coronavirus situation in a time of stress, we’re always going to need our bed capacities. So we can’t overdue the asset-light part, right.

Peter McCanna 27:08
Yeah, I mean, the top part in our country is that our government doesn’t fund standby capacity disasters, right. I used to do work way back when and consulting for the Military Health System. They fund standby capacity. Right? That’s one of their roles to make sure that they’ve got that in the event of a military conflict or war. But that doesn’t exist in the American healthcare system. So that’s why we’ve got to do the things I was mentioning earlier is rapidly find excess capacity and get it online. A tough issue in the current environment.

Gary Bisbee 27:39
It is tough, going back to digitization things are moving so quickly on the technology front, it’s very expensive to build data lakes, are you going to need at some point, a significant digital partner?

Peter McCanna 27:54
It’s a good question. I think first on the data side, we’ve evaluated this issue. Is our data deep enough and broad enough to support AI development to support the insights we need today and in the future for our clinicians, for our patients? And I think the conclusion is, it may be deep enough, but it may not be diverse enough. And what I mean by diversity, other forms of data from nonhealthcare sources, I think there’s a pathway on the data side to make our data pool or a data reservoir expanded in certain ways to your question about a partner. To this point, our development has been with vendors that assist us in development, but I do think there will come a point where we need a partner, either a large tech company that we would partner with, and or one of these digital-native startups that are addressing a particular pain point in the care continuum. I can see us partnering with one of those firms and actually scaling some of the success that they’ve had scaling it to a much larger patient population. I think those types of partnerships are intriguing, and I think they can be very, very beneficial for our patients.

Gary Bisbee 29:15
All of this is exciting and demanding. Quick question, are you having fun, Pete?

Peter McCanna 29:20
I think in the current environment you can be told by our teams that you really have a choice to make, you can get exhausted by the amount of change and the pressures, or you can be energized by it. It’s a choice you make. Well, I’ve chosen the latter, and I’ve enjoyed the latter. And that is we really are at a point where we can change healthcare for the country. And it needs change, particularly healthcare systems in the value chain of healthcare were the most fragmented piece and there are a lot of pain points. There are a lot of problems. And now given some of the tools we have, we have the ability and we have the opportunity to fix them and that’s the exciting part about it.

Gary Bisbee 29:59
That is exciting and I can tell just from the way you’re framing that you’re optimistic about the next few years.

Peter McCanna 30:06
Yes, I’m very optimistic, but we’re gonna have to do things very differently than the way we’ve done in the past.

Gary Bisbee 30:11
Hence the value of the business model understanding and discussion. Why don’t we land here? Pete, this has been a terrific interview with you. You’re a great leader among our health systems. Congratulations for that. We look forward to following up with you as we continue to interview you, leaders.

Peter McCanna 30:27
Thanks, Gary. It’s been my pleasure.

Gary Bisbee 30:30
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Transcribed by Otter