Jump . . . or Get Pushed

Carrie Vaughan, for HealthLeaders Magazine , April 9, 2009
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The tough decisions you don't want to make now—but may have to.

It's not a time for nice leadership anymore. Those wimps belonged to an era when the Dow was at 14,000 and hospital margins were in the black no matter how wasteful the organization was. Managing growth when the capital was as easy to get as a Blockbuster membership? An MBA with a Blackberry could do that. Ah, those were the good ole days . . . of 2007.

Healthcare CEOs and their leadership teams have a whole new source of insomnia now—operating margins at half of hospitals are in the red, according to a survey from Thomson Reuters. Forget about borrowing money. Investment income is gone. Those wealthy donors who a few years ago were talking about new wings being built in their names are now in hiding. Then there is the spiral of increased unemployment leading to reduced benefits, more uninsured, more bad debt showing up at your door. Death spiral stuff.

Now is the time for hard leaders to make hard decisions. And the hardest decisions may not be the ones you think. Sure, it hurts to lay off people in administrative belt tightening, but its processes are well known and the organizational risk in this era is minimal. The hard decisions may be to grow needed clinical services now at the worst time or spend resources because future demand requires it. The hard decisions involve understanding that short-term survival mode means not coming out of the recession weak and unable to move for years.

Should we fire the CEO?
Is the CEO good enough for the times? It's not like anyone in this current generation of leadership or the one that preceded it has any experience leading through a downturn this severe. But trustees and boards are balancing the need for stability with the need to chart through to a better time. Firing a placeholder CEO is easier than ever. Firing one who is pretty good but may not be the right guy or gal for right now is excruciating.

"I've heard boards say that sometimes they need a wartime CEO versus a peacetime CEO," says Dan McKay, vice president of Eastern operations for QHR, a hospital management and consulting company based in Brentwood, TN. In difficult times, organizations may need a CEO who is more focused on operations and who can control expenses versus growing the market, he says.

But unless there is a sound business reason to do so, McKay cautions against changing leadership just for the sake of changing leadership. "Too many hospitals do that," he says, adding that supplemental resources like consultants can help hospitals get through challenging economic times. "When hospitals go through three CEOs in five years, it is hard on that hospital. There is no consistency. There is just a lack of direction," says McKay, who has been in hospital operations for more than 18 years, including two stints as a CEO.

Brian T. Shockney, president and CEO of Logansport (IN) Memorial Hospital, votes against changing leadership during a down economy, as well. Unless, of course, it's due to some disciplinary action or the hospital is in such dire straits that there is no alternative. "Every time you move a leadership position you have to rebuild, and in today's economy with what we are facing that just makes the future more uncertain for employees, medical staff members, leadership teams, and the community," he says.

Patients are already postponing preventive surgeries and screenings because of the economy and lack of health insurance. Changing leadership—especially in very small communities where the hospital is one of the largest employers—can create more uncertainty in the community and negatively impact the organization, Shockney says. It is no different than the banking industry where large organizations have had CEO turnover, he adds. "People are losing brand loyalty and they are losing faith in those organizations because of that turnover."

Firing a CEO is not free. Cost needs to be taken into consideration, says Ted Woodrell, CEO of Sparks Regional Medical Center, a 300-staffed-bed facility in Fort Smith, AR. Hospitals can spend two and half times the departing CEOs salary in severance and recruitment expenses, according to search firm estimates. Aside from the direct costs involved in finding a new CEO, hospital operations can also take a hit.

During the transition, the institution may lose focus operationally, or a new program may go off track. A 1% loss is not insignificant.

Still there are times when firing the CEO is necessary and delaying that decision can put the organization's future viability at risk. "In hard times, more often than not, we tend to delay and not move as fast as we should," says Woodrell.

Here are a few cues that new leadership may be warranted. A gradual slide in performance—especially if it can be traced back prior to the recession—may indicate a breakdown in certain fundamentals. For example, the CEO has failed to develop and implement action plans that have very specific goals, timelines, projected outcomes, and assigned responsibility. Or if the same problems keep occurring, that may be a sign that hospital leadership is not up to the task. It may also signify that board members are not receiving an honest picture of the hospital's operations.

If the CEO has a poor relationship with the medical staff and there is no sign it will improve, it is probably time for new leadership, as well. "There are some situations where it is a personality and style that is causing conflict," says McKay. The CEO's relationship with physicians is critical, because doctors are just as concerned about their income in this economy and they are increasingly sought by other hospitals, says John Siedlecki, senior managing director with Brentwood, TN-based turnaround and consulting firm FTI Healthcare. "There are a host of enticements to physicians and practices that can destabilize current relationships with other providers."

While many CEOs can manage in stable times or through some turbulence, far fewer can lead through extraordinary times like these. "Boards will be looking for the ability of their leader to adapt, plan, and execute plan," Siedlecki says.

When a hospital's performance is down, the CEO is often the first to be blamed. "[CEOs] are having to run operations at near-perfect efficiency in every respect to succeed in this tough environment," says Siedlecki. Yet, there are some factors out of the CEO's control, like unemployment rates, tight credit markets, and regulations. So when should the board stand by their CEO?

CEOs who can manage to a specific action plan and revise that plan based on market conditions will likely remain at the helm, says Siedlecki.

"If the CEO can look back and say, 'We've executed our plan and gotten the results we said that we were going to get, but other factors have occurred to cause us to revise our plan,' I think boards will be patient and understanding with the CEO," he says.

Should we cut services?
CEOs struggle to cut services for all of the right reasons. Namely, their organization has a commitment to the communities and patients it serves to provide the healthcare services that they need. Unfortunately, some services like long-term care, maternity, pediatrics, and community education programs are often money-losing endeavors and healthcare organizations can no longer keep them afloat. "If you can focus on expenses and eliminating services that are not core to the mission, now is the time to do it," says McKay.

"It is something that weighs heavily on your mind and it is not something that one would do lightly. As a result, we tend to be slower than we should be," says Ted Woodrell, who made the decision to close Sparks Regional's small skilled nursing facility this past year.

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