Ingredients for a successful healthcare turnaround

Some of the most rewarding experiences in my three decades as a healthcare CFO and COO have come from being part of substantial financial turnarounds.

An organization’s ability to carry on its mission is severely threatened when it is losing money, and returning to sustainable stewardship (profitability) is essential. It’s been my privilege to be a part of five successful, sustained turnarounds. Each of these organizations were well into the red, and moved to solid, substantial profitability in one to three years.

In many “classic” turnarounds, a significant focus is reduction of FTE’s, renegotiation of physician contracts and decreasing cost of purchased services. While these can help in the short term, unfortunately they often don’t address the real issues and risk that the turnarounds are unsustainable.

What have I learned in five successful turnarounds?

There are four base elements that must exist for a turnaround to succeed:
• Senior leadership team alignment on the need for improvement,
• Organizational willingness to change,
• Diagnosis of what is broken and needs to be fixed,
• Strong turnaround plan and effective execution.
These are all multiplicative, meaning if any of these are at “zero,” an effective turnaround won’t occur. To ensure the turnaround is sustainable, it is important to fix things that are actually broken. One can achieve the same immediate result by laying off 100 employees, or by fixing a serious underpayment issue with one major payor. Fixing the broken underpayment issue produces the long-term lasting results.

Beyond these “musts,” my experience has shown the five most important parts of a margin improvement plan, in order of importance and dollar impact are:

1. Culture of accountability

Leaders at all levels have responsibility to take actions and make decisions that improve stewardship. Nobody gets to say, “I’ll just deliver great patient care, and someone else can make the stewardship work.” Every leader makes hundreds of decisions each year that can nudge finances in one direction or another. Financial impact shouldn’t necessarily trump every decision, but it must be considered. Many small lifts add up to a large improvement. Growing this culture will likely require new skills for many leaders, through formal education and individual coaching.

2. Effective revenue realization (correcting revenue cycle issues)

Traditional measures of revenue cycle such as “Days of Revenue in Accounts Receivable,” and “Cash Collections as a Percent of Lagged Net Revenue” are useful and should continue to be measured and improved. But even if these measures are in an acceptable range, without a deliberate, formal routine review of low yield accounts, it is likely that net revenue can be improved by 1-3% or more. There are over 40 processes that need to work perfectly every time for bills to go out accurately, allowing payors to pay properly. Building an internal, formal dedicated team to identify likely underpayments, tracking back to root causes and resolving them is the best way to pick up this 1-3%. Recurring patterns of issues are identified, and ad-hoc teams of operational department and revenue cycle staff can quickly resolve most issues at the root cause level, reducing or avoiding future underpayments. Outside consultants are often employed to rebill underpaid accounts, but rarely is there an effective information loop back to resolve the issues permanently.

3. Understanding service portfolio performance and growth

By carefully classifying each patient into one of 50-60 homogenous groups of inpatients and outpatients, and computing contribution margin (historical actual payment less allocated direct cost), a ranking of profitability is determined. On the high end, this analysis identifies 10-20 clearly profitable services (including some surprise “winners”). These should have active plans to grow volume and continue their success. On the lower end, there are likely to be seven to 10 services (mostly surprises) that don’t even cover their own direct costs. These each deserve a team to study them carefully, and to develop an improvement plan with positive changes to volume, revenue, and cost. In one case, a home care service losing almost $2 million per year was transformed to generate over $1 million profit annually through a mix of improvements. In another example, a newly added cardiac implant service was losing over $11,000 in direct cost for each patient. By making five changes to the revenue/expense equation, this service moved from being a financial drain to more than supporting itself.

4. Labor cost and productivity

Doing large layoffs (i.e. “let’s reduce by 45 FTE’s in the next 60 days”) is rarely the right thing to do and is usually not sustainable. It is often a generic response to an unknown problem. The three items above all address true problems that have eroded profitability.

Clearly, it’s important to manage productivity. Setting a long-term, ongoing goal of improving by 2-3% per year is likely necessary in today’s healthcare environment, but it must be achieved as waste is reduced and processes are streamlined, not by arbitrary or across-the-board reductions. Benchmarking can help but should not be used as an absolute defense for maintaining the status quo. When every leader is accountable for stewardship, productivity moves the right direction.

5. Non-labor expense management

There is generally good opportunity for reducing cost in supplies, purchased services, utilities, leases, and physician contracts. It is important to look at these holistically, ensuring that savings in one area don’t create an unintended cost increase or revenue reduction elsewhere. When the culture of accountability mentioned above is strongly in place, leaders naturally find these opportunities on an ongoing basis.

By paying careful attention to these key ingredients and maintaining the commitment to stewardship in all decisions, leaders make their organizations stronger and ensure enduring achievement of mission. A successful turnaround also promotes high levels of leader engagement and retention, helping to give the team well-earned confidence to approach any clinical or business challenge.

August 2018

Ron Benfield, FACHE
Millwood Associates
PO Box 284, Washougal, Washington, 98671

Author Bio:

Ron Benfield is President/CEO of Millwood Associates, an organization committed to helping hospitals strengthen their financial position to ensure sustainability of mission. Prior to founding Millwood Associates, Ron served as a senior healthcare executive for over thirty years, bringing skills in healthcare operations, finance, strategic planning, clinical service lines, managed care and revenue cycle. He has functioned as both Chief Financial Officer and Chief Operating Officer, in diverse healthcare markets in California, Ohio, Tennessee, Florida, Maryland, Oregon and Washington.

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