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- [00:00]
A
This is Laura Darda with the Beckers Healthcare podcast. I'm thrilled today to be joined by Dr. Eric Streco, Chief Financial Officer at Michigan Medicine. Eric, it's a pleasure to have you on the podcast today.
- [00:11]
B
My pleasure to be here, Laura. Thank you for the invitation.
- [00:13]
A
Absolutely. Now, I'm excited for this interview because, you know, it's such a unique time in healthcare right now and in particular I can imagine for you as a CFO on the finance side trying to really understand what it'll take in order to create a thriving organization for the future. And so we'll dig a little bit deeper into that in a minute. But first you introduce yourself and just tell us a little bit more about Michigan Medicine.
- [00:35]
B
Yes, Laura. So as you stated, I am Michigan Medicine's Chief Financial Officer. I've been here in Ann Arbor for approximately two years. Prior to that I was the CFO of Keck Medicine of usc. Prior to that I was Chief Financial Officer at Penn State Health and then before that I was in various finance roles at the University of Virginia Health System. So my career has generally focused on academ medicine. And Michigan Medicine certainly is that it's a large tertiary quaternary care academic health system with a children's hospital, women's health hospital and our main university hospital. But we've also built out a regional health network where we have a series of community hospitals in regions of Michigan where that are proximate to us, that are reachable but certainly are in markets that we haven't been in the past. And we've grown pretty substantially over the last, I would say five years. We're approaching $10 billion a year in top line revenue and our plans are to continue to grow that because we have a clear commitment to our academic mission. Our medical school receives significant funds flows from the clinical enterprise and we pride ourselves on the success of the medical school. That's our main focus. So that's Michigan Medicine.
- [02:07]
A
Absolutely. That's amazing to hear and what a great foundation that you have within Michigan Medicine to just provide great service to the community. Now I'm curious, what's your biggest winner success story from the last year that you'd like to share with us?
- [02:22]
B
We just closed fiscal year 2025 and we had a very successful year financially. I think that is our, our biggest success. Our financials, our financial performance. Our operating margin grew from less than 1% just a year or two ago to now around 3%. And it positions us well to address our never ending capital needs. But it also enables us to advance strategic initiatives and to grow the investment in biomedical and health science research and education. One of the notable success stories financially was the turnaround at our Sparrow Health System. Sparrow Health System was a independent provider in the Lansing area and they merged with Michigan Medicine right out of the pandemic. And there were operating losses that were growing and we really focused our attention on Sparrow and was able to turn it around to where now it is, is contributing to that healthy 3% margin. So it was a good year for our operations and our income statement.
- [03:41]
A
That's fascinating and you know, really great to see that type of financial improvement and turnaround, especially since I know so many organizations are still struggling with thin margins and figuring out how they can have that type of success. So from your perspective, what do you see as really driving factors for that turnaround of that success? How do you really, you know, kind of quantify that ability to make that turnaround from, you know, operational side, the team side? Where do you really see a lot of those, those successes coming from?
- [04:16]
B
Well, we have very successful clinical leadership here and I also think that we spent a lot of time introspectively really looking at our operations and wondering where we can improve. I'm very proud to say that Michigan Medicine has that built into its culture that we never rest on laurels. We acknowledge our success, but we're always driving to improve, to do it better, to reach more patients and to serve the state in a stronger fashion. But our introspective analysis and our self realization really, really helped us focus on the one area that we can control to improve financial performance. And that is patient access and patient volumes. Michigan is a challenging state in many ways. You can say that with the health plans here in Michigan. Blue Cross Blue Shield dominates. So you can conclude, I think safely, that we're in a monopolistic position here, that Blue Cross controls 70% of the health plan market. And so as a result of that, our commercial reimbursements are some of the lowest in the country. Probably. We're probably ranked 47th out of 50, that's how low. So in that environment, our financial success really derives from opening up patient access and getting more volumes through our operating rooms, through our inpatient units, through our ambulatory clinics. And we focused on length of stay, appointment, wait time, turnaround, and the results really show that we had some success on that front.
- [06:10]
A
That's amazing to hear and definitely just fascinating to learn a little bit more about that payer environment in Michigan. I can imagine, as you mentioned, just some unique challenges with having 70% of the market be dominated by one health plan. But then to, you know, being innovative and having that ability to still be successful through that environment, it seems like it'd be really critical even looking ahead into the future, you know, no matter what challenges are thrown at you.
- [06:40]
B
Yeah, I mean, I, I do think the advantage Michigan Medicine has is, is its reputation. I think a lot of the citizens of this state really want to get their care at Michigan Medicine. We are the predominant academic medical center in the state. We achieved notable success in our research, translational research in particular, where the quality of care, the contemporary nature of care, we are applying the latest and most proven techniques to treat our patients. And, and I think the demand to get your care here is what's also underlying our success. And you're right. I mean, if I were to list the top two or three issues that we're facing in the coming year, commercial payer contracting certainly is one. We need to sit down with Blue Cross Blue Shield and renegotiate our contract. And you know, we can go in and demand higher rates. We can sit back and say that it'll be tough for them to sell product without Michigan Medicine, you know, in their network. But we also recognize that Blue Cross Blue Shield is, is an organization that also has a history of success. And we, we really need to get creative. Where can we partner and experience mutual benefit? That, that's going to be our challenge and we've started the conversations and it's something that we'll just have to figure out a way to get to. Yes, but I do think that there is opportunity to partner with a payer and figure out ways of mutual economic benefit.
- [08:29]
A
Absolutely. That is such helpful context, especially going into those future negotiations. And when you look at partnerships, possibilities or potential in a general sense, is that around some more of the value based care or risk sharing or types of community programs just in general? Where do you see some of those opportunities?
- [08:49]
B
Exactly. I think you hit it. We have to be able to stand behind the quality of care that we provide. And I do think that outcomes based reimbursement arrangements are going to be one of the areas that we will work on. There are other ways of doing a partnership as well. We can jointly, we could be capital partners and join initiatives that will bring care to places in Michigan where Michigan medicine is not proximate. I think we're looking into that as well. The environment here in Michigan regarding payers and providers is interesting. The three largest health systems I would argue are probably Corwell Health, Henry Ford and US and Corwell and Henry Ford have health plans of their own that compete with Blue Cross Blue Shield. We do not have a health plan that is that competitive and so is Blue Cross potentially that type of partner. We'll see, we'll see what comes out of the negotiations, but that's an area that we would be looking at.
- [10:00]
A
Got it. That's really helpful to know and understand. And you know, beyond some of the payer contracting, are there any other issues that you're really focused on or you see as being top of mind in a lot of your decision making discussions today?
- [10:13]
B
Oh yes. I mean right now I think the biggest one is long term capital planning. In the face of economic uncertainty emanating from the federal policy changes that we've seen come out of Washington lately. We constantly look at our long term capital plan and it's not limited to years. We go out as far as we feel we need to. So right now we have a seven year plan and you know, it is challenging to forecast cash flows, to look at patient demographics and pay or mix to look at the existing economic conditions nationally and see how they may evolve or change over the course of that seven year period. That's when that's been some of our biggest challenges. So we constantly adapt. What's the source of capital we're going to use to grow organically? What sources of capital are we going to use to maintain our information technology infrastructure or to do other types of growth such as mergers, acquisitions or affiliations? And so that's been a challenge that long term capital planning. I think another one would be related to that technology infrastructure. For us, the electronic medical record development is key. We have three versions of EPIC in Michigan Medicine's health system and that's the result of hospital acquisitions and mergers. We're investing to consolidate into a single version and integrate new technologies. And that's to extend Michigan's medicine's reach to more patients in the state and bring easier access to tertiary quaternary care for Michiganders. And so those are the three, I would say the long term capital planning, the commercial payer contracts and our investment in electronic medical record technology.
- [12:20]
A
Epic, Absolutely. That makes a lot of sense. You know it is really cool to see and think about how the technology coming together. I know it's a huge investment front especially of both capital as well as time and energy resources of the team. But having that all come together it seems like really can be a difference maker for building a foundation for the future. And you know, speaking of looking ahead, where do you See some of the other big growth opportunities over the next couple of years from your perspective.
- [12:50]
B
Well, at Michigan Medicine, we have a more traditional, you know, a more traditional growth strategy. I mentioned just a moment ago, organic growth with new facilities and new markets. We just broke ground earlier this week on a significant $250 million project in Troy, Michigan. It's closer to Detroit. It's a Detroit suburb. And we really feel like we can bring cancer care, musculoskeletal care, primary care, mental health care to that area of the state. It is a population center, and we're confident in our capabilities and the strength of our brand. So, you know, we're growing organically in that fashion. We're looking at other projects here in Ann Arbor to modernize our clinic space and to also expand our services and ambulatory surgery enlancing the Sparrow system. We're looking at a large behavioral health project there and another ambulatory surgery center. And in our facilities to the far west in Grand Rapids, it is again, it's cancer care, musculoskeletal and cardiovascular. So, you know, that's us investing in ourselves to extend our capabilities. And then there's the growth through affiliations with other providers. We're constantly looking for care partners. We think that we've been very successful with joint operating agreements that we already have in place with, say, Trinity Health or Clinical Program Development out in Holland, which is near Grand Rapids. We're open to having these types of affiliations, and who knows, they may end up leading into full member substitution and mergers. And we're open to that because we feel in order to compete in this environment, we do have to grow. Like I said earlier, the strategy when you're in a low reimbursement state is to gain financial strength through volumes. And that is how we plan to grow. But we're not ignoring our growth in technology. I think that with our work on consolidating into a single version of epic, we want to open up new capabilities in telehealth. And everybody is talking about artificial intelligence and the virtues of that. And we certainly see a place for AI, you know, in our business processes and functions as well as our clinical. They will. That will help facilitate better care, more accurate diagnoses, and manage the workload on our care providers. So, you know, as we will continue to invest in brick and mortar, we will look to affiliate with other existing providers and we will try to extend our reach through technology.
- [16:04]
A
Absolutely. I think that makes a lot of sense and definitely having that AI focused and technology focused way of figuring out how you can expand the capacity and leverage that in order to become an integrated system. In that way, you know, makes seems to make a lot of sense. And I also really appreciate you talking through some of the investments you're making on, you know, just building new facilities and expanding care on that front too. I know some organizations are, you know, nervous to make that kind of investment right now, especially given the environment. But it's great to hear that you're in a position where you can expand that care and really make some of those capital investments as well.
- [16:46]
B
Yeah, Michigan Medicine, I have to say we have a steady determination about us. We take calculated risk and we're not hesitant to do so because I think we have the quiet confidence that we know we provide excellent care and we will make good returns on our investments, whether tangible financial returns or returns measured in mission accomplishment. This organization is purposeful and is not hesitant to invest the way we're doing if we think that it is for the greater good financially and in terms of patient care, research and education.
- [17:35]
A
Absolutely. That's awesome to hear and what a great philosophy to live on, especially thinking through all the big things that are going on in healthcare today. And, you know, I think that dovetails nicely into my last question here for you on leadership. I think, you know, I wanted to just dig a little bit deeper there. What do you think it will take in order to leave lead a thriving organization in the next five years or so? I can imagine given all of the experience you have as a CFO and in the financial space for academic health care organizations, you've seen a lot of change and you know, of course a lot more is ahead. So what do you think is necessary in order to be successful in this space?
- [18:16]
B
I think having a sense of sort of professional courage to utilize the assets at your disposal to advance your mission and take calculated risk. I think that is a characteristic that can lead to success. I think we have to have clarity of our strategic intent. I mean, we just can't, you know, willy nilly invest in new clinic buildings or expanding space without having a clear idea as to what the strategic goal is. I think you have to have an unrelenting commitment to achieve the missions, just focused on it and continuing to persevere even through uncertain times like today. And you know, we have our chief executive officer, David Miller, has a really principled approach to how he does his work, and he tells us we have to work at pace with humility that I've learned since coming here, that we are humble enough to know that we may not have all the answers, we may have to make course corrections, but to not let that alter the pace we set for ourselves to achieving our goals. And then, you know, in the end, we have to embrace the changes that technology can bring. Artificial intelligence to me in the beginning was a mystery. It was something that I didn't fully understand and I didn't know how to use it. But in a short time, as we really examine the technology, I think we see such great potential and that that could lead very easily to workflows and success that will continue us as a thriving organization.
- [20:11]
A
Absolutely. It makes a lot of sense and I love so much of what you said right there. Just really leading with that humility and understanding. You can certainly continue to dig deeper into some of these topics that come up, especially with how quickly technology and AI is advancing. But at the end of the day, leaning on the space that can fulfill the mission of any healthcare organization is so critical. Eric, thank you so much for joining us on the podcast today. This has been such a fun conversation. I look forward to connecting with you again soon and seeing you at our CEO CFO Roundtable in November.
- [20:48]
B
I will be there. Laura, thank you for the time. I agree this was a fun conversation. Look forward to having more with you.