Web Extra: Hypothetical Case Study: Metropolitan Health System
Daniel K. Zismer
Metropolitan Health System (Metro) operates a 450-bed and 100-physician integrated community health system in a competitive market that has 1 million people residing in the primary and secondary service area. The 100 employed physicians are principally primary care and hospitalists. Management estimates that 80 percent of its total hospital business is accounted for by approximately 280 physicians (including the employed primary care base).
At the conclusion of its last fiscal year, Metro reported a 2.5 percent operating margin and a 5.2 percent total margin. One of Metro's credit rating agencies confirmed an "A" rating with a "negative" outlook. The determinate of the "negative" and unstable outlook was a product of several observations that are related to the "quality of the earnings":
- The operating margin decreased from 3 percent last year to breakeven this year.
- There is growing concern over the stability and productivity of future investment markets (potentially affecting investment returns).
- Days cash on hand has declined to 110 from 130.
- Metro has a disproportionate reliance from two clinical specialties (cardiology and orthopedics), which are dominated by independent physicians in large group practices that are experiencing financial pressures and that also work at a competing hospital.
- Metro is looking to invest $100 million in a new bed tower, increasing its debt to equity ratio to approximately 58 percent, and management is recommending installation of a comprehensive electronic health record (cost undetermined).
- The owned primary care network is productive, but based upon the total cost structure and its contribution to total health system financial performance, the total operating expense inflation rate is exceeding real revenue growth.
- Although Metro has enjoyed the No. 1 position for its heart center, competition may erode its pricing power and volumes.
- The total staff wage and benefits inflation rate is now slightly greater than an estimate of the per-unit payment rate from key payers, especially the government payers.
- Last year's operating margin was inflated by a large amount of prior year cost report settlements.
In summary, despite outward strength in performance, a closer scrutiny into the quality of earnings by the rating agency discloses concern and potential enterprise risk. Management could restabilize earnings with a careful emphasis on strategy redesign in key underlying earnings drivers. An emphasis on strategy that strengthens alignments with key physicians is recommended, as is differentiation from competitors in key specialty services with strategies focused on access, quality, and disease management. The primary care base is to be maintained to ensure market access and patient direction.
Improvement of primary care operating results is feasible and recommended.
Daniel K. Zismer, PhD, is associate professor, Division of Health Policy and Management, School of Public Health, University of Minnesota; Director, ISP, Executive Studies Program; and managing principal, Essentia Health Consulting, city, state (firstname.lastname@example.org).
Steven Proeschel is head of the Healthcare Finance Group, and managing director, Piper Jaffray & Company, Minneapolis, and a member of HFMA's Minnesota Chapter (email@example.com).
Publication Date: Tuesday, December 01, 2009