Nick Hula (00:00): I've heard people say, oh, my ambulatory site struggles to crack 5% margins. And then I've heard other organizations say like, oh, I'm in the ballpark of 30%. That's a big difference there, so there's a lot of slack in the system for organizations to get a lot better with ambulatory. Rae Woods (00:18): From Advisory Board, we are bringing you A Radio Advisory, your weekly download on how to untangle health care's most pressing challenges. My name is Rachel Woods. You can call me Rae. (00:29): Earlier this year, we released an episode on how leaders can modernize their ambulatory strategy. It's all about getting out of our past hyperfixation on building up sites and assets and into an era that's focused on ambulatory capabilities. And that's actually a big mindset shift. Frankly, it's a shift away from thinking of ambulatory as merely a means to funnel inpatient volumes. For one system, that might mean focusing on longitudinal preventative care. For another, it might mean convenient or accessible care, or maybe integrated specialty care, low cost procedural care and more. (01:04): Regardless of the posture that you take, the ambulatory network that you envision also needs to operate as efficiently as possible. It actually needs to make money on behalf of the enterprise and honestly, that's the hard part. (01:17): To talk about operating the ambulatory network of the future. I've brought Advisory Board experts, Nick Hula and Lauren Woodrow. Hey Nick, hey Lauren. Welcome to Radio Advisory. Lauren Woodrow (01:29): Hey Rae. Nick Hula (01:30): Thanks for having us. Rae Woods (01:31): I should say welcome back. It wasn't that long ago that we were talking about ambulatory. And dare I say it's even more important in September than it was when we talked about this just a few months ago in February. When we first started tracking the rise of ambulatory sites and networks, and when I say we, I mean Advisory Board, it was frankly indirect response to consumer demand. And it's been well over a decade since we first started tracking the emergence of ambulatory sites. Here's my question, have years of effort resulted in a healthcare ecosystem that is indeed keeping up with consumer expectations? Nick Hula (02:11): Broadly, no, Rae. At least not health systems and not right now. I don't think it's that anyone has made bad strategies or bad decisions over the past decade, but I think health systems have designed their organizations to succeed in the current healthcare environment. And 10 years ago that was probably, hey, we need things like hub and spoke. We need to funnel patients from ambulatory sites to our hospital for profitable stays, and that worked. That was really good. That worked back then, but that's not where we are today. Where organizations are lagging behind is in adapting the ambulatory strategies for new demand of 2025. Rae Woods (03:00): And to be a true strategy, right? Maybe we were successful in ambulatory sites, getting the right physical thing in place, feeding the inpatient beast, but not necessarily an ambulatory strategy. Certainly, not the inventory strategy of 2025. And I have to admit, I had a feeling that you would say that, that despite all of the effort, the delivery system is just not keeping up with patient and consumer expectations. Is that the only area where you see ambulatory strategy falling behind? Nick Hula (03:29): Yeah, I think strategy is one half of it, right? We do see organizations falling behind not having ambulatory strategy for 2025. The other area is operations, falling behind on operating ambulatory sites effectively. And there are organizations who do this well, but again, I think it's where health systems who through no fault of their own, have been focused on operating hospitals for a really, really long time, it's not a core competency of them. And they're just starting to realize we can't copy and paste a playbook for the same service in a hospital and just pop that into an ambulatory site and expect it to run. Rae Woods (04:08): We're not off to a good start here, Nick. Nick Hula (04:10): No, we are not. Rae Woods (04:11): If ambulatory strategy is not meeting consumer or frankly business expectations, that is certainly not a place that any business leader wants to be in 2025. But I'm curious, Lauren, from your perspective, why is it so important to run a successful ambulatory business given all of the pressures in healthcare business today? Lauren Woodrow (04:31): I think it all comes back to that sort of short-term margin pressure. Systems actually cannot afford to miss out on the revenue they generate from their ambulatory business. There's fierce competition for outpatient volumes. Every other purchaser, every other major healthcare player wants to steer care to the ambulatory sites. Rae Woods (04:51): Yes, they don't want to steer members or employees to high-cost hospitals. Lauren Woodrow (04:56): No. And payers, employers are dealing with their own margin pressures, which is prompting them to place an even more concentrated push to lower their costs. Rae Woods (05:08): That was the short term. What about longer term? We, I have been talking about growth of ambulatory networks for too long, too long. In fact, I'm not even going to give away how long I've been talking to health leaders about ambulatory. Skeptics listening to this conversation might be thinking this big promise of ambulatory volumes, of money coming from ambulatory networks didn't really happen. Or I didn't feel it, not in my balance sheet. What do you say to that pushback? Lauren Woodrow (05:37): I think it's a fair feeling, because for so long this has felt like this shift is happening somewhere in the near future. But it's not happening in the future, it's happening now. We're seeing that the outpatient shift is continuing and we're seeing evidence of that with site neutral payment reforms, the elimination of the inpatient only list. There's just a bigger amount of increased policy and regulatory pressure, there's economic uncertainty, so it's more important than ever to position your business for success. Nick Hula (06:06): I love that point, Lauren, about this isn't a future problem, this is a today problem. You listed out a lot of policy factors that are pushing these set of care shifts into today. It's also things like the innovation landscape, clinical, technological innovation. It's patient preferences. Payers are exacerbated with these cost pressures, they might dial it up. It's also competition. Organizations that don't look to where the puck is headed with these set of care shifts might fall behind competitors who are. Look at things like joint replacement, that's been a very high profile shift from hospitals to ambulatory surgery centers. And we saw organizations that didn't start to invest in ASCs for joint replacement, a lot of them have lost their outpatient market share for that service altogether as others have taken that spot. Lauren Woodrow (06:56): Right. Can we talk about the balance sheet issue specifically? Rae Woods (07:01): Absolutely. Lauren Woodrow (07:03): Most margin in healthcare actually comes from the outpatient space. Rae Woods (07:07): From the outpatient space? That surprises me a little bit, at least when I hear about the sentiment of I can't afford to invest in ambulatory or in outpatient because I'm going to lose money there. Are you saying that sentiment is wrong? Lauren Woodrow (07:23): Yeah, I think it's easy to look at your primary care for example, and say, primary care isn't making my organization money, it's a loss leader. But actually you should be thinking about your outpatient sites and your outpatient capabilities in the aggregate, and think about how is it helping your overall health system rather than how much money is this one specific site making me. Rae Woods (07:47): So this is what I'm hearing, reasons to invest in ambulatory. First of all, it's actually making you a lot of money, even if your accounting practices might be hiding just how much your outpatient network is feeding your enterprise-wide margin. There are also all of these pressures that are growing now. The outpatient shift is continuing, more pressure from policy on site neutrality, on eliminating the inpatient only list, pushing further into value-based payment. (08:14): I want to double-click on policy, because I've also heard folks go in the opposite direction and say, because of the margin pressure, the economic pressure, the pressure for tariffs that I'm under right now, thinking about the last conversation we had, Nick, they're saying, I actually need to pause. I can't afford to build now because the cost of building has gone up. There's tariff volatility, et cetera. Is that a reasonable response? Nick Hula (08:40): I think it's a totally fair response that we're hearing from a lot of organizations, but there are two things I would challenge leaders on when they come up with that. First is what Lauren just said. If you are having to be very targeted with your investments, hey, if a lot of your margin, most of your margin is coming from the outpatient side, a lot of times that is where your business is. And that might be the area where we do have to make investments for long-term sustainability. The second thing I always point out there is, you use a key word there, Rae, of build, what we encourage people to think about with ambulatory is in what ways can you get better and expand capacity, expand access to ambulatory by getting better? Not necessarily getting bigger by building and buying. Rae Woods (09:27): Wait a minute, are you saying that building the ambulatory network of the future may not actually require building at all? Lauren Woodrow (09:35): You will always need a place to deliver care, so there will always be reasons to build, but there will also always be reasons why you can't. Our point when it comes to your ambulatory network is that building shouldn't be the default action. Rae Woods (09:51): Yes. Lauren Woodrow (09:51): There are solutions that can help fix efficiency problems without that huge capital and time investment that building requires. And so that good efficiency for the enterprise includes ambulatory efficiency. Rae Woods (10:07): So then what does good ambulatory efficiency look like? Nick Hula (10:10): I think it means expanding your ambulatory capabilities, which if any of you all listened to our episode from back in February, we talked a lot about our capabilities. It means expanding those or offering new ambulatory capabilities with your existing infrastructure. Rae Woods (10:30): Can you give me an example of what getting better before bigger looks like practically? Nick Hula (10:36): Yeah. There are a ton of ways we found in our research the good news. I'll go through a couple, but the good news is none of these are foreign to anybody. They are all tried into tactics that organizations have used in the past. It's just these need to be the first place people turn when they think I need to add ambulatory, as opposed to the knee-jerk reaction of building new sites. So it includes things like improving operational efficiency. Hey, instead of adding more primary care sites, can we just improve scheduling with what we already have? Rae Woods (11:10): Yeah, improve the capacity that you already have. Absolutely. Nick Hula (11:12): Exactly. It's care team. I don't just mean like clinicians, physicians, nurses, but there's non-clinical support staff that we can add in smart ways. It's telehealth, it's repurposing planned investments like, hey, we were originally trying to go towards ex-service in this site, but our market changed so we need to adapt and they need to serve a different purpose. Lauren Woodrow (11:34): And Nick, actually on that note, one organization that we spoke with noticed that they were getting a lot of specialty care visits, but a lot of those patients didn't have a PCP. So they decided to co-locate primary and specialty care offices. They already knew patients who were willing to travel to that location and the patient said that they didn't have a PCP. They could essentially walk them across the hall and schedule a primary care appointment. Rae Woods (11:59): Which also, by the way, feeds the broader enterprise. And that's honestly the underlying theme that I'm hearing here. When we used to talk about ambulatory, it felt very separate. It was like, what do you do with this entity and how do you make the most of it? But there's an underlying theme that I'm getting from the two of you, which is that actually focusing on ambulatory has to take an enterprise-wide approach. Even if you think about the accounting, how you're thinking about how you're feeding your enterprise, how you're thinking about efficiency, it's not just inpatient efficiency, it's the whole network. Nick Hula (12:30): Right. And again, it's not just those sites feeding the hospital, but it's those sites all feeding each other. So in the example Lauren just shared, that's specialty care feeding PCP, right? Or it can be urgent care feeding imaging center volumes. It's almost like a web of sorts of all these different sites benefiting all the other types of sites or care settings within the organization. Rae Woods (12:55): Which is exactly why, and this was the big insight that you shared with us in February, Nick, that the right ambulatory strategy focuses on capabilities and not sites. It's not widgets, it's not things, it's capabilities, right? Nick Hula (13:07): Right. Rae Woods (13:08): To Lauren's point, you are still going to have to build. Focus on efficiencies first, focus on the enterprise first, but at some point you actually do need to get bigger. So how should leaders focus on smart growth when it comes to physical expansion? Lauren Woodrow (13:23): Like we just talked about, smart growth requires getting better before bigger, which includes maximizing your existing footprint. But smart growth when you do need to build requires staying flexible and nimble so that you can adapt to changing market needs. Rae Woods (13:40): For example, changing tariff policy. Nick Hula (13:43): Exactly, changing tariff policy, or even looking at an individual market. One organization who we spoke to, they were building some sites to meet their community's needs. But a major manufacturer said, hey, we're building a plant in your market now and we're going to add tens of thousands of people to that market that were going to need a very different service than what they were building for. Rae Woods (14:10): And all of a sudden, a new opportunity that you hadn't planned for. Nick Hula (14:14): Right, exactly. So what they did was, hey, as opposed to expanding more and more and more, hey, through the sites that we already are building, let's figure out if we can add a different service to that. In this case, it was primary care. They needed a ton more primary care. So they just added primary care to the sites that they were already building, shuffled some things around without needing to do a ton more new growth. Rae Woods (14:36): Yeah. Lauren Woodrow (14:36): Another form of flexibility, which is sort of an opposite example to the one that Nick just shared, is maintaining an off-ramp. So these break points in the building process allow you to reflect on what we've learned, but then also you to pivot due to external factors like real estate changes, new legislation, changing market needs. That off-ramp allows you to sort of take a step back and say, hey, is this still the best course of action for our organization? Rae Woods (15:05): Meaning would we pause, stop, divest? Is that what you mean by off-ramp? Lauren Woodrow (15:12): Exactly. That off-ramp sort of allows you to get out. But stopping building doesn't just mean stopping investment and ambulatory growth. It just means changing your focus and maybe putting more emphasis on operations over those new sites. Rae Woods (17:02): I love that you're pushing back on this idea that health leaders tend to default to certain practices, defaulting to inpatient first, defaulting to building and adding more sites. There's another default which is defaulting to consumer preferences, and I want to be careful here. I'm not saying that consumer preferences are not important, but they are far from the only factor here. You both rattled off a bunch of them. You talked about the importance of employers and purchasers, you talked about the importance of policy. I want to talk about clinicians, because they have strong preferences too. You can have the best inventory network that has all the capabilities that you need, that's strategically aligned at the vision of the organization and as efficient as possible, and that network is only going to make you money if clinicians are actually sending their patients there. And we know that clinicians can be incredibly loyal, I might even use the word rigid to their referral pathways. Lauren Woodrow (18:02): Rae, what you're describing is site attachment. If clinicians are attached to specific sites, then the health system is attached to specific sites. What causes this for clinicians is, it could be as simple as they don't have any interactions with people at other sites. It could be that each site has its own way of doing things, its own processes. And part of it is that every group of physicians has their own unique culture. Don't get me wrong, autonomy is important for clinicians and you have to respect that. Rae Woods (18:33): Absolutely. Lauren Woodrow (18:34): But in order to have a strong ambulatory network, that autonomy has to be balanced with the system's need for efficiency, consistency, and actual systemness, which requires breaking clinicians' attachment to sites. Rae Woods (18:49): And how do you do that? Lauren Woodrow (18:50): Yeah, two sides to this. Operations and culture. You have to make it easy for clinicians to do what you want them to do, meaning you have to streamline the referral process, create shared EHR and technology platforms. Rae Woods (19:05): That's got to be a big part of better before bigger, right? Lauren Woodrow (19:08): Yes, absolutely. You have to make it easier for clinicians to refer in network. Rae Woods (19:12): And if you want to hear more about referrals, we actually just re-released one of our top episodes from last year that was all about maximizing referrals and not missing out on the quite literally millions of dollars on the table. Lauren Woodrow (19:26): The other thing in addition to operations is culture. You have to establish a system-centric culture that helps clinicians understand the system capabilities, generate buy-in for system goals, which all comes back to that ambulatory vision conversation you had back in February. And one example here is an organization that we spoke with created recurring engagement events that had a dedicated budget so that clinicians could interact across sites. And these events helped clinicians see the bigger picture, it humanized the ambulatory strategy. And we heard anecdotally that these events actually helped retention rates. Rae Woods (20:05): And this is a long time best practice when it comes to physician and clinician engagement, which to your point, benefits the whole enterprise, the whole system. Back to that big theme I was talking about, is make sure they understand the team that they are working for. Right? Lauren Woodrow (20:20): Exactly. Nick Hula (20:21): And I think that's a hard part of all of this, especially that culture piece, where you can have have the best strategy, the best operations for your clinicians to follow. If the culture's not there, they're not going to do it. Rae Woods (20:34): And just like we were saying that leaders need to take the operations and the efficiency seriously, you have to take this culture building piece seriously too. This is not an ice cream social, this is not a pizza party, because there is a lot of money on the table from referrals. And that's why I love this idea that building the ambulatory network of the future starts with maximizing what you already have. (20:58): But I have to imagine that health systems are not going to be good at everything. That's where we started this conversation. We started this conversation saying that the traditional delivery system hadn't kept up with expectations for access or affordability for anyone. Knowing that systems aren't going to be good at everything, at least not today, and we don't have another decade to let them develop all of the ambulatory capabilities they need, what should leaders do? Nick Hula (21:24): They need to look at partners, Rae. It comes back to those operators that I mentioned earlier in the conversation. A lot of times, these operators, they have been doing this for decades and have dozens, sometimes hundreds of sites, and they can do ambulatory a lot better right now than health systems can as they just start to dip their toes into these waters. Rae Woods (21:45): But these are the people who you said at the beginning of this conversation, as part of an urgency lever, are your competitors. The independent ASC operators that are a machine at doing say, hip and knee replacements, you're saying not just competitors, maybe partner. Is that right? Nick Hula (22:02): Exactly. And that's because it might be worth partnering with these organizations. As a health system, sure, you get less equity from those ventures, but a lot of times health systems are not experts at providing that type of care. Which is a tough pill to swallow for a lot of health system leaders I've heard. A lot of health system leaders, they have been caring for their communities for gosh, generations and generations. But comes a time when you need to accept like, hey, do I really know how to run an ASC? Do I really know how to do combined freestanding emergency room urgent care sites? Do I know how to do freestanding infusion centers well? (22:42): If the answer is yes to that, congrats, go forth, conquer. But a lot of times I'd wager that answer is going to be no, because that's a new frontier for them. And a lot of times that might mean they need to partner for the first couple of ventures, potentially with someone who's your competitor, in order to the next handful times you do it, you can do that alone. You know how to run those sites well, Rae Woods (23:05): So the partnership doesn't have to be forever. It means learn now so that you can catch up. But if you're pursuing something like a joint venture, partnership doesn't mean marriage in this case. Nick Hula (23:15): Exactly. That's correct. Rae Woods (23:17): Nick, earlier this year, you came on Radio Advisory to talk about the mindset shift that is the backbone of best in class ambulatory strategy. It's a shift that requires making ambulatory as strategically important as inpatient. And I listened back to that episode before we sat down to record this one, and you told me at the time that the way you know that an organization has elevated ambulatory to the strategic importance of the enterprise is that you can see it. You can see it in the reporting structure, in the budget, in the vision, and you can see it in the data. The open question leaders need to answer is how to measure the performance of ambulatory services. (23:58): Lauren, you said at the beginning of this conversation that outpatient care makes up more than half of health system margin today. And that is very different than the prevailing perspective, the idea that ambulatory is a loss leader, it loses money, which we already talked about is mostly a result of accounting practices, like only considering direct revenue from the individual asset, which I know now is a big no-no. What is the right data-driven perspective to have here? Nick Hula (24:27): Yeah, there are two big things I'd share there, Rae. First is, is it better to get 50 cents on the dollar or no cents on the dollar? Ambulatory volumes and revenues are going to increase over time. That is where we see the most growth in healthcare. Organizations that cling to that very inpatient business model completely in the name of maximizing revenue, I think might be risky. You risk losing market share for certain services over competitors who go into that space. So it's a mindset shift away from how do we maintain current course and speed with how we define financial success for our organization as long as possible, to how do we succeed on a different course that accounts for ambulatory? (25:15): The second thing I would share there is I hear a lot of people saying ambulatory is a loss-leader. Rae Woods (25:21): Yes, exactly. Nick Hula (25:23): Is ambulatory a loss-leader or does it need to be a loss-leader though? Because ambulatory can make money. Rae Woods (25:31): Yeah. There's a reason why there's so much competition, because someone has figured out how to make money. Nick Hula (25:37): Right. I've heard people say, oh, my ambulatory site struggles to crack 5% margins. And then I've heard other organizations say, oh, I'm in the ballpark of 30%. Rae Woods (25:47): Wow. Nick Hula (25:47): That's a big difference there, so there's a lot of slack in the system for organizations to get a lot better with ambulatory. And we said that from a physical footprint and capacity perspective, but also from an operational perspective too. There's a lot of slack for health systems, for other organizations to be operating their ambulatory sites more effectively, more efficiently to make money. Lauren Woodrow (26:10): I will sum this up with something I mentioned earlier, which is focus on aggregate margin. What margin is generated by the system as a whole rather than one single hospital ambulatory site? And then consider how much each asset contributes to system level success, not just how much a single site is making. Rae Woods (26:33): Yeah, absolutely. That's how you get value of operating and running a whole enterprise. Nick Hula (26:38): Exactly. Rae Woods (26:40): Well, Nick, Lauren, thank you for coming on Radio Advisory. Nick Hula (26:43): Thanks for having us again. Rae Woods (26:49): Look, if I'm honest, the healthcare industry operates with a lot of inertia. We're slow to change and we're slow to transform. And I can't think of a better example of that than the decades of work in ambulatory sites, but not necessarily an ambulatory strategy. It's time for us to actually pick up the pace. There's only going to be more pressure on health system margin and on outpatient shift. So you might as well start working on this now. There's plenty more to learn, and we'll add some more links to the show notes. Because remember, as always, we're here to help. (27:48): New episodes drop every Tuesday. If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts, and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Rae Woods, as well as Abby Burns, Chloe Bakst, and Atticus Raasch. The episode was edited by Katy Anderson, with technical support provided by Joe Shrum, Chris Phelps, and Dan Tayag. Additional support was provided by Leanne Elston and Erin Collins. We'll see you next week.