Avoiding the (Nearly) Inevitable

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The hospital turnaround business is booming.

The reasons why are as numerous as there are hospitals that hire turnaround artists. By the time many boards realize they’re not getting all the information about how well they’re doing financially from their chief executive officer or chief financial officer, it’s too late. That spells the end of the line for those administrators, thrusting boards into the unfamiliar position of finding a temporary administrator who will be honest with them.

One constant among the small percentage of CEOs and CFOs who aren’t sharing the right information with their board seems to be fear, according to those who frequently have to clean up messes that other senior leaders leave behind. Fear that if you shoot straight with the board, they’ll let you go, which is perceived as a bigger threat than slowly letting the hospital drift downhill financially. “Nonprofit administrators are rarely incentivized by operating performance,” says Guy Sansone, managing director and head of the healthcare industry group at Alvarez & Marsal, a professional services firm that sometimes works with troubled healthcare providers. His current client, St. Vincent Medical Centers in New York, is in bankruptcy protection and until recently faced the real possibility that it would be liquidated.

Sansone suggests that the big pensions many nonprofit leaders hold make them reluctant to suggest doing politically unpopular things that may jeopardize their standing among board members.

Best get over that fear, however, say many turnaround consultants, because St. Vincent’s notwithstanding, the days when administrators could keep quiet about poor performance are long gone. Many CEOs and CFOs are realizing the need for more detailed operational and financial dashboards for the board.

Management to blame?

Old-school CFOs may not take board education seriously. Such managers prefer to obfuscate rather than educate, says Sansone. “My frustration is that there is no triggering event in the marketplace to make boards and other fiduciaries drive results,” he says. “Boards are focused on community services, philanthropy, quality and whether the doctors are being treated well—not on driving financial results.”

Hospital boards, often made up largely of community leaders with little financial acumen, have historically been easily manipulated, says Hank Wells, a retired turnaround expert. Most recently with Navigant Consulting, Wells engineered a financial turnaround at the five-hospital University of Missouri Health Care in Columbia. “So many hospital boards get monthly what I refer to as ‘three accountants’ reports,” consisting of the income statement, balance sheet, and cash flow statement, he says. “There’s no detail. Each can be summarized to a large extent and can be easily misunderstood.”

He’s seen fear of political retribution keep both CEOs and CFOs from leveling with their boards about finances, but putting it off just helps those problems grow bigger. “CEOs and CFOs are often afraid of information,” he says.

Can’t handle the truth

Not all of the blame can be laid at the feet of senior management, however. Sometimes, the board just can’t handle money-losing reality because solutions to the poor financial performance might mean layoffs or cuts to services.

Sansone says St. Vincent’s board was operating under a false sense of security under administrators who weren’t sharing enough information for them to realize there were major problems before bankruptcy became the only option. Among other problems, unrealistic credit extensions by vendors allowed St. Vincent’s to appear to be on solid footing. But the information that would have set off warning bells wasn’t shared with the board, contributing to the near-death experience for the only Catholic community hospital left in Manhattan and a 19-month stint under bankruptcy protection with debts of close to $190 million (creditors should get about 80 cents on the dollar under the reorganization).

Get over yourself

Sometimes, it’s best to bring in experienced management consultants before the turnaround is needed, says the admittedly biased John Tiscornia, principal at Wellspring Partners Ltd., a hospital performance improvement firm in Chicago. The large majority of his business used to consist of turnarounds when the CEO and CFO had been ousted, he says, but now at least 40 percent of the time his people are called in to fix problems before they become too big.

Wells argues that sometimes the biggest hurdle boards and other senior leaders have to clear is the CFO’s fear of being blamed for problems that may be beyond his control. But if he keeps the ugly numbers to himself, he deserves the blame, Wells says. The most important characteristic of an effective CFO today, he says, “is not that he’s a good accountant, it’s that he is a good communicator of the data that’s important for his constituents to understand.”

That doesn’t absolve the board of its responsibilities, however. “If I were on a board or a member of the executive team, I would insist on getting data that show key operational information compared to benchmarks and to my peers,” says Wells. “Too many hospitals don’t do that.”

Philip Betbeze is finance editor with HealthLeaders. He can be reached at pbetbeze@healthleadersmedia.com.

11 key metrics to know

Turnaround experts are convinced that many hospital board members have a good grasp on goals like patient safety measures, community services, employment and how well doctors are being treated. Similarly, they realize the importance of such metrics on the hospital’s performance.

What board members often lack, however, is insight into what financial performance measures they should receive and how to gauge their importance in the grand scheme of running a hospital. John Nilsson, interim CEO of Community Medical Center Healthcare System in Scranton, PA, and a consultant with QHR Strategic Initiatives in Brentwood, TN, says senior leaders must be honest with board members about the key financial metrics that paint a picture of how the hospital is doing financially, at least every quarter. Here are 11 big ones:
  • Cash flow
  • Collections compared with billing
  • Debt service divided by capacity
  • Full-time equivalents per occupied bed
  • Supply costs as a percent of net revenue
  • Staffing costs as a percent of net revenue
  • Man-hours per adjusted discharge
  • Days cash on hand
  • Length of stay
  • Market share
  • Bond rating
He’s seen the aftermath of the obfuscation many CFOs have been guilty of—in some cases, taking over for executives who for too long played their cards so close to the vest that a turnaround was necessary. “Boards have to understand you have to have earnings to reinvest in infrastructure, and you have to make a margin.”

—Philip Betbeze




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