Strategic Partnerships Mergers and Acquisitions

Schuylkill Health Faces the Future by Changing its Course

November 10, 2016 9:49 am

Leaders spearheaded a major turnaround.

In 2008, two hospitals operating within a mile of each other decided to merge, creating Schuylkill Health—a 275-bed rural community health system. But the two hospitals never truly integrated and continued to operate as separate entities.

During that time, market forces put an incredible strain on healthcare organizations around the country—particularly community health systems. Schuylkill’s operating margin fell to -6 percent, and cash on hand dropped precipitously. In addition, patients were migrating out of the system at a worrying pace, and medical staff engagement was weak.

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By 2015, Schuylkill’s board of directors felt the urgency of the situation and during the next 18 months pursued three concurrent strategic paths.

  • A major turnaround operating plan
  • Campus integration for its two existing hospitals
  • Exploration of a possible strategic partnership

As the process evolved, Schuylkill added a fourth prong—a major financing to fund its campus integration plan and its strained near-term working capital needs. These major pursuits would keep even the largest healthcare systems with deep corporate benches busy, but Schuylkill had to move quickly on these goals with the resources of a small community hospital system.

Plan to Stop the Downward Spiral

Schuylkill engaged an outside turnaround consultant to achieve its goals. Significant improvement opportunities were identified in revenue cycle, workforce management, and clinical processes. As part of these focuses, the team worked quickly to make needed changes in the following areas.

Improving revenue cycle processes. The team increased point-of-service collections and cleaned up front-end billing claims cycle processes, resulting in improved back-end processing. In addition, a program was developed to finance patient account receivables and accelerate cash flow

Consolidating nursing units. Because patient volume was not a challenge, the team consolidated units, improved staff efficiency by funneling patients into fewer units, and reduced overtime and premium pay.

Reducing excess workforce numbers. In each cost center, new productivity targets were created and managers were taught to staff for productivity instead of staffing and budget. The team also created tools to track and monitor weekly productivity.

Reducing patient length of stay. Adjustments to care management processes improved patient discharge efficiency and more closely aligned patients with appropriate lengths of stay. Increased post-acute-provider coordination streamlined transitions into the community.

Significant improvements were achieved. But as volume pressures continued and as a result of Schuylkill’s limited cash and investments, more changes were needed.

Campus Integration Plan

As the turnaround plan was being developed, management, the board of directors, and outside consultants also focused on much-needed consolidation of the two campuses. When Schuylkill was formed in 2008 following the merger of Good Samaritan Regional Medical Center and Pottsville Hospital and Warne Clinic, a comprehensive rationalization of services across the two had never occurred.

To rectify this problem, the team embarked on an extensive integration plan that included the following steps.

Consolidating medical-surgical nursing units into one location. Inpatient volume was not enough to justify having two campuses. Inpatients could be placed on one campus at a more appropriate occupancy level.

Converting one emergency department (ED) into an urgent care center. The two EDs were combined into one facility’s ED, which was expanded to handle the volume that both EDs saw previously. The second ED was converted into an uurgent care center that captured necessary volumes and relieved the main ED of lower acuity cases.

Repurposing other clinical areas. The team condensed the operating room, imaging, labs, therapy departments, and other areas to gain further efficiencies.

This was an ambitious integration plan in light of the hospital’s lack of capital and resources.

A Partnership on Schuylkill’s Terms

As the hospital pursued major operating improvements and prepared for campus integration, the board of directors did not have the luxury of waiting to see the results. Consolidation across the state was booming, and neighboring systems had been adding hospitals in Schuylkill’s region during the prior 24months.

In light of Schuylkill’s challenges and its competitors drawing closer, Schuylkill launched a search for a partner with the help of an outside adviser, who worked closely with the board of directors and the interim management team. Schuylkill board members and physicians were educated on potential partners, structures, and the process that would follow. Over the ensuing nine months, Schuylkill thoroughly vetted options and partners, culminating in a definitive agreement to merge. But before getting there, Schuylkill had to find capital.

Much Needed Financing

Existing bondholders and lenders were keeping a close eye on Schuylkill and its debt covenants. Management and the board of directors faced pressure to abandon the campus integration plan. However, unless Schuylkill could achieve campus integration, further operating improvement would be impossible. Schuylkill, its advisers, and legal counsel worked with existing debt holders and other sources for a solution.

Ultimately, Schuylkill could not wait for completion of its merger; it filed the needed financing documents and directly placed debt with an investor to fund the integration plan. But that left the need to fund an urgent working capital shortage. After exploring options, Schuylkill was able to obtain, prior to closing of the strategic alignment, a commitment from its partner for a working capital loan to bridge its needs for closing the partnership.

The Result

In April 2016, Schuylkill announced an agreement to merge with Lehigh Valley Health Network, the largest healthcare provider in eastern Pennsylvania-based Lehigh Valley, with five campuses and more than 900 licensed acute-care beds, along with urgent care centers, clinics, and physician locations. Lehigh Valley is committed to building the Schuylkill medical staff, implementing an electronic health record that integrates with Lehigh Valley, and investing needed capital, among other activities.

This would have been the story of yet another community hospital merging with a larger system if it were not for the major performance turnaround effort, the campus integration, and two debt financings. This turnaround illustrates that community hospitals can proactively control their destinies and continue serving the patients who need them most.


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