elective and (non)urgent procedure volumes: a Crash Course in running a hospital

The very first requirement in a hospital is that it should do the sick no harm.

– Florence Nightingale

My brother-in-law is “petrified” of going to the hospital for a necessary appointment because he doesn’t want to catch the coronavirus.

– Dr. Ron Hochman, CEO of Providence, St. Joseph Health

Last Friday night over (zoom) cocktails with some friends the subject of the on-going crisis underway at our hospitals came up. The conversation wasn’t about ventilators or PPE. Rather it was about the collapse of elective procedures and non-urgent care, how much elective procedures subsidize the operating models of every hospital* (* a lot) and the corresponding liquidity crisis in the system. In fact – there is currently an estimated net revenue decline of $1.44 billion PER DAY nationally because of Covid19. Thats per day, every day.

*Yes, this conversation is pretty deep for happy hour but remember we have no sports (kids or professional) to discuss during quarantine. (One small benefit of quarantine: diversify the cocktail hour conversations away from the same topics over and over again.)

I sent a note to my colleagues who specialize in the HealthCare vertical to open an internal dialogue. What are we seeing at our customers and how can we help? I learned a lot. I have a brother who works at a hospital in SLC and told me his hospital was significantly cutting back on hours. That surprised me. But after some research it didn’t. Furloughs and layoffs in our hospitals across the country are everyday headlines.

By Sunday I was reading the 10Ks for HCA and by Tuesday I found myself listening to a webcast featuring 2 hospital CFO’s. It was fascinating. Hospital volumes have dropped dramatically and so quickly since the end of February that many health system financial executives are scrambling for sources of cash.

Its one thing to read a news report or blog, but it sinks in more viscerally when you hear it directly from a finance practitioner (the CFO’s on the call) They were talking about emergency liquidity steps to shore up their cash positions, the short term changes required, the structural changes already forecast and what kinds of partners they needed.

https://flashreportmember.kaufmanhall.com/national-hospital-report-april-2020?

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Net: As a country, we clearly need our hospital capacity. However we got to this point, we should all do everything we can to help those running our hospitals and providers. This crisis will accelerate Telehealth & Digital Transformation in HealthCare. It will change the status quo on partners, operating and financing strategy.

A few interesting learnings / data points:

#1 – Hospitals are a huge employer. You knew it was big, but >5 % of the workforce and >7 Million people?

In the US, Healthcare also accounts for 18% of U.S. Gross Domestic Product. Hospitals account for a third of that and they employ more than 7 million people. (that is ~5% of total workforce)

COTD #1 ( Chart of the Decade)

Chart of the Decade* (*so far)

If you like charts, the Covid19 pandemic is providing raw material that will last the rest of my career and beyond. I know it’s early in the year, but we may have a winner for “Best Use of Data Visualization” or “Showstopping Chart of the Year”. The effect of this chart used on the real estate of the NYT’s front page will be very difficult to beat.

#2 – Pandemic planning was part of provider risk assumptions

From HCA Annual report (last 3 years – identical language):

“The emergence and effects related to a pandemic, epidemic or outbreak of an infectious disease could adversely affect our operations.“

If a pandemic, epidemic, outbreak of an infectious disease or other public health crisis were to occur in an area in which we operate, our operations could be adversely affected. Such a crisis could diminish the public trust in health care facilities, especially hospitals that fail to accurately or timely diagnose, or are treating (or have treated) patients affected by infectious diseases. If any of our facilities were involved, …., patients might cancel elective procedures ….Further, a pandemic, epidemic or outbreak might adversely affect our operations by causing a temporary shutdown or diversion of patients, by disrupting or delaying production and delivery of materials and products in the supply chain …..the potential emergence of a pandemic, epidemic or outbreak is difficult to predict and could adversely affect our operations.

#3 – Telehealth was forecast to Double BEFORE the Pandemic

COTW #2 (Chart of the Week).

Telehealth Revolution* Its still called “tele-health”? This revolution has been forecast for so long the advanced technology that the revolution is named after is the telephone. This “revolution” has been slow to materialize.

That said – one CFO on the call shared they went from 25 in Feb to 25,000 in April! The forecast below was before Covid19.

The Market projected to double before the pandemic.
Driven by a) shortage of physicians, rise in geriatric patients, large # of rural and underserved population, prevalence of CHRONIC conditions, cost benefits and Finally (and most importantly) easing of Government Regulations!!

https://www.barrons.com/articles/coronavirus-has-ushered-in-the-telehealth-revolution-which-stocks-to-play-it-51587169350

https://www.fiercehealthcare.com/tech/industry-voices-will-remote-healthcare-outlast-covid-19

“….many of the rules and regulations that hindered the growth of remote care were removed. To name a few: Medicare now reimburses remote care, physicians can practice across state lines, pharmacists can upskill and perform more clinical-grade services and more.

Just one of these would have been a game changer. All of them together signal a revolution underway.

This new, and for now temporary, state of regulation unleashed the power and promise of remote care. Millions of Americans are now receiving care and interacting with medical practitioners online and in full clinical utility. Over a billion virtual healthcare interactions are expected by year-end. For the first time, the question is not, “Why do it remotely?” It’s, “Why do it onsite?”

how much Does Storage cost? (oil edition)

this post relates data storage economics to oil storage. the fundamentals are different but a negative oil price made me think a lot about storage economics.

the “you will never see this again” moment happened last Monday when the front month contract on WTI oil went NEGATIVE. People would pay you to take delivery of oil.* (*if you had storage capacity to take delivery in Cushing, Oklahoma on Tuesday) It prompted a much deeper dive into the economics of storing Oil.

I never once wondered about the economics of Oil storage before last Monday. I have a working knowledge of oil price fundamentals thanks to years of reading investment research: Supply, demand, spare capacity. Daily average usage is ~91 Mill barrels of Oil/day. Futures curves can be in Contango or Backwardation, horizontal drilling has massively changed decline rates and increased production. etc, etc.

I even know what 3:2:1 crack spreads are but only because my friend Scott Brown used to ask new sales people that question during role-plays simply to haze them. He wanted to make sure they realized no matter how much they had studied the topic – they were newbies – tourists in the energy markets, not really ready to talk to serious investors. Trust me – a fool proof question to freak out a sales trainee is “whats the current 3.2.1 crack spread?”

But along with a large % of the population, I was shocked when the price of WTI contract for May delivery went to negative -$38 on Monday.

COTW #1 (Chart of the Week) Negative oil price

How can the price go negative?  There is an enormous glut of crude thanks to both a supply shock due (Saudi and Russian production increases) and demand collapse due to coronavirus pandemic. On Monday – Buyers vanished and oil markets broke down owing to lack of storage space.

“You mean they will give you money to take the oil? I could buy a barrel of oil, burn it and then sell the barrel itself for $40 easy.”

– My brother-in-law, Monday April 2020 – 2:30 pm. (actual quote)

So, you have to take delivery of it, then store it?

Futures contracts are settled by physical settlement. Delivery. Most traders do not want physical deliver so will roll over futures contracts to switch from the front month contract that is close to expiration to another contract in a further-out month. However, somebody eventually has to take delivery – exit financial parties / enter real Industry participants.

How much does it cost to store?

Good question. The answer – it depends.

  • Where is it located?
  • Can you secure it?
  • When do you need to access it?
  • How much does it cost to move it?
  • How close are you to full capacity? (scarcity value)

POTW #1 (Picture of the Week) – Salt Caverns = Cheap and Deep Storage costs historically about $3.50 per barrel in capital costs.

The cheapest place to store oil is where you don’t expect to access it for a while. The Strategic Petroleum Reserves are the largest stockpile and cheapest storage. We mostly use salt caverns believe it or not.

Salt Caverns – – SPR (Strategic Petroleum Reserves) – Currently Full

•

• Why is crude oil stored in salt domes and not in tanks? Salt domes storage has advantages in cost, security, environmental risk, and maintenance. Salt formations offer the lowest cost, most environmentally secure way to store crude oil for long periods of time. Stockpiling oil in artificially-created caverns deep within the rock-hard salt costs historically about $3.50 per barrel in capital costs.

COTW #2 and POTW #2: Storage capacity and Tanks at Cushing OK. Storing oil in above ground tanks, by comparison, can cost $15 to $18 per barrel – or at least five times the expense.

A key part of the energy infrastructure is normal crude and refined product storage. Above ground storage tank costs are more expensive but more convenient. These costs are built into the cost of finished products and don’t usually vary far outside normal operating range. (until now)

POTW #2 & 3: Burst Capacity = Tankers Floating at Sea. Costs just went up ~15x in last month!

When regular storage fills up – – tankers provide burst capacity. Hundreds of millions of barrels have gushed into storage facilities worldwide. Traders have hired vessels just to anchor them and fill them with the excess oil. A record 160 million barrels is sitting in tankers around the world. Oil tankers carrying enough crude to satisfy 20% of the world’s consumption are gathered off California’s coast..highest volume of crude to ever float off the West Coast..

You know where this is going: This storage is more expensive still.

Some of the 27 oil tankers anchored off shore during the outbreak of the coronavirus disease (COVID-19) are viewed from a U.S. Coast Guard helicopter near Long Beach

Right now, a Ship can earn more Cash in ~60 days than in 5 years of normal operations:

How much Storage capacity is left and can we add more?

Long term storage (SPR) is full. Regular above ground tanks are almost full and can easily be full in next 2 weeks. Burst capacity in floating tankers is at ~98% utilization at record high amount of crude. We can apparently convert smaller ships and older ships into service but will not be quick. So that leaves…..Converting pipelines used for transferring crude into storage!

How does Oil storage relate to Data Storage? Data is the new Oil revisited.

Just like oil during the pandemic, data storage volumes are going higher. And like Oil – data storage costs need to be measured, considered and managed.

Unlike Oil storage, we can and are adding data storage capacity every day. And unlike oil, technology is improving rapidly and the right data storage technology provides increasing efficiencies (more for less).

Capacity management and planning are a core part of IT management. And modern storage platforms and consumption models can provide predictability regardless of operating model (traditional, hybrid, Cloud, SaaS) The goal is to make Infrastructure invisible to the user – but pricing transparent & predictable for operators.

Infrastructure is invisible…but 2 weeks to Go until they run out of oil storage. Otherwise a new extreme shock in oil price in May.

At least there is some consumer upside…

car insurance, Subscriptions & recurring revenue. Payment Plans are Not Utility Models.

“Did you see that Geico commercial? They are giving money back because of Coronavirus!! I love that company.”

my wife. The worlds only consumer who loves an insurance company

I don’t use Geico insurance anymore, even though I do love their advertising and my wife has an unnaturally strong brand preference for the Gecko. She actually loves the company. They sell insurance. Not exactly a product normal people have an affinity for. But if you have a heartbeat, you know the brands – the advertising spend total for all insurers is $6.7 Billion – (the top 10 are 82% of total) –  the total TV advertising revenue is $62.23 Billion. Sure, not all $6.7 B is spent on TV but its seems like it and that will earn you some brand recognition. Why don’t I use Geico? I have a close friend who runs an Allstate agency and as he says to me all the time….”Insurance isn’t funny. It’s a calling, not a job.” Its not the most compelling argument but he’s a good friend, Allstate has fine coverage and I am a lazy consumer* (*aka sticky customer).

(quick aside on Ad spending: Did you know Expedia spends > $5Bill on advertising? Chairman Barry Diller says they are dropping ad spending 80% from $5B to $1B! that is definition of pro-cyclical )

Insurance companies are giving $$ back because no-one is driving. And it’s not just Geico. All the insurance carriers (including AllState) are offering rebates but its not out of kindness. Claims = accident frequency X severity. So they are proactively lowering their premiums. I would bet their claims are dropping way more then their premiums. I’m sure they will lose some premium revenue as some policies are cancelled, but overall the revenue stream is highly defensive and getting more profitable with less claims. And overall they are starting in a healthy profit position with a combined ratio for the auto insurance industry below 100 for the first time in a decade ~ 97.2. (Below 100 = the industry is making an underwriting profit)

COTW #1 (Chart of the Week)

COTW #2 and #3 – Gasoline Demand at All-Time Low, Supply at All-Time High

Subscription Payment Plans are not Utility Models

We don’t usually get variable pricing based on how much we drive. While I appreciate the break on my bill, I still get the autopay notification every month that I’m paying that premium. Like everyone else – I am not using any gasoline or driving anywhere. Yet I am still paying for insurance. It’s just on a convenient payment plan.

Infrastructure as a Service can be Utility model or a Payment Plan (and its at an inflection point)

I have spent some quality quarantine-ing time (QQT) getting deeper into Data Economics in general and the current state of the market specifically in ‘as-a-Service offerings’, cloud costs and utility models. When you are building and operating an enterprise you are using a wide range of technology stacks and financing it via combination of utility model (usage), subscription and lease payment plans, capex and depreciation schedules, etc. And while not difficult to understand topics, it does require some work to get grounded in the fundamentals if it’s not your primary domain.

According to IDC – we are about to see a huge acceleration of IaaS spending (Infrastructure as a Service). I absolutely agree with this call and I am seeing this everyday in my business. It is the perfect time to get grounded in the fundamental building blocks of the offerings. Buying a car, leasing a car and taking an Uber all provide transportation but very different experiences. And I don’t pay for insurance, gas or car washes for my Uber driver.

The Corona-Recession is going to Challenge Recurring Revenue Forecasts

The inevitable Corona-recession is going to test the recurring revenue consensus view. I highly recommend this read by Gavin Baker of Atreides Managment.

Software contracts, first-lien debt and the reality that no revenue is truly recurring. Robert Smith, CEO and founder of Vista Equity Partners famously said: “Software contracts are better than first-lien debt. You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee. We get paid our money first. Who has the better credit? He can’t run his business without our software.” 

While he is talking specifically about Software – it is thought provoking and just as applicable to IaaS or cloud in my view. My main takeaway – – its not the payment model or go-to-market model that will provide defensible revenue – its the actual hard ROI of the software underneath the offering.

While its not likely I will switch my auto insurance – I probably should. Its best practice to switch your provider every 2 years. 15 minutes could save you more than 15% in this market.

POTW (Picture of the Week). Every Parking Lot

nobody Knows anything *

* actually, some people know quite a bit and have interesting data and experience. Learn and contribute – but be cautious of predictions made by extrapolating during peak uncertainty. Focus where you had fundamental convictions of structural change before the world tipped off its axis due to Covid-19.

** I thought “Nobody Knows Anything” was a more famous quote than my google search proved it to be. It turns out, the phrase was made famous by Oscar-winning screenplay writer William Goldman (Princess Bride, All the Presidents Men, Butch Cassidy etc) who said it to make the point that you should stand by your ideas, because you can never know what will be a hit in Hollywood. He had great hits but also failures – and this quote was about how he couldn’t predict what would be a hit before hand…”Not one person in the entire motion picture field knows for a certainty what’s going to work.” Predictions are difficult in the best of times.

So how about predictions during peak uncertainty? We are ~ 30 days into the world having clear consensus we are in a new crisis. I think the date we will remember is March 11th when the NBA suspended the season and Tom Hanks announced his positive diagnosis. Go back in your memory to Oct 2001 – 30 days post 9/11. What were we forecasting then? We knew we were in uncharted territory then as now. I can tell you my experiences or you can draw on your own – the range of predictions which were feasible and real possibilities were scary. To be sure, plenty of things changed forever, but many of the worst case scenarios were never realized. What about in Oct 2008, 30 days after Lehman Brothers filed Chapter 11?

On Monday, I was reading an analyst note that was stress-testing a buy recommendation on PSTG. What happens if we see ~30% decline in industry rev predicated on a ~25% decline in GDP? That same morning, I saw a forecast for a -12% decline in Q2 GDP. Down 25% is a lot worse than down 12%, to put it mildly. But take a look below at the current range of Q2 GDP outlook from a respected group which shows a range of -9% to -40%. It’s not fun to publish your forecast while the facts change so rapidly. Ask any analyst or ask your favorite sales leader. Most forecasts are generally an extrapolation of underlying trends and the variations are between the the models become compromised* (*temporarily useless?) during a major dislocation.

There is plenty of great analysis that’s worth reading and valuable, but the conclusions should be taken with a grain of salt right now. Not to pile on, but to illustrate – BofA 2Q GDP forecast went from -12% to -30% in 2 weeks….!

This forecast went from -12% to -30% in 14 days

So if trend extrapolation is not helpful at the moment, what is? I believe dislocations speed up underlying structural changes that were slowly building. Some long simmering problems will boil over (see Higher Education) and some long predicted changes will happen seemly overnight.

In enterprise tech, two major structural changes that have been underway but happening unevenly are ‘digital transformation‘ and ‘utility economic models‘ (public cloud, hybrid cloud or variable capex). Both trends have a range of definitions and fountains of ink (or pixels) used to analyze and write about the fundamental shift. Just a few short weeks ago, I was using a variation of a Bill Gates quote as my point of view on these shifts: “most people overestimate the what they can do in 1 year and underestimate what they can do in 10“.

I believe this market dislocation will speed up what was building up. Given the shared uncertainty about what unfolds next, the benefits of a variable, utility model are suddenly front and center if the industry can really deliver them. And the stubborn, people and organizational process obstacles that held back Digital transformation projects will unstick or evaporate.

Image

Last – history has many examples of people and companies who were ingenious in the face of great uncertainty. A leader on our team wrote an email titled “Winning This Situation” which was about not being an optimist or a pessimist – but a realist in the face of uncertainty. We cannot know how this crisis will fully unfold and we shouldn’t extrapolate what we expected a few weeks back. But we can improve every day and we focus on the structural changes that could come a lot faster than we recently predicted.

be well…

the Quarantine project

” I trained for the marathon with a repaired knee, taught my daughter to drive and started my blog. What did you accomplish during the great quarantine?..”

Future Me speaking at a hypothetical commencement ceremony

I hate working from home. I always have and was never good at it. I watch too much ESPN, read too many Twitter posts and am generally a lot less productive. When i would work from home in the BQ* era *before quarantine, I was always amazed at how many people came by the house every single day. Mailman, landscapers, Amazon prime deliveries x 4, 2 kids friends, dry clean delivery, etc etc. That was before lunch. The traffic really started when the kids start rolling home. How the hell are you supposed to get anything accomplished with all that traffic?

In fact, I am one of the very rare species who actually enjoys the daily Long Island Railroad ritual or Uber ride to JFK for a flight. Fresh cup of coffee and a change of context that signals my brain… “I’m now switching to work mode”. Some of us are simple.

“What was it like DQ* grandpa“? *during quarantine

During Quarantine, if you have kids, you get a little (*actually a lot) closer to the content of what they are learning in school. That is a topic for another, much longer post. This last week my high school aged daughter had a writing project which made me feel really bad for every college admissions officers everywhere, for the next 10 years. The assignment: Begin your college admission essay. “What I accomplished during quarantine….” . Her essay was about the business she started during quarantine. It is a Jewelry business. The essay was inspiring and I loved it. Only she hasn’t started a business. She only thought of the name. When reminded of that, she said to me…its just like that blog you always talk about.

…..so, in order to model the right behavior and avoid becoming like Aunt Becky, I told her she should start her business and I would start my blog.

I am not even sure I want to be a blogger – – but I write a lot already. When I worked on Wall St, I got used to writing daily to summarize our research, communicate ideas to my clients and share my thinking.  I started a weekly piece and published to a broader institutional clientele. The writing habit carried over to my roles in enterprise technology. It helps me clarify my thinking and communicate with my colleagues and customers. I subscribe to the FEYNMAN technique…

I plan to write about technology industry, enterprise sales, business development topics and some equity and macro market topics. I follow politics but will try desperately not to ever write about it. I like NY sports teams but will save that for twitter.

While I hope it proves useful to a broader audience…I know it will be useful for me. I like feedback – let me know what you think. Let’s see how it goes…while I often start new projects, I sometimes don’t f