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Can your health system produce service line financials on a repeatable basis? Can you systemic physician variation schedules? The work is hard but the value of clarity leads to great return for cost and quality for the health system. Rob DeMichiei, the CFO of UPMC talks about their Activity Based Costing journey. Great insights, hope you enjoy. 


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 Welcome to this Week in Health, it influence where we discuss the influence of technology on health with the people who are making it happen. My name is Bill Russell, recovering healthcare, CIO, and creator of this week in Health. it a set of podcasts and videos dedicated to developing the next generation of health IT leaders.

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If you're interested in either of those services, check 'em out on the website. Today we're starting another of our interviews from the Health and Analytics Summit in Salt Lake City, put on by Health Catalyst. If you're trying to apply data as a transformative part of your healthcare strategy, this is a fantastic event.

I caught up with one of the panelists, Rob dhe, uh, CFO for UPMC, for a great discussion on merging GL and EHR data to gain insights into health systems costs. Also, towards the end of this episode, we talk about it budgeting from a CFO's perspective. Have a listen. Hope you enjoy, hope you'll learn as much as I did from this interview.

Alright, so here we are with another, uh, session from the Health Catalyst Conference. I'm here with Rob Demer, who's the uh, uh, CFO for UPMC. And, uh, thanks for joining me. I really appreciate it. Great. Thanks to be here, bill. Um, now we don't normally have CFOs on the, uh, on this week in health It, but I, so many questions that I have from CIOs, um, we're gonna go into to some of those, but let's start with um, a little bit of your background.

'cause you're a non-traditional . Healthcare, CFO? Yes. Um, so I, before coming to UPMC, I had, I had no healthcare experience, so my background was starting my career with Pricewaterhouse. So big, big four accounting firm. And with Pricewaterhouse I had primarily manufacturing and high technology clients. And so from there I went to General Electric and General Electric, couple of different businesses, uh, transportation and energy before I came.

And I'm a native of Pittsburgh, so I actually came back home to work. For UPMC. So it was my first time working in the industry and to be honest, um, any disadvantage from not having industry knowledge was an advantage. And as far as looking at things with a fresh set of eyes without any preconceived notions.

And so I think that's been actually one of my, um, greatest assets as having a, um, no preset opinion on, on the way things are done and critically questioning everything that we do. Which is, which is interesting. Is that one of the reasons they hired you when they It was actually, um, our CEO, Jeffrey Romoff very progressive and uh, I think he acknowledged at the time he wanted me to bring world class processes, financial processes.

We were growing. So controls, um, . Analytical processes. He knew that we had the healthcare knowledge already residents. We had some very long tenured finance employees who could handle the healthcare things until I got up to speed on healthcare. So it was very much a deliberate strategy, um, a bold one, I would think, uh, at the time because it's very safe to hire the person who's been in healthcare for 30 years.

But that was the intent to bring a, a different viewpoint to the industry and to UPMC. Yeah. And we're starting to see that happen in the CIO ranks. We just saw somebody hired from Microsoft to a large health system and, um, and Kimberly Clark to a large health system as well. So that's, and then you're seeing it in the supply chains as well.

Yeah, that would, that would make sense to me. So, you know, one of the, I I attend the JP Morgan conference every year and I get to listen to the CEOs and CFOs give their account. And I, and uh, one of the things that struck me was I, I used to think it was just our health system that had, you know, low

Margins, you know, two ish, two 4%. Uh, and then I listened to system after system get up there, and it seemed to be pretty much the norm. And I, I would say somewhere even below that, that threshold, there's a lot of cost pressure on healthcare. I mean, where's that coming from and is that gonna change? Or is that, is that the new norm?

Yeah, it seems like everybody makes money in healthcare except the providers, right? Which is sort of, uh, crazy if you think about it, right? The very lucrative business for the pharmaceutical companies. For the device manufacturers, for the software vendors, quite frankly, um, but not so much for the providers and, and the folks doing really the hard and the good work, um, in taking care of patients.

So, uh, I think it's only going to get tougher. Um, the government reimbursements, uh, can only continue to be reduced. Um, Medicare and Medicaid are, uh, have to be squarely . Um, uh, on the target of any federal cost reduction in state cost reduction going forward, uh, individual, um, businesses are looking to reduce their healthcare costs.

They've pushed as much as they can to the, to the actual employee. So that really is, is no longer an opportunity. And if you think about, uh, just in general, you know, we're, we're 20% of the GDP, so it's to the point where the, the pressures . Will only grow greater. And then you bring in the disruptors. So the digital disruptors, but also the insurers who I think are the greatest threat, if you will.

And I'm not saying that, uh, I think it's actually a good thing for the industry. We need to be threatened. Our business model needs to be, and we've asked for it through the inefficiency that we have. So, uh, the Aetna CVS matchup what United is doing. Um, you know, they're acquiring physician practices.

They're basically taking over the outpatient space. What will be left for the hospitals will be the acute care and the inpatient and the ICUs, but 50% approximately of all revenues come from outpatient and that revenue's at risk. So it's gonna put enormous pressure on health systems to be more cost productive.

It's, plus we're going into an election cycle where healthcare is just gonna be at the center of the conversation, which is, um, which is not gonna help the environment much, I would imagine. Um, you know, one of the reasons I wanted, we're gonna go into the session you just had on, uh, uh, cost accounting, the cost accounting journey that you guys did.

But one of the things that happens with, uh, CIOs, I hear from CIOs a lot, is, uh, people come in and they go, uh, the executive team gets together and says, well, we need to, we need to reduce costs. And they, you know, they, they just take out this broad thing and say, okay, 5% across the board, 5% gets to the cio and CIO looks at 'em and goes, um, okay, I can't cut my, I can't cut my Epic contract or my Cerner contract.

Mm-Hmm. I can't cut this. I, you know, there's so much it in the way of fixed cost that they're like, you know, there has to be a better way to do . Cost reductions than just this blanket. Um, which gets us to this conversation of, uh, your cost accounting journey. Give, give us an idea of the UPMC cost accounting journey.

Sure. So the, the really, the, um, I, I can't take credit for it. It was actually our, our finance committee chair, uh, Bob Hernandez, who was the former CFO of US Steel. And so he was, uh, he's been the finance committee chair for the 15 years that I've been at UPMC. So, uh, just a very experienced gentleman, . Um, a tremendous experience.

He's seen everything and he made the comment, you know, I think you guys need a cost accounting system. And this was very early in my tenure with UPMC and I said, okay, that's a big undertaking. Gimme some time to do other things. Integration, uh, standardization of financial platforms. But eventually we got around to it.

So after about six years or so, I was ready to take on developing a cost accounting system. So we brought over . Um, a finance director from Italy by the name of Pietro Ferrara. Uh, Pietro had implemented a cost accounting system for Italian subsidiary because they're in a capitated arrangement over there, so they don't have a fee for service environment.

So we imported his knowledge and he was one of the. People that, uh, helped us. Uh, we created a skunk works, if you will. I had a team of, started out five or six people, grew to about 12 approximately. And what they did is they went out, they searched the market. There were no activity based costing tools for healthcare, so we, we had to build our own.

And so we went about doing that. And, um, . You know, it was a, a four year journey to create a system. We started with a pilot at one hospital. We expanded it to other hospitals. It was fully implemented, uh, it was working. Uh, and we decided again, uh, started to have some success with and decided, you know, this is something that others could utilize and we.

Reached the decision to commercialize it. And so then we partnered with Health Catalyst because what we had was a homegrown version. It was clunky. I used to joke that, uh, when we would run the system, the lights would dimm in all of UPMC because it was really consuming much data. Again, it's taking EMR data, it's accessing the EMR and all the ancillary systems and then the general ledger.

And it's really kind of smashing these things together, this data together at a patient level so we can identify the patient's activity both clinically and financially. But it was a very bulky, awkward, homegrown system. And so the decision was made to go with Health Catalyst to create a commercial grade version, and we were the Alpha customer for what became to be known as chorus.

And so now we're utilizing Chorus, um, very slick system, very user friendly, and, um, it's, it is really been, um, a game changer for us. So prior to that, so most health systems and prior to that, um. You, you really run off of a sort of an RVU system. Can you describe the difference between an RVU system and Costa County?

Yeah. An RVU system, unfortunately is, I use the best analogy is that in a way, um, it's based on the, the procedure being performed, the relative value unit. That procedure, you're assigning a cost based on that procedure. And so in a way they all look the same. Right? A, a knee implant, . From this patient, patient A to patient B, to patient C or physician A to physician B, to physician C.

The costs generally look the same, and that's, um, not accurate because we know that physicians have different practice patterns. They utilize resources differently, they use different supplies, different suppliers. They may use more or less blood. They may, may be in the operating room shorter or longer.

They, the length of stay for their patients may vary and all those things consume resources, right? Length of stay consumes hospital beds, so we needed a system. RVs can't deliver that, and so they can't identify physician variation, which is one of the things we think is very important. It's an opportunity to grow more efficient and to help us on that journey of having better efficiency from a cost standpoint, but also improve quality.

And so RVs can't deliver that physician differentiation, whereas activity-based costing can. So we knew that we, we had to have a method. That was not RVU based or ratio of cost to charge based, which is even worse, which is just based on, uh, a very high level relationship between the total cost incurred and the total revenue.

So there are a lot of the industry has legacy inaccurate costing systems that are very pervasive, uh, even today. And it's, and it's a significant port. I mean, it's what, 98%? 98. If, if you have a 2% margin, then you have 98% cost. And it's one of the legs of the, uh, triple aim. Triple aim, right? You want to have kind of the patient experience, the cost, and the quality.

And so, uh, if, if cost is one of the pillars of that triple aim, how do you go into a, a long-term strategic . Approach when you have a flawed, inaccurate agent system that you're relying upon. Yeah. And you actually said, you know, cost is one of the pillars of transformation. Really understanding your cost.

So give us a, give us a couple examples. Um, you talked about, uh, physician variation. How did you, how did you implement that? And then how did it sort of, uh, reveal itself to, uh, generate some savings across the board? So, so one of the examples, there are many, many, and they, we continue to create new use cases as the, um, tool becomes embraced, um, in a much broader way.

But, um, we like to talk about . The progress we've made in women's health. And so one of the first use cases was around, uh, was in women's health, was around hysterectomies. And so we looked at all the hysterectomies that were being performed in our women's health service line, and we noticed significant variation between open hysterectomies and laparoscopic.

And there really wasn't a rhyme or reason as to why. I mean, in some cases there's a clinical decision when you have to do an open hysterectomy, but in many cases it's really physician training. This physician was trained a certain way, so they would do what they were trained to do. Well, we are able to look at the cost of those different types of hysterectomies and then also the clinical outcomes.

I. Length of stay, hospital acquired, uh, acquired infections, et cetera. And we saw significant variation in cost and quality be by using the tool, by understanding the cost of the individual performance of those physicians in, in performing hysterectomies. And so we're able to make corrections. To ask tough questions to reassign physicians in some cases, um, if they weren't trained on laparoscopic surgery, maybe they weren't the ones to be doing hysterectomies any longer.

So we were able to improve both the lower the cost of hysterectomies, but also more importantly, improve the quality. And so that was one of the early wins that we had utilizing the cost management system. And there's a lot, there's actually a lot of, wow, there's the benefit of being in a hotel. You get the different sounds, , um.

But there's a, once you have this data and once you have the platform for doing the analytics, um, it's things like you, you know, you said you went into a, a surgery center for knee, and you looked around and you said, I, I have, I have some questions, you know, about, you know, just the, the utilization and then you were able to take that data.

Mary was, so why, why don't you just Sure. The, the, you know, we we're examining. Now again, health systems have very high fixed costs. They have facilities, whether it be inpatient facilities or outpatient facilities with exam rooms. And so, um, in a way, in a fee for service world cost plus, the more you do, the more lucrative financially is the old model, right?

So right. You are celebrated or you are rewarded by building the new outpatient center by adding this, you know, luxurious space with a big, large atrium. But what we've discovered is, again, we're we're trying to be good stewards of resources. And so if we're building that outpatient facility. We wanna be close and convenient to the patient, but we also have to make sure that we have adequate throughput in utilization of those exam rooms.

And so, um, again, looking for variation, we started to examine how are we utilizing exam rooms throughout our system And we found. Like many systems, we acquired physician practices over the year, the years, and they weren't unnecessarily done with a geographic thing in mind. It may be a certain specialist or um, uh, a very esteemed practice or a high level of volume related to that practice.

And so over time. And we also acquired hospitals that had physician practices. So over time, after years of acquisitions, you're left with this footprint, which is in many ways nonsensical. Right? A physician here and then one a mile down the road or one next door, right? And so we had instances where we had a, a long one highway, literally, you know, 10 physician UPMC physician practices.

Within like four miles of one another on a highway. And so you take that to say, wait a minute, I can optimize this. So in this one example, by learning the overlap and the lack of utilization of those exam rooms, we consolidated, we closed those physician offices. We created an outpatient center for relatively modest amount of capital, but brand new.

Uh, shared space with a number of physicians, but much more highly utilized. So this is an example where there's variation, there's inefficiency hiding in plain sight, I call it. And so much of what the opportunity available to us is optimizing these very significant fixed costs that we have, uh, employed.

So we have hospitals, we have . Physical locations, we need to optimize them. We have ex um, operating rooms. All these things need to be optimized. And so you, it's hard to do that without seeing variation, without understanding cost, and, and you have all that data in the EHR. I hear physicians every now and them saying, yes, you do.

You know, there's no value in the EHR because it has made their life. Challenging. Um, but there is value in that data. Yes. I mean, all the criticisms from physicians are valid. Uh, it may not be optimized, it may not be efficient. We know it takes away from time with the patient, but there is a treasure trove of data that's available in those EMRs.

And so what, what we've been doing is leveraging. Operational, EHR data and other ancillary clinical systems, marrying it with financial data from the general ledger. So it's the source of truth for the financials in creating this combined, um, data mart of clinical and financial information, which is very, very powerful.

So let me ask you the million dollar question, which is, let's assume I picked you up, took you over to a new system, didn't have any of this in place, you were starting from scratch. Um. Uh, how would you get the journey started? How would you, how would you get it started and what, what were would be some of the first things you would look at in terms of getting quick wins?

So this is really, this takes a ton of willpower and I was lucky I had our finance committee chair, . Publicly state, this is something we need to do. So I had support from the corporate governance body, our CEO, uh, is very mindful of, of improving quality. Um, we're a integrated delivery and financing system.

So he recognized the importance of cost efficiency. 40% of our revenue in the provider side is capitated from our own health plan. The cost is very important. So I had . Board governance support. I had CEO support and then as CFOI set the tone and, and it did take, uh, convincing of my own team. I had, um, financial personnel who had always been in healthcare, didn't see the value of activity-based costing, so it really took having a champion executive support.

A champion in the organization. That was me. And then hiring, uh, and pulling into this Skunk works the best and brightest to create a system, but so we now have a product chorus through Health Catalyst, so they don't need to create a product. There is a very, very good robust product out there, which is chorus and it's, it's to my understanding, the only act true activity based costing system that's out there.

There are others that are . Advertising that are dipping their toe into cost accounting and cost management. But they're all primarily RVU based systems. So, um, so there's a very good system out there in Health Catalyst, but it takes, um. E evangelists, you know, within those systems to really be the zealot to push, to understand the importance, to link in with the clinicians.

And I think that's been the most powerful piece, is we haven't had to push this out to the physicians once we have explained it to them and they see the day that's available to them, and the ability to manage a service line and to manage a physician population. They've been the people that have embraced it, and it's been a pull, they're pulling the information from the finance department, and that's always much more powerful than pushing somebody, pushing someone tops down to adopt a technology that they don't embrace.

Yeah. And you gave us two questions in the, uh, in the session. You know, can I, as a system, questions you can ask, you know, as a system, can you develop service line financials on a regular basis, which is not a, not an easy thing to do. I mean, and, uh. I, I, I'm, I'm not sure I can run name five health systems that are doing that.

That's, uh, uh, that's a tall order. But once you get to that point, now you can take on those risk-based contracts with confidence. I've seen systems take on risk-based contracts without really having this, uh. That's, that's, that to me seems like a very beyond dangerous or risky, right? Dangerous. Um, yes. You are taking on risk, right?

With a capitated amount of revenue, not really knowing what it cost you to do it. So, yes, but again, I go back to, in a way, we're a victim of our success. These are usually very successful. Health systems with very great reputations. And so even if they lose a bit of money, right? It's, it's, it's a small book of business, so it kind of gets covered up by their other activities and their other profitability.

So, uh, in a way, you, you, you could argue that it's crazy to take on risk without knowing your underlying cost. And so. And you also said physician variation in a repeatable fashion. Yes. So the, uh, the questions to ask, again, if, if we're trying to create those zealots or evangelists within your health system, I think you need to go back to your financial people, perhaps your CFO or your, your individual hospital CFOs, and you ask the question.

Can you create service line financials systemically every month, or does it become an episode? Right? It becomes a special project that I'm gonna analyze 2018 and see how our service lines performed. And you can do it. It's hard. It takes months. You're looking at disparate systems to pull the data together.

Well, that's no way to run a business. That's no way to impact and affect change. It has to be systemic. And so with A, B, C, with the core suite, we can create systemic service line, p and ls and systemic physician variation schedules so we can show at whatever interval we choose monthly, may not make sense quarterly when you have some volumes to actually dissect and understand.

We can show physician variation with . High volume procedures and see where we have, and again, it's gotta be married with quality, right? Because we're not just there to, right, to do the procedure for the least amount of money. We want the intersection of cost and quality. So, uh, how do we deliver safe, effective, uh, fantastic outcomes for patience at.

A certain level, and if this physician can do it at this moderate or low level, then why can't the one who's at a very high level, so it, it, it, it creates, it stimulates a conversation. Um, you don't wanna do this, uh, heavy handed and say, why are, why are you twice as much? But it certainly stimulates a conversation about why you cost twice as much as this other high performing physician.

But, and that dialogue leads to improvement and Yeah. And reduced variation? I would think so. 'cause I, I've sat through the RVU conversations and, uh, the, um, the lack of, the lack of clarity, the lack of, uh, specificity around it, uh, I think drives some people crazy. But when you get the, I'm sort of curious, I guess the question is, when you get this data in front of physicians, I would assume they embrace it because of

Because of the clarity of that, it creates, they do, I mean, with a lot of the things that the finance folks do, you're, you're always looking kind of, you know, in some cases it's pushing a boulder up the hill to get physician buy-in, into what you're doing. They're highly analytical, they're highly educated.

Um, let's face it, they are the, some of these smartest people in the world, right? That's what, why they do what they do. Uh, with this, when you present them with the information from an a, b, C system, they recognize their profile. They're right, yes. That, that, that is what I do. That is the supply that I use.

That is the or time that I use. So they recognize the data and they, they very quickly buy in and, and, and understand the data, so you're not spending time arguing about the accuracy. We found quite the opposite. We're not pushing information and they're pulling it from us. So we're creating advocates.

They now feel that they can manage their service lines better. They can, um, empirically measure the performance of their physicians and see who the top performers are. So we've found quite the opposite that our, our clinical team has been like some of our best advocates. For, for the service lines and for the activity based costing.

So my, the, the CIO listeners and IT listeners would be, uh, upset with me if I did at least ask this question, how does ACFO think about the IT budget? You know, it's interesting, and this is almost like a separate story, but we, we, um, it's significant spend for us. We put one of our best and brightest finance people, uh, a gentleman by the name of the name of Dean Ry.

So he is our CFO, if you will, for, for enterprise services, including it. And what they did is they undertook a, uh, analysis. Almost like an activity based costing for it. And so instead of saying this is an IT budget, we're looking at the drivers of consumption. So of course there are things that, um, that are hard to prescribe consumption to.

Um, like a data center, you're gonna, you're gonna make some analysis of of, of really who's responsible for the cost of that data center. That may be harder to prescribe cost to, but we certainly know . Different applications and the cost of those applications and the support cost, the people cost to support those applications.

That isn't an IT cost, that's a hospital cost, that's a physician cost because those applications are supporting the hospital operations or the physician operations, or the insurance operations, or the corporate operations. So what we've done is we've taken the old IT budget and we're out now able to say, wait a minute.

This is the amount of spend, but it's being consumed by our hospital team. It's being consumed by our insurance team. So we're now making them responsible for the consumption of resources so that in the old world, the IT budget was separate. So you could consume as much as you wanted and you could blame it on it.

Yeah, right. The IT budget is over. It's growing. Well, wait a minute. You know, they're not doing this for the, for the fun of it. They're doing it to, to stand up and to keep, uh, an epic or a Cerner running, or these ancillary systems running, or a financial system running. So we've undertaken our own activity based allocation of our IT costs as well, and it's created, again, a dialogue where there's responsibility for consumption.

There, there's, uh, an acknowledgement and an education around the, the cost of consumption. Uh, so chargeback model or showback model, or neither, um, or modified ki kind of a modified we are instead of spreading . It like peanut butter. We're allocating specific costs to the business units, so the cost of consumption that we can truly make the case that you're consuming those costs, those are allocated to the business units.

And then the costs that can't be allocated are spread, um, kind of like peanut butter to the remaining business units, so it self liquidates. So it's kind of a mixed model of . Uh, identifying specific costs and then, um, managing those general costs, uh, as a separate bucket. Fantastic. Rob, thanks for your time, bill.

Thanks. Appreciate great this discussion. I really wanna thank Rob for joining me on the show. He had so many great insights. Two great questions to start to ask within your health system. Can we generate service line financials on a regular basis and also physician variation reports on a, uh, repeatable basis.

Great place to start for any organization looking to get going on their activity-based cost journey. Thanks for listening. We have several other great interviews from has 19. Uh, please check them out on the website, iTunes or YouTube, and, uh, please come back every Friday for more great interviews with influencers.

And don't forget, every Tuesday we take a look at the news that is impacting health. It. This shows a production of this week in health It for more great content, you can check out our website at. This week, or the YouTube channel this week, Just go to the top, click on the YouTube link and it'll take you there.

Thanks for listening. That's all for now.


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