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In 2013, two health systems in suburban Chicago, Edward Hospital and Health Services and Elmhurst Memorial Healthcare, followed the national trend and merged. Thanks to the finance team’s 10-year track record of leading operational improvement efforts, the new health system has achieved significant savings in the first year of the merger.
Vincent Pryor, system executive vice president and CFO of the newly formed Edward-Elmhurst Healthcare—with annual revenues of approximately $1 billion from three hospitals and more than 50 outpatient clinics—discusses the role of finance in the integration.
On the newly merged system’s capital strategy in the first 100 days. “After the merger, we moved very quickly to refinance some fixed-rate, tax-exempt bonds with fixed- and variable-rate bonds for a savings of $3 million annually,” Pryor says. “In addition, we trimmed the number of banks we were using to back our bonds (from five banks to three banks) and reduced the overall cost of the letters of credit through private placements and replacement letters of credit.”
Prior to the merger, Elmhurst had been renewing its letters of credit year to year, he added. “We were able to extend that to five years for private placements and to three years for letters of credit. Down the road, this will eliminate a time-consuming annual task and give the finance team more time to focus on strategy.”
On moving to a defined contribution plan. “We inherited a defined benefit plan from Elmhurst that was more than $60 million underfunded,” Pryor says. “To limit the volatility of that balance sheet item, we froze the defined benefit plan and moved to a defined contribution plan.”
System executives took several steps to quell employee anxiety. “We chose to be very honest and upfront with the staff and invited them to attend several ‘state of Elmhurst’ meetings we hosted, where we spelled out our finances in terms everyone could understand,” Pryor says.
On their operational improvement process. “Each year, our senior leadership team establishes about a dozen initiatives that total approximately $15 million in opportunity,” Pryor says. “For each initiative, we set an annual goal and establish a project team leader, usually an up-and-comer who can drive the process. The team leader selects a multidisciplinary team that includes leaders in finance, clinical, and other areas.
“Some of the teams look at ways to improve top-line revenue through inpatient and outpatient growth, which is what makes an organization sustainable,” he says. “After all, you can’t expense your way to salvation. The teams also look at the quality of that revenue and how to enhance the revenue cycle through collections, managed care contracting, and other processes. These initiatives are focused on broad areas, but they are broad on purpose. We don’t want to restrict the teams as they look for opportunities.”
The health system also has teams focused on the expense categories, such as supply chain, benefits, and pharmacy. On the process side, some teams have worked on patient throughput in the OR and ED, discharge times, case management, and clinical documentation.
“However, our biggest wins typically come from the revenue cycle, inpatient and outpatient growth, and non-salary expenses because these categories are so broad,” Pryor says. “In the other areas, the opportunities tend to be more cyclical.”
On a biweekly basis, each project leader reports back to Pryor, the CEO, and other senior leaders, sharing any results and seeking executive-level assistance as needed. “This approach has been extremely effective,” Pryor says. “Over the past 10 years, we have achieved 90 percent of our goals on an annualized basis. Part of this success is the result of the natural competition that develops between the project leaders—and we use a scorecard to take advantage of that.”
Access related tool: Edward’s Operational Improvement Team Scorecard
On integration management. After the merger, health system leaders established a goal to identify $25 million in savings for FY14, with a focus on reducing costs in the supply chain, revenue cycle, insurance, and other areas (see the exhibit below).
“After nine months, we have achieved more than $31 million in savings,” Pryor says. “A lot of that success is the result of our history of operational improvement. We approach integration management the same way. Integration management is like operational improvement on steroids.”
Advice for other finance leaders in a merger. “You need to act quickly after a merger while still recognizing the different cultures in both hospitals,” Pryor says. “Even if you feel like your organizations will be a good fit, there will still be cultural issues that can derail your progress. And you need to decide early on who is going to lead so you have one voice determining the direction.”
Laura Ramos Hegwer is a freelance writer and editor based in Lake Bluff, Ill.
Interviewed for this article:Vincent Pryor, system executive vice president and CFO, Edward-Elmhurst Healthcare, Naperville, Ill., and a member of HFMA’s First Illinois Chapter.
This article is based on an interview and a presentation at the HFMA’s Capital Conference in Chicago in April 2014.
What do you think? Please share your thoughts in the comments section below. Alternatively, use the "inshare" button at the top of this web page to share this article and your comments on the CFO Forum’s LinkedIn board.
Publication Date: Tuesday, July 08, 2014
There are several comments about the steps to take after the merger. What issues need attention and/or focus prior to formal discussions about a merger or acquisition?Please discuss the time and energy that the parties invest and what might be done differently in the future.
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