
Chapter 04: Bringing Fiscal Sophistication to MD Anderson
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Description
In this segment Dr. Leach explains that by the nineties, he had “turned into a serial entrepreneur” working in high-risk situations. Rethinking his career, he realized he had reached a point where he wanted to “give back” and, very near that time, Michael Myer called to tell him that MD Anderson was looking for a CFO. Dr. Leach then describes the fiscal context when he assumed the role at MD Anderson. He also talks about John Mendelsohn’s vision for the institution and some of the changes made early in his role as CFO (e.g. shifting the institution from fund accounting to GAAP accounting; canceling managed care contracts as a shock tactic so HMOs would renegotiate).
Dr. Leach observes that Charles LeMaistre’s downsizing strategy was the right approach for the situation. He also notes that the reports submitted by the consulting firm hired to evaluate MD Anderson’s financial fate under HMOs (negatively) distorted the institution’s importance to health care delivery in Texas. Dr. Leach knew that managed care was not going to be able to “squeeze” MD Anderson.
Dr. Leach goes on to assess the institutional situation when he arrived. The administrative team was in place; he developed a business modeling system to predict how the institution would need to grow. He explains the “Value Proposition,” an equation that quantifies cost savings. As an example, he explains that the equation can show how much money MD Anderson saves patients by giving them a correct initial diagnosis (as opposed to having to correct a diagnosis given by a non-MD Anderson physician).
Dr. Leach discusses his economic forecasting model and talks about his goals as CFO.
Identifier
LeachL_01_20121115_ C04
Publication Date
11-5-2012
City
Houston, Texas
Interview Session
Leon Leach, MBA, PhD , Oral History Interview, November 05, 2012
Topics Covered
The University of Texas MD Anderson Cancer Center - The Finances and Business of MD Anderson; Professional Path; The Administrator; Character, Values, Beliefs, Talents; Evolution of Career; Professional Practice; The Professional at Work; Joining MD Anderson; Overview; Definitions, Explanations, Translations; The Business of MD Anderson; The MD Anderson Brand, Reputation; Building/Transforming the Institution; Growth and/or Change; The History of Health Care, Patient Care; Fiscal Realities in Healthcare
Transcript
Leon Leach, MBA, PhD :
By then, I had a sailboat in Newport Beach Harbor, and I’d become a Californian. My career plan at that point was to—I had a forty-foot sailboat. I was going to sail it down to Cabo San Lucas and just hang out. We kind of cashed out of the company, and the venture capitalists were happy with us. They made money. They were going to—it was so long ago, they were going to fax me business plans, not email them or scan them to me, and when I found one I liked, I’d come back and do it. That was kind of the deal. By then, I was just staring the big fifty in the face. I was forty-nine or something. I had discussions with my wife about, I’m not sure—I was turning into a career entrepreneur, or a serial entrepreneur. I was starting and selling businesses. I had done two of them, and it was almost the opposite concern that I had when I was twenty-seven or twenty-nine, twenty-nine being pitch and hold as an IS guy. That’s really a younger man’s game, the churning businesses, and it’s high risk. I was fortunate that we did good with a couple companies, but I was thinking that I don’t know if I want to do this the rest of my life. I think I’d like to find something where I can feel more like I’m giving back. It’s not that I didn’t feel that way working in the healthcare sector, because I thought we were giving back, but it was more the financial play.
I got the boat as far as Ensenada. I got a call from Mike Myer, who Dr. Mendelsohn had employed to find him a CFO. Mike was a partner with (???) (inaudible) a national recruiting firm. Mike wanted to tell me about MD Anderson. I’m in healthcare. I know who MD Anderson is. I think highly of them. I’d never been out here. Well, I’d been to the building right across the street. I knew who they were, but I’d never been in the facility here. Those outer windows are the Prudential building. I wasn’t sure why they were even interested in me, because I’m thinking career entrepreneur, and even if they’re looking for a CFO, there are plenty of hospital CFOs that I had negotiated against building HMOs that I could put them in touch with that know more about the inner workings of the hospital. I came out and interviewed with folks and met with John and really liked the environment. You can sense—this was before we picked caring, discovery, and integrity as our values, before we emphasized that, but you could feel the caring when you walked in the door. You could feel that. They were trying to help you, little boy lost type of thing. That was here in ’97 when I got here, and it’s one of our greatest assets.
Long story short, John saw exactly what you were talking about, the blend of skill sets that I brought, and it was very diverse. You don’t find somebody who was on the marketing side and built systems and has the common thread of financial understanding and knows something about Medicare and knows something about Medicaid and knows something about traditional insurance, has started and put together healthcare delivery systems and HMOs and had a physician practice management company that he was CFO of. One of the questions I got asked was, “How do you do that? How do you manage physicians?” It was very simple. These were fee-for-service doctors that have managed care contracts and all that, but the patients that they saw and billed for, that’s what they collected. This is last year’s summary profit and loss statement for MD Anderson. We had one of these for each doctor, and I can show them this is what you’re doing, and I can show them this is what the guy down the hall is doing. If the guy down the hall is producing better returns than you are, you might want to invest in lunch and see how he’s using his physician assistant or his nursing staff. It was just about giving them the data. You give them the data, they’ll figure out what to do with it and do the right thing.
Tacey Ann Rosolowski, PhD:
Tell me more about this introduction. How long did you spend when you came here for these conversations?
Leon Leach, MBA, PhD :
Longer than I would have thought. I came out for just a day visit, and they had a whole structure, but I think I came back two or three more times, and one time they were getting serious they had a real estate agent, and I brought my wife, and they showed us around. It progressed from who is this guy and who is MD Anderson to—it’s almost like matchmaking in a way. Is he a good fit for us?
Tacey Ann Rosolowski, PhD:
What were you picking up on about what the situation was and what they wanted you to do?
Leon Leach, MBA, PhD :
Well, that’s a good question, because when you ask what about the interviews, one of the interviews I had was with a group of about ten faculty leaders at the time. One of them asked me—it was almost like the market thing. If you were the CFO, what would you do? What would you change? I said, “I would move you away from the fund accounting and move you to GAAP accounting.”
Tacey Ann Rosolowski, PhD:
What does that mean?
Leon Leach, MBA, PhD :
Fund accounting was at that time more or less cash accounting, and it doesn’t give you a true picture of where you’re really at, and it was antiquated and still is and is insisted upon by the state. It’s how the government does their accounting. Fund accounting is governmental accounting. Non-profits use it, but they’ve changed fund accounting a lot now to make it look more like GAAP accounting.
Tacey Ann Rosolowski, PhD:
And cap means—
Leon Leach, MBA, PhD :
GAAP, G-A-A-P, generally accepted accounting principles. That’s an acronym. What I said to them was, I’d move you away from fund accounting to the GAAP accounting, but you’d still report to the state on a fund accounting basis, but this statement I just showed you is GAAP accounting. He got this blank look on his face and said, “Why would you do that? We have enough gaps in our accounting already.” (laughs) Okay. Now I know what I’m getting into.
Tacey Ann Rosolowski, PhD:
So we needed to raise the level of sophistication about fiduciary matters.
Leon Leach, MBA, PhD :
A little bit. Yeah, raise that bar a little bit. That was part of it, and of course, the Sharp study, and the managed care is going to eat your lunch type of thing. John told me about this all up front. I probably had a copy of the Sharp study at one point in time. Anderson had cut back at that point in time. They laid people off. My assessment of it was—and the Sharp study, that was a consulting firm out of San Diego. They basically said gloom and doom, managed care is going to eat your lunch. The whole reason—I mean, what John really saw in me is this guy has dealt with this from the other side, and that’s what I want on my side, because he knows what the hell they think and what they do, and it was true.
Tacey Ann Rosolowski, PhD:
And what were your conversations with John Mendelsohn about what he was envisioning for MD Anderson? What were your conversations about that?
Leon Leach, MBA, PhD :
He had already started investing in MD Anderson. He was starting to put money back after they had contracted, and I think it was more visceral. He’s a researcher and world class, and he wanted to grow the institution. But he wasn’t sure of how do you do that in the face of these studies, and the take I had on it was Anderson—today the phrase is “too big to fail.” It wasn’t that Anderson was too big to fail, but it was too big of a name not to have in your managed care portfolio. One of the things that we did within the first year that I was here was we canceled a number of the managed care contracts, which scared the bejeezus out of people, but there was a method to the madness. The way you communicate, so to speak, in that world is you have so much notice if you’re going to cancel the contract. You can’t get the managed care companies to negotiate with you on a serious basis unless you send them a shot. That’s how it was back then. It’s changed now. It’s much more sophisticated. That was just standard operating procedure, and it’s a way of letting them know that we’re going to renegotiate the contract, and we didn’t do it with all of them. We did it with ones where it was pretty clear that we’re losing money, and we would talk to them and say, “We want your business. We want your patients. We don’t intend to be disruptive, but we can’t have them and lose money. Like you, you make money in this business. We need to make money in this business.” That kind of turned the financial fortunes a little bit and got us back on the right track. We’ve not had a year in which we’ve lost money at MD Anderson since 1997. We’ve been positive every year, and it’s given us the wherewithal to invest as we have in the buildings and the facilities and the science, all of that.
Tacey Ann Rosolowski, PhD:
What perspective can you bring to the strategy of the previous administration and their way of dealing with the financial crisis, if you will? I mean, that’s the phrase that people use. What were the pros and cons of the downsizing mentality that was in place when John was in—
Leon Leach, MBA, PhD :
In the late 70s?
Tacey Ann Rosolowski, PhD:
Yeah. I’m thinking under Dr. LeMaistre.
Leon Leach, MBA, PhD :
I think Dr. LeMaistre fixed the fundamental problem. The fundamental problem was people couldn’t self refer, and I think that given the information that they had at the time, they probably made the right decision, even though that was a bitter pill for everyone. No one knew if people would self refer even when they were allowed to self refer. Getting the state legislature to enact legislation where we could accept patients as self refer was key. I think the consulting reports that they based their decisions on to reduce staff—I think they were done with good intent, but I think it did discount MD Anderson’s importance to healthcare systems and healthcare delivery systems in Texas. I think that managed care wasn’t going to be able to squeeze Anderson as hard as what they’d squeezed folks out in California, and that was the lens at the time, but that’s twenty-twenty hindsight. I think with the information they had at the time it was probably the right decision.
Tacey Ann Rosolowski, PhD:
Coming back to the situation that you entered into, what were—you’ve set the scene of some of the context. Now, what were some of the first steps that you took when you set up—because I understand you had a management team that you were part of. I’m remembering—let’s see. There was a specific group that you led that was responsible for changing the handling of all financial matters here basically.
Leon Leach, MBA, PhD :
You’re talking back in 1997?
Tacey Ann Rosolowski, PhD:
In ’97 when you arrived.
Leon Leach, MBA, PhD :
When I arrived, like most new people on the job, I just tried to assess what I had in more detail.
Tacey Ann Rosolowski, PhD:
And how did you go about doing that?
Leon Leach, MBA, PhD :
Well, talking to people, much like John went around and took copious notes. I didn’t have quite the circuit to make that John had to make. I was more on the business side, but I think we had used the title chief financial officer with two other folks at the time, and we needed to consolidate that. It was pretty clear to me we needed to move to a GAAP accounting system that got good numbers. The stories I heard—and I wasn’t here for it, but the stories I heard were that more time was spent arguing over what the right number was versus what are we going to do about it, because they couldn’t get agreement on what the data was showing them. We went to a GAAP system, and that standardized a lot. That gave us the database that we needed to make good business decisions, and we did all that in the first year. It wasn’t really—there was a team involved, but they were here. The players that were here—I did recruit Ben Melson. Ben brought Dwain Morris with him, and Dwain was the vice president of financial services at Hendrick Healthcare System in Abilene where we recruited them from. Ben came out here—he was the CFO there. He came out here to be the vice president of financial services. It was a lesser title but a much bigger playing field. I brought Ben in as my right-hand person with Dwain and a guy by the name of Weldon Gage. They were kind of the core team.
Dan was here before I was. He was a lawyer, but there has always been a strong chemistry there as far as—in today’s world the business and legal decision are so intertwined. We worked closely together to make those decisions for years. But most of the fundamental stuff we did in a year’s time. I mean, we got to the point where the numbers were right, and there was agreement on the numbers. Then where you have the discussion is forecasting forward, which there was no real tool to do that before I got here, and what we did within the first year—it might have taken a little longer than that. It might have been the first couple of years. We developed a financial model. It was more than a financial model. We developed a business model of how MD Anderson worked, and it started out as a spreadsheet. It became a gigantic spreadsheet. We’ve now gotten more sophisticated, and it predicts things like square footage needed, staff size. It’s more granular today. But it was relatively easy over most of those—it’s been fifteen years. Until the last few years the model has been amazingly accurate and the system relatively easy because there were periods of pretty much constant growth. There were some ups and downs, and the model would show you where that was happening, because we’d use it both to model out, but we’d take the prospective look during the budget. But the world is a lot less predictable today as far as healthcare. There is more uncertainty, how is the Care Act going to affect us and all that. Those questions—they still aren’t answered definitively, and they may change tomorrow or on Tuesday with the election.
But the model that we built is flexible enough to accommodate those changes. It’s just the linear projections that come out of that you want to be very careful about, because the curves are changing in different ways. It takes more insight now into what does that mean strategically? It kind of gets back to the dissertation. Where do we need to be positioning ourselves strategically? Anderson is, I think, very well positioned today with Ron’s vision and with the financial strength we’ve built up, but it’s a very fragile world, so we can’t take anything for granted. The one thing that we do know about the future is nobody is talking about paying us more. We are going to have to think about that. How can we be more efficient? Tom Burke has done a lot of work on the value proposition working with Michael Porter, and I think that’s going to be very important, because that’s what people are going to be looking for, the value.
Tacey Ann Rosolowski, PhD:
Tell me more about that value proposition.
Leon Leach, MBA, PhD
Well, the best person to talk to there is Tom, because he’s worked very closely with Porter on this, but it’s basically an equation that says you get your money’s worth. You get the right outcomes. Not necessarily the cheapest, but the most cost-effective. We change—it’s surprising to me how many diagnoses we change when people come in here. If you start thinking about how would that model out on a macroeconomic basis, how much money are we saving people? There are patient safety issues. There are personal comfort and discomfort issues. But if you can come here, and we get it right the first time versus having a diagnosis that needs to be changed, there is huge value in that. That’s part of our value proposition. It’s that concept, doing it right the first time, patient safety, the quality of our care. It may not be the cheapest, but if you’re misdiagnosed, that’s going to be a lot more expensive in many ways.
Tacey Ann Rosolowski, PhD:
Tell me more about the process that you went through in those first years when you were here, and I know I’m kind of going back, but it was such a complex time, a lot going on, because John Mendelsohn not only needed you to find ways to make the institution much more efficient and sophisticated financially but also to grow with these unprecedented rates. It’s really this amazing balancing act. I’m interested in some key points or some key things that involved both of those.
Leon Leach, MBA, PhD :
A couple of key points is one—the economic forecasting model helped us very much with that. We had a long-term capital plan that we would refresh. I tried to do it annually, but sometimes we’d do it as frequently as quarterly.
Tacey Ann Rosolowski, PhD:
Why was that?
Leon Leach, MBA, PhD :
Because demands were changing. Markets were changing. We had a different idea about what we wanted to do. Some things were becoming more important, and some things were becoming less important. We do refresh the economic forecasting model quarterly. Oftentimes we don’t do a whole lot with that, because everything is okay. But if you have bumps in the road, then you need to move faster. Part of—to be brutally honest with you, part of what helped me was my apathy. I had never worked in an academic medical center and didn’t really understand the politics and wasn’t terribly interested in the politics. I’d become educated through the school of hard knocks, but I made decisions that were probably somewhat incredulous in this setting, because I kind of viewed it as I’m going to be held accountable for the financial performance, and therefore, we have to have good reports so I understand the numbers and so I can brief the president to make the right decisions. There wasn’t a whole lot of discussion about what are the reports going to look like?
Tacey Ann Rosolowski, PhD:
What were some of the decisions that you made that people would find—or that you made out of naïveté?
Leon Leach, MBA, PhD :
Well I think a lot of the—moving away from fund accounting and people thinking of their fund as their money. It’s not. It belongs to the state. It belongs to the taxpayers, and we have a fiduciary responsibility to manage it. It was a different way of looking at it and acting on the different way and doing it relatively quickly. I know there are times that we made decisions that I feel needed to be made that you don’t have time to talk to everybody and build a consensus. And that didn’t so much occur in the early days. I mean, in the early days I think the amount of—if there were people nervous about what I was doing—and there were some—the amount of clarity that came out of it and transparency—I mean, today there are probably 1,000 people that go in and look at our financials, and anybody can on the Internet here at MD Anderson. It’s very transparent. But I think the rate of change was just alarming to some people because academic medical centers usually don’t change that quickly, and that wasn’t on my mind. On my mind was—and it wasn’t a desperate, “Oh, they’re going to wonder.” When you started looking at it from a GAAP accounting basis, there was more money there than people realized, because they were taking a look at a particular frame instead of looking at the whole movie. But I think it was the rapidity at which we moved, and to me, that was the pace I was used to.
Recommended Citation
Leach, Leon MBA, PhD and Rosolowski, Tacey A. PhD, "Chapter 04: Bringing Fiscal Sophistication to MD Anderson" (2012). Interview Chapters. 1199.
https://openworks.mdanderson.org/mchv_interviewchapters/1199
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