Do Health Care and Profits Mix?


Posted by: Joel Wittman 

The debate continues: can a social service such as health care operate in a profit-generating mode?  Undoubtedly, there are fierce opinions on both the pro and con aspects of this question.  Those who support the notion that health care can operate as for-profit entities point out that the financial difficulties encountered by not-for-profit health care providers.  Their mantra is “No Margin, No Mission”; the patient population will receive fewer, or no, services if health care companies are not managed in financially responsible and profitable ways.  On the other hand, those who favor the realm of the non-profit universe contend that the quality of care is compromised and patients not receiving care because of the emphasis in the profit mentality.  So, who’s correct?  It’s a difficult conundrum to address.

An article in the January 8, 2013 edition of the New York Times focused on this issue.  The article appears below:

Health Care and Profits, a Poor Mix

By EDUARDO PORTER
Published: January 8, 2013

Thirty years ago, Bonnie Svarstad and Chester Bond of the School of Pharmacy at the University of Wisconsin-Madison discovered an interesting pattern in the use of sedatives at nursing homes in the south of the state.

Patients entering church-affiliated nonprofit homes were prescribed drugs roughly as often as those entering profit-making “proprietary” institutions. But patients in proprietary homes received, on average, more than four times the dose of patients at nonprofits.

Writing about his colleagues’ research in his 1988 book “The Nonprofit Economy,” the economist Burton Weisbrod provided a straightforward explanation: “differences in the pursuit of profit.” Sedatives are cheap, Mr. Weisbrod noted. “Less expensive than, say, giving special attention to more active patients who need to be kept busy.”

This behavior was hardly surprising. Hospitals run for profit are also less likely than nonprofit and government-run institutions to offer services like home health care and psychiatric emergency care, which are not as profitable as open-heart surgery.

A shareholder might even applaud the creativity with which profit-seeking institutions go about seeking profit. But the consequences of this pursuit might not be so great for other stakeholders in the system — patients, for instance. One study found that patients’ mortality rates spiked when nonprofit hospitals switched to become profit-making, and their staff levels declined.

These profit-maximizing tactics point to a troubling conflict of interest that goes beyond the private delivery of health care. They raise a broader, more important question: How much should we rely on the private sector to satisfy broad social needs?

From health to pensions to education, the United States relies on private enterprise more than pretty much every other advanced, industrial nation to provide essential social services. The government pays Medicare Advantage plans to deliver health care to aging Americans. It provides a tax break to encourage employers to cover workers under 65.

Businesses devote almost 6 percent of the nation’s economic output to pay for health insurance for their employees. This amounts to nine times similar private spending on health benefits across the Organization for Economic Cooperation and Development, on average. Private plans cover more than a third of pension benefits. The average for 30 countries in the O.E.C.D. is just over one-fifth.

We let the private sector handle tasks other countries would never dream of moving outside the government’s purview. Consider bail bondsmen and their rugged sidekicks, the bounty hunters.

American TV audiences may reminisce fondly about Lee Majors in “The Fall Guy” chasing bad guys in a souped-up GMC truck — a cheap way to get felons to court. People in most other nations see them as an undue commercial intrusion into the criminal justice system that discriminates against the poor.

Our reliance on private enterprise to provide the most essential services stems, in part, from a more narrow understanding of our collective responsibility to provide social goods. Private American health care has stood out for decades among industrial nations, where public universal coverage has long been considered a right of citizenship. But our faith in private solutions also draws on an ingrained belief that big government serves too many disparate objectives and must cater to too many conflicting interests to deliver services fairly and effectively.

Our trust appears undeserved, however. Our track record suggests that handing over responsibility for social goals to private enterprise is providing us with social goods of lower quality, distributed more inequitably and at a higher cost than if government delivered or paid for them directly.

The government’s most expensive housing support program — it will cost about $140 billion this year — is a tax break for individuals to buy homes on the private market.

According to the Tax Policy Center, this break will benefit only 20 percent of mostly well-to-do taxpayers, and most economists agree that it does nothing to further its purported goal of increasing homeownership. Tax breaks for private pensions also mostly benefit the wealthy. And 401(k) plans are riskier and costlier to administer than Social Security.

From the high administrative costs incurred by health insurers to screen out sick patients to the array of expensive treatments prescribed by doctors who earn more money for every treatment they provide, our private health care industry provides perhaps the clearest illustration of how the profit motive can send incentives astray.

By many objective measures, the mostly private American system delivers worse value for money than every other in the developed world. We spend nearly 18 percent of the nation’s economic output on health care and still manage to leave tens of millions of Americans without adequate access to care.

Britain gets universal coverage for 10 percent of gross domestic product. Germany and France for 12 percent. What’s more, our free market for health services produces no better health than the public health care systems in other advanced nations. On some measuresinfant mortality, for instance — it does much worse.

In a way, private delivery of health care misleads Americans about the financial burdens they must bear to lead an adequate existence. If they were to consider the additional private spending on health care as a form of tax — an indispensable cost to live a healthy life — the nation’s tax bill would rise to about 31 percent from 25 percent of the nation’s G.D.P. — much closer to the 34 percent average across the O.E.C.D.

A quarter of a century ago, a belief swept across America that we could reduce the ballooning costs of the government’s health care entitlements just by handing over their management to the private sector. Private companies would have a strong incentive to identify and wipe out wasteful treatment. They could encourage healthy lifestyles among beneficiaries, lowering use of costly care. Competition for government contracts would keep the overall price down.

We now know this didn’t work as advertised. Competition wasn’t as robust as hoped. Health maintenance organizations didn’t keep costs in check, and they spent heavily on administration and screening to enroll only the healthiest, most profitable beneficiaries.

One study of Medicare spending found that the program saved no money by relying on H.M.O.’s. Another found that moving Medicaid recipients into H.M.O.’s increased the average cost per beneficiary by 12 percent with no improvement in the quality of care for the poor. Two years ago, President Obama’s health care law cut almost $150 billion from Medicare simply by reducing payments to private plans that provide similar care to plain vanilla Medicare at a higher cost.

Today, again, entitlements are at the center of the national debate. Our elected officials are consumed by slashing a budget deficit that is expected to balloon over coming decades. With both Democrats and Republicans unwilling to raise taxes on the middle class, the discussion is quickly boiling down to how deeply entitlements must be cut.

We may want to broaden the debate. The relevant question is how best we can serve our social needs at the lowest possible cost. One answer is that we have a lot of room to do better. Improving the delivery of social services like health care and pensions may be possible without increasing the burden on American families, simply by removing the profit motive from the equation.

 

Granted this is one person’s view of the matter. What are your thoughts?  In my course, “The Business of Health Care”, this issue is a key component of the subject matter.  Care to learn more and hear both points of view?  Register for the class.  I look forward to meeting you.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


Reducing Waste in Health Care


Posted by: Joel Wittman 

The discussions continue about the ways that  waste and overspending can be  restrained in our domestic health care system.  With health care expenditures soon to approach 20% of the GDP, the matter is increasingly more important.  Recent studies and policy papers have addressed this issue.

With the Institute of Medicine concluding that the U.S. healthcare industry wastes about $750 billion a year, hospitals need to understand the types and levels of waste, as well as the barriers to eliminating it.

A Health Affairs policy brief published yesterday points to care delivery failures, poor care coordination, overtreatment, administrative complexity, pricing failures, and fraud and abuse as the greatest drivers of waste in healthcare.

Former CMS Administrator Donald Berwick has also called on healthcare leaders to focus on these six categories of waste that account for more than 20 percent of escalating healthcare expenditures.

For instance, poor execution of care delivery processes not only leads to higher costs but also patient injuries and low clinical outcomes, the policy brief notes.

It also recommends addressing fragmented care to prevent unnecessary hospital readmissions and avoidable complications. With poor care coordination, costs can jump by $25 billion to $45 billion a year.

Overtreatment accounts for extremely high levels of waste, with defensive medicine as the primary culprit. Doctors have admitted to providing too much medical care, but thanks to malpractice concerns, current reimbursement systems and clinical performance measures, more aggressive healthcare will likely continue.

Higher-priced services that don’t provide greater health benefits than their less-expensive counterparts are another problem plaguing the healthcare system. But some hospitals, including Memorial Sloan-Kettering Hospital, are starting to say no to expensive drugs and devices that don’t guarantee value.

The industry also needs standardized forms and procedures to get rid of complex and time-consuming billing work for providers. In fact, about 30 percent of every healthcare dollar goes toward paperwork and administrative tasks, Forbes reported.

However, the policy brief noted, eliminating waste in healthcare gets even more complicated with fears that cost-curbing efforts will jeopardize or ration patient care.

The policy brief follows:

A third or more of what the US spends annually may be wasteful. How much could be pared back–and how–is a key question.

What’s the issue?
Health care spending in the United States is widely deemed to be growing at an unsustainable rate, and policy makers increasingly seek ways to slow that growth or reduce spending overall. A key target is eliminating waste–spending that could be eliminated without harming consumers or reducing the quality of care that people receive and that, according to some estimates, may constitute one-third to nearly one-half of all US health spending.

Waste can include spending on services that lack evidence of producing better health outcomes compared to less-expensive alternatives; inefficiencies in the provision of health care goods and services; and costs incurred while treating avoidable medical injuries, such as preventable infections in hospitals. It can also include fraud and abuse, which was the topic of a Health Policy Brief published on July 31, 2012.

This policy brief focuses on types of waste in health care other than fraud and abuse, on ideas for eliminating it, and on the considerable hurdles that must be overcome to do so.

What’s the background?
Many studies have examined the characteristics and amounts of wasteful or ineffective US health care spending in public programs, such as Medicare and Medicaid, and in care paid for by private insurance as well as out-of-pocket by consumers. By most accounts, the amount of waste is enormous.

THE COST OF WASTE: By comparing health care spending by country, the McKinsey Global Institute found that, after controlling for its relative wealth, the United States spent nearly $650 billion more than did other developed countries in 2006, and that this difference was not due to the US population being sicker. This spending was fueled by factors such as growth in provider capacity for outpatient services, technological innovation, and growth in demand in response to greater availability of those services. Another $91 billion in wasteful costs or 14 percent of the total was due to inefficient and redundant health administration practices.

By looking at regional variations in Medicare spending, researchers at the Dartmouth Institute for Health Policy and Clinical Practice have estimated that 30 percent of all Medicare clinical care spending could be avoided without worsening health outcomes. This amount represents about $700 billion in savings when extrapolated to total US health care spending, according to the Congressional Budget Office.

More recently, an April 2012 study by former Centers for Medicare and Medicaid Services (CMS) administrator Donald M. Berwick and RAND Corporation analyst Andrew D. Hackbarth estimated that five categories of waste consumed $476 billion to $992 billion, or 18 percent to 37 percent of the approximately $2.6 trillion annual total of all health spending in 2011. Spending in the Medicare and Medicaid programs, including state and federal costs, contributed about one-third of this wasteful spending, or $166 billion to $304 billion (Exhibit 1). Similarly, a panel of the Institute of Medicine (IOM) estimated in a September 2012 report that $690 billion was wasted in US health care annually, not including fraud.

Exhibit 1
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CATEGORIES OF WASTE: Researchers have identified a number of categories of waste in health care, including the following:

  • Failures of care delivery. This category includes poor execution or lack of widespread adoption of best practices, such as effective preventive care practices or patient safety best practices. Delivery failures can result in patient injuries, worse clinical outcomes, and higher costs.

    A study led by University of Utah researcher David C. Classen and published in the April 2011 issue of Health Affairs found that adverse events occurred in one-third of hospital admissions. This proportion is in line with findings from a 2010 study by the Department of Health and Human Services’ Office of Inspector General (OIG), which found that Medicare patients experienced injuries because of their care in 27 percent of hospital admissions.

    These injuries ranged from “temporary harm events,” such as prolonged vomiting and hypoglycemia, to more serious “adverse events,” such as kidney failure because of medication error. Projected nationally, these types of injuries–44 percent of which were found to be clearly or likely preventable–led to an estimated $4.4 billion in additional spending by Medicare in 2009, the OIG found. Berwick and Hackbarth estimate that failures of care delivery accounted for $102 billion to $154 billion in wasteful spending in 2011.

  • Failures of care coordination. These problems occur when patients experience care that is fragmented and disjointed–for example, when the care of patients transitioning from one care setting to another is poorly managed. These problems can include unnecessary hospital readmissions, avoidable complications, and declines in functional status, especially for the chronically ill.

    Nearly one-fifth of fee-for-service Medicare beneficiaries discharged from the hospital are readmitted with 30 days; three-quarters of these readmissions–costing an estimated $12 billion annually–are in categories of diagnoses that are potentially avoidable. Failures of care coordination can increase costs by $25 billion to $45 billion annually. (See the Health Policy Brief published on September 13, 2012, for more information on improving care transitions.)

  • Overtreatment. This category includes care that is rooted in outmoded habits, that is driven by providers’ preferences rather than those of informed patients, that ignores scientific findings, or that is motivated by something other than provision of optimal care for a patient. Overall, the category of overtreatment added between $158 billion and $226 billion in wasteful spending in 2011, according to Berwick and Hackbarth.

    An example of overtreatment is defensive medicine, in which health care providers order unnecessary tests or diagnostic procedures to guard against liability in malpractice lawsuits. A September 2010 Health Affairs study led by Harvard University researcher Michelle M. Mello estimated that in 2008, $55.6 billion or 2.4 percent of total US health care spending was attributed to medical liability system costs, including those for defensive medicine.

    Overtreatment can also result from overdiagnosis, which results from efforts to identify and treat disease in its earliest stages when the disease might never actually progress and when a strategy such as watchful waiting may have been preferred. For example, in July 2012 the US Preventive Services Task Force recommended against prostate-specific antigen-based screening for prostate cancer because of “substantial overdiagnosis” of tumors, many of which are benign. Excessive treatment of these tumors, including surgery, leads to unnecessary harms, the task force said.

    Overtreatment also includes intensive care at the end of a person’s life when alternative care would have been preferred by the patient and family, or excessive use of antibiotics.

    Another form of overtreatment is the use of higher-priced services that have negligible or no health benefits over less-expensive alternatives. When two approaches offer identical benefits but have very different costs, the case for steering patients and providers to the less costly alternative may be clear–for example, using generics instead of brand-name drugs.

    There is also provision of many services that may once have been considered good health care but that now have been discredited as lacking in evidence of benefit. Under the umbrella of the American Board of Internal Medicine Foundation’s “Choosing Wisely” initiative, nine different medical specialty groups and Consumer Reports have identified a series of regularly used tests or procedures whose use should be examined more closely. In 2013, 21 additional medical specialty groups will release similar lists in their respective fields.

    The National Priorities Partnership program at the National Quality Forum, a nonprofit organization that works with providers, consumer groups, and governments to establish and build consensus for specific health care quality and efficiency measures, has produced a list of specific clinical procedures, tests, medications, and other services that may not benefit patients. The next step is for physicians and payers to change their practices accordingly.

    After requesting public input, CMS on November 27, 2012, posted on its website a list of procedures or services that may be overused, misused, or provide only minimal health care benefits. They include lap-band surgery for obesity, endoscopy for gastroesophageal reflux disease, and lung volume reduction surgery. CMS said that these services may be evaluated to determine whether they should continue to be reimbursed under Medicare.

  • Administrative complexity. This category of waste consists of excess spending that occurs because private health insurance companies, the government, or accreditation agencies create inefficient or flawed rules and overly bureaucratic procedures. For example, a lack of standardized forms and procedures can result in needlessly complex and time-consuming billing work for physicians and their staff.

    In an August 2011 Health Affairs article, University of Toronto researcher Dante Morra and coauthors compared administrative costs incurred by small physician practices in the United States, which interact with numerous insurance plans, to small physician practices in Canada, which interact with a single payer agency. US physicians, on average, incurred nearly four times more administrative costs than did their Canadian counterparts. If US physicians’ administrative costs were similar to those of Canadian physicians, the result would be $27.6 billion in savings annually. Overall, administrative complexity added $107 billion to $389 billion in wasteful spending in 2011.

  • Pricing failures. This type of waste occurs when the price of a service exceeds that found in a properly functioning market, which would be equal to the actual cost of production plus a reasonable profit. For example, Berwick and Hackbarth note that magnetic resonance imaging and computed tomography scans are several times more expensive in the United States than they are in other countries, attributing this to an absence of transparency and lack of competitive markets. In total, they estimate that these kinds of pricing failures added $84 billion to $178 billion in wasteful spending in 2011.
  • Fraud and abuse. In addition to fake medical bills and scams, this category includes the cost of additional inspections and regulations to catch wrongdoing. Berwick and Hackbarth estimate that fraud and abuse added $82 billion to $272 billion to US health care spending in 2011.
What are the issues?
Although there is general agreement about the types and level of waste in the US health care system, there are significant challenges involved in reducing it. Much waste is driven by the way US health care is organized, delivered, and paid for and, in particular, by the economic incentives in the system that favor volume over value. An additional problem is that attacking “waste” usually means targeting someone’s income.

In its September 2012 report, the IOM offered 10 broad recommendations for creating a very different health care system in which research, new incentives, partnerships between providers and patients, and a culture that supports continuous learning and development could lead to real-time improvements in the efficiency and effectiveness of US health care.

Although the IOM committee that prepared the report did not estimate cost savings, it predicted that implementing these measures would improve care and reduce expenses. The panel’s recommendations included the following:

  • Improve providers’ capacity to collect and use digital data to advance science and improve care.
  • Involve patients and their families or caregivers in care decisions. Increasing comparative effectiveness research may help physicians, patients, and their families make more informed decisions. (See the Health Policy Brief published on October 8, 2010, for more information on comparative effectiveness research.)
  • Use clinical practice guidelines and provider decision support tools to a greater extent.
  • Promote partnerships and coordination between providers and the community to improve care transitions.
  • Realign financial incentives to promote continuous learning and the delivery of high-quality, low-cost care. Numerous efforts are underway among public and private payers to move from the traditional fee-for-service mechanism, which pays based on the volume of services performed, and toward those that pay based on value and outcomes. (For more information, see the Health Policy Brief published October 11, 2012, on pay-for-performance, and the Health Policy Brief published January 31, 2012, on accountable care organizations.
  • Improve transparency in provider performance, including quality, price, cost, and outcomes information. In a May 2003 Health Affairs article, Gerard F. Anderson from Johns Hopkins University, Uwe E. Reinhardt from Princeton University, and coauthors compared US health care spending with those of other member nations of the Organization for Economic Cooperation and Development. They found that the United States spent more on health care than any other country and that the difference was caused mostly by higher prices.

One way to improve transparency and reduce prices is through “reference pricing,” in which an employer or insurer makes a defined contribution toward covering the cost of a particular service and the patient pays the remainder. The objective is to encourage patients to choose providers with both quality and costs in mind. In a September 2012 Health Affairs article, University of California, Berkeley, researchers James C. Robinson and Kimberly MacPherson reviewed how this approach is being tested.

Many of the measures described above are in process, although they are playing out at different rates in different regions and systems around the country. There are widespread concerns about how replicable and scalable some new payment models are, and how soon they will make a major difference in the way care is provided and in what amount. There are also cross-cutting trends, including consolidation of hospital systems and their employment of physicians, which could lead to the provision of more unnecessary services, not fewer.

For example, in a May 2012 Health Affairs article, Robert A. Berenson, an institute fellow at the Urban Institute, and coauthors found that dominant hospital systems and large physician groups can often exert considerable market power to obtain steep payment rates from insurers.

FEAR OF RATIONING: In theory, a focus on eliminating waste in health care could skirt the issue of rationing because wasteful activities, by definition, carry no benefit to consumers. However, there may be a fine line between health care that is of no benefit and situations where the benefits are relatively small, especially in comparison to the cost.

A common example involves continued chemotherapy treatments for patients having certain advanced cancers. These treatments can cost tens of thousands of dollars but extend a patient’s life by only a few weeks. However, restricting the use of such treatments or services can lead to accusations of “rationing.”

To address many Americans’ fear that the Affordable Care Act would lead to rationing, the law specifically forbids the federal government from making decisions on “coverage, reimbursement, or incentive programs” under Medicare that take cost-effectiveness into account, and “in a manner that treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill.” The law is silent on any of these activities going on outside of Medicare.

What’s Next?
Efforts to extract waste from the health care system will in all likelihood continue along a range of federal government initiatives, including information technology adoption, pay-for-performance, payment and delivery reforms, comparative effectiveness research, and competitive bidding. Similar programs are also being initiated by state Medicaid agencies and by private payers. In the view of many experts, even more vigorous efforts to pursue the reduction of waste in health care are clearly warranted.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part II


Posted By Joel Wittman

Part II: Part II – What to consider when a not-for-profit is the acquirer

In last month’s post, I wrote about the considerations to take into account when evaluating the sale of a not-for-profit health care entity.  In this month’s article, I will look at the issues to consider when a non-profit is the acquirer.

Since Congress enacted health reform legislation in 2010, there has been a marked increase in mergers and acquisitions in the healthcare space. Although for-profit organizations drove the bulk of the nearly 1,000 transactions taking place in 2011, a growing number of nonprofits have begun to see mergers and acquisitions as part of a larger strategy to effectively navigate the reformed healthcare marketplace. This reflects the increasing role that nonprofit organizations play in the delivery and financing of healthcare in the US – according to an estimate by a nonprofit healthcare trade group, about 60 percent of community hospitals are nonprofit, roughly one-third of nursing homes are nonprofit, and almost 20 percent of home health agencies are nonprofit. Further, over 40 percent of all private health insurance enrollees receive services from a nonprofit health plan.

Nonprofit healthcare organizations consider mergers and acquisitions for the same reasons for-profit entities do. They seek to improve quality or efficiency; they desire increased access to capital, enhanced capital base or expansion of cash flow; they want to expand service lines, enhance product offerings or target other geographic areas; or they seek to gain specific types of talent or other assets. But unlike the for-profit environment, nonprofit organizations have other specific issues to consider as they plot a merger or an acquisition strategy. It is recommended that a nonprofit organization’s board and management perform a detailed strategic analysis before executing an M&A strategy.  The following four considerations are a solid start.
Fit. The idea of considering organizational fit when thinking about pursuing a merger or an acquisition with another company seems simple, but it can be a rather complicated matter. Although for-profit companies also consider whether a potential buyer or acquisition fits strategically or organizationally, nonprofit organizations have their mission to the communities they serve to consider beyond these primary issues when it comes to fit. Unlike for-profit companies, nonprofit healthcare organizations exist within a framework of mission-based operations, and the mission colors everything from operational strategy to daily execution. The leadership of every nonprofit organization considering an M&A strategy needs to be clear about its mission, how open to change that mission might be, how an M&A strategy will affect that mission, and what limitations – or opportunities – that mission offers. And if acquiring another non-profit, boards must think about how changing the target’s mission affects perception or buy-in among the target’s patients, providers, staff or payers.

Financial impact. Nonprofit board members and staff management need to think carefully about the financial implications of the potential transaction. Naturally, a common part of the M&A process is to weigh the financial advantages and disadvantages of the transaction, as well as to evaluate an organization’s financials and assess its real value. Part of the discussion is whether an acquisition is best the use of funds to further the organization’s mission.  In today’s environment, many providers are leveraging their healthy balance sheets to reach a level of scale that can offset future reimbursement cuts.  This may be an appropriate strategy, but an organization that may not have internal acquisition and integration experts must evaluate if the use of funds for an acquisition is priced appropriately considering the internal and external integration risk.  Nonprofits also need to consider additional layers of financial impact; any partners advising a nonprofit about a transaction need to be well-versed in these layers. Special tax situations must be considered, as well as the value and disposition of certain types of charitable assets.
Process. There is a logical process to every transaction – but nonprofit organizations have additional steps to follow and angles to consider. The additional steps can extend the acquisition timeline and put the nonprofit buyer at a disadvantage when they are competing for a target.  An experienced advisor can help a nonprofit board and leadership prepare and execute the specific processes that need to happen and minimize the potential disadvantages. All nonprofit M&A transactions will naturally need to involve a realistic valuation of the transaction, a substantive due diligence process, evaluation of legal and antitrust issues and a detailed analysis of financial impact. The legal and financial implications of a nonprofit transaction differ from those of a for-profit transaction, so any strategic process should accommodate not only specific evaluation and analysis of these implications, but appropriate planning to execute them.

Access. Probably the biggest difference between a for-profit entity considering a merger or an acquisition and a nonprofit entity is that in the nonprofit world, there are relatively few knowledgeable financial and strategic advisors who understand the nonprofit environment, and of these, even fewer have significant access and deep relationships across the industry. As your organization considers an M&A strategy, ask yourself whether you have the right access – not just to sources of capital, but also to potential buyers or acquisition targets. Do you know how to source and evaluate potential targets? Do you how to begin a conversation with a target? Finding the right partner with the right access and market credibility is critical to the success of your M&A strategy.

Last month’s and this month’s postings provided the reader with some thoughts about both the sell and buy sides of mergers and acquisitions in the non-profit health care community.  So, for all of you not-for-profit health care organizations out there, are you a seller or, perhaps, a buyer?  Either consideration will require a thoughtful and careful approach.   Please let me know what you decide to do.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at joel.wittman@verizon.net.


The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part I


Posted by Joel Wittman

Part I – What to consider when evaluating the sale of a not-for-profit organization

Nonprofit health care organizations are faced with a conundrum.  Is entering the world of mergers and acquisitions (M&A) on either, or both, the sell and/or buy sides, a strategy to be undertaken by nonprofit healthcare organizations in response to the changing healthcare landscape?

In March of this year, Moody’s Investor Service predicted increased M&A activity in the nonprofit healthcare arena.  They cited as reasons for this increase decreased Medicare reimbursements, changes to state funding schemes for Medicaid, and a reform environment that urges increased efficiency and care coordination.  As a reaction to these compelling reasons, and in an effort to continue providing care to its constituent communities, some nonprofit providers are being forced to consider merging with another organization or putting the organization up for sale.  This is a very complex and emotional issue facing the Boards of nonprofit providers.  Sink or swim?  Don’t sell or sell?  How to evaluate the options?

Nonprofit providers historically have played a large role in healthcare as a traditional care provider; their work with the surrounding community and their focus on their nonprofit missions not only embeds them in a community, but often limits the creative thinking that might allow the expansion and extension of the mission. However, in today’s healthcare environment, it is imperative that board members of nonprofit provider organizations evaluate all of the options available to them.  Nonprofit Boards of Directors typically do not have vast experience working on the M&A process and, therefore, have struggled to identify issues and considerations when evaluating their strategic options, including selling the organization.  This lack of experience makes it necessary for the organization to conduct a thorough analysis, including the option of its sale.

Easier said than done.  What should the Boards and management consider as they begin their strategic review.  The following may be an appropriate way to begin

Sustainability of the Mission

With the deterioration of the reimbursement environment and decreasing margins, nonprofit boards are being forced to consider the sustainability of the organization.  First, a Board has to evaluate what strategies it could pursue that will better position the organization for survival in the post-reform environment

A key component of this evaluation is the organization’s ability to access capital. One of the greatest challenges reported by nonprofit healthcare organizations is obtaining necessary funding or financing to upgrade facilities and equipment. Boards are often reluctant to use reserve funds to invest in innovation or changes in strategy. Many Boards view reserve funds as their mission’s backstop. The critical decision point is whether the use of funds will truly sustain the mission or just provide a temporary fix to a fatal decline.

Ultimately, a Board may come to the conclusion that its long-term mission is at risk and decide it is better to sell the company and use current cash reserves and proceeds from the sale to alter or extend the mission. Evaluating this issue is a complex process, requiring a deep understanding of trends in the industry combined with a thorough analysis of an organization’s strategic options.

Impact on the Mission

After wrestling with the question of whether their organization is sustainable, the top concern for nonprofit Boards when they think about selling is how the transaction will ultimately affect the organization’s mission.

Although Boards will examine multiple variables in the acquisition process, the impact on mission is critical – it is the Board’s ultimate fiduciary responsibility. Boards need to consider the potential positive impact on the community if they sell to another provider and use the proceeds of the sale and current cash reserves to expand, extend or alter the mission.

Some Boards find that the community can still receive high quality care from another provider, and the use of proceeds from a sale can allow the organization to serve more community members in need in other ways. This is especially so for those providers faced with declining margins who might struggle to survive as the environment worsens. Such a scenario requires board members to consider how flexible the organization’s mission is, how open to adjustment it might be, and how any changes to its mission would affect its ability to serve the surrounding community.

Impact on Community/Stakeholders

Consideration of stakeholder impact goes along with thinking critically about how an acquisition will affect an organization’s mission. Any nonprofit Board thinking about selling to a for-profit company should think carefully about how a potential sale might affect all of the various stakeholders – patients, staff, surrounding community members, donors and volunteers.

How a Board begins the search for a buyer can be a delicate matter. Any advisors the Board retains should be well-versed in not only finding the right buyers, but in finding them in a way that is respectful of its role in the community.

Many stakeholder groups make negative assumptions about the effects of the purchase of a nonprofit organization by a for-profit entity, even though research suggests that such assumptions are not valid. Careful consideration and planning can ensure that all stakeholders are on board with a potential sale and the benefits it can bring to an organization and the community it serves.

Impact on Quality and Service Lines When Considering Selling to a For-Profit

A common concern by nonprofit Boards when considering selling the organization – particularly to a for-profit – is that they could experience a drop in quality of care.  Research shows that this is false – in many cases, providers maintain the same level of care or experience an increase in quality.

Board members should think about dedication to quality in examining potential buyers, as well as how an acquisition might affect service lines and community benefit. Most nonprofit providers offer services that are less lucrative or even unprofitable, usually as part of their stated missions or in service to the surrounding community. Board members should ask themselves whether they would be willing to see a change in service mix after an acquisition and how that might affect the organization and the community overall.

The Congressional Budget Office (CBO) has reported virtually no change in the amount of charity care provided before and after an acquisition of a nonprofit provider by a for-profit company. In fact, nonprofit Boards should consider the possibility that the right buyer could find ways to meet their mission profitably and efficiently. CBO analysts have cited studies showing that for-profit providers tend to be more efficient and cost-effective than nonprofit providers, adeptly changing their mix of services to respond to reimbursement patterns and aggressively coding to increase reimbursement.

No one ever said it was going to be easy.  This is the responsibility that Boards members have agreed to assume when consenting to serve on the Boards of Directors of nonprofit healthcare organizations.  Mission vs. Margin (profit, that is).  Are they mutually exclusive?  Can the differences be reconciled?

Next month I will write about issues to consider when a nonprofit organization is the acquirer.

 

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at joel.wittman@verizon.net.


Five Cost-Cutting Health Care Trends to Watch


Posted by Joel Wittman

With health care reform requiring close scrutiny of financial performance, hospital and health systems are closely examining ways to reduce spending.  Following is one person’s thoughts about how fiscal responsibility can be achieved:

1. Mergers and Consolidations

Mergers and acquisitions in the health care sector are at an all-time high in terms of dollar value.  Hospitals and physicians are no doubt integrating and other providers are combining and coordinating care delivery models in response to the current and expected changes resulting from health care reform.  There are experiments in reimbursement and payment methodologies that should lead to fiscal sanity but can also lead to a concentration among providers.  Some believe that this will lead to less expensive care while others argue that it will lead to monopoly and its attendant effects on the health care financial landscape.  What do you think?

2. Reduced Readmissions

Tied to reimbursements, readmission rates are the target of hospitals to reduce the number of patients for the same condition.  Previous studies have found that a number of things can help reduce readmissions, such as home health use after hospitalization, patient engagement and education, use of nurses for patient follow-up, and remote health monitoring.  Hospitals should be focused on reducing readmissions and unnecessary admissions for conditions that probably would not have led to an admission if the person had gotten proper primary care.  Will accountable care organizations help in this regard?

3. Comparative Effectiveness Research

As leading institutions continue to look at evidence-based medicine and patient outcomes, new research is being developed about what is most effective.  A most hopeful trend is occurring in health systems where they are really looking in detail at examining what doctors actually do and what the results are in terms of outcomes and then feeding it back into the system.  Look into Geisinger and Kaiser Permanente as leaders in this practice.  but, will this be widely accepted by physicians as their medical decisions and care are more frequently scrutinized?

4. Care Coordination

With initiatives already in motion for accountable care organizations and patient-centered medical homes, more attention will focus on outcomes from care coordination and managing the entire care spectrum of the patient.  There is a trend to reimbursing health care providers based on outcomes instead of paying for more care.  Will the government (read Medicare and Medicaid) focus on this paradigm of paying providers or will extraordinary pressure be exerted by various advocacy organizations to maintain fee for service reimbursement?

5. Collaborative Communication

With increasing requirements for compliance, hospitals and providers will need to collaborate in their communication efforts.  New ways to work together will evolve resulting in more lines of communication.  Hopefully, the expansion of health information technology will lead to virtual connections between providers.  But at what cost and in what time frame?

And so it goes.  Payors are aligning with providers either through acquisitions or other creative forms of working together.  With increased emphasis on outcomes-based medicine, companies that provide care coordination oversight and patient care management will assume more importance in the health care cycle.  Was Humana prescient in its acquisition of SeniorBridge Family of Companies with the strategy of positioning them to favorably respond to the changing health care environment?  Will others follow?  Stay tuned.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


Sticky Notes & Pairs: Dial Up Staff Collaboration and Improved Solutions in your Performance Improvement Work!


Posted by Paloma Medina

Situation: You have an organizational issue that would benefit from the use a team approach. Perhaps you need to update a work flow or improve organizational performance on a specific measure. However, during staff meetings you find that engagement is low, brainstorming lacks innovation, specific people dominate the meeting, and/or inter-departmental tensions impede collaboration.

Solution: Change your meeting structure! The following “Meeting Recipe” will dial up staff energy and lead to better performance improvement solutions!

What you’ll need:

Meeting time of 1 – 2 hours (epending on the depth of the problem or area you’re focusing on)

20 or more sticky notes and one pen per attendee

Dry erase board or flip charts

A volunteer to act as a high-energy facilitator & time keeper

Instructions:

  1. Assign attendees into random or strategic pairs
    Have them sit together in their pairs
    I highly recommend being strategic — think about how pairs might increase collaboration among departments or individuals. You could pair up nurses with providers, administrators with front-line workers, etc.
  2. Pass out sticky notes and pens to each attendee
  3. State the challenge and the goal. Be clear and concise
    For example, “We want to increase provider productivity by 20% in three months” or “We want to improve our patient check-in process to decrease patient and staff stress”
  4. Give individuals 5 minutes to brainstorm on their own ideas for how this could be done
    Rules:
    1. One idea per sticky note
    2. Each attendee must write down  4 – 10 ideas (yes – this is doable!)
    3. At least one idea must be crazy, really fun, or pie-in-the-sky big (I often award candy to craziest ideas — this greatly energizes and revs up divergent thinking)
  5. Have individuals now share ideas in their pairs
    Give them 2-3 minutes per person to share their ideas, call “time” when it’s time to switch and have the other person share
  6. Have pairs generate ideas
    Give them 10 minutes to come up with 10 more ideas with their partners. Ideas can be  completely new or building on each others. Again, one idea per sticky, at least 2 new crazy ideas.
  7. Call everyone back together and round-robin to report back ideas
    Rules:
    1. Have pairs come up and post their sticky notes as they explain their idea onto the dry erase board or flip charts
    2. Hold off on judgement – responses to ideas can only be praise or clarification questions
    3. Limit reporting to 60 seconds per idea – make it a fun but strict cut-off to assure pairs report concisely and energy stays high in the room
    4. If an idea was already presented, just have pairs say “ditto on ___ idea” rather than repeat it
    5. Spread out the area where you’re posting the stickies, the more spread out, the better
    6. Anyone at any point can “build” on an idea that is being presented and write down a new sticky note for it
  8. Everyone vote for their 5 favorite ideas
    Have everyone walk up at once and move around to review the ideas, then “vote” by marking the chosen sticky notes with a star. Give this just 5 minutes for this to assure people move fast and energy doesn’t drop – you’re almost there!
  9. Now re-vote to narrow it down
    Take down all but the top 10  voted-on ideas. Have everyone vote again but this time everyone gets one vote – this will lead you to your top 2-3 ideas to test out.
  10. Decide on next steps
    As a group decide what are the next steps to test out the chosen ideas, include time frames. Have pairs volunteer to take on the tasks. Pairs can them meet outside the meeting to plan how they’ll carry out their tasks. Have everyone report back in a meeting within a week.

After the meeting: Have someone transcribe all the ideas and note which were the highest rated. Refer back to these when you’re ready to try out a new test.

Real-life example:

A New York community health center faced this exact challenge — front-line staff were tasked with improving their productivity numbers but felt frustrated by leadership’s lack of support for their ideas. Months of meetings went by with little improvement in the situation and their numbers remained low.  The front-line workers requested to have a potluck lunch meeting with leadership to re-energize the group and used this “recipe”. They paired up management team members with frontline staff members to break down hierarchy walls. After the meeting both leadership and front line workers reported loving the voting structure and noted the high energy among everyone- a significant change from prior meetings! They now plan on using “pairs” for all of their performance improvement work.

Paloma Medina is an MPA HPAM 2012 candidate with a specialization in organizational coaching and development. Her background is in homeless health care, community development and design. In her spare time Paloma can be found tailoring her clothing, re-organizing her craft supplies or coming up with new toppings for hot dogs.


Let’s Meet to Meet


Posted by Jacob Victory

The routine is the same every morning. I enter my office. I walk in, put my large coffee, banana and yogurt (creamy, please) on my desk, hike off my hiking boots (I walk to work) and look for that button under my desk that officially starts the day: the “on” button on the computer. I guzzle a few sips of the piping hot coffee as I wait for the computer to boot up. Once the computer’s ready (it’s temperamental), I search not for new emails, not for documents, but I search for my schedule as I know they’ll be something (or, a lot of things these days) on my calendar that makes me wince. There is always one (or three) meetings staring back at me that garners the “I-don’t-want-to-meet-just-to-meet-anymore” sentiment.

In a time of doing more with less, with job cuts eating into staff productivity, with the excessive amount of presentations executives must present to other executives, most meetings don’t make sense anymore. I’ve reported to “Ms. Healthcare” for awhile now. She is brilliant, fun and very driven. Yet, she is obsessed with meetings—so much so that she proposes pre-meeting meetings to meet about what to meet about. She also requests that I prepare documents for these pre-meetings and send them to her 24 hours prior our meeting. Here’s how one typical meeting rolls:

First 10 meetings: I wait outside her door for her to wrap up her last meeting.

First “official” 5 minutes of the meeting: “What are we meeting about again?” she asks with her arms folded.

Next 10 minutes: I’m trying to walk her through the rationale of why I was asked to prepare a document for this meeting and guide her on what was in the document. It is clear she has not read it.

Next 20 minutes: We spend only 5 minutes talking about the relevant items and the next 15 trying to undo everything we discussed in the last 30.

Last 15 minutes: We discuss alternatives to what we think trying to do, only to nix all of the options in every second that follows.

Last 30 seconds: “I’m late for my next meeting,” I’m told, as I collect my pad and walk out of there with a bewildered look that leaves me confused on my next steps.

Amusingly, I’ve noticed that my meetings are scheduled only on Mondays and Fridays, which leaves me anxious on Sundays and exclaiming TGIF! on most Friday afternoons.  I will bet you cash-money that if you ask a fellow executive, you’ll get a similar response on what a typical meeting feels like. You may ask, “Why don’t you just refocus your boss and do a better job managing up?” Well, our response will be that the executives are not listening to their staff and are so immersed in meetings that they don’t realize this pattern of unproductive busy-ness that most take so much pride in.

Here’s how I’ve learned to focus the meetings that I lead:

  1. Send out the documents prior to the meeting and require people to read them before the meeting.
  2. Do not bring copies of the documents to the meetings. For the non-readers, they will quickly learn that you mean business!
  3. Send an agenda prior to the meeting. Keep it less than 4 bullets.
  4. With the agenda, send out the question you need to answer with the meeting members before the meeting ends. This will focus the meeting.
  5. Respect people’s time—you get extra brownie points for ending the meeting earlier than planned.
  6. Thank people for their work and make sure there are next steps, with accountable folks and deadlines.
  7. Set up the next meeting immediately, following the timelines given at the meeting.
  8. Presto. Here’s another cash-money bet: You’ll end the meeting in less than 40 minutes.

Now, I’m not espousing that we don’t connect with our fellow workers, and that we don’t mingle, schmooz and banter around. But we’re all busy and we’re all drowning in governmental regulations, expenditure reduction initiatives, staff shortages and changing policies due to the new health reform projects. To keep the ship afloat, let’s meet more efficiently!

Here’s another quick solution to reduce meeting time and keep things focused: conference calls. There is no better way to get a one hour meeting condensed into a 10 minute discussion that is pointed, productive and empowering. Chat away!

Jacob Victory, an NYU-Wagner alum, is the Vice President of Performance Management Projects at the Visiting Nurse Service of New York. Jacob spends his days getting excited about initiatives that aim to reform and restructure health care.  He’s held strategic planning, clinical operations and performance improvement roles at academic medical centers, in home health care and at medical schools. Jacob also exercises the right side of his brain. Besides drawing flow charts and crunching numbers all day, he makes a mean pot of stew and does abstract paintings, often interpreting faces he finds intriguing.


Strategies for the Health Care Reform Era


Posted by Joel Wittman

The Patient Protection and Accountable Care Act (PPACA) has unleashed a flurry of activity by health care providers and executives in response to some of its provisions.  While the PPACA primarily addresses the issue of access to health care services by patients, it also touches on the areas of cost-cutting, reimbursement and improvement in quality of care.  This article will refer to some strategies for hospitals to consider in adapting to the changing health care climate. Future articles  will indicate five cost-cutting health care trends to watch and will provide a list of recommendations for savings  developed by health care executives that were submitted to the now-failed “Super-Duper Congressional Deficit Reduction Committee”.

Hospitals and health systems are developing and implementing strategies to adapt to the dynamic health care environment.  The American Hospital Association Committee on Performance Improvement recently issued a report on priority strategies for hospitals and health systems of the future, which included responses from health care executives, which should be undertaken in the coming decade.  The top four are:

  1. Aligning hospitals, physicians, and other providers across the care continuum:    Described as a shifting paradigm from “competition to interdependency”, according to the report, aligning providers across the care continuum is essential to true partnerships and care coordination.  This can include shared savings incentives and sharing of data.  Wenatchee (Wash.) Valley Medical Center held meetings with all providers and acted on their suggestions.
  2. Utilizing evidence-based practices to improve quality and patient safety: Quality is directly tied to reimbursement, especially as hospitals with high readmission rates will be penalized starting in 2013.  Hospitals need to improve outcomes and should employ multi-disciplinary teams to review cases that failed with the goal of modifying processes accordingly.  Flowers Hospital in Alabama was able to achieve a more than 99% compliance rate with CMS core measures, tied to its financial reimbursements.
  3. Improving efficiency through productivity and financial management: Hospital executives are looking for ways to cut redundant efforts and standardize processed to cut costs and improve patient care.  North Mississippi Medical Center sought to improve patient satisfaction in the ED around wait times by implementing bedside triage, allowing for X-ray viewing abilities in each patient room, and installing a computerized tracking system to increase patient flow
  4. Developing integrated information systems: While health IT is critical to connecting providers with information in real time, in addition to owning the technology, hospitals and health systems must perform sophisticated data mining and analysis for continuous improvement in patient care and for the organization.  Piedmont Clinic in Atlanta, using several sources of electronic data, created a single data warehouse with information on patient satisfaction, core measures, physician quality reporting, population health statistics, and billing.  In addition, Piedmont provided daily updates about the critical data.

Change is inevitable and will occur.  What will vary is each organization’s journey to develop responses to these changes.

In next month’s column, I will suggest five cost-cutting health care trends to watch and, perhaps, what cost-cutting measures health care leaders suggested to the now-defunct Congressional Deficit Reduction Committee.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

 


“My Boss, Ms. Healthcare: Leadership in Action”


Posted by Jacob Victory

I embrace the theory that leadership is an action-step. And I also think that bosses are an interesting species. It is sometimes hard not to notice themes when colleagues and friends who work in pharmaceutical firms, nursing homes, home health care agencies, hospitals, health care law or managed care organizations describe their bosses. “I need a leader, not a boss!” proclaims one close friend. “She’s a busy regulatory expert who can’t operationalize anything,” says one colleague. Another quips, “I can’t find him. He’s always focused on preparing board documents and is not interested in the day-to-day details.” Yet another smirks, “My boss is so overwhelmed putting out fires and worrying about reimbursement cuts that she rarely provides any direction—so I make the decisions that she needs to make for me!”

One synthesized it succinctly: “Healthcare has too many busy leaders who are focused on changing regulations or survival.” Indeed, healthcare insurance coverage, utilization, care delivery and reimbursement structures are evolving (I won’t use the word “changing”). As a service industry, healthcare is solely about people helping people. What help do our leaders need to manage their people, who can then help others to make this industry churn?

Since most of us work in the health care industry, let’s for a moment assume that we all share the same boss. We’ll call her “Ms. Healthcare” (I say “Ms” strictly based on personal experience, as I’ve had 11 bosses in my career thus far and nine have been women). Ms. Healthcare walks into her office every morning and faces: 1) Clinical staff shortages; 2) Changing regulations; 3) Chronically ill patients who need more coordinated care; 4) Reimbursement that increasingly does not cover expenditures; 5) An inquisitive board who seeks solutions; and 6) Management staff who fear self-implosion if they receive another project to manage—without resources. Let’s also assume that Ms. Healthcare has developed a short-attention span, is anxious, doesn’t espouse project management, and is continually faced with the same six issues I list above.  And with phone calls and meetings that clog her calendar all day, it can seem like it’s an endless cycle. (Luckily, patients continue to be served.)

Ms. Healthcare, being of awesome power and might, feels she can conquer everything. She is bright, hard-working and dedicated. Indeed, Ms. Healthcare has a lot to offer. She is continually chipping away at ensuring efficiencies, new care models, staff development and patient care. I’ve learned a lot from Ms. Healthcare, too. She’s taught me to think at a high-level, that building relationships are key and to have high expectations of myself and others. But let’s consider some easy leadership tips I’ve learned in my own experiences leading people, programs and projects and what I’ve observed in the experiences of others that she can follow to make her day even more productive. If I was her coach, I’d advise her to:

1.  Go to your computer. Find the delete key. Cancel 50% of your meetings. You don’t need them.

2.  Get a pen. Make a list. Prioritize your objectives. Do we really need all those projects completed simultaneously?

3.  Grab the phone. Call your direct reports. Check-in. Do you know how much a “How’s it going?” can re-energize your staff? And how much thinking has been done on staff development and succession planning?

4.  Find a clinician. Ask him what he needs. Are you prepared for what he might say?

5. Call a politician. Invite them to take a tango lesson with you. Could you dare your government to seek your input?

Now, you may think that the five points above are droll or too simplistic. My next five blog postings will address each respective tip in a bit more detail.  Blog postings thereafter will address the other healthcare issues that Ms. Healthcare faces. Leadership is indeed a verb, an action-step. I firmly believe that it can be easy only if its simplest tasks are mastered.

Jacob Victory, an NYU-Wagner alum, is the Vice President of Performance Management Projects at the Visiting Nurse Service of New York. Jacob spends his days getting excited about initiatives that aim to reform and restructure health care.  He’s held strategic planning, clinical operations and performance improvement roles at academic medical centers, in home health care and at medical schools. Jacob also exercises the right side of his brain. Besides drawing flow charts and crunching numbers all day, he makes a mean pot of stew and does abstract paintings, often interpreting faces he finds intriguing.