May 17, 2006
Healthcare organizations do not get into trouble overnight. Problems mount over an extended period of time, frequently five to 10 years or longer. Successful turnarounds require leadership, resources, and well-executed and monitored plans.
The latest Financing the Future II report offers strategies to help financially distressed hospitals and gives examples of hospitals that have succeeded in turning around their difficult situations. The report was developed by HFMA in partnership with GE Healthcare Financial Services and Kaufman, Hall & Associates, Inc. The report includes the story of Crouse Hospital, a 556-bed facility in Syracuse, N.Y., which filed for bankruptcy protection in 2001 with debts of $91 million. By 2003, however, it emerged as a financially viable and still independent hospital.
A Hospital in Crisis
Although Crouse Hospital was well respected in its community, the hospital's problems were deeply entrenched, many of them dating to the 1990s. These included leadership decision making that occurred without proper financial analysis and input, high management turnover, heavy losses from acquired physician practices, and inadequate information systems and performance monitoring. Serious challenges for the hospital included faulty review of hospital charges, inadequate capital investment in a rapidly aging physical plant, and a poorly implemented accounts receivable system that had interrupted billings in 1999 for several months. Although annual depreciation was $8 million, the hospital could afford to invest only $1 million per year in its facilities.
The hospital's financial crisis also was evident in its rapidly deteriorated cash position, which fell to as low as two to five days cash on hand in 2001. Kimberly Boynton, now Crouse Hospital's CFO and on staff in 2001 as a finance manager, spent a lot of time on the telephone "making sure we could make the payroll, pay our debts, and keep supplies coming into the hospital."
With bankruptcy filing, the hospital hired accounting and legal consultants as well as the turnaround consulting firm of Speltz & Weis. The principals of the latter, Tim Weis and David Speltz, joined Crouse Hospital on an interim basis in spring of 2002 to assume the CFO and CEO positions, respectively.
The Keys to Success
Turnaround improvement initiatives focused on the following:
Board restructuring. The hospital's board declined in size from 20 to 12 directors.
Implementation of appropriate information systems. Technology was introduced to better monitor organizational performance.
Productivity and staffing. "We had to take a very significant look at our full-time equivalents per adjusted occupied bed and bring these down to industry standards," comments Boynton. Union wage increases of 8 percent to 9 percent were reduced to about 3 percent through concessions.
Debt restructuring. Crouse Hospital negotiated a five-year deferral of debt from secured creditors. "This process took a while but the deferred payment of principal was expected to save the hospital $12 million during that period," says Boynton. "This money could be reinvested in the facility."
Revenue cycle improvements. A revenue cycle improvement group ensured that the hospital was charging properly for procedures, performing reconciliations, and renegotiating payer contracts.
Supply expense reductions. Led by the director of materials management, a team standardized supplies and renegotiated supplier contracts to reduce expenses.
New contracts and capital equipment approval processes. All contracts, whether involving an emergency department renovation or an equipment service agreement, and all requests for capital equipment were required to be properly evaluated and reviewed by senior management. All directors attended biweekly (now monthly) responsibility reporting meetings to track and address budget variances covering volume, productivity, and expenses. "These meetings brought the directors together as a team," says Boynton. "No one had to hang out there on his or her own."
A Promising Outlook
Under the leadership of its new CEO, Paul Kronenberg, MD, Crouse Hospital has improved market share and continues to make financial and operational progress. Results to-date have been promising. The hospital has been "in the black" and ahead of budget for each of the two full years following Chapter 11 filing. Days cash on hand is now 60 (up from two days), and A/R days is 45 (down from 80 days). "Crouse has achieved marked improvements in physician and employee satisfaction, has been recognized by JCAHO and CMS for exceeding national standards in a number of clinical areas, and recently received the Greater Syracuse Chamber of Commerce Business of the Year Award," says Boynton.
SOURCE: Strategies for Financially Distressed Hospitals, the fifth report in the Financing the Future II series.
Additional Resources
If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble.
HFMA Wants You to Know ISSN: 1540-0697. Volume V, Issue 11. Copyright 2006, Healthcare Financial Management Association. All rights reserved.