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Happy Tuesday Hospitalogists,
This week continues my ongoing series on interviewing health system leadership. After chatting with Baylor’s Pete McCanna, I talked to Fairview Health Services’ James Hereford (his LinkedIn here) a couple weeks ago and really enjoyed my conversation.
This newsletter is a breakdown of our conversation along with some Q&A at the end. We talked all things Fairview and the turnaround the health system has experienced over the past couple of years, including consumerization, revenue diversification, local market dynamics, the potential impact of ICHRA, and Fairview’s strength in pharmacy - including its new pharmacy business launched in late 2024 - Fairview Pharmacy Solutions.
But before I leave you, I have a few asks for you:
Join me and my handpicked crew of analysts and investors to talk healthcare shop and discuss the Q2 outlook. Register here!
I’ll be in NYC in the back half of the week and speaking and learning alongside The Garage during their flagship event, Fuse, to talk all things VBC and innovation. Register for the livestream here!
Capacity management - ED capacity buildout, observation unit micro hospitals to alleviate bed capacity
Expense management and turnaround activity, outsourcing
Local market dynamics around physician alignment; physician employment dynamics “we don’t need to own everything in healthcare”
Large independent physician groups in Minneapolis around key service lines forces Fairview to “play ball”
Low unemployment means competitive employment market; employers less focused on drilling down on cost of benefits because they’re more focused on retention and competitive benefits offerings to their employees
Entrance of for-profit insurers within the past 5 years (UHC, Aetna) has introduced more payor competition, which is good for Fairview
Fairview has dominant market share (30% of inpatient admissions) in Twin Cities
Sustainability of current commercial vs. government pricing and threat of ICHRA if defined contributions continues to gain steam → lower reimbursement to provider organizations
10,000 foot overview of Fairview Health Services
Here’s a quick overview of Fairview Health Services.
The health system is based in Minnesota and operates 10 hospitals, 37 retail and specialty pharmacies, 80 primary and specialty clinics, and is the largest nonprofit senior care provider in the country. Fairview generated over $8B in total operating revenue in 2024, operating income of $51M, and net margin of $185M - significantly greater than results in 2022 and 2023, where Fairview was losing money. It partners with the University of Minnesota on tertiary and quaternary care, and holds a network of 4,300+ affiliated providers while employing 34,000+ FTEs as one of the largest employers in the state of Minnesota.
In 2024 Fairview admitted nearly 90,000 patients into its hospitals which comprises approximately 30% of inpatient market share across its geographic service area.
Fairview has been on a few years long path to financial and operating recovery post-pandemic. In talking with James, here’s what they did to turn things around.
The Turnaround: How Fairview Flipped the Script in 2024
James outlined how the organization moved from a $200M operating loss in 2023 to a $41M (and improving) operating margin in 2024 - up to $320M in net margin in 2024 as well. The recovery rested on three pillars: labor discipline, pharmacy growth, and operational rigor.
Labor discipline produced the single largest swing. Post-pandemic, labor costs were out of control. A quarter of Fairview’s workforce was travel nursing, and by the fourth quarter of 2024 that figure had fallen into the low single digits after an aggressive campaign to recruit permanent nurses, emphasize retention, rationalize premium pay policies, and standardize clinical staffing ratios. The initiative removed tens of millions of dollars in variable expense without compromising quality scores.
Length of stay management and throughput was more efficient while acuity rose. There are generally a ton of challenges with patients coming in and being put into observation care, creating challenging length of stay environments. Fairview implemented - and continues to implement - processes to manage patients who were in acute care but didn’t need acute care level care and were challenging social circumstances. The team also tackled extreme outliers, for example patients ordered by a judge to remain in the hospital or individuals with complex social circumstances who previously sat in acute beds for weeks. On a similar vein, Fairview is thinking about how to leverage post-acute assets more effectively to get people out of the hospital and into more appropriate environments to match their acuity and need. Care navigation and coordination comes to mind here, similarly to what Baylor mentioned as a core need.
Pharmacy growth supplied a significant growth engine. Fairview’s pharmacy division reported a 20%+ increase in top‑line revenue year over year. Home infusion volumes expanded at a similar clip, capturing ambulatory utilization that previously defaulted to the inpatient setting.
Operational rigor closed the expense gap. Centralization and outsourcing were big themes for Fairview across certain administrative functions. A new system operations center provides real‑time visibility into census, acuity, and staffing across the entire network. Weekly standing meetings track throughput metrics, revenue‑cycle performance, and scheduling backlogs, creating a cadence of continuous improvement. In thinking about the operating turnaround, there was no rock that wasn’t overturned and James constantly asked the team “how can we do things better?” And these questions resulted in lots of good hard work on the ops side - revenue cycle management, care access processes, managing scheduling, and more.
There was one point where James thought everything was broken but (luckily for Minnesotans) he doesn’t feel that way anymore. Fairview is on the up and up.
Understanding Minnesota’s Healthcare Market
Let’s back up for just a second and talk about the Minnesota market, drilling down into the Twin Cities, a major population hub. One of the first questions I asked James was around Minnesota’s local markets and the Twin Cities specifically. What are the economics of the healthcare delivery market there, and how do those mechanisms differ from other areas of the country? Here were some of the more unique aspects.
An Efficient Care Delivery Market. Fairview operates in a uniquely efficient and competitive environment within the seven‑county Minneapolis Saint Paul metropolitan area. Fairview as a health system is the only care delivery organization that has complete coverage of the entire 7-county service area, but faces competition throughout those strongholds. Still, as a result, Fairview holds an impressive 30% or so inpatient market share, but the market both on the IP and ambulatory sides is competitive as a whole. James mentioned the Twin Cities is a very efficient market when it comes to care delivery.
Payor Environment. On the payor and reimbursement side, the market is growing competitively. But because of the competitive provider environment and a historically Blues plan, these combined effects kept commercial reimbursement muted. In more recent years, the state has allowed for-profit players to enter the market, so players like United and Aetna have joined in the fun, adding more competition to the market but having no effect (yet, at least) on rates.
Academic Medical Center Dynamics. Fairview partners with the University of Minnesota on academic tertiary and quaternary care, but there’s an interesting dynamic with the Mayo Clinic being 80 miles to the south. Fairview’s academic footprint tends to see more government-heavy patient mix simply because of how strong Mayo’s branding is (and this effect is nationwide). Stated differently, Mayo has an incredibly strong commercial draw of patients and tends to leave Fairview with the lower reimbursing government book of business.
Large Independents Dominate MD Affiliations. Here’s one of the more unique dynamics for a big-city healthcare market. Large independent specialty groups such as Twin Cities Orthopedics, Minnesota Oncology, and MNGI Digestive Health control significant outpatient volume. As a result, the market is driven more by ASCs and outpatient migration, moving from the hospital to ASC environment. This dynamic makes physician alignment more difficult, and health systems have to play ball. Fairview chooses not to pursue a closed‑network model, instead positioning its hospitals as the preferred inpatient destination when complex admissions are necessary.
Labor Market is Tight. James mentioned wages run relatively high in the Twin Cities and that nurses in this market hold the second highest pay rate in the country, which presents its own unique challenges, especially given nursing unions. This dynamic forces Fairview to be disciplined operationally. E.g., how to use capital to drive down its cost structure, and where to identify segments and market opportunities to leverage capabilities and expand. More on that in a bit.
On the Sustainability of the Employer Commercial Market, and ICHRA
Speaking of the labor and employee environment, James and I had a great chat around employer dynamics in both the Minnesota market, but also the dynamic that has existed in healthcare for the past 30 years between commercial insurance and government insurance and the reimbursement disparity / hidden tax.
A big worry of Hereford’s is the deteriorating cross subsidy between governmental and commercial payors, and we spent a decent amount of time dissecting the various factors at play here. Decades of underpayment by Medicare and Medicaid have been offset by consistent year‑over‑year increases in commercial premiums. Rising employer resistance, the recent emergence of Individual Coverage Health Reimbursement Arrangements (ICHRA), and the maturation of direct contracting models threaten to unwind this arrangement.
I asked James about the sustainability of all of this. And it’s something I ask a lot of people. WHEN is the breaking point? Employer healthcare costs rise so much every year, yet they continue to stomach it. What will break it?
While we don’t know the answer to that question, nevertheless, the dynamics described above will continue to catalyze employers to seek out more creative structures for their health benefits, ICHRA and direct contracting being marquee examples here (and also in line with Mark Cuban’s thoughts on all this unnecessary healthcare complexity). James mentioned this as an acute threat to the current reimbursement model for provider organizations and one Fairview needed to pay attention to. If more employers adopt ICHRA or go direct, that’s a big threat to your most lucrative source of patient revenue.
I also asked James whether he perceives employers going direct as an opportunity for Fairview given the care delivery and network asset base they operate. James said yes, but caveated it by saying a network or marketplace needs to exist to facilitate this kind of arrangement, and that complexity is holding employers back from going all in on something like this. Large employers simply don’t want the complexity of dealing with all the direct contracting - but the complexity may be worth it if the current strategies aren’t controlling costs and the tight labor market makes employers be more competitive with benefits. Health benefits act as a competitive advantage for employers in tight markets. Tight labor market makes employers less aggressive with health benefits and medical cost management.
During James’ time at Stanford Health, he noted the premier academic health system experienced this competitive employer market dynamic all the time, to Stanford’s benefit. Tech companies ONLY cared about attracting engineers. They didn’t care about healthcare services price at all. Stanford priced aggressively and benefited from that, of course.
So eventually, over time, the thesis is that we’ll see a lot more direct purchasing by large organizations of healthcare services. This thesis is in line with Mark Cuban’s thoughts on healthcare, and has also led to movements like direct primary care.
A good example (noted already) of a potential ‘disruption’ path lies within ICHRA. If a large employer gets out of defined benefits and goes to defined contribution and pushes their employees to the individual markets, the tight labor market keeps people from making that move for now, but there’s a point where that pathway makes sense for employers. But overall that move would be devastating for hospitals and health systems because it fundamentally changes the calculus for organizations like Fairview and revenue reimbursement. Again, you’re losing employer sponsored insurance for something lower reimbursing.
Sustainability of the Physician Employment Model
You might notice a theme of our discussion. We talked a lot about healthcare economics and sustainability, which was right up my alley. Next I asked him about the sustainability of the current hospital physician employment subsidy model. Here were my takeaways from this portion of the conversation.
You can’t control physician behavior even if they’re employees. As soon as they become their employees, what health systems tend to do is unload their overhead on these practices. And when they acquire these practices, it’s highly probable they weren’t financially sustainable anyway how they were being run, so they add some labor and overhead by default, and the integrated practice immediately becomes a cost structure issue for the enterprise.
So Fairview tries to take a more manicured approach. It maintains employment for primary care physicians to guarantee access and moderate panel churn, but it remains agnostic for many procedural specialists who may function more efficiently as independent partners. Hereford noted Allina Health’s physician unionization effort as evidence that formal employment does not automatically align incentives or benefit a health system economically (and for physicians, they sometimes learn unionizing isn’t what it’s necessarily chalked up to be). James also said there was / is this big urge in healthcare to own everything, and owning everything doesn’t always mean finding success in everything.
For that reason, Fairview’s physician alignment posture is to be amenable as possible to independent physicians, especially given the large independent group dynamic in the Twin Cities. They never had a strategy to internalize everything. Large groups need a place to do their inpatient cases, and they want to be amenable to that. Nowadays so many cases are being done on the outpatient basis and that changes a health system’s revenue profile over time.
Fairview also has to prepare for this future and continued outpatient migration. And this will continue to happen. Why? Because physicians are incentivized to move things outpatient, because this is where their ownership opportunities lie.
That's it for part 1! Stay tuned for Part 2 on Thursday. Thanks for reading, Hospitalogy fam. Love u guys.
My dynasty fantasy football league's rookie draft has concluded and I'm very pleased with my picks. I picked up Egbuka (he fell to me at 1.09! Crazy), Skattebo in the second, and then Savion Williams and Tahj Brooks late in the fourth. Might as well sign me up to be the Cowboys GM at this point.
Thanks to the HIMSS Tennessee chapter for showing me some great hospitality in Nashville! I had a great time meeting people and being a part of the summit this year. Til next time, Nashville.
Thanks for the read! Let me know what you thought by replying back to this email.
— Blake
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