In the "Driver's" Seat (Part 2)

Published May 17, 2023, 8:01 AM

Join Ann Somers Hogg for part 2 of this series as she speaks with Scott Powder, President of Advocate Aurora Enterprises and an incumbent health care leader who's transforming their business to better address drivers of health. 

The drivers of health (DOH) play a significant role in health outcomes, yet most existing health care business models are not equipped to address them. In these episodes, we explain why a health care entity would, and should, tackle the drivers of health, and how they can go about doing so effectively and sustainably. 

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A lot of leaders and innovators talk about disrupting health care, but what does that really mean? And how does one actually do it on life centered health care? We dive into these questions and more talking to innovators who are leveraging Clay Christensen's theories to transform our health care ecosystem. I'm Ann Summers Hogg, senior research fellow of health care at the Clayton Christensen Institute. And I hope these stories help inspire you along your journey to transform health and care. Hello listeners. Welcome back to another episode of Life centered Health Care. Today we'll continue our discussion about the drivers of health and the fact that while they play a significant role in health outcomes, most existing health care business models are not equipped to address them. In part two of this focus on drivers of health, we'll speak to an incumbent health care leader transforming their business to better address drivers of health. Wherever you are in your drivers of health journey, you can learn from both this perspective and part one. If you haven't listened to that episode yet where we had many on a factor health on the show, I suggest you do go back and listen to it after this episode as I think you will gain great insights from both conversations. There is much to be learned from Scott Powder today and I am thrilled to welcome him to the show. Scott is the former chief strategy officer of Advocate Aurora Health, where he has been in leadership role since 1993. Scott is currently president of Advocate Health Enterprises, where he is responsible for advancing Advocate Health's whole person health strategy. This includes investing in solutions that complement the health system's core clinical offerings to help people live well at every stage of life and broaden the business portfolio. He is one of the most forward thinking corporate innovators I know, both inside and outside of health care, and I know you'll learn a lot from Scott today. Welcome, Scott. I'm thrilled you're here.

Well, thank you. I'm thrilled to be here. Great.

Without further ado, let's dive into our discussion. I really like to start with why. So could you tell our listeners why you started Advocate Health Enterprises and your vision for what it could accomplish?

Absolutely. So I probably have to take you back to and get a couple of foundational things cleared up. So Advocate Health Enterprises until three months ago was called Advocate Aurora Enterprises. And you referenced my role as chief strategy officer at Advocate Aurora. We recently completed a merger with Atrium Health and we renamed the new combined Entity Advocate Health, and we decided to rebrand advocate Aurora Enterprises as advocate health enterprises. So just to make things really confusing for everybody, but the genesis of what's now called Advocate Health Enterprises goes back to when Advocate Aurora was originally created roughly five years ago, and at the time I was chief strategy officer. And we were as we were coming together and creating this new organization, we really identified our purpose as helping people live well, which is a broader health purpose. If we had defined ourselves as providing the best and safest clinical care, that would be one purpose. But we really had a much broader orientation around improving people's health, improving people's lives. And as we looked at that and we looked at what do we do today to impact people's health, we realize that 99.9% of it was actually clinical care, which is important but is certainly not it's necessary, but not sufficient in terms of ultimately having an impact on people's health and fulfilling our purpose and our mission. So that was one thing that was sort of happening at the time. The other thing that was happening at the time was a realization that the clinical care business, which is our core business, had been and was going to experience a long term decline in profitability that was structural, not cyclical in nature. So our ability to continue funding the investments we needed to in our core business we thought was going to be compromised. And now five years later, sort of post-pandemic, a lot of those trends have come home to roost in a breathtaking manner in terms of the size and scope of the challenge. But at the time we were certainly seeing the handwriting on the wall. So and lastly is we realized that we thought a great clinical care company and I think we are a great clinical care company, but clinical care is largely episodic in nature in terms of the interactions we have with the people we serve. I always used to say I spend 20 minutes a year talking to advocate Aurora, now advocate health about my health, and that's through my annual physical with my primary care physician. And knock on wood, if nothing else happens to me, that's it. I spend 90 minutes a week talking to my fitness provider about my health, so my fitness provider knows a lot more about my my current weight, my health goals, what's happening in my family and my. Eating correctly. If I'm missing those workouts, if I'm getting better, if my body mass index is better. So we realized if we wanted to truly fulfill our purpose of helping people live well and address the underlying challenge that we were facing around profitability, we needed to be in a new set of businesses, what I call the broader consumer health ecosystem. And we founded Advocate Aurora Enterprises, now branded as advocate health enterprises, as the vehicle by which we would begin to participate in that broader consumer health ecosystem. So that's the genesis of how we created HP, if you will, going back 4 or 5 years. Technically, we were established just over two years ago, so we officially started, I call it December of 2020. But the genesis of this goes back to the strategic planning from four and a half, five years ago.

Great. Thank you so much for explaining that and I love your framing around helping people live well, as well as helping the organization really to continue sustainably into the future. Now, for listeners who may be unfamiliar with the concept of a strategic investment arm of a health system, could you explain advocate health enterprise's business model or the core components of it?

Yeah, and I'm always careful to say we're not an investment arm, so and that's okay that you call this that, but it makes us sound like our job is to deploy capital like a private equity or venture capital firm would make investments and then sell the businesses, harvest the investment returns if they are there, and then move on to the next thing. And that's really not what we're designed to do and not what our business model is. So what we we do have some attributes that make us look like what I would call a lower middle market private equity fund. So we have an allocation of capital. We realized if we were going to participate in this broader consumer health ecosystem, we are going to need to deploy capital to either invest in or acquire companies. So so in that sense, we do look like an investment arm. The difference is my job from a financial perspective is to generate recurring and accretive cash flow for the parent organization. So the word recurring is the key. If our if my job was to generate a multiple on invested cash as or an internal rate of return through investment returns, which are, by the way typically not recurring, you invest, hopefully grow the business and harvest the results. That would be an investment arm. But again, our job is really once we invest in a company or acquire company, we intend that to be in perpetuity. And the goal is ultimately to have an operating division, a consumer health operating division. That, and my analogy may not be a perfect one, is sort of the way UnitedHealth Group formed Optum many years ago. They had these sort of stray assets inside their core health insurance business. They realized they weren't getting the attention they needed and they were really fundamentally different from the core insurance business. So they spun that out, created Optum, and then deployed a lot of capital. And Optum went on an acquisition and investment spree and built up a business that today represents more than half of the profitability of the UnitedHealth Group. So the what started as sort of a small, I guess, adjacent revenue arm has now become, you know, a large driver of the profitability of the UnitedHealth Group, not that the core business of health insurance isn't still there, but Optum really is driving a lot of that and is investing in a lot of different businesses. So similarly, my hope in 25 years is that Advocate Health Enterprises is a little bit like that. Optum We've got the core clinical care business, but we've created this other thing that is a going concern that has a portfolio of product services and companies, again, designed to meet the needs, the broader health needs of the consumers we serve. So we do invest in typically now most of our activity is acquiring controlling interest in companies. We do like the companies. We like to have strategic control because we want to own them in perpetuity. We oversee the companies, much like a private equity firm. Would we sit on the board? We manage them and again, we try to maintain a certain amount of separateness of our portfolio from the core business. The whole point of this is to not smother them with the bureaucracy and the weight of the core, but to give them some nimbleness and freedom while still having access to capital and the benefits of being connected to a large, high quality clinical care delivery system. So that's a quick summary. I can certainly go deeper as well.

Thank you for clarifying that. It is not categorized as a strategic investment arm and your explanation makes complete sense how you called out the difference. But. Recurring in a creative cash flow and that you're really seeking to develop a consumer health operating division, which is not what investment arms do. Also, the corollary to United's Optum is something listeners will understand, certainly, and I'd actually love to dive into something you said at the end around the separateness of the portfolio from the core business. Could you tell listeners how, especially as you were thinking about the resources required to staff this business model, how you went about ensuring separateness from the core?

I can certainly give you what's happened thus far, but this is a never ending journey and I think it's true of anyone who's running a business unit within a large corporate parent where there are just certain things you sort of have to do. But at the same time, you tried to shield your organizations from some of the things that could diminish or degrade the value. So here's some examples of some of the things we've done over time. Again, to provide separateness, but also to be tethered to the core in some respect. So the two non-negotiables around being tethered to the core are assuming we're acquiring a controlling interest in the company is financial reporting, integration and compliance. So anything that we control, we're going to want to make sure they've got we've got a robust compliance program. To the credit of our chief compliance officer, we've tried to recognize that a lot of the companies we are acquiring and operating inside Adventhealth Enterprises aren't delivering clinical care the way a hospital or a medical group would. So they have customized and streamline the compliance requirements for our business units. But we have to have a compliance program and it's got to meet the federal regulations around the key components because we've got reputational risk and other things. And the last thing we want to do is have a small business unit, you know, have a compliance issue that creates a major public relations and brand implication for, again, a $2,829 Million health system. So compliance is non-negotiable. The other is financial reporting because we consolidate our results to the parent company income statement, we comply with the accounting policies and financial reporting requirements of our parent company. So those are non-negotiables. Everything after that around how our companies interact with and operate is essentially negotiable. And what I have my posture whenever we acquire or invest in a company and we start integration planning is first do no harm, which is of course, the Hippocratic Oath. And so unless there is a legal bright line, legal or financial reason why we have to do something, we default to not integrating unless there's a definitive benefit. Because if there's no definitive benefit, we won't integrate just to integrate things. So as I mentioned, benefits is an example. All of our portfolio companies maintain their own benefits load. We periodically revisit that and look at, Hey, if you came on to the Advocate Health Benefits program could save some money on administration, but the benefits load would again kill the the income statement of the companies. We let the companies continue to do their own procurement. So we have a huge supply chain and procurement function within advocate health. But our portfolio companies do their own procurement because they're in different businesses, they're buying different kinds of equipment and products and services. And quite frankly, our procurement process, while it's very effective at managing cost, it's not very nimble and it takes a long time for vendors to get approved that would sort of kill our companies. So that's another example where we have some separateness. And then probably most important is my organization is exempt from certain policies and procedures of the core. So again, I'm going to use a really little example, but it's important. So when we at the parent company, as financial challenges emerge, one of the things almost every health care system does is they go on a hiring freeze and they require it's my favorite two words position control, which means anyone who wants to replace a vacant position has to go through some kind of committee, usually the CFO and the head of human resources and others have to review every single position request and you have to justify it before you can replace it. So I'm exempt from that. My and what we agreed to is as long as I'm managing to my budget, I don't need to go through that process because we are and our portfolio companies again, run in a very nimble way and need to be able to make decisions. So one of our portfolio companies is in the home technology business and if they couldn't actually if they had to go through position control to get like a new engineer, software engineer to. Some of the technology issues, we'd sort of kill the company. So that's the kind of stuff where we've maintained separateness. And again, with the understanding of our board and our CEO and our leadership team. And again, I've been Chief barrier removal Officer, but I do this with the blessing of and the vocal support of the CEO. That's what allows us to happen.

That's great. Thank you for for elaborating on the keys of separateness. And I do love your title, Chief Barrier Removal Officer. There are many chief innovation officers, I'm sure, in corporations across the country, but especially in health care, who likely feel that that should be their title as well. You also called out that flexibility is key and that you default to not integrating without a definitive benefit to the company, to the parent company or the company in your portfolio. And you called out that there were two areas that do require you to be tethered to the core business. So the financial reporting integration and the compliance. But for everything else, you really seek this separateness which is wonderful for your portfolio companies. And I would say something that others pursuing similar strategies should consider because the majority of mergers and acquisitions actually fail because leaders don't realize the value of what they acquired and they unintentionally integrate it into their core business when they should have kept it separate. So the fact that that is one of your guiding principles for when you're working with these portfolio companies is likely a key to your success. Now, shifting a little bit from the big picture of the organization to how you brought this strategy to life. You mentioned in your vision for Advocate Health enterprises that consumer health and wellness offerings were not the 99.9% of the core clinical offerings that advocate Aurora Health offered. And because this wasn't part of the historical approach to doing business, that advocate or health, how did you bring this strategy of whole person health and consumer health and wellness to life?

Yeah, well, it's probably again important to go back to when we were talking through the strategy. The strategic underpinning of this is really the dual transformation strategy, which, you know, obviously that's what Clay Christensen sort of pioneered along with insight. And I happen to be a disciple of that. And in theory, we could have diversified revenue and and honestly, we could have. If you really want to get something that generates the most assured profitability for the long term is by McDonald's franchises. Right. And by the way, nothing against McDonald's franchises. That is a proven profit center. They're hard to manage. You've got to be disciplined. But we said, look, that's not necessarily core to what we're doing. So what what we said again, this does go back to what are arenas that we can participate in that are consistent with our mission and to do that are diversifying revenue and cash flow. And three are things where again, to go back to the the concept of dual transformation, where there's a capabilities link, where there are things in our core business capabilities that if we could bring them forward and bring them to bear on these new lines of business, that there would be some competitive advantage, for lack of a better word, that we could have. And so that's where where we landed on this idea of consumer health. And I can probably it's worth going a little bit deeper because we ended up picking a couple of specific areas because consumer health is a giant. It's really $1 trillion economy. And so we we landed on two key areas. And I would just say we've gotten traction in one of those, maybe more so than the other, just because of the opportunities that emerged over the last couple of years. But the theory was, first of all, where is there in the consumer health economy? Where is there growth, which is important to where is there an opportunity to diversify revenue and cash flow? Where are there significant unmet needs and or fragmentation of solutions? And where do we then, most importantly, where do we have capabilities that if we could maintain that capabilities link and sort of port over those competencies from our core business without allowing the core business again to suffocate these new businesses, where could we really maybe deliver a better mousetrap, a better product, a better service to meet the needs of the people? And we landed on two. One of them is what we call aging independently and the other which is how to help seniors stay in their home and thrive in their home for longer, in a safe manner and provide them and their loved ones with peace of mind. And that is obviously with the graying of America, a growing area, if you've ever tried to manage. In my case, I went through this managing my parents, going through the aging process. It is a nightmare of fragmented services and payment methodologies, impossible to tell who's good or bad or otherwise. So it fit all those criteria. And then most importantly, in our core business, we have two things going for us that we thought we could take advantage of. One is we have very deep clinical expertise in taking care of seniors. So we have world renowned geriatricians. We have nationally renowned memory care specialists. So we've got a set of clinical expertise, and I dare say it, clinical credibility that we could bring to products and services that might give us a branded and differentiated edge over just sort of the rank and file companies participating in the industry. And then the other thing we have, which is kind of a unique to the advocate health system, is we're a huge player in value based care for seniors. So unlike a lot of providers, we actually take financial risk for the total cost of care and quality and outcomes of our Medicare recipients in particular. So if we could identify products and services that actually benefited the overall health of the people we serve, thereby reducing their need for hospitalization, institutionalization, and therefore also reducing their total cost of care, that becomes a win for our core in addition to being a win for us. So that was why we chose that particular area. The other one we chose is personal wealth. And by the way, we've gotten a lot of traction in the aging independently. That's the one that we found really interesting. Companies that have become part of our portfolio. The other is personal wellness. So helping individuals optimize their personal performance by aligning mind, body nutrition and sleep. How could we bring all those solutions together and make it easier for people to improve their own well-being? And again, because we have a lot of capabilities in sports, medicine and fitness, we take financial risk for commercially insured patients as well. So we thought there'd be a real opportunity there. Our footprint has not been and our traction that just hasn't been as good, mostly because we haven't found companies that we could acquire that fit the financial profile. So we're pretty disciplined about sticking to our financial investment criteria.

Right. I do want to recap one thing you mentioned in terms of how you landed on the two key areas of consumer health and wellness. And it sounds as though you asked for critical strategic questions in order to decide how do you focus your portfolio? And it was where is their growth, where is their opportunity to diversify revenue and cash flow? Where are there unmet needs in the market? So listeners will who are familiar with Christiansen's, theories might hear some jobs to be done language there where their unmet jobs to be done, they're not being served. And then fourth, where is there a capabilities link where you could deliver a better solution to the market than was currently available? And I call those out because those are critical strategic questions for anyone considering a transformative strategy to be sure that they think through. So thanks for highlighting those.

You nailed it and the jobs to be done. I like to say, at least in the aging independently, the job that what we're really selling, if you will, is peace of mind. Our two companies, just to maybe go one smidge deeper. One is a company called Senior Helpers. They provide in-home personal care services. So home health aides, certified nursing assistants, they come in to an elderly client's home and they help them with activities of daily living, household chores. They provide companionship, and they provide kind of in-home oversight to make sure nothing bad happens. That's and again, I had to arrange those services for my parents when they were ailing. And part of what I was looking for was peace of mind. So the way I selected and ultimately kept the company that I worked with is they showed up on time. They gave me good information about what was happening, and I trusted the caregivers to have my parent's best interests. And so and then the other company we acquired a year ago is called Mobile Help, and they provide personal emergency response and file detection technology and remote clinical monitoring technologies in the home. So again, I've got an 85 year old mother in law who lives alone in southeast Florida, and we're buying her the mobile health technology just because if she's home alone and something, God forbid, happens, she falls down, gets knocked out, this device will detect that and send a rapid send a generate a response, whether it's paramedics or police or something. Again, I'm just simply selling peace of mind to people. To me, that's one of the it's not the only but it's one of the 2 or 3 jobs to be done, I think, in this particular sector. So I very much resonate with Clay's whole approach to that.

That's a great thing to call out because it's not just in health and health care. The functional component of the job is rarely. What pulls people in. It's often the emotional component which you just pointed to with with peace of mind. In my last question, part of your response towards the end was the importance of being good stewards of every capital dollar that you're given and economically challenging times. Funding for innovation efforts is often diverted back to the core business. In fact, Clay Christensen used to say that the time to invest in innovation is when the core business is strong, because if leaders waited until the core business was struggling, it was often too late because too much pressure would be put on the innovation to grow quickly, which is not what disruptive innovations do. So most incumbent health systems are struggling financially in the aftermath of Covid because of high and rising labor costs, labor shortages, declining reimbursement, increased competition. ET cetera. But as someone who has managed the tension between funding the core and funding a transformative innovation, how would you advise other incumbent leaders to tackle this challenge?

So this gets a little bit into like some, I'd say, lessons learned along the way. And I'm we're only two and a half years into this journey, so probably these are early lessons learned. One of the things so there is some truth to that idea that you want to start funding the stuff when times are good. Because when the going gets tough, people tend to kind of hunker down, which honestly, one, I try to push people to think past that because if, again, if you're in a challenged organization that's truly struggling to make payroll and cash flow and all that, that's one thing. But if you're a strong incumbent organization who may be having a challenge right now, this is the time actually, you know, again, to use a contemporary of Clay's, Michael Porter would say like, look, that's actually the time to double down on, you know, in tough times because others don't have the staying power that you have. Again, you've got to have staying power. You've got to have that balance sheet strength. So I like to say, look, actually during times of struggle, that is the time when you can actually pick up assets, maybe at lower valuations. And if you can deploy capital more aggressively, double down, you could actually again grow share faster than you would in in the good times. So there is a little bit of that. But with all that said, yes, there is a reality. Most folks tend to hunker down in the tough times. I would say one of the most important things is if you are deploying a strategy that requires a multi year investment of any magnitude, make sure you've got more than just lip service commitment to that multi year investment because there's nothing worse than being partway through deploying again, making investments or acquisitions and then things grind to a halt at the first sign of challenge, and then you don't know if they're ever going to re, you know, restart. And usually, you know, certainly in the businesses that we're in, this requires a multi year commitment to build the scale just even get to the point where my team's overhead isn't creating losses for our company. And so if we stopped after the first year, after the first couple of transactions we had done, and we basically just be losing money in perpetuity, the whole goal was to get to a certain level of scale to cover our startup costs and our overhead and generate a return. So securing a multi-year commitment of funding is critical because it's almost you're almost better off not even starting if you don't feel like you have that commitment. So that's one biggie. I'd say. The other thing is being really nimble and entrepreneurial about how much overhead you need, because let's face it, my team and myself, even we are overhead. My portfolio companies are actually what generate revenue and profitability. So our team, to be fair, has gotten leaner over time as we have dialed in what our core function is, which is there's that oversight of the portfolio. We're starting to do more operational integration between our portfolio companies where it makes sense to harvest synergy. And we are most of what we do now is focus on how do we drive value creation between our two companies and eventually hopefully more companies and also with our core business, because that is something that our core businesses can't usually do on their own. So being very thoughtful about not building up a massive empire of of overhead is always a good thing because that's the first thing that gets looked at to be cut in tough times. And then my last comment and is and this is may seem really, I guess, small, but it's turned out it's actually been a huge issue, which is understand deeply the accounting policy. Seats of your parent company. I can't tell you how many times, unfortunately, our accounting policies. I just was naive to what some of these accounting policies where we have accounting policies that are set up for running a large capital intensive, tax exempt health system. Those accounting policies tend to penalize the portfolio companies that we acquire. And as a result, you know, we flow through the income statement of the parent as an operating loss, even though we generate positive free cash flow and in a creative way, which is why I go back to that recurring accrete of cash flow. I probably emphasize that 4 or 5 times a week to people that that's our job, because the way our accounting policies are set up, we look terrible on paper at the operating income level, but we look great on the free cash flow and the EBITDA level. And I've gotten folks to understand that's what really matters because everything else is sort of accounting policy. But if you don't understand that when times get tough, the first thing people do is look for what's generating losses, operating losses. And if people don't understand what how you're accounted for, they're going to look at you and say, well, why are we funding that thing? So those are my three lessons learned.

I think that's a great question to end on. Scott, So thank you so much for coming today. Just to recap for our listeners, some of the insights that you shared with a transformative strategy and a potentially disruptive business model. Separateness is the default, not the exception. So go for separateness whenever you can. And as anyone leading a transformative business, they must also be a chief barrier removal officer. I love that phrase. When you're determining where your business will focus, you should ask yourself the four key questions that we summarized earlier. And then you had three key lessons learned that have led to your success to date. The first one is ensuring dedicated commitment to the transformative strategy. So that means you have the support through and through and a multi-year commitment of funding. Second, you need to be nimble, entrepreneurial and focus on limiting your overhead, because in financially tough times, those things will be scrutinized. And then third, you emphasize the importance of deeply understanding the accounting policies of the parent company. And these lessons learned are applicable for any health care innovator out there seeking to implement a similarly transformative strategy. And those things are especially essential right now in our financial and economic environment. So thank you so much for joining us today, Scott. If listeners would like to learn more about Advocate Health Enterprises, we highlighted their impressive work in the report that came out from the Christiansen Institute last November. Improver Transform, and you can read more about their model. And as well you can also find more on their website. So thank you again so much. Scott. It was great to talk to you and wonderful to have you here today.

Thanks for having me.

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