Chairman's Letter (Q2 2018)

The mergers continue…Interesting times when CVS and Aetna come together, Cigna and Express Scripts and Walmart and Humana, while at the same time Ascension and Providence-St. Joseph call their merger off. 

What does this tell us? Corporations merge when they perceive that their core business can no longer achieve its long-term growth targets. Size matters in mature slow growth markets. 

I have said for years that the Federal Government only wants to deal with a few large suppliers.  The cost to do business with the government, the regulations and the various requirements pose a real burden that small business cannot afford. As a result, by default only large players are able to meet the stringent requirements of RFP’s, compliance demands, and the long contract procurement times.

Medicare and Medicaid are large government programs. And over the past 20 years, and even in the past 10 years, the regulatory burdens as a result of everything from enactment of Medicare Part D to Affordable Care Act to MACRA and MIPS have had a double whammy of reducing real payments and substantially increasing the regulatory compliance burden.  

Size matters if economies of scale can lower operating costs and decrease the compliance cost per unit of service.

Larger insurance plans have an advantage as they are able to spread administrative costs on a larger subscriber base. Larger PBM’s likewise are able to achieve economies of scale by negotiating one contract for a larger number of covered lives.  

But—and this is a big but—larger service businesses have no fundamental economies of scale when it comes to core service delivery.

Whether you employ 100, 1,000 or 10,000 nurses, your cost per hour of care is the same.  You still have to pay local competitive salaries. In California, state law mandates 1 nurse per every five patients on medical surgical units and most hospitals across the country staff to the similar ratios.

Health care service delivery is a hands-on business, it still requires employed practitioners, no matter what the setting to deliver service. There are no labor economies of scale the larger the size of the delivery enterprise. Yes, larger size allows for the allocation of overhead over a larger revenue base and allows for the acquisition of talent and resources that can better organize the delivery of services and defray the costs of regulatory compliance.

Yet the opposite is more likely the case: the larger the organization, the more there are dis-economies of scale. The larger the organization, the greater the complexity of operation.


When it comes to innovation, and we experience this first hand, the larger the organization the more people that “have to get involved” to support the project. In a small organization, decision-making is by a few who have the power to change. Larger organizations have more people around the table and we know the more people around the table, the greater the likelihood that someone will have a political objection to the new idea!

So what should health care delivery organizations do? We have been employing cost reduction consultants for decades, we have implemented new information systems that allow for better access to information but increase the costs of operation substantially. Paper records are very cheap to operate versus a big data center with very expensive EMR software. 

It is now time to really look at our delivery costs and realize that time is the most expensive component of our cost structure. And if we are going to impact the cost curve, we need to reduce the time it takes to do any task or provide any service. Time is expensive. The concept is so simple to grasp, but so difficult to measure and embrace.

You can probably think of so many examples of time sinks in health care delivery…patient waits, delays in returning lab and test results, delays in delivering supplies to the patient, delays in access to needed equipment, delays in staff response, delays in accessing care, patients in waiting rooms infecting other patients, staff waiting for a physician to arrive before a procedure can begin, patients not arriving on time…and the list goes on and on.

Something as simple as the layout of “hospitals” that have only grown larger and larger, requiring more time to get from Point A to Point B.

How to solve the time issue: first just recognize that it is a problem. Second, measure the time to complete any task and how many people are involved in that task and then determine ways to decrease time and accelerate the care delivery process.  

Guess what? If it takes less time, not only will it save money, but it will delight the patient/customer! Do you like the plane to be on time or running behind? On-time planes make more money—funny how that happens!

We at TLSG are actively involved in helping organizations better understand the time element of their cost structure. It seems obvious and many of you will say “so what’s new about this?” The new is that there is now technology, the Internet of Things, that makes it easy to measure time, track staff and patients, and compare performance. Data assembled in unique ways with leading practices to bring about fundamental change in the delivery of care.

We want care to cost less, scale will not make this happen, only a strong desire to focus on the basics of fundamental time reduction will make a difference.

You can’t reduce costs unless you reduce the time to deliver every element of the care process…time is running out on many organizations if they can’t begin to focus on the Time!

I will be glad to talk with your organization about the New Time Based Economy and what it means for health care.

Give us a shout and see how quickly we respond!

Michael A. Sachs

Chairman's Letter (Q1 2018)

Innovation is creating new solutions to current day problems. 

We constantly see business plans and talk with entrepreneurs about innovative ideas. 

Having started our first business over 30 years ago, we have seen trends come and go and have been part of many waves: from the "hardware" days of the first personal computers, to the "software" days of writing applications for those machines, to the first internet wave of the late 90's, to the "App" wave of the first smartphones, to the "cloud" wave of today.

Entrepreneurs often think that they are the only ones with the great idea...only to be shown that their solution is not that unique and that many others have solutions to the same problem that they see.

It's not about the idea, or recognizing a need, but about having a real solution that customers want to buy…a solution that makes the customer's pain go away.

If we see a business pitch deck, that starts out with a global description of an industry problem, we know that someone has written a very nice academic paper.

But if we see a business pitch deck, with a clear, bottom line business need and a very clear, understandable solution that can be easily described and sold…we know that there is a potential for success.  Even more, if the team with the solution has real world experience in the area of need, the chances for success of the new business increase substantially.

Population health coupled with big data, how novel is that? How many health care organizations have developed an internal system and think that every other health system will want that solution? Almost all…but if "XYZ" System has developed that solution, you can be assured that other Systems are either developing their own at the same time, or they have found a vendor to build one for them.


So what do we think will be the next big wave? We look outside of health care to see what potential new business models or technologies exist that can address the real problems of:

  • Rapidly increasing costs of delivering care
  • Growing lack of adequate insurance coverage and payment
  • Worsening access to care issues
  • Increasing government regulatory oversight of care
  • Demanding consumer requirements for safety, reliability and yes…organic services

And the list could go on.

One thing clearly out there is the "Amazon" effect.  Five to ten years ago, strategically you could always cite Apple as the great innovator and the simple design that Steve Jobs engineered by bringing together pieces of technology into the ecosystem of "Apple". In the past few years, it is Jeff Bezos and the "Amazon" ecosystem that rules the day. The "Apple" utility continues to gush cash, but Amazon has rewritten the entire face of retailing and distribution.  Thriving malls, for a whole host of reasons, have become ghost towns, and when Amazon agreed to buy Whole Foods last year, the entire market capitalization of grocery stores took a nose dive. Kroger with over $120 Billion in sales, is worth $24 Billion, while Amazon with $150 Billion in sales (and less than $15 Billion in gross profit) is worth $474 Billion.  Their margins are the same, so why such a diversion in value? Amazon is the new thing and Kroger is the old thing.


We of course think that the story is someplace in between. Amazon must think so as well, given that they are building/buying brick and mortar assets in key locations.

So how does this apply to health care? We know who the Kroger's are, the incumbent health care providers trapped in the "insurance paid" ecosystem.  We don't know who the Amazon is yet, whether it is one major Amazon or 100's or 1,000's of smaller Amazon's.

Or perhaps the 'Amazon' of health care may turn out to be…Amazon. If recent rumors are to be trusted, Amazon has thought seriously about entering the pharmacy market by selling drugs online at a discount, using their distribution and supply chain expertise.

Whatever the future holds, what we do know is that the industry cannot go on in its current configuration, or at some time in the future, our GDP spend on health care will go over 20% on its way to 25%...think of that, one in every five or one in every four dollars going into health care.  Not going to happen.

So as investors, innovators, and entrepreneurs, we are looking for that next wave of companies that solve real-world problems, access to care at an affordable price, at times that are convenient for people to use.  We are looking for real solutions that reduce the costs of care, or the waste that leads to excess costs.  Bottom line solutions that are clear to describe and easy to implement.

Give us a call, send us an e-mail, we would like to hear the stories and see how we can help.

Michael A. Sachs