Hospitals are constantly faced with challenges that require them to reassess how they deliver care to their communities. Continuous improvement is necessary as expense inflation consistently outpaces reimbursement gains. However, more fundamental issues threaten hospital fiscal viability such as payor mix deterioration, population or market share declines, and utilization changes. Amplify this environment with a difficult EMR installation and a “perfect storm” creates a fiscal crisis that necessitates a turnaround.
If covenants are breached, bond agreements often require an external and independent consulting firm that is engaged to help create and oversee the implementation of a turnaround plan. Otherwise, a CEO must make a value judgment on whether to outsource the turnaround balancing cost considerations with an honest assessment of (1) their management team’s bandwidth, and (2) ability to prepare and execute a turnaround.
There are multiple models for outsourcing a turnaround. In a complete outsourcing, an engagement letter with the “performance improvement” consulting firm would include an assessment phase and the preparation of a comprehensive plan that covers all areas of operations followed by implementation support services. The firm may require an on-site presence of one year or more to assess, validate, and assist in the implementation of recommended interventions. This can be effective, but the fees can easily reach seven figures even for modest community hospitals. In addition, even in a complete outsourcing there is still a major demand on the time of senior leadership. As a result, management sometimes chooses to limit the scope of a performance improvement engagement, which results in a partial outsource. The limitation may be to only outsource the plan development in the form of a report. This would detail the operational interventions and the implementation steps, but it would leave the heavy lifting of implementation to existing leadership. Alternatively, the scope may be limited by excluding certain areas of review. While there may be valid reasons for the latter approach, limiting the areas of review can be counterproductive to a turnaround plan because many issues are systemic such as patient throughput or revenue cycle. Further, restricting certain areas for review may create the appearance of “untouchables” or “sacred cows,” which should be avoided in a turnaround.
While the CEO should always be the ultimate leader of the turnaround, the CFO is indispensable in the process whether it is fully or partially outsourced or done completely in-house. These abilities are not always in the CFO’s skill set; some executives are most effective in a steady-state as opposed to a turnaround environment. The CEO will be relying on the CFO to demonstrate the following traits, which require a large degree of emotional intelligence:
- Delegate some responsibility to their lieutenants but communicate the financial imperative and manage overall execution of the turnaround
- Appropriately raise the alarm when progress is not being made. Too much alarm can be seen as crying wolf and too little can add to complacency.
- Do not be averse to confrontation but do not create it where it is not necessary. Only use the CEO for those most difficult situations where it cannot be avoided to ensure execution remains on point.
Human nature dictates that self-interest may compromise the CFO’s objectivity. There will be times when the best interest of the organization and the individual are in conflict. If the incumbent CFO is not up to the task, replacing them with an interim CFO with turnaround experience is a better option.
An experienced interim CFO in a turnaround situation has several advantages. First, it can afford the CEO the opportunity to underscore the urgency of the situation by making an example. The experienced interim CFO understands their primary role is to be a key asset in the execution of the turnaround. They are not there to make friends but to influence people (although the best ones do both). Because they are not angling for promotions or favor for future consideration from the board, they are apolitical, and their intentions are more transparent. Having been through turnarounds before, they possess the tools to assist the CEO and the board navigates the ups and downs. Perhaps most importantly, the interim CFO is in the best position to tell the CEO and the board things they may not want to hear such as the need to give up independence or consult bankruptcy counsel if the situation warrants.
Obviously, it is necessary that the hospital must continue to operate safely, securely, and legally during a turnaround. This can be a difficult balancing act, not just for the CFO but for all senior management. The CFO must continue to safeguard the assets of the organization. Likewise, other members of senior management must push back if a turnaround plan may imperil patients, visitors or staff, or violate the law. Consequently, it may be beneficial to bring in other interim C-Suite leaders who are able to effectively manage the multiple critical priorities during a turnaround in addition to, or instead of, an interim CFO. However, this must be carefully weighed against continuity of management and the organization’s ability to attract and retain talent. Senior management turnover creates stress on the organization and is ultimately a reflection on the CEO.
There is not a one-size-fits-all approach to creating and executing a turnaround plan. Outsourcing to consulting firms can infuse new ideas and analytical talent, but it is expensive and still often leaves management with the bulk of the responsibilities. Experienced interim management can add independence and objectivity to create a glidepath for execution.