M. Alexis Kirk
George M. Holmes
George H. Pink

Executives from 19 of the nation's top-performing critical access hospitals (CAHs), as measured by five key financial performance indicators, point to nine factors that they deem essential to a CAH's financial success.

At a Glance  

  • CEOs and CFOs of 19 critical access hospitals (CAHs) that achieved benchmark financial performance over three years were interviewed regarding the strategies they use.
  • The interviews identified nine success factors for exemplary financial performance that were common to all or most of the 19 hospitals.  
  • All of the participating executives agreed that other CAHs would likely benefit from applying these nine success factors.    

Communities across the nation depend on critical access hospitals (CAHs) to deliver essential care that, were it not for these facilities, would be extremely difficult for the communities' residents to access. The success or failure of CAHs therefore has far-reaching implications. To ensure the financial success of their organizations, CAH leaders should follow the example of those CAHs that have demonstrated exemplary performance.

To this end, we used benchmarks for five indicators of a CAH's financial performance to identify CAHs demonstrating the highest levels of performance:

  • Cash flow margin >5 percent
  • Days cash on hand > 60 days
  • Debt service coverage > 3
  • Long-term debt to capitalization < 25 percent
  • Medicare outpatient cost to charge ratio < 0.56

These indicators were drawn from the CAH Financial Indicators Report, an annual report developed by the Flex Monitoring Team to provide CAHs with comparative financial information that can help them achieve performance excellence (see the sidebar below).

Three years of CAH financial data (2006-08) from Medicare cost reports were analyzed to identify those CAHs that performed at or above benchmark on all five indicators for three consecutive years. Out of about 1,300 CAHs in the nation, only 32 were able to meet these criteria.

To learn about the financial and operational strategies that made these CAHs such a success, we contacted CEOs and CFOs at each of the 32 top- performing CAHs to participate in a phone interview. Ultimately, CEOs at 19 hospitals, and CFOs at 16 of these hospitals, agreed to participate, and interviews with all 35 leaders were completed between January and May 2011. We then aggregated, analyzed, and categorized qualitative data from each interview by type of strategy.

Exhibit 1


Strategic Success Factors for CAHs

From these interviews, we gleaned nine strategic success factors that were common to all or most of the 19 top-performing hospitals. The following discussion offers insight into the various ways these success factors are applied at the high- performing CAHs.

Educate and use the board. Every hospital leader interviewed acknowledged the board as an integral part in the success of their institution. Most attested to having "conservative" boards that have pursued "conservative financial strategies," defined commonly as minimal or cautious use of debt, not overbuilding plant, not using investment income to fund operations, and staying within budget. Many also mentioned that they take great care to ensure their boards are both knowledgeable and diverse.

At one hospital, when vacancies arise on the board, new board members are specifically recruited for certain skill sets and areas of expertise needed on the board. Several of the leaders mentioned the importance of having business people or those with a financial background playing central roles on the board. One CEO holds "mini-interviews" with potential board members to ensure they understand the responsibilities associated with being on the board and are dedicated to the success and vision of the hospital.

A few executives said that their organizations require new board members to undergo an orientation and mentorship program to help them adjust to their new roles and learn about hospital policies and philosophies from current members.

One CEO emphasized the importance of ensuring that board members understand the meaning of "not-for-profit" and the need for not-for-profit hospitals to provide services that are known to lose money because they fulfill an important community need. The leaders also emphasized the need for board members to understand what work life is like for physicians, including being on call and keeping abreast of new drugs.

In short, the executivess all saw board members as guiding decision making for the hospital and ensuring that all operational and financial decisions are congruent with hospital vision and mission.

Meet the needs of your physicians. Every leader mentioned physicians as an integral component of achieving financial goals, primarily through increased patient volume and hospital revenue. Primary care physicians, general surgeons, obstetricians/gynecologists, and orthopedic surgeons were the most frequently mentioned types of physicians sought by the hospitals. The CEOs and CFOs cited surgeons as being particularly important to a CAH's financial well-being. However, there was no consistent pattern in the types of relationships with physicians. Some leaders firmly believed that employed physicians and an integrated system is the path to financial success. Others said they could achieve similar financial performance working with physicians who are in private practice.

Many different types of strategies to recruit and retain physicians in rural settings were identified, the most common being competitive compensation and new technologies (such as 64-slice CT scanners) to keep physicians satisfied in their line of work. Supporting the training of physicians with ties to the community also seems to be a successful recruitment strategy for some CAHs.

One executive described a "grow-your-own" strategy for recruiting healthcare professionals to the institution. The hospital allocates a substantial amount of money as a line item in the hospital budget to provide scholarships to aspiring young healthcare professionals from its community. Other hospitals pay for medical, nursing, and technical students to attend school in hopes that funding part of their education would entice the students to return to the area after their graduation to work at the hospital.

In contrast to a "grow your own" strategy, one hospital recruits physicians that would have difficulty practicing in a larger, urban area-not because of quality issues but for credentialing reasons. One hospital uses its "family atmosphere" (a sociable community, family-friendly hospital policies, and supportive work environment) to attract physicians and staff to the hospital and community. Another hospital uses "values-based coaching" and "invisible architecture" to enhance organizational culture and to enhance the working environment for physicians and hospital staff.

Take strategic planning seriously. Several hospitals placed great importance on a comprehensive and regular strategic planning process. Leadership at one hospital never undertakes any planning alone; rather, a mix of board, medical staff, hospital staff, and different constituencies from the community drive the process. The CEO of this hospital commented, "Vision and mission statements don't come from the 'ivory tower' but from people who need to be included and have ownership in the organization. Communication, education, common vision, patience, trust, and understanding describe our strategic planning process."

Don't leave cash on the table. One executive encapsulated this idea, noting that although many CAHs tend to focus on cost and cost containment, revenue is an equally important area of focus. Most CEOs and CFOs interviewed mentioned pricing as an important factor in obtaining the most revenue for the services provided. Many of the hospitals had conducted chargemaster reviews within the previous five years, resulting in price restructuring that helped to increase revenues.

One CEO observed that CAHs tend to undercharge for their services, thinking that cheaper services will help increase patient volume and revenue. "Given the choice, I would rather be the highest charging hospital than the lowest because the perception of quality of care is a stronger draw for patients than price," the CEO said.

Other hospitals set prices about the same as those of surrounding competitors. One hospital's prices factor in commuting costs (gas, travel time lost) for patients to receive care at larger competitors.

Several executives mentioned the importance of paying attention to cost allocation used for Medicare cost reports. One uses a sensitivity analysis tool to assess the effect of changes in particular variables on the hospital cost report and payment for services delivered to Medicare beneficiaries. "For example," the executive said, "we look at the effects of expensing versus depreciating, breaking up depreciation into smaller components, and faster depreciation to see if it has a positive effect on cost reporting. If you have a choice of two or three different statistics, understand that the use of one over the other can make a difference in reimbursement."

Another hospital reported increasing revenue by paying close attention to the use of swing beds, including transferring high-need post-acute patients from skilled nursing beds to swing beds. Larger hospitals in its system also transfer eligible patients to the CAH to take advantage of the higher payment for swing beds.

Several executives mentioned that their hospitals had focused on revenue cycle improvements. They commonly contract with local collection agencies and consultants to look at the entire spectrum of revenue cycle activities: service documentation, claims production, claims submission, third-party follow-up, denials management, and claims denial. Some reported intensive efforts to improve the training and skill levels of coding clerks to ensure that delivered services are captured accurately, completely, and in a timely manner.

Look continually for cost-reduction opportunities. Most executives said ongoing, intensive, and comprehensive efforts to reduce costs were a key factor in their organizations' financial success.

One CEO emphasized that when it came to vendor pricing, everything was negotiable. The hospital's vendor list is reviewed by volume, and the top 20 vendors are contacted to negotiate pricing of contract rates, supplies, and capital assets. This type of negotiation had saved hundreds of thousands of dollars each year.

Among the other cost-reduction strategies mentioned were buying equipment rather than leasing, carefully assessing the need to replace staff who resign or retire, and cross-training staff.

Deliver services that the community needs and wants. Many executives noted that in small, rural settings, relationships with the community and service area are vital to a hospital's success. Many of the hospitals perform community needs assessments to identify service niches as a means to boost patient volumes and increase loyalty. Services such as colonoscopies, orthopedics, obstetrics, and general surgery in conjunction with up-to-date technology and equipment, such as 16-slice CT scanners, help to retain patients in the community and make the hospital a destination spot for patients. Some hospitals have also used telemedicine and telehealth as a patient-retention strategy. As one CEO stated, "You have to offer enough services to keep people in the area; if they leave for one service, they will eventually leave for other services, too."

As public entities, some hospitals can levy taxes on their community. Although some executives acknowledged that such taxes can be an important source of capital, others believe a more effective approach is simply to ask for donations from the community. Many mentioned traditional sources of hospital income, such as thrift stores and foundations, as important sources of operating revenue and capital.

Take advantage of network affiliations. Although most of the hospitals in the study are stand-alone not-for-profit hospitals, several have network affiliations that provide financial benefits. Executives at these CAHs cited many benefits of network affiliation or system ownership, including preferred access to tertiary care, referral relationships, market power when negotiating commercial insurance contracts, group purchasing of equipment and supplies, education programs for clinical staff (such as ICD-10), and access to capital.

One CEO observed that spreading the costs of patient satisfaction surveys, patient education, IT, consulting, and pharmacy over a system greatly expands the resources and expertise available to the CAH.

One CAH is the ophthalmology center for the entire system, serving as a regional referral center for system patients. The CAH was specifically chosen for ophthalmology because of the high proportion of Medicare patients and the low need for an intensive care unit and other postoperative facilities and equipment.

Some executives of freestanding hospitals said that voluntary membership in peer networks provides access to system resources with minimal investment and without ownership by another entity.

Exhibit 2


Communicate and hold people accountable. Most executives mentioned the importance of regular communication with medical and hospital staff and holding people accountable for achieving financial goals. Several meet monthly with each department head to review actual performance versus budget, identify important variances, and challenge the department head to be creative when coming up with solutions instead of "throwing money at the problem."

As one executive noted, "Decisions are linked to organizational goals, point people are assigned, targets and dates are assigned, and we follow up on a fairly frequent basis. Communication flows within the organization so folks are continuously reminded of progress toward strategic initiatives."

An interesting strategy that one of the executives employs is to quiz each department head about his or her monthly budget. Department heads are asked relatively simple questions, such as "Which expense is most over budget?" and "What's your operating margin?" This process continues monthly until the department head answers all of the questions correctly. This approach identifies gaps in financial skills, points to a need for additional training, and generally elevates the financial prowess of department heads.

Financially astute department heads are believed to have a greater sense of empowerment and autonomy and to be better able to solve problems without intervention by senior management. One CEO mentioned, for example, that when departments were allowed to manage their own staffing reductions during the summer, department heads could see for themselves that not as many staff were always needed, which reduced staffing costs during the rest of the year.

Hang on to good CEOs and CFOs. Obviously, this guidance is intended for CAH boards. CEO and CFO tenure was perhaps the most commonly mentioned as a key factor contributing to high financial performance because of its importance in ensuring the stability and success of the hospital. The executives suggested that high turnover among administrators and staff can stymie the overall growth and success of a hospital. Senior managers need time to develop community relationships, become familiar with the hospital operating reality, get to know the medical staff, and learn how to do the job.

A Benchmark Performance Checklist for All CAHs

The success factors described here are not intended to be an exhaustive list of all that is required for a CAH to achieve exemplary financial performance. Clearly, many other factors influence hospital financial performance, including a hospital's location, payer mix, and service mix. Nonetheless, the opinions of executives at hospitals that have demonstrated superior financial performance over time can be instructive to all hospitals. Indeed, none of the executives interviewed regarded his or her hospital circumstances to be unique, and none could think of reasons why their success factors could not also be success factors for other CAHs.

M. Alexis Kirk is a public health analyst, Health Care Quality & Outcomes Program, RTI International, Research Triangle Park, Durham, N.C. (mkirk@rti.org).

George M. Holmes, PhD, is director, North Carolina Rural Health Research and Policy Analysis Center, Cecil G. Sheps Center for Health Services Research, and assistant professor, Department of Health Policy and Management, University of North Carolina at Chapel Hill, Chapel Hill, N.C. (holmes@schsr.unc.edu).

George H. Pink, PhD, is senior research fellow, North Carolina Rural Health Research and Policy Analysis Center, Cecil G. Sheps Center for Health Services Research; Humana distinguished professor, Department of Health Policy and Management, University of North Carolina at Chapel Hill, Chapel Hill, N.C.; and a member of HFMA's North Carolina Chapter (gpink@email.unc.edu).



About the CAH Financial Indicators Report  

The CAH Financial Indicators Report is an annual publication issued by the Flex Monitoring Team (FMT), whose objective is to provide comparative financial information to critical access hospitals (CAHs). The FMT comprises Rural Health Research Centers at the Universities of Minnesota, North Carolina-Chapel Hill, and Southern Maine, which together are recipients of a five-year cooperative agreement award from the Federal Office of Rural Health Policy to monitor and evaluate the Medicare Rural Hospital Flexibility Grant Program. Congress created the program in 1997 to authorize licensing of small hospitals as CAHs and to offer grants to states for initiatives to strengthen the rural healthcare infrastructure.

The intent of the FMT's annual report, which was first issued in 2002, is to give CAHs an institution-specific document to monitor current financial performance and the tools to set performance goals. In addition to a comparison of a hospital's financial performance with peer group, state, and national medians, the report includes benchmarks for 21 indicators of a CAH's financial performance, five of which were used as a basis for identifying the 32 highest-performing CAHs referenced in this article. The benchmarks were developed from an online survey of CAH CEOs and CFOs as a way of providing high but attainable standards of performance that do not vary over time, as is the case with medians. Read the most recent CAH Financial Indicators Report, issued in August 2011.



Publication Date: Monday, April 02, 2012

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