CHI, the second-largest Catholic system in the country, had a year-to-date operating margin of 0.8 percent in Nov. 2008, says Michael Rowan, COO and executive vice president of this 75-hospital organization, based in Denver. “We were on track to lose money on operations for the year,” he recalls.
The executive team decided to take strong action to initiate a turnaround, implemented in two steps. First, during the final six months of FY2009, which ended on June 30, 2009, the organization would carry out $120 million in reductions and move to an operating margin of 1.5 percent. Then during FY2010, which will end on June 30, 2010, CHI would find $130 million more in reductions and reach a 3 percent operating margin. Altogether, the organization would need to shed $250 million in expenses in just 18 months.
With less than six months left before the end of the full 18-month period, Mr. Rowan can already pronounce the turnaround a success. CHI reached its first goal for reductions and its operating margin most recently stood at 3.4 percent, well above the 3 percent goal. Looking forward to June 30, Mr. Rowan expects the organization will exceed the overall $250 million goal by $8 million.
7 steps to a successful turnaround
He credits the following seven steps for CHI’s remarkable turnaround.
1. Review markets with significant financial problems. CHI carefully reviewed subsidiary systems in markets where it has been losing money. For example, Saint Clare’s Health, a four-hospital Catholic system based in Denville, N.J., had been losing $20 million a year when CHI acquired it in April 2008. “We aimed to have it break even in two to three years,” Mr. Rowan says. Saint Clare’s systems of operation, such as its financial operations, will be replaced with CHI’s own standardized systems, creating savings of $6 million a year.
At the start of the turnaround, CHI’s Colorado subsidiary, 12-hospital Centura Health, was losing money for the first time in memory. Mr. Rowan says significant construction in the Denver area — eight hospitals in the past five years — made the market more competitive. CHI brought in a new leadership team at Centura and realized $19 million in bottom-line improvements.
2. Spin off hospitals that don’t fit into corporate structure. In 2008, CHI had almost 80 hospitals and 45 nursing homes spread out over 20 states but to provide strong financial results, it needed to have a strong presence in each of its markets. “Having only one hospital in a state or having a system that isn’t one of the top two to three in the market may not make sense because you don’t have market leverage,” Mr. Rowan says. “We looked at 10 of our markets and asked: ‘Are they being optimized by being part of CHI? Could they be successful in another organization?’ ”
Hospitals that did not fit this goal were transferred to other Catholic systems. A hospital in Joplin, Mo., went to the Sisters of Mercy in Nov. 2009, and three hospitals in Nampa, Ida., Ontario, Ore., and Baker City, Ore. are now in the process of going to Novi, Mich.-based Trinity Health.
3. Improve performance across all markets. Reaching the organization’s goal of a 1.5 percent operating margin within six months meant pinpointing what exactly should be cut. The national office met with each region monthly and recorded its findings using an IT tool listing year-to-date financial performance in every market. The tool showed how near each market was to reaching its target. “This helped us stay on top of potential problems,” Mr. Rowan said. In all, 3,500 full- and part-time jobs were eliminated, for a savings of $50 million in FY2009. In this way, the organization met and surpassed its goal for cuts in the first leg of the turnaround.
4. Make the national office more productive. The national office was a prime target for cuts because it was not a revenue-producer and “the goal was to add value to the markets,” Mr. Rowan said. But CHI executives were too close to the situation to determine what should go, so they hired Deloitte Consulting to do so. In a six-month, data-intensive process, Deloitte surveyors benchmarked each area and department in the national office against similar units in other organizations. They asked very specific questions, such as how much it costs to produce a payroll check. They even surveyed executives at the frontline hospitals to determine their satisfaction with the national office.
The national office cut $35 million in expenses in the first six months and it expects to reach a total of $90 million in cuts by the end of the fiscal year. Deloitte found opportunities for reductions in the benefit program, legal services, purchased services, clinical engineering and travel in the national office. It cut $6 million a year in travel alone, through such measures as switching to video conferencing. It eliminated four senior vice presidents and their teams, who were liaisons to the hospitals. In their place, a hospital CEO from each market talks directly to the national office. “This arrangement actually improved communications because the relationship became more direct,” Mr. Rowan says.
5. Create a centralized billing function. By moving billing functions from each hospital to a centralized place, CHI was able to implement more efficient best practices across CHI. “Our smaller facilities will benefit from top talent that they could have not recruited on their own,” Mr. Rowan says. Following up on that change, the organization is now focusing on better insurance verification and point-of-service cash collection at the hospitals and other providers. As a result of changes on the revenue cycle side, the organization saved $10 million in the last six months of FY 2009 and expects to generate an annual $50 million improvement.
6. Find savings in the supply chain. CHI was one of nine Catholic healthcare organizations running the Consorta group purchasing organization. Two years ago Consorta was merged into HealthTrust Purchasing Group, and since then CHI has realized $25 million in annual savings on supplies.
Finding more savings in the supply chain has been “a Herculean effort,” Mr. Rowan says. “We had to gather a lot of information, using data from our GPO, and review thousands of contracts.” On the supply chain side, CHI saved $12 million in the last six months of FY 2009 and Mr. Rowan expects to double that in the full 18 months. Next year CHI plans to focus on clinical resource utilization as a way to bring down the cost of supplies and length of stay.
7. Look to improve the revenue side. In the first phase of the turnaround, CHI focused on finding savings on the expense side, but Mr. Rowan says there are limits on how much an organization can cut without affecting quality. This year, CHI is focusing on the revenue side, such as improved billing and collections.
More financial pressures expected
Even though CHI is reaching its goals, Mr. Rowan does not think the organization can let up. “It’s going to be more difficult for hospitals going forward,” he observes. “The recession is not over. In fact, this year has been tougher than last year. Our levels of bad debt and charity care are up significantly since the summer of 2009.”
Mr. Rowan thinks many newly uninsured people have waited months before they sought care and are now arriving in hospitals as charity cases. Many of the newly unemployed transferred to federally mandated COBRA coverage, but this opportunity generally ends after 18 months and generous federal subsidies of COBRA insurance are due to stop at the end of the year.
On the provider side, Mr. Rowan thinks payors will introduce more restrictive measures, including withholding payments for medical mistakes and for readmissions. Payors’ move toward bundled payments, expected in the longer term, would pressure hospitals to create integrated organizations with doctors. “We are already moving toward an integrated organization and have been hiring more physicians,” Mr. Rowan says. “But it’s too early to figure out the best way to align physicians and hospitals in a payment system.”
At CHI and many other systems, investing in IT is going to be a significant expense. “We have a ways to go,” Mr. Rowan concedes. “We need to spend about $750 million on IT in the next four years.”
Despite all of these extra costs, Mr. Rowan does not believe hospitals will be able to negotiate higher reimbursements to make up for these expenses. “The negotiating advantage has shifted to the payors,” Mr. Rowan says. “Hospitals used to get rate increases of 5-10 percent. I’d be really surprised to get that today.”
Looking to break even on Medicare rates
In less forgiving times ahead, Mr. Rowan believes CHI will need to redouble efforts to provide high-quality, cost-effective care. “We would like to become even more efficient so that eventually we could break even at 5 percent below Medicare rates,” he says.
“We are not anywhere near that level but I believe we could get there,” he adds, noting that the turnaround the organization is now wrapping up is a good prelude. “What we have done with cost reductions thus far is more than just grab at the low-hanging fruit,” he says. “I think we have already moved midway up the tree. But the top of the tree is going to take a lot of work.
“It will take a different kind of work, too,” he adds. “It will involve managing clinical resources. It will involve choosing leaders who are capable of marshalling their clinical colleagues and instilling best practices.”
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