The First Steps In Hospital Turnaround

While most organizations strive for continuous improvement, there are several reasons why a hospital might encounter financial deterioration. To meet these challenges head-on, fundamental changes have to be made. The operational efficiency of healthcare organizations is our primary concern and it is where our expertise and experience reside. HealthTechS3 can help you identify imperatives as well as provide resources for resolution.

With more than 20 years of healthcare industry and financial consulting experience, John Mallia (BSBA, MBA), a Colorado licensed Certified Public Accountant, shares our sentiment and in this blog he sheds light on the important role leadership plays in the turnaround process by identifying imperatives, communication strategies and the search for a strategic partner.

The First Steps in a Hospital Turnaround

A turnaround is broad term for an intense phase of recovery for an organization.  It requires fundamental changes to correct a sustained negative trend and is distinct from the budget crunch exercise many organizations endure annually.  For healthcare providers, a turnaround may be required after years of slowly declining performance that trips bond covenants.  Other providers may have a relatively sudden loss of key referring physicians or reimbursement that pushes profitability below required levels.   Although the term is mostly associated with financial, not all turnarounds are.  Many hospitals find themselves in a position where quality and safety trends have experienced significant and sustained deterioration and requires a turnaround.  While organizations strive for continuous improvement, they cannot exist in a perpetual turnaround state due to the level of intense resources required, most especially steadfast leadership and constant communication.

If the CFO has been effectively communicating, other senior leadership should recognize that a state of crisis exists. Often this happens when objective financial thresholds are crossed such as bond covenants for minimum profitability, cash or debt service coverage ratios.   Some undercapitalized hospitals who have been living on the edge may be tipped over by a change in reimbursement or a significant program or market share loss.  However, the turnaround itself can only happen when leadership identifies the imperatives and commits the organizational resources to their execution.

For financial turnarounds, these imperatives are operational interventions that require the full attention of leadership and first level of management.  The largest expense for any hospital is labor, and it always needs to be addressed in a turnaround.  Labor initiatives may only require an elimination of overtime and “flexing” to volume, but it usually requires a reduction in force to right-size the organization to match a reduced or shifted volume level.  Staff recognizes this is on the table, and it causes great anxiety.  Therefore, it is important to communicate what the imperatives are and how long it is thought to achieve them.  Be as honest as possible on the expected impact to staff by department.  In some cases, this may even work in management’s favor at it becomes a catalyst for some individuals to begin to look for alternatives to their current employment.

Transparency and visibility – values that viewed together look oxymoronic – are keys to effective communications by leadership during any crisis.  Visibility is important to avoid the appearance of hiding from issues or tough questions.  Conveying a sense of transparency enhances trust and allays the fear that the leader is holding back key information.  There are examples of organizations that try to “keep the lid on” financial distress so that the community and employees do not become  overly concerned.  Often the leaders that do this are later blamed for a lack of transparency.  Many leaders effectively utilize the town hall format, which is conducive to delivering consistent messages to be delivered from the top to every member of the organization.  This is especially useful in a hospital setting with multiple shifts; meetings can occur over the course a week at multiple times during each shift. Company-wide memos usually do not have the same impact and lack the necessary visibility of leadership though they can be used to supplement face-to face communications and provide updates during the turnaround process.

Equally important to how you communicate is to whom you communicate. We’ve already mentioned line staff in order to address potential staff reductions but there is also board members and bondholders.  A board should never be surprised and constant communication, on the minutes and off, regarding the turnaround is a must.   Hospitals are often the largest employers in town and, as representatives of the community, it is important that they are fully informed on potential reductions in force and why they may be necessary.  Individual board members are often approached by patients or employees with whom they have relationships.  In severe cases, vendors with whom the hospital is delinquent may try to reach board members directly to resolve their outstanding A/R if they feel they are being ignored by staff or management of staff.   Therefore, it is critical that they be armed with the approved message.

For stand-alone hospitals, turnaround efforts may coincide with the search for a strategic or capital partner.  Special board sessions may be necessary and executive sessions can be lengthy.  The board should be educated on turnaround terms such as “run-rate” and “burn-rate.”  They should not be expected to increase their depth of knowledge of hospital operations because of the situation, but it is the responsibility of management to make sure the board is aware of the outlook and larger implications of the turnaround efforts.  As soon as bankruptcy becomes a reasonable option, counsel should be identified and consulted jointly with the board.

Bondholders often have clauses in the indentures that require their involvement in a turnaround if bond covenants are breached.  This involvement might include their attendance at full board or finance committee meetings, weekly or monthly calls with management regarding turnaround process, and/or requests for turnaround plan details or projections.   In some cases, the bondholders can impose a consultant on the hospital to act on their behalf.   While this adds an increased burden to management, the bondholders and their consultants should be welcomed.  Treating them as adversaries is counterproductive.

Like everything else, all turnarounds must end.  While some conclude in closures, bankruptcies or acquisitions, successful turnarounds should be celebrated by the organization. If your organization is in financial stress and you need additional assistance from a third-party, please do not hesitate to contact John Mallia or HealthTechS3 at 615-309-6053 or click here.