Description
For struggling hospitals, challenging the status quo may be the only way out of the zone of insolvency.
i ma g e f r o m i s to c k p hoto 1 Tr us t ee J une 2010
T
he negative impact of the 2008 financial market
decline and the 2008 and 2009 recession pushed
many hospitals’ financial condition into the
“zone of insolvency.” While no bright-line test
exists to determine when a hospital has entered
this zone, the evaluation involves a combination of legal and
financial tests.
At this stage, the hospital is neither fiscally sound nor in
bankruptcy proceedings. The American Hospital Associa-
tion’s August 2009 survey, The Economic Crisis: Ongoing
Monitoring of Impacts on Hospitals, reported that nearly
10 percent of hospitals surveyed indicated they had a bond
covenant financial default.
It is extremely difficult for these providers to access
BY RO B E R T CL A R K E A N D BR U C E BU C HA N A N
For struggling hospitals,
challenging the status quo may be the
only way out of the zone of insolvency
Turnaround
Strategies
capital through traditional strategies, such as bank loans, asset-
based lending, leasing or tax-exempt borrowing. They are
challenged to finance investments in new technology and facil-
ities, patient safety and quality, and new services and programs,
which are essential to address regulatory and commercial mar-
ket performance requirements. A “rehabilitation” of their bal-
ance sheets will be required, and it will neither be an easy nor
quick journey. Other hospitals whose financial condition is
stronger than those in the zone of insolvency may still be eval-
uated as noninvestment grade (typically considered as 80 days
or less cash on hand and a debt service coverage ratio of less
than 2.0) and may face similar access to capital challenges,
particularly access to tax-exempt borrowings. Health reform
legislation is expected to have a positive near-term financial
impact on hospitals, but it will not provide the financial relief
needed by highly distressed providers.
The response to this financial crisis depends on the specific
financial circumstances of each organization, but generalizations
can be made based on the institution’s financial position. While
many hospitals are embarking on a journey to rehabilitate their
balance sheet, others—including many who are enjoying their
best financial performance in recent years—are playing offense
by opportunistically acquiring distressed assets and investing in
markets where competitors are struggling to keep pace on access,
service and quality. Others are trying to determine their “sus-
tainable bet” strategy, identifying areas of clinical excellence
that will position them for long-term financial viability. The
chart on Page 28 depicts some of the typical responses by orga-
nizations based on their current financial wherewithal.
This analysis offers some perspectives
on turnaround strategies that we believe are
more important than ever to consider. While
the sense of urgency is greatest among non-
investment grade hospitals, these ideas are
applicable to all providers irrespective of
their current financial condition.
The status quo of all business models
should be challenged and providers should
reassess their strategies for continuing rel-
evance and likelihood of facilitating sus-
tainable financial performance.
Implementing innovative and dramatic
changes in operations, financing methods,
service lines, sites of care, and people and
governance will be essential to sustaining
financial performance and mission-driven
success. Health care reform will likely
accentuate this disruption and fuel the need
for strategic re-evaluation and change.
The Rehabilitation Journey
Providers should begin their accelerated
financial rehabilitation by making an honest assessment of their
situation and objectively answering tough questions such as:
• What is our hospital’s competitive position? What are the
realistic projected financial results under a “status quo” scenario?
• What is the level of financial performance improvement
needed to obtain access to capital? Is it achievable?
• What is the hospital’s range of options to achieve strong,
sustainable financial performance?
Not until these answers are known and explored will gover-
nance, management and other constituencies understand the
magnitude of the change required to position the organization
for sustainable financial success. Clarity regarding the require-
ments for success should begin to form, and a picture should
emerge about the level and type of change needed in the way
the hospital operates.
Creative Solutions
Today’s financial rehabilitation requires rethinking the usual
turnaround strategies and taking a more comprehensive per-
spective and approach to creating and implementing turnaround
solutions; thinking shouldn’t be limited to just financing tactics
such as debt modifications. Following are some potential turn-
around strategies for consideration. Some are tested but not fre-
quently implemented and others are more innovative and
emerging. While “one shoe doesn’t fit all,” each of these ideas
merits consideration. Each requires an open mind and a will-
ingness to not just accept the status quo. If a provider’s balance
sheet is to be rehabilitated to levels expected by creditors, a
serious evaluation of the following turnaround strategies should
be undertaken.
Financing Strategies: While the rehabilitation shouldn’t be
limited to financing tactics, providers should consider vigorously
pursuing certain financing strategies. In a turnaround, all aspects
of the business should be evaluated as a potential source of cap-
ital. Virtually all operating areas, both
direct patient care and infrastructure, can
be a source of capital accessed by entering
into financing arrangements. For example,
providers have entered into financial trans-
actions involving the lab, IT, physical ther-
apy, medical office buildings, the parking
garage and imaging.
The resistance to leveraging these assets
as sources of capital has typically been
loss of control; however, this risk can be
mitigated by service-level agreements and
termination clauses. Ceding financial con-
trol doesn’t necessarily mean ceding qual-
ity control and oversight. The search for
resources should not be encumbered by
historical precedent. Value exists all around
us. We just need to recognize its existence
and capitalize on its potential. The emerg-
ing view is that capital can be sourced from
all our assets, both tangible and intangible.
Stated differently, all assets should be in
play as a potential source of capital.
Another potential financing tactic is pursuing the development
of public-private partnerships around either key lines of business
or areas of operation. Perhaps strange bedfellows, but on an
increasingly frequent basis, private and public organizations
are coming together to form public-private partnerships to pursue
common objectives.
Commonly referred to as PPPs, these ventures infuse gov-
ernment capital with private market expertise. Formed through
the creation of special purpose entities, PPPs are much more
prevalent in other countries and U.S. industry sectors than in
U.S. health care. A blank sheet of paper exists for providers to
collaborate with the public sector and provide an expanded
source of capital and collectively address needs that will emerge
due to health care reform or current challenges, such as care of
the uninsured. President Obama called upon the public and pri-
vate sectors to enhance their dialogue around ways to better
collaborate. Some examples of potential public-private partner-
ship ideas that are emerging include:
• Emergency response network operations;
J une 2010 Tr us t ee 2
The status quo
of all business
models should be
challenged and
providers should
reassess their
strategies as to
continuing relevance
and likelihood
of facilitating
sustainable financial
performance.
TURNAROUNDS OR TAKEOVERS?
Proiders' responses to the recession depend on their financial condition and access to capital:
$ Pla#ing offense b# acquiring distressed assets
$ Making strategic inestments in IT, ph#sicians and serice lines
$ Focusing on operational e"cellence
$ Focusing efforts on cash and costs
$ Replanning capital priorities and allocations
$ E"panding financing options
$ Determining their focused %bet&
$ Restructuring b# ealuating asset o!nership and lines of business
$ Modif#ing debt
$ Seeking capital partner
$ Ealuating bankruptc#
• Information repositories to improve the quality of care and
lower costs;
• Programs to manage chronic diseases;
• Financing of replacement facilities; and
• Creation of clinics to provide low cost access to care.
Operations Strategies: Operational changes are usually a
primary driver of the financial rehabilitation. A wide variety of
strategies are being implemented across areas such as supply
chain, care coordination and management, fixed costs and con-
tracting.
Care Coordination and Management: One idea is to
improve the management of care through strategies such as
operating clinics to provide free care in lieu of uninsured patients
using costly emergency department care. Patients with non-
emergency care needs can be triaged to a clinic setting with
longer clinic hours to mitigate off-peak emergency room usage.
While not new, this tactic is underutilized. Each provider should
consider conducting an analysis of the net benefit of operating
a clinic designed to support the uninsured. Also, many providers
have entered the retail medicine area in an effort to reduce high-
cost ED utilization.
In a related vein, this cost benefit analysis should also evaluate
the merits of creating a care management process for the unin-
sured and others, such as patients with chronic diseases, who
frequently use the emergency room. These patients typically
require a disproportionate level of resources that can potentially
be reduced through care coordinators who follow up with the
primary attending physician to develop care plans designed to
reduce the utilization of services. This cost benefit analysis
involves modeling the cost of providing care to the uninsured
that could perhaps be avoided through enhanced care coordi-
nation versus the unfunded cost of the care expected to be ren-
dered in the absence of effective care coordination.
Fixed Costs: Providers should consider adopting a paradigm
that all costs are variable. Financially distressed providers should
view all costs as controllable and every cost should be evaluated
for its direct benefit to patient care and critically challenged as
to whether it adds value or just cost. Each cost pool, particularly
in those functions that don’t flex their cost structure based on
volume changes, should be evaluated as to whether it can be
changed from a fixed to a variable cost. Costs that are typically
subject to “restructuring” to a more variable cost characteristic
typically include all purchased and professional services. Zero-
based budgeting should be considered for each budget cycle.
In addition, a critical review of all policies and practices should
be conducted in an attempt to identify ones that unnecessarily
burden the organization or create unnecessary costs.
Managed Care Contracting: The health insurer is viewed
as having the data in the managed care contracting negotiation
process, making it difficult for the provider to optimize its posi-
tion in the negotiation because their arguments aren’t fact based.
It is more imperative than ever that providers consider investing
to capture information that supports their ability to negotiate a
fair payment rate based on the facts relative to costs and margins
under managed care contracts. Providers need to know their
real costs of care to negotiate payment because while you “get
what you negotiate” you need to know what you are negotiating
for and why.
Supply Chain: While clearly a time-tested strategy, some
current factors are enhancing the relevance of lowering supply
costs. Bundled episodic payments are an outcome of health
reform. This involves, for example, a single payment for an
inpatient stay, including the professional component. The incen-
tives for physicians will be aligned to pursue supply chain
improvements. Also, advanced supply chain process analysis
techniques are demonstrating enhanced improvements in this
area for providers who previously believed there were only nom-
inal savings still attainable. These techniques include refinements
in supply team selection, problem-solving techniques, measure-
ments and status reporting.
Other key actions that are being pursued include a renewed
focus on product standardization that can then add more leverage
to vendor contract negotiations as well as implementing more
caps for high-cost items; that is, the maximum price paid for a
similar product to any vendor.
Accounts Receivable Cash Acceleration: Experience suggests
that providers do not take advantage of some of the tools available
to increase the availability of cash. Even relatively small hospitals
3 Tr us t ee J une 2010
“A”
Credits
“B”
Credits
Noninvestment Grade
Zone of Insolvency
can generate significant increases in up-front cash collections
simply by knowing how much to ask the patient to pay at the
time of service. Most patients come to the hospital knowing that
they have to pay a portion of their bill. Enhanced software is now
available to assist registration and admitting in determining patient
co-pays in a real-time mode. Asking for the correct amount up
front can reduce future billing costs, reduce bad debts and poten-
tially increase cash without adversely impacting patient satis-
faction. In fact, patient satisfaction can be increased because the
wave of billings sent to patients following their care is dramatically
reduced.
Management and Governance: Turnarounds are not an easy
business. You not only need the whole organization with you,
but the process is not without pain and the risk of losing your
top-performing talent is real. It is incumbent on management
to engage the workforce in the turnaround and to reward per-
sonnel for their contribution to the turnaround’s success. Every-
one needs a sense of purpose, to feel ownership of the change
process and an understanding of the way forward. Not many
boards commit up front to sharing the turnaround’s economic
success with the employees. This commitment can result in
everyone helping to source ideas in support of improved financial
viability.
You can’t “deal” your way out of a crisis. It frequently requires
organizational discipline. Creating this type of culture is not the
enjoyable or glamorous part of management, but if it isn’t well
done, there will not be time to move beyond crisis to the strategic
and innovative aspects of managing a turnaround. Management
should make sure all leaders are vigilant in focusing on the
details and consistently reinforce with managers and associates
what their priorities are and the importance they play in achieving
the organizational goals. The board and management should be
prepared to make difficult decisions and once made, to stay the
course.
Physician Alignment: The future of health care is headed
toward greater physician integration. Some physician practices
want to be purchased by health providers. The turnaround’s suc-
cess can be enhanced by the involvement of the medical staff
and mechanisms to align the interests of the hospital, and the
physicians should be at the forefront of the turnaround effort.
It is imperative that physicians be involved in the build-out of
the turnaround strategies. Contemporary strategies in this area
include comanagement agreements and gain-sharing arrange-
ments.
The Way Forward
The financially distressed or at-risk provider should consider a
planning process that will achieve consensus on the provider’s
baseline financial performance given current environmental fac-
tors and strategic priorities. This baseline financial performance
should identify capital deficits and gaps in performance compared
with credit market financial benchmarks.
Next, the provider should develop a set of options, including
the vital strategies set forth above, to work toward achieving
sustainable financial performance. The scenario planning should
consider, where appropriate, combinations of options as well
as varying assumptions responsive to key planning variables
such as Medicare, Medicaid and managed care payment rate
changes, supply cost inflation and other similar variables.
Finally, a roadmap, based on the results of the scenarios,
should be developed to return the organization to sustainable
financial performance. The blueprint can address the risks and
related critical success factors to achieving the improved financial
performance and form the basis for the development of change
management strategies, including communication plans.
Sustaining the Change
Sustainability is always the critical question. Experience suggests
some actions that are often critical in this regard:
• Refresh the strategy on a regular basis. The market is dynam-
ic, and reform may well accelerate the changes that providers
need to implement.
• Focus on a limited number of service offerings; you may
not be able to be everything to everyone.
• Target solid margin generating services. Market share growth
doesn’t always mean profitable growth. The ability to cost shift
or obtain subsidies will likely diminish, so being profitable on
your own is important.
• Consider joint ventures, particularly where you believe ser-
vices are essential but sufficient scale is difficult to achieve.
• Quality of care and investments that directly support quality
should be the long-term plan. This supports your contracting,
branding, and physician retention and recruitment plans.
Crisis and Opportunity
While the financial crisis and recession impaired the financial
condition of many providers, it created the opportunity to step
back and rethink the business model. The disruption in the finan-
cial markets also made it imperative to be able to access credit
on the strength of the hospital’s own creditworthiness, not simply
through credit enhancements.
This is the time to embark on a journey of financial rehabil-
itation. It will take time and patience, but it can be accomplished.
The old adage of “no margin, no mission” is now “no financial
strength, no access to capital.” These strategies may help you
achieve the financial strength necessary to be able to access the
capital markets and therefore fund those needed investments as
you work toward achieving sustainable financial performance. ?
ROBERT CLARKE ([email protected]) is a partner with
Deloitte Financial Advisory Services LLP and national practice
leader for the Health Sciences & Government Industry, Chicago.
BRUCE BUCHANAN ([email protected]) is a managing
director with Healthcare Management Partners LLC, Phoenix.
4 Tr us t ee J une 2010
Original content published in the June 2010 issue of Trustee magazine, Vol. 63, No 2.
© 2010 by Health Forum Inc. All rights reserved. Permission granted for digital use only.
doc_599186823.pdf
For struggling hospitals, challenging the status quo may be the only way out of the zone of insolvency.
i ma g e f r o m i s to c k p hoto 1 Tr us t ee J une 2010
T
he negative impact of the 2008 financial market
decline and the 2008 and 2009 recession pushed
many hospitals’ financial condition into the
“zone of insolvency.” While no bright-line test
exists to determine when a hospital has entered
this zone, the evaluation involves a combination of legal and
financial tests.
At this stage, the hospital is neither fiscally sound nor in
bankruptcy proceedings. The American Hospital Associa-
tion’s August 2009 survey, The Economic Crisis: Ongoing
Monitoring of Impacts on Hospitals, reported that nearly
10 percent of hospitals surveyed indicated they had a bond
covenant financial default.
It is extremely difficult for these providers to access
BY RO B E R T CL A R K E A N D BR U C E BU C HA N A N
For struggling hospitals,
challenging the status quo may be the
only way out of the zone of insolvency
Turnaround
Strategies
capital through traditional strategies, such as bank loans, asset-
based lending, leasing or tax-exempt borrowing. They are
challenged to finance investments in new technology and facil-
ities, patient safety and quality, and new services and programs,
which are essential to address regulatory and commercial mar-
ket performance requirements. A “rehabilitation” of their bal-
ance sheets will be required, and it will neither be an easy nor
quick journey. Other hospitals whose financial condition is
stronger than those in the zone of insolvency may still be eval-
uated as noninvestment grade (typically considered as 80 days
or less cash on hand and a debt service coverage ratio of less
than 2.0) and may face similar access to capital challenges,
particularly access to tax-exempt borrowings. Health reform
legislation is expected to have a positive near-term financial
impact on hospitals, but it will not provide the financial relief
needed by highly distressed providers.
The response to this financial crisis depends on the specific
financial circumstances of each organization, but generalizations
can be made based on the institution’s financial position. While
many hospitals are embarking on a journey to rehabilitate their
balance sheet, others—including many who are enjoying their
best financial performance in recent years—are playing offense
by opportunistically acquiring distressed assets and investing in
markets where competitors are struggling to keep pace on access,
service and quality. Others are trying to determine their “sus-
tainable bet” strategy, identifying areas of clinical excellence
that will position them for long-term financial viability. The
chart on Page 28 depicts some of the typical responses by orga-
nizations based on their current financial wherewithal.
This analysis offers some perspectives
on turnaround strategies that we believe are
more important than ever to consider. While
the sense of urgency is greatest among non-
investment grade hospitals, these ideas are
applicable to all providers irrespective of
their current financial condition.
The status quo of all business models
should be challenged and providers should
reassess their strategies for continuing rel-
evance and likelihood of facilitating sus-
tainable financial performance.
Implementing innovative and dramatic
changes in operations, financing methods,
service lines, sites of care, and people and
governance will be essential to sustaining
financial performance and mission-driven
success. Health care reform will likely
accentuate this disruption and fuel the need
for strategic re-evaluation and change.
The Rehabilitation Journey
Providers should begin their accelerated
financial rehabilitation by making an honest assessment of their
situation and objectively answering tough questions such as:
• What is our hospital’s competitive position? What are the
realistic projected financial results under a “status quo” scenario?
• What is the level of financial performance improvement
needed to obtain access to capital? Is it achievable?
• What is the hospital’s range of options to achieve strong,
sustainable financial performance?
Not until these answers are known and explored will gover-
nance, management and other constituencies understand the
magnitude of the change required to position the organization
for sustainable financial success. Clarity regarding the require-
ments for success should begin to form, and a picture should
emerge about the level and type of change needed in the way
the hospital operates.
Creative Solutions
Today’s financial rehabilitation requires rethinking the usual
turnaround strategies and taking a more comprehensive per-
spective and approach to creating and implementing turnaround
solutions; thinking shouldn’t be limited to just financing tactics
such as debt modifications. Following are some potential turn-
around strategies for consideration. Some are tested but not fre-
quently implemented and others are more innovative and
emerging. While “one shoe doesn’t fit all,” each of these ideas
merits consideration. Each requires an open mind and a will-
ingness to not just accept the status quo. If a provider’s balance
sheet is to be rehabilitated to levels expected by creditors, a
serious evaluation of the following turnaround strategies should
be undertaken.
Financing Strategies: While the rehabilitation shouldn’t be
limited to financing tactics, providers should consider vigorously
pursuing certain financing strategies. In a turnaround, all aspects
of the business should be evaluated as a potential source of cap-
ital. Virtually all operating areas, both
direct patient care and infrastructure, can
be a source of capital accessed by entering
into financing arrangements. For example,
providers have entered into financial trans-
actions involving the lab, IT, physical ther-
apy, medical office buildings, the parking
garage and imaging.
The resistance to leveraging these assets
as sources of capital has typically been
loss of control; however, this risk can be
mitigated by service-level agreements and
termination clauses. Ceding financial con-
trol doesn’t necessarily mean ceding qual-
ity control and oversight. The search for
resources should not be encumbered by
historical precedent. Value exists all around
us. We just need to recognize its existence
and capitalize on its potential. The emerg-
ing view is that capital can be sourced from
all our assets, both tangible and intangible.
Stated differently, all assets should be in
play as a potential source of capital.
Another potential financing tactic is pursuing the development
of public-private partnerships around either key lines of business
or areas of operation. Perhaps strange bedfellows, but on an
increasingly frequent basis, private and public organizations
are coming together to form public-private partnerships to pursue
common objectives.
Commonly referred to as PPPs, these ventures infuse gov-
ernment capital with private market expertise. Formed through
the creation of special purpose entities, PPPs are much more
prevalent in other countries and U.S. industry sectors than in
U.S. health care. A blank sheet of paper exists for providers to
collaborate with the public sector and provide an expanded
source of capital and collectively address needs that will emerge
due to health care reform or current challenges, such as care of
the uninsured. President Obama called upon the public and pri-
vate sectors to enhance their dialogue around ways to better
collaborate. Some examples of potential public-private partner-
ship ideas that are emerging include:
• Emergency response network operations;
J une 2010 Tr us t ee 2
The status quo
of all business
models should be
challenged and
providers should
reassess their
strategies as to
continuing relevance
and likelihood
of facilitating
sustainable financial
performance.
TURNAROUNDS OR TAKEOVERS?
Proiders' responses to the recession depend on their financial condition and access to capital:
$ Pla#ing offense b# acquiring distressed assets
$ Making strategic inestments in IT, ph#sicians and serice lines
$ Focusing on operational e"cellence
$ Focusing efforts on cash and costs
$ Replanning capital priorities and allocations
$ E"panding financing options
$ Determining their focused %bet&
$ Restructuring b# ealuating asset o!nership and lines of business
$ Modif#ing debt
$ Seeking capital partner
$ Ealuating bankruptc#
• Information repositories to improve the quality of care and
lower costs;
• Programs to manage chronic diseases;
• Financing of replacement facilities; and
• Creation of clinics to provide low cost access to care.
Operations Strategies: Operational changes are usually a
primary driver of the financial rehabilitation. A wide variety of
strategies are being implemented across areas such as supply
chain, care coordination and management, fixed costs and con-
tracting.
Care Coordination and Management: One idea is to
improve the management of care through strategies such as
operating clinics to provide free care in lieu of uninsured patients
using costly emergency department care. Patients with non-
emergency care needs can be triaged to a clinic setting with
longer clinic hours to mitigate off-peak emergency room usage.
While not new, this tactic is underutilized. Each provider should
consider conducting an analysis of the net benefit of operating
a clinic designed to support the uninsured. Also, many providers
have entered the retail medicine area in an effort to reduce high-
cost ED utilization.
In a related vein, this cost benefit analysis should also evaluate
the merits of creating a care management process for the unin-
sured and others, such as patients with chronic diseases, who
frequently use the emergency room. These patients typically
require a disproportionate level of resources that can potentially
be reduced through care coordinators who follow up with the
primary attending physician to develop care plans designed to
reduce the utilization of services. This cost benefit analysis
involves modeling the cost of providing care to the uninsured
that could perhaps be avoided through enhanced care coordi-
nation versus the unfunded cost of the care expected to be ren-
dered in the absence of effective care coordination.
Fixed Costs: Providers should consider adopting a paradigm
that all costs are variable. Financially distressed providers should
view all costs as controllable and every cost should be evaluated
for its direct benefit to patient care and critically challenged as
to whether it adds value or just cost. Each cost pool, particularly
in those functions that don’t flex their cost structure based on
volume changes, should be evaluated as to whether it can be
changed from a fixed to a variable cost. Costs that are typically
subject to “restructuring” to a more variable cost characteristic
typically include all purchased and professional services. Zero-
based budgeting should be considered for each budget cycle.
In addition, a critical review of all policies and practices should
be conducted in an attempt to identify ones that unnecessarily
burden the organization or create unnecessary costs.
Managed Care Contracting: The health insurer is viewed
as having the data in the managed care contracting negotiation
process, making it difficult for the provider to optimize its posi-
tion in the negotiation because their arguments aren’t fact based.
It is more imperative than ever that providers consider investing
to capture information that supports their ability to negotiate a
fair payment rate based on the facts relative to costs and margins
under managed care contracts. Providers need to know their
real costs of care to negotiate payment because while you “get
what you negotiate” you need to know what you are negotiating
for and why.
Supply Chain: While clearly a time-tested strategy, some
current factors are enhancing the relevance of lowering supply
costs. Bundled episodic payments are an outcome of health
reform. This involves, for example, a single payment for an
inpatient stay, including the professional component. The incen-
tives for physicians will be aligned to pursue supply chain
improvements. Also, advanced supply chain process analysis
techniques are demonstrating enhanced improvements in this
area for providers who previously believed there were only nom-
inal savings still attainable. These techniques include refinements
in supply team selection, problem-solving techniques, measure-
ments and status reporting.
Other key actions that are being pursued include a renewed
focus on product standardization that can then add more leverage
to vendor contract negotiations as well as implementing more
caps for high-cost items; that is, the maximum price paid for a
similar product to any vendor.
Accounts Receivable Cash Acceleration: Experience suggests
that providers do not take advantage of some of the tools available
to increase the availability of cash. Even relatively small hospitals
3 Tr us t ee J une 2010
“A”
Credits
“B”
Credits
Noninvestment Grade
Zone of Insolvency
can generate significant increases in up-front cash collections
simply by knowing how much to ask the patient to pay at the
time of service. Most patients come to the hospital knowing that
they have to pay a portion of their bill. Enhanced software is now
available to assist registration and admitting in determining patient
co-pays in a real-time mode. Asking for the correct amount up
front can reduce future billing costs, reduce bad debts and poten-
tially increase cash without adversely impacting patient satis-
faction. In fact, patient satisfaction can be increased because the
wave of billings sent to patients following their care is dramatically
reduced.
Management and Governance: Turnarounds are not an easy
business. You not only need the whole organization with you,
but the process is not without pain and the risk of losing your
top-performing talent is real. It is incumbent on management
to engage the workforce in the turnaround and to reward per-
sonnel for their contribution to the turnaround’s success. Every-
one needs a sense of purpose, to feel ownership of the change
process and an understanding of the way forward. Not many
boards commit up front to sharing the turnaround’s economic
success with the employees. This commitment can result in
everyone helping to source ideas in support of improved financial
viability.
You can’t “deal” your way out of a crisis. It frequently requires
organizational discipline. Creating this type of culture is not the
enjoyable or glamorous part of management, but if it isn’t well
done, there will not be time to move beyond crisis to the strategic
and innovative aspects of managing a turnaround. Management
should make sure all leaders are vigilant in focusing on the
details and consistently reinforce with managers and associates
what their priorities are and the importance they play in achieving
the organizational goals. The board and management should be
prepared to make difficult decisions and once made, to stay the
course.
Physician Alignment: The future of health care is headed
toward greater physician integration. Some physician practices
want to be purchased by health providers. The turnaround’s suc-
cess can be enhanced by the involvement of the medical staff
and mechanisms to align the interests of the hospital, and the
physicians should be at the forefront of the turnaround effort.
It is imperative that physicians be involved in the build-out of
the turnaround strategies. Contemporary strategies in this area
include comanagement agreements and gain-sharing arrange-
ments.
The Way Forward
The financially distressed or at-risk provider should consider a
planning process that will achieve consensus on the provider’s
baseline financial performance given current environmental fac-
tors and strategic priorities. This baseline financial performance
should identify capital deficits and gaps in performance compared
with credit market financial benchmarks.
Next, the provider should develop a set of options, including
the vital strategies set forth above, to work toward achieving
sustainable financial performance. The scenario planning should
consider, where appropriate, combinations of options as well
as varying assumptions responsive to key planning variables
such as Medicare, Medicaid and managed care payment rate
changes, supply cost inflation and other similar variables.
Finally, a roadmap, based on the results of the scenarios,
should be developed to return the organization to sustainable
financial performance. The blueprint can address the risks and
related critical success factors to achieving the improved financial
performance and form the basis for the development of change
management strategies, including communication plans.
Sustaining the Change
Sustainability is always the critical question. Experience suggests
some actions that are often critical in this regard:
• Refresh the strategy on a regular basis. The market is dynam-
ic, and reform may well accelerate the changes that providers
need to implement.
• Focus on a limited number of service offerings; you may
not be able to be everything to everyone.
• Target solid margin generating services. Market share growth
doesn’t always mean profitable growth. The ability to cost shift
or obtain subsidies will likely diminish, so being profitable on
your own is important.
• Consider joint ventures, particularly where you believe ser-
vices are essential but sufficient scale is difficult to achieve.
• Quality of care and investments that directly support quality
should be the long-term plan. This supports your contracting,
branding, and physician retention and recruitment plans.
Crisis and Opportunity
While the financial crisis and recession impaired the financial
condition of many providers, it created the opportunity to step
back and rethink the business model. The disruption in the finan-
cial markets also made it imperative to be able to access credit
on the strength of the hospital’s own creditworthiness, not simply
through credit enhancements.
This is the time to embark on a journey of financial rehabil-
itation. It will take time and patience, but it can be accomplished.
The old adage of “no margin, no mission” is now “no financial
strength, no access to capital.” These strategies may help you
achieve the financial strength necessary to be able to access the
capital markets and therefore fund those needed investments as
you work toward achieving sustainable financial performance. ?
ROBERT CLARKE ([email protected]) is a partner with
Deloitte Financial Advisory Services LLP and national practice
leader for the Health Sciences & Government Industry, Chicago.
BRUCE BUCHANAN ([email protected]) is a managing
director with Healthcare Management Partners LLC, Phoenix.
4 Tr us t ee J une 2010
Original content published in the June 2010 issue of Trustee magazine, Vol. 63, No 2.
© 2010 by Health Forum Inc. All rights reserved. Permission granted for digital use only.
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