Ronald Schmidt
Gene Altus

Learn how some healthcare leaders are responding to the toughest challenges facing their organizations-and what you can do to help your organization succeed in turbulent times.

At a Glance

Challenges that most healthcare organizations face today include:

  • Falling bond ratings and the scarcity of capital resources
  • Delivery of consistently high-quality care despite budget cuts
  • Changes in payer mix due to unemployed patients, the uninsured, early retirees, and  an increase in patients postponing care
  • Increasing competition from nontraditional competitors
  • The need to prepare for healthcare reform without knowing what form it will take

"Even though our hospital is ranked as a top performer, with high productivity, low cost, and high quality, our profitability is in the tank because of high unemployment, increased physician competition, and a change in payer mix."
-Midwest health system CFO

Many health systems and hospitals are fighting for survival as a result of the current economic downturn and the increasingly complex, competitive healthcare environment. Healthcare organizations' bottom lines are affected by changing payer mix, reduced investment earnings, increased cost of capital, the payment crunch, increased expenses, and the lack of alignment with their most important customers: physicians.

To better understand what organizations are experiencing and how they are meeting the challenges of today's economy, 123 healthcare executives in hospitals and health systems across the country were interviewed to obtain their perspectives regarding the issues they face and their organizations' approaches and solutions to revenue enhancement, cost containment, and growth. Those interviewed included CEOs, COOs, CFOs, chief medical officers, chief nursing officers (CNOs), and business development and service line leaders.

The interviews identified several challenges faced by the majority of respondents that are affecting their organizations' ability to meet their mission and deliver services. In addition to the challenges described here, physician relationships were commonly cited as an important area of focus, with key challenges in this area being the need to sustain positive relations with physician practices amid today's turbulent times and the need to reconnect with primary care physicians. (Read about how organizations are responding to these two key challenges in this Web Extra). 

Challenge: Falling Bond Ratings and the Scarcity of Capital Resources

The investment funds that many organizations relied on to get them through hard times have lost value. Many hospitals have experienced a downgrade in their bond rating, further decreasing their ability to access capital. According to Standard and Poor's, the downgrade-to-upgrade ratio was more than 6:1 from October 2008 through March 2009, compared with 4:1 for CY08, with the key factor in 69 percent of downgrades cited as "significant operating losses and pressures" (The Impact of Investment Market Declines on U.S. Not-for-Profit Health Care Provider Ratings, S&P Credit Research, April 27, 2009).

The ROI for some capital projects has a longer payback period and lower rate of return, which further affects hospitals' ability to obtain the capital funds needed. Many executives surveyed indicated their organizations need an infusion of capital, with several organizations halting renovation and/or construction on major projects, and all being selective in their capital outlays.

Solution: Preserving cash will be critical to healthcare providers' ability to carry through the economic downturn. Organizations are prioritizing capital projects and asset allocation strategies and are considering alternative sources of capital by seeking answers from other industries. For example, many vendors in manufacturing and health care are willing to buy back major equipment and lease it back to the organization, thereby giving hospitals capital dollars for much-needed renovation projects, with the leased item becoming an annual operating expense.

One CFO indicated his hospital used an unbiased third party to perform a financial assessment and audit of the organization's revenue cycle and costs. This approach identified the financial ratios that impaired the hospital's bond rating. Based on the analysis, the CFO's team developed short- and long-term financial improvement plans to increase cash and address reimbursement, accounts receivable, cost containment, staffing, and the supply chain to support the organization's strategic imperatives for growth.

Respondents also reported they are moving to a service line structure and have developed business plans and financials for capital funding.  Integrated delivery systems benefit economically when their resources are properly used. Effective product line management requires that a baseline be established and growth targets set. Multiple means of fostering growth-encompassing market research and specific product line marketing-are essential.

"Integration of service lines has supported best-of-class clinical outcomes and higher patient and physician satisfaction that differentiate services.Clinical synergies between physicians and staff also result in greater value for the patient, the physicians, and the hospital."
-Service line administrator in the Midwest.

The administrative team at a hospital in the Southwest used service line reporting to support the recalibration of resources within the organization to optimize access, availability, value, and economic stability. Restructuring key service line management and operational structures reduced silos between the service lines and ancillary services, supporting the hospital's newly defined goals and objectives for growth. The financial results from this initiative later set the stage for an upgrade of the organization's bond rating.

Having a documented action plan that addresses ways to enhance revenue, cost containment initiatives, and operations can help organizations improve their bottom line and bond ratings. The critical component to sustaining financial viability is to monitor financial, operational, and quality performance while reengineering the revenue cycle, key programs, and services to reduce cost and improve staff utilization.

Challenge: Delivery of Consistently High-Quality Care Despite Budget Cuts

Cutting budgets for hospital services without taking into account and communicating the rationale behind such cuts and their impact can erode organizations' relationships with their physicians, staff, and communities.

Solution: Buy-in from stakeholders at all levels of the organization is essential to support the changes required during difficult economic times. Tracking performance milestones with accountability measures also is crucial.

To create a sense of shared urgency regarding the challenges faced and changes needed, a midwestern hospital's administrative team communicated to the board, medical staff, and employees:

  • Information regarding the effects of economic challenges on the bottom line
  • Identified solutions and a realistic timeline for achieving results
  • Rationale for cutting services and/or reducing staff, if needed

"By communicating proactively the situation, approach, and time line to the key stakeholders, we were able to implement the necessary reductions while minimizing impact on physician and staff relations."
-CEO of a hospital in the Midwest

One Eastern hospital created a budget for remaining profitable under worst-case scenarios, and then communicated the need to reduce complexity, costs, and capacity in select, low-margin areas to hospital leaders and clinical teams. This approach to marginal services was met with resistance by members of the medical staff and clinical teams who wanted to continue to provide high-quality marginal services. The hospital's financial team presented financial reports for these services to physicians and clinicians and discussed their findings. A steering committee of administrators, physicians, and clinical staff was formed to address worst-case scenarios. Today, this team is working to address recommendations for low-margin services.

Another organization's management team starts the day with a required operational meeting, wherein senior and mid-level managers communicate and discuss critical information from nursing, ancillary services, and support areas regarding bed availability, admissions, discharges, length of stay, surgical case load, emergency department visits, and other operational, financial, and quality indicators. These meetings ensure that daily operational decisions best support the need to curb and control expenses without compromising quality. In addition, nurse managers at the organization use daily operational metrics to support their staffing decisions and to monitor patient acuity, admissions, discharges, and nursing unit expenses by shift.

Challenge: Changes in Payer Mix and an Increase in Patients Postponing Care

Many of the leaders surveyed from midwestern and southern hospitals indicated that 12 percent or higher unemployment in their service areas had negatively changed their organizations' payer mix. Before the downturn, these organizations relied on patients having health insurance from local employers. They are currently experiencing an increase in self-pay and Medicaid patients due to layoffs. About 25 percent of leaders surveyed said their organizations' Medicaid percentage rose 4 percent or more. Hospitals in these service areas indicated although their volume was at budget, the change in payer mix had produced a significant budget shortfall in net revenue that was negatively affecting their bottom line.

Many patients who once had commercial insurance but who are now unemployed and uninsured are delaying healthcare services. Patients also are holding off on elective procedures because of higher copays.

The service line leaders surveyed indicated their organizations' financial reports were not timely enough to show how changes in payer mix have affected their margins. All of the organizations are pressuring their finance departments to provide timely reports to better manage net revenue and costs. Approximately 25 percent of the leaders surveyed had difficulty obtaining timely reports and communicating actual net revenue and direct cost by service line.

The survey also found that forecasted operating budgets were built on historical volumes and a payer mix that no longer applies in the economic downturn. Significant rate increases for utilities and other expenses, including labor, also had put stress on healthcare organizations' ability to deliver cost-effective, high-quality care.

Solution: Today, CFOs are recasting their budgets and adjusting staffing and expense levels to reflect reduced procedural volumes. Teams are identifying and analyzing variances to explain budget shortfalls and creating plans of action that prioritize the strategic initiatives required to maintain sustainability.

Several CEO respondents stressed that having an open and collaborative relationship with physicians is critical when adjusting hospital budgets and resources, as these changes will have implications for the physicians' practices and their patients. Many CEOs use a financial dashboard to help identify and communicate changes.

Challenge: Increasing Competition from Nontraditional Competitors

About 55 percent of the executives interviewed said their organizations are trying to maintain outpatient revenue by establishing satellite facilities that provide rehabilitation, imaging, and other ancillary services in response to community needs and competing pressures. Several CEOs responded that their outpatient services are an area of concern because their systems' outpatient and inpatient services are working in silos, contributing to unhealthy competition within their organizations. The increasing numbers of outpatient procedures being performed at outpatient satellites and freestanding centers are further eroding the hospitals' bottom lines.

Typically, physicians under 45 years of age are looking to be employed and search for the best financial opportunity that meets their lifestyle requirements. Physicians who want to remain independent are seeking income preservation through indirect compensation, access to ancillaries, and reductions in practice overhead. Physicians will align with organizations that can meet their economic and quality of life needs.

For-profit firms have become formidable competitors, with specialty services, convenient medical clinics, and other ancillary services that were traditionally provided by the hospital.

Solution: Approximately 20 percent of the CEOs surveyed commented that this is a time for growth as their competition hunkers down, concentrating only on managing cash and cost reduction during the economic crisis. Senior executives reported they are providing managers with a road map for strategic hospital/physician alignment that is easily communicated and that supports the hospital's strategic imperatives. These road maps are created with physician
leadership input, often with outside facilitation, and are designed to foster collaboration with the medical staff as well as educate physicians to ensure compliance in light of changes in Stark law and Centers for Medicare & Medicaid Services (CMS) regulations.

Several executives have countered their competitors through existing hospital/physician business ventures and comanagement arrangements. They have involved their primary care physicians and specialists in the development of patient-centric care models and clinical pathways to improve access and document clinical outcomes with best-of-class benchmarks. To ensure that service and quality will not be adversely affected by the changes, they created financial, operating, and quality dashboards by service line that included data on cost per case, utilization, procedure volume, length of stay, clinical outcomes, and other aspects of operational performance.

"Physicians are going to [collaborate] with someone; it is just a matter of time and with whom."
-Healthcare executive

Some organizations have built brand recognition and increased consumer awareness while strengthening their relationships with physicians by including physicians in the design of best-practice models. This approach has involved linking physician offices with hospital admitting and registration processes through an e-file, thus differentiating services from the competition and supporting the hospitals' growth initiatives.

Other strategies include:

  • Paid medical directorships and medical management service agreements to strengthen physician alignment and create a more collaborative hospital/physician environment
  • Comanagement of service lines or new programs with physicians to reengineer, differentiate, and brand services based on improved access, throughput, and patient satisfaction with documented high-quality, cost-efficient services
  • Steering committees by service line or program with paid physician consulting agreements to further develop clinical pathways and quality metrics

Many stressed they also are improving or have developed a rapport with physicians in their primary and extended service areas to better position their organizations to develop business ventures, grow market share, and obtain incremental volume to offset competitive threats.

Challenge: The Need to Prepare for Uncertain Healthcare Reform

One key healthcare reform strategy that CMS is considering is value-based purchasing. Medicare is transforming from a passive payer to an active purchaser of higher quality, more efficient health care. Strategies that have been considered and included in demonstrations include payment incentives, public reporting, and initiatives such as competitive bidding, bundled payments, global fees, and steerage. Finance reform will be one of the most effective methods of change, but it will require hospital and physician collaboration and possibly a new billing system to support global fees and bundled payments.

"I know I need to prepare my team and my hospital for healthcare reform; however, I have no idea what it will look like."
-CEO of a northern hospital

 Many executives believe quality and efficiency of care can be improved by changing how payment is made; however, many are concerned about the timing and the resources required in implementing reform programs.

Solution: Hospital executives report they are working with the American Hospital Association to track the new administration's healthcare reform initiatives. They are proactively pursuing physician partners to help shape and implement the changes that reform likely will require:

  • Reassessing strategies for growth and revenue
  • Identifying strengths and weaknesses within the current healthcare delivery model
  • Creating disease management models that are accessible, efficient, and cost-effective
  • Preparing to move aggressively to seize strategic opportunities

Executives are positioning their organizations for change during the economic downturn while anticipating the future healthcare delivery system. Some hospitals have formed steering committees to discuss how their organizations should prepare for the impact of reform. Key objectives are to strengthen hospital/physician collaboration, develop a game plan for reform, and establish goals to identify optimal ways to work together in implementing tough changes required under reform. Many hospital executives are evaluating participation in demonstration projects such as the CMS Acute Care Episode project.

Where Do We Go from Here?

The current economic downturn has many organizations on their knees: 80 percent of the hospital executives interviewed say they are in a retrenchment mode due to a lack of capital. Today's healthcare delivery system is fragmented, they say, and the payer system is keeping hospitals and physicians at odds with each other. Implement-ing meaningful change will take a team approach from all sectors of health care and the government. These executives believe it will take local and regional collaboration and support to sustain high-quality services and help hospitals remain financially viable to meet the needs of the communities served.

Ronald Schmidt is a principal, DMI Transitions, Brecksville, Ohio (

Gene Altus is administrator, Cleveland Clinic Cole Eye Institute, Cleveland (

Publication Date: Friday, January 01, 2010

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