Hang On

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A special issue to get you through the downturn and to forecast what the healthcare industry will be on the other side. Get ready for the failure of the HIT stimulus dream, episode of care contracting, the end of easy credit, and a public plan.

Talk of change in healthcare is dirt cheap these days. So many views of what the future in healthcare may hold come out in a single day, only to vanish before sunset. The industry is finally and deservedly finding itself under intense societal scrutiny, but it's hard to hear any wisdom through the shouting.

The natural defense is to sit back and wait for change to happen and react. This is healthcare—where risky bets get you buried, after all. Sit back, take care, save money, and wait it out.

But what if you shouldn't? What if the biggest change of all is that healthcare is "fundamentally" changing. Do the old rules about consolidation still matter? What if a public health plan is more than a political bargaining chip but the biggest game changer since Medicaid? Is your strategic and financial planning fast enough? If the marching order was "grow" in 2005-2007, "manage" in 2008-2009, are you ready for "risk" in 2010?

Finance in the Instant Decade
With the effects of the recession stretching well into the next decade, hospitals will need to reassess capital allocation and spending priorities.

Joe Fifer, vice president of hospital finance at Spectrum Health in Grand Rapids, MI, is pretty certain he's got the right systems in place to make strategic decisions on a dime. He's going to have to be. Between the capital markets disaster and the flood of uncertainty created around healthcare reform, he's operating in a business climate that has become downright hostile for hospital and health system finance teams trying to develop five- and 10-year forecasts, let alone quarterly plans.

Fifer says the $2.8 billion integrated delivery system that includes seven hospitals, a medical group, and an HMO, is operating very much in contingency mode these days. He, along with many of his colleagues, doesn't see this easing up anytime soon. One problem they face is figuring out how to make capital allocation decisions in an environment that looks different now than it did just six months ago. "The challenge for CFOs is, how do you make this multiyear forecasting process relevant on a daily basis?" questions Fifer.

"At Spectrum, we are making fewer annual capital decisions," he says, noting that in the past, typically before the start of the fiscal year leaders would have allocated roughly 80% of their capital for the year. This year, maybe $15 million out of approximately $58 million will be spent on projects out the gate, says Fifer.

Being nimble enough to make strategic decisions daily and hold onto cash longer may be the best approach as healthcare rides out this recessionary period, but imagine this scenario playing out over the next 10 years. It could. Some finance experts think we've seen interest rates fall about as low as they are going to go and that we are entering a time of increasingly higher rates reminiscent of the Jimmy Carter era. If that happens, borrowing will seize up, especially for the lower-rated organizations. The past year has taught that the industry is changing how chief executives do everything from setting budgets to accessing capital.

Thomas Dolan, PhD, FACHE, president and CEO of the American College of Healthcare Executives in Chicago, agrees that chief executives will need to be much more flexible and carry a short-term plan in their back pockets in the future. "You have to be prepared to make immediate changes in your direction given governmental or economic changes," says Dolan. It means doing contingency planning like Spectrum and a much more careful monitoring of operations. "Given the current economic environment, if something starts to go south, you have to pounce on it immediately or it can become a real drain on the organization," he says, especially when it comes to dealing with accounts receivable, bad debt, and the uninsured.

Fifer predicts capital allocation decisions are going to get even tougher if certain aspects of healthcare reform come to fruition. "If you believe that bundled payment or episode of care reimbursement models are in the future, man, we have a long way to go in terms of making adequate investments in information technology," says Fifer. "Add that to the current environment where we already have huge demands for more clinical technology and more facilities, and I think it will be fascinating to see capital allocation decisions into the future."

At the same time, chief executives will have to become creative once again in accessing capital. "Everybody realizes that everything counts now and you can't become over-reliant on any one funding source, whether it is for operations or capital construction," says Dolan. For instance, he says, in the past some organizations relied too heavily on stock market returns to supplement operating income or they ignored other sources for capital construction, such as philanthropy. "Hospitals will go back to the community much more now than in the past to ask for financial support for capital construction," he adds.

Not only that, but Fifer, for one, believes hospitals will have to move to an environment that is less dependent on an annual budget. He says Spectrum is creating a budget process more representative of the manufacturing world and basing it on set standards for expenses per unit of service. For example, he says, hours per patient day on a nursing unit is considered a unit of service. "We would like to be able to use that to ramp up and down our resources as those units of service change, not unlike what a manufacturing company does." But, he acknowledges, certain areas still have to be worked out. "So many things we do are not tied to a direct product we are manufacturing or delivering."

However, Fifer says, setting a static annual budget doesn't make sense anymore. "If we do just an annual budget, we are making decisions in February and March that are going to last for the next 15 months," he says, noting that Spectrum's fiscal year ends June 30.

For all the fear of the future, Dolan says some of these changes being imposed on organizations today are positive. "I remember the button that said: ‘Everything is important.' Well, we are in that era right now around the financing of our operations," says Dolan. For example, he says, there is a lot more emphasis currently on supply chain management. "Now we realize that is an important source of savings."

Todd Nelson, technical director, senior financial executive at the Healthcare Financial Management Association in Chicago and former CFO of Grinnell (IA) Regional Medical Center, agrees that going through such a time of unprecedented difficulties will leave its stamp on how executive teams approach financial planning. "Quite frankly, I think we have moved from hospital emergency preparedness from a disaster perspective to financial emergency preparedness," Nelson says, noting that this is forcing organizations to collaborate much more broadly from within. "It isn't that we haven't done it before, but we are seeing everybody do it and what is key is people are receptive to that change and collaboration."

Michelle Ponte

Complex Contracts
Payment reform does not mean a return to the IDS model.

When policymakers talk about the potential of healthcare payment reform, the examples that they use to back up their arguments usually involve citing the quality outcomes and low cost of one or a few of the nation's remaining integrated delivery systems. Such systems are vertically integrated and own not only hospitals and health plans, but also a variety of ancillary healthcare components like clinics, rehab centers, and nursing homes, for example. Such entities are tailor-made for taking responsibility for a continuum of patient care and control enough of the components to take responsibility for a "bundled" payment that covers a patient's overall health.

But these real-world examples are far from the dominant model in healthcare today. So if payment reform means bundled payments are meant to serve to reduce cost and waste, few healthcare entities are currently well-equipped to deal with such a system. That said, strategies to deal with comparative effectiveness research and bundled payments are likely to be key to the well-being of hospitals and large physician practices. As a result, the design of complicated contracts with other providers as well as strategies to determine the most effective treatment protocols will likely be the order of the day as healthcare reform takes shape.

Many hospitals have already ramped up their efforts to employ their own physicians, a hallmark of an integrated delivery system, and indeed, many might be better positioned to compete in a bundled system with an IDS model. But even dominant, high-margin systems probably don't have enough dry powder financially to build or buy the health plan element even if they wanted to. At the same time, ancillary healthcare services businesses are fair game, says Kathleen Henchey, a principal at Noblis Health Innovation, Falls Church, VA. As for health plan acquisitions or organic growth in that arena, "few of the clients we're working with are interested at all in doing that currently," she says.

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