The Margin Hospitals Already Earned, But Never See [PODCAST]

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The Margin Hospitals Already Earned, But Never See

In this episode, Venkat Mocherla, Co-Founder and President of Midstream Health discusses the margin hospitals already earned but never see.

Highlights of this episode include:

• From advising founders to becoming one.
• Wartime moment for hospital finance and how leaders should act differently because of it.
• Difference between money a hospital has technically earned, a signed rebate, a negotiated rate, and money that actually shows up on the P&L.
• Where recovering earned margin fits and what can’t fix it.

Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome Venkat Mocherla. Venkat is the co-founder and president of Midstream Health, an enterprise AI company focused on enhancing financial operations for some of the world’s largest hospital systems. He’s dedicated to helping hospitals run more efficiently with limited resources. Since its launch in 2023, Midstream has been live across leading provider organizations nationwide, including Houston Methodist, CommonSpirit, and Mount Sinai, together representing more than $80 billion in net patient revenue. Prior to founding Midstream, Venkat was a partner at a16z where he invested in and supported high-growth healthcare and enterprise technology companies. He also served as head of business development at Qventus, helping scale partnerships with leading hospitals and advance AI-driven operational improvements.

In this episode, we’re discussing the margin hospitals already earned, but never see. Welcome, and thank you for joining us, Venkat.

Venkat Mocherla: Hey, it’s great to be on, Kelly. Thank you for having us on.

Kelly: Yeah, no problem. Let’s go ahead and jump in. So, you spent four years watching healthcare startups go to market before you became a founder yourself. What made you turn from advising founders to becoming one, especially in hospital finance?

Venkat: Yeah, I appreciate that question. I get it more often than you think. And the honest truth is that my observation, sitting at one of the largest venture funds in the world, was that more hospitals had closed in the last decade than the last hundred combined. And when I had met my co-founder at the time, he was sharing this anecdote that became really powerful that every single hospital that his dad, who was a rural practitioner, was working in had closed down. In fact, one of the hospitals, Kelly, had turned into a day’s inn.

Kelly: Oh, wow.

Venkat: And we were sort of struck. You can look at data sometimes, but then you sort of see these anecdotes. And for me, I grew up both in India and the US. And I worked as the intern at my grandfather’s clinic. And my grandfather was one of these physicians who kind of tapped dance to work. He literally practiced till the last day he was living. And he was filled with joy and didn’t particularly think about economics. But it was my grandma that was the secret CFO in the background that made him do what he wanted to do best. And so, when I sort of looked at the stats in the US and I looked at the investments that were being made, most of the investments that were being made at the time in AI were all focused towards the revenue cycle, think about how do you optimize coding and billing and think about reimbursement, which is critical. But healthcare fundamentally has a cost problem. And so, for me, sort of one of those moments of, “Okay, if no one is doing this, we should do this, and we should do it now.” And at the time, it was an incredibly powerful time of ChatGPT and LLMs, and we thought technically, we could do a lot more than ever before.

Kelly: Yeah, I mean, that’s quite a story. I mean, I can see why you had some interest in that. So, there’s a lot of talk that hospitals are in crisis. Is this a wartime moment for hospital finance? And how should leaders act differently because of it?

Venkat: Yeah, honestly, I don’t envy the job of leading these institutions today. I mean, if you look at across the board, whether it’s policy headwinds, reimbursement headwinds from the payers, supplies costs going up dramatically, labor costs, drug costs, genuinely, there is no tailwind. And the sort of once-in-a-lifetime headwinds are happening all at once. And so you could see that a significant part of the industry is operating in the red. And genuinely, you’re facing these pretty existential threats around shutting down hospitals, which, to some of us who live in San Francisco or New York or LA, might not mean much. But if you’re in West Virginia or anywhere else in the country and you have a hospital shut down, not only do you now have to drive hundreds of miles, but you now have to think about– one of the largest employers in most parts of America is the hospital.

And so it has dramatic socioeconomic impacts as well. And so for me, revenue is largely set by the payers and policymakers. But when you think about the lever that hospitals have that they can control creatively way before they make deep cuts into affecting clinical services or patient care, are these decisions that happen every day. It’s these contracts you’ve negotiated, whether it’s on the payer side or on the medical device side or in other categories. What you’re owed, you should get paid. And we believe that there’s now an opportunity to sort of make sure that that happens agentically or without your humans in the loop.

Kelly: Yeah, I mean, this is quite an interesting time. And I can really relate to what you’re talking about, as far as in some of these areas in the United States, a hospital closing is really catastrophic. And there’s a difference between money a hospital has technically earned, a signed rebate and negotiated rate, and money that actually shows up on the P&L. Why does that gap exist? And how big is it in practice?

Venkat: Yeah, it’s fascinating to me. I’ll just sort of say this in a very simple way, right? So if you go to a local restaurant in town, I love all dishes with spinach, for some reason. Maybe my mom just sort of ingrained this into me. And so you see the price of spinach going up because of inflation and sort of supplier costs or whatever. The person who’s making the menu, right, goes and sort of erases the price and ups the price because the ingredient and input costs have gone up. That’s a very simple way.

In a hospital, what happens is cost and revenue, data sets, teams, all of it organizationally, are incredibly siloed. And it’s maybe in peacetime finance, that’s okay, right? Your payer mixes up, and your growth is up, and it doesn’t matter. But in a world where you’re losing oftentimes billions of dollars, that matters a lot. And so, this ability to combine these data sets – think about margin, not just cost or revenue – is an incredibly profound mindset shift. And then once you can actually think about the world through margin, it’s not just about sort of understanding the context of that margin. It’s like, “What do I do about it in that moment?” And again, our argument, Kelly, is that before you think about deep cuts into your labor pool or shutting down hospitals, there’s lots of little decisions. I sort of often say that we work– I don’t know if you know the 80/20 Pareto efficiency, right?

Kelly: Right.

Venkat: Everyone works on 80/20 inside of health systems just because there’s so much to do. And you got to remember these are not-for-profit institutions. But the 20 ends up mattering a lot if you’re a 1%, 2% margin organization. Pharma makes 70%, med device makes 40%, for-profit hospitals make north of 10%. Some of our institutions are just not barely cutting to neutral, right? And so that 20% of all the little decisions you make on contract compliance or rebates or invoices and policy changes, all of this stuff where the money leaks is incredibly important and it makes a difference between keeping it open or closed.

Kelly: Most definitely. I mean, we really cannot operate in silos anymore. That’s definitely true. So hospitals already have ERPs, GPOs, and consultants looking at spend. Why does this problem continue to persist despite all of that infrastructure?

Venkat: Yeah, I mean, look, the way you think about peacetime versus wartime, right? So, in peacetime, you think about all the investments you made in the systems of record, ERPs and EMRs. And those systems of record typically have been built to, like, report on the value, right? Report on margin, report on data. My joke is it’s death by dashboards and death by meetings inside of these institutions. In wartime, right, just because you have a report or a consulting firm diagnoses a report, nobody’s job is today to go actually capture that value, not in a year, in the next week, right? In the next two weeks.

At Midstream, we actually report internally our savings, the generated savings for our partners every week. And that’s a metric we’re really proud of. Not-for-profit hospitals, by the way, have spent– I think just the top 15 institutions have spent $7.8 billion between 2009 and 2023 on consulting with no measurable improvement on operating margin. The crazier thing to me is that the last decade of M&A deals, we were told bigger is better. But on average, it’s found that the margin went down by 150 basis points for every deal that actually happened from an M&A perspective. So, no one’s doing it. The big hospitals are not doing it. The small hospitals are not doing it. The systems of record are not doing it. The consulting firms are not doing it. And so that, to me, is an incredible gap that we got to now fix ASAP.

Kelly: That consulting stat, that’s crazy.

Venkat: I know.

Kelly: Yeah, that’s wow. We know AI is everywhere in healthcare right now, and a lot of it doesn’t hold up. What does responsible AI in hospital finance actually require, given that approximately right isn’t good enough when real dollars move?

Venkat: Yeah, you have to remember, the decisions we help our partners make are deterministic in nature, right? So, hey, am I buying five things today or six things? That makes a big difference, right? Especially, again, I always remind people, right, if you barely have enough money in your bank account to make rent next month, whether you buy five apples or six apples actually is profoundly important. And you can’t just have a probabilistic model tell you, “Hey, there’s a 60% chance that you should buy the sixth apple or not,” right? And so that’s not good enough. And so not only do you need to think about helping have high trust that you can actually make that deterministic decision, but you need a clear audit trail of, “How did you come to that decision?” “Oh, well, I read the receipt, and in the hospital’s case, I read the contract. I looked at your data sets from your spend perspective. I also looked at all the publicly available data. Maybe I looked at sort of the external data sets from the other side. And then this is how I came to the conclusion. Oh, by the way, here’s also the exact analysis I did so that you can rerun this analysis and come to the same conclusion.” So oftentimes, I don’t know if you find this to be true, but if you go to ChatGPT or Claude or any of your favorite AI tools and you prompt something, and you prompt something again, the same question again, you’ll get a slightly different answer. That’s not acceptable in the case of financial decisions.

And so, I think these generalized models, they’re able to read documents, right? But they’re not able to be sophisticated enough to understand the data ontology of, “Oh, wait a minute. If I say glove, I could mean 45 different things,” just to give you the complexity inside just one area of hospitals, in supply chain, oftentimes the SKUs that a hospital has is more than Walmart and Target combined, right? So, the level of sort of fatigue in understanding exactly what every line item means. Well, you got to have high trust that this system is able to do that. And oftentimes, most people don’t meet that bar. That’s why when they use Copilot or any of these other AI tools, they open it, they use it, they close it, and they never use it again. And so that’s the sort of difference between these tools and Midstream.

Kelly: Yeah, and I really loved what you said about needing that clear audit trail. That made a lot of sense to me. So, everyone’s being told to cut costs. With Medicaid and ACA pressure coming, where does recovering earned margin fit? And what can’t it fix?

Venkat: I mean, I think one thing is, look, when the federal government makes a massive cut to Medicaid or the changes that are happening to any particular policy, there’s no cost lever that’s going to entirely fill that alone and I think that– there’s a famous quote that culture eats strategy for breakfast. And I think in healthcare, policy eats everything else and so anyone who tells you otherwise is selling something. So, I am not going to discount the power and effectiveness that policy has over healthcare reimbursement and healthcare finances. But the lever when– our sort of argument, fundamental argument, Kelly, is that there’s so many things in your own control today that you just don’t take advantage of as a hospital, right? And so, when you think about can a human read every contract, look at every spend, look at every claim, look at every single decision? They can’t because they’ve got, again, 80/20, right? They’ve got the big negotiation to take care of. They’ve got the big contract to look at. But if you have 1,200 contracts, maybe you have the energy to look at 30.

And what about everything else? And so, our argument is, imagine this second brain that’s able to optimize every single decision and then most importantly, action against it, which is– the most important thing is– most people are either they don’t have the time for it, they’re potentially burned out. And so that ability to sort of not just look at every data set and say, “Hey, there’s a rebate that you didn’t claim here and there’s a price discrepancy that you’re accessing because of a different contractual obligation.” That sort of discrepancy should not just be identified, but it should be actioned against. And so that’s sort of like where our north star is. And I will just sort of say in all of this, just speed matters. At the end of the day, if I can find a million dollars in the next week for a health system versus a million dollars in two years, it’s still a million dollars, but it has dramatically different impact. And so, it’s not just the denominator of the dollars, it’s also this time in which you can affect that. So, what it can’t do is it can’t change your payer mix from– in a certain market because you’re in a certain geography, can’t change your policy, but it can make those hard strategy calls, right? But it can control all the little decisions you make.

Kelly: Yeah, I mean, I know the amount of data sets is just astounding. And I really love what you said about speed matters because that is so true. Three years from now, if the industry gets this right, what’s different?

Venkat: Yeah, I would just sort of say cost and revenue stop being two separate problems. And I think that we’ve paid too much lip service to cost in the last decade. And in peacetime, maybe that would have mattered. In wartime, it just is different. I think when you think about the datasets and decisions on cost and revenue and the teams that are working on pharmacy, and supply chain, and managed care and revenue cycle, these are all very different teams and they all have the same context, the same picture. And so, they shouldn’t be using different tools and different data sets. They should all be speaking one. In fact, if you’re negotiating against a different stakeholder, like an insurance company – let’s just say it’s a Fortune 5 business – and you’re a not-for-profit, the one thing you should have is you should know your business better than they do. And oftentimes today, the vendor or the payer or whoever negotiating against that hospital knows more about them than they do. And that’s just not fundamentally acceptable. And then spend gets managed as actively as– optimized as actively as revenue. And I’m saying every minute, every hour, every day, not just once a year from a report or an audit perspective. And so, the gap between what you’re contractually promised and what the actual number is on your P&L and the CFOCs every week, every month, that gap is going to cease to exist. I also just think that the bridge between the clinicians, the operators, and the finance folks– these are different people, different languages, different set of problems, but if they have a shared language, then I think we can navigate the wartime successfully. And then, by the way, if we have these extra resources coming out of wartime, we can go invest in, not cut, but invest in, the future of healthcare, which is incredibly promising, right? You’ve got cell and gene therapies that want to cure sickle cell and Huntington’s. But these therapies are expensive to not just invest in, but deliver. So, how do we pay for all of this? How do we give– how do we actually give more money to our clinicians, not less? That question around abundance happens when we can create that breathing room on finances, which today we just don’t have.

Kelly: Yeah, I really loved what you said about investing in the future of healthcare. I think that’s so true. And I hope we do that. And thank you, Venkat, for sharing your insights with us on the margin hospitals already earn but never see. And if a listener wants to learn more or contact you to discuss this topic further, how best can they do that?

Venkat: Absolutely. Yeah, I mean, it’s pretty simple. I mean, our email is my name, my first name, Venkat, at midstream.health. So, drop me a line, and I’d love to talk to you.

Kelly: Awesome. Thank you for providing that. And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time…

[music] This concludes today’s episode of The Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.holdings/podcasts. The Hospital Finance Podcast is a production of Besler Holdings.

If you have a topic that you’d like us to discuss on The Hospital Finance Podcast or if you’d like to be a guest, drop us a line at contact@besler.holdings.

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