With many deals delayed by the pandemic, 2020 turned out to be slower than anticipated for hospital mergers and acquisitions. But we’d expect the pace of mergers to quicken this year as health systems emerge from the winter COVID surge. The calculus centers on both strategy and security.
Having weathered the pandemic better than expected, many larger systems approach the market as opportunists, looking expand their reach and capabilities. And systems of all sizes are seeking scale to enable better access to capital and greater risk mitigation—now viewed as essential should they once again face a pandemic-sized shock.
As systems contemplate new combinations, they would be wise to learn from the high-profile combinations that fell apart last year. In our experience, many mergers are felled by the “social” issues: board seat allocation, leadership structures, or cultural mismatches. These types of challenges appeared to be behind the stalling of Advocate Aurora Health’s merger with Beaumont Health (which faced pushback from doctors and community stakeholders) and the demise of the combination of Intermountain Healthcare and Sanford Health (called off amid leadership turnover).
Any successful merger must not only present the financial rationale for partnership, but also make a clear case as to how a combined system will bring new capabilities that will improve care, access and experience for local consumers.
Expect scrutiny on deals to rise in the Biden administration with the likely confirmation of Department of Health and Human Services (HHS) Secretary nominee Xavier Becerra, who took a strict antitrust posture in reviewing hospital mergers and contracting during his tenure as California’s attorney general.
Lown Institute berates greedy pricing, ethical lapses, wallet biopsies, and avoidable shortages.
Greedy corporations, uncaring hospitals, individual miscreants, and a task force led by Jared Kushner were dinged Tuesday in the Lown Institute‘s annual Shkreli awards, a list of the top 10 worst offenders for 2020.
Named after Martin Shkreli, the entrepreneur who unapologetically raised the price of an anti-parasitic drug by a factor of 56 in 2015 (now serving a federal prison term for unrelated crimes), the list of shame calls out what Vikas Saini, the institute’s CEO, called “pandemic profiteers.” (Lown bills itself as “a nonpartisan think tank advocating bold ideas for a just and caring system for health.”)
Topping the listwas the federal government itself and Jared Kushner, President’s Trump’s son-in-law, who led a personal protective equipment (PPE) procurement task force. The effort, called Project Airbridge, was to “airlift PPE from overseas and bring it to the U.S. quickly,” which it did.
“But rather than distribute the PPE to the states, FEMA gave these supplies to six private medical supply companies to sell to the highest bidder, creating a bidding war among the states,” Saini said. Though these supplies were supposed to go to designated pandemic hotspots, “no officials from the 10 hardest hit counties” said they received PPE from Project Airbridge. In fact, federal agencies outbid states or seized supplies that states had purchased, “making it much harder and more expensive” for states to get supplies, he said.
Number twoon the institute’s list: vaccine maker Moderna, which received nearly $1 billion in federal funds to develop its mRNA COVID-19 preventive. It set a price of between $32 and $37 per dose, more than the U.S. agreed to pay for other COVID vaccines. “Although the U.S. has placed an order for $1.5 billion worth of doses at a discount, a price of $15 per dose, given the upfront investment by the U.S. government, we are essentially paying for the vaccine twice,” said Lown Institute Senior Vice President Shannon Brownlee.
Webcast panelist Don Berwick, MD, former acting administrator for the Centers for Medicare & Medicaid Services, noted that a lot of work went into producing the vaccine at an impressive pace, “and if there’s not an immune breakout, we’re going to be very grateful that this happened.” But, he added, “I mean, how much money is enough? Maybe there needs to be some real sense of discipline and public spirit here that goes way beyond what any of these companies are doing.”
In third place: four California hospital systems that refused to take COVID-19 patients or delayed transfers from hospitals that were out of beds.A Wall Street Journal investigation found that these refusals or delays were based on the patients’ ability to pay; many were on Medicaid or were uninsured.
“In the midst of such a pandemic, to continue that sort of behavior is mind boggling,” said Saini. “This is more than the proverbial wallet biopsy.”
The remaining seven offenders:
4. Poor nursing homes decisions, especially one by Soldiers’ Home for Veterans in western Massachusetts, that worsened an already terrible situation. At Soldiers’ Home, management decided to combine the COVID-19 unit with a dementia unit because they were low on staff, said Brownlee. That allowed the virus to spread rapidly, killing 76 residents and staff as of November. Roughly one-third of all COVID-19 deaths in the U.S. have been in long-term care facilities.
5. Pharmaceutical giants AstraZeneca, GlaxoSmithKline, Pfizer, and Johnson & Johnson,which refused to share intellectual property on COVID-19, instead deciding to “compete for their profits instead,” Saini said. The envisioned technology access pool would have made participants’ discoveries openly available “to more easily develop and distribute coronavirus treatments, vaccines, and diagnostics.”
Saini added that he was was most struck by such an attitude of “historical blindness or tone deafness” at a time when the pandemic is roiling every single country.
Berwick asked rhetorically, “What would it be like if we were a world in which a company like Pfizer or Moderna, or the next company that develops a really great breakthrough, says on behalf of the well-being of the human race, we will make this intellectual property available to anyone who wants it?”
6. Elizabeth Nabel, MD, CEO of Brigham and Women’s Hospital in Boston, because she defended high drug prices as a necessity for innovation in an op-ed, without disclosing that she sat on Moderna’s board. In that capacity, she received $487,500 in stock options and other payments in 2019. The value of those options quadrupled on the news of Moderna’s successful vaccine. She sold $8.5 million worth of stock last year, after its value nearly quadrupled. She resigned from Moderna’s board in July and, it was announced Tuesday, is leaving her CEO position to join a biotech company founded by her husband.
7. Hospitals that punished clinicians for “scaring the public,” suspending or firing them, because they “insisted on wearing N95 masks and other protective equipment in the hospital,” said Saini. Hospitals also fired or threatened to fire clinicians for speaking out on COVID-19 safety issues, such as the lack of PPE and long test turnaround times.
Webcast panelist Mona Hanna-Attisha, MD, the Flint, Michigan, pediatrician who exposed the city’s water contamination, said that healthcare workers “have really been abandoned in this administration” and that the federal Occupational Safety and Health Administration “has pretty much fallen asleep at the wheel.” She added that workers in many industries such as meatpacking and poultry processing “have suffered tremendously from not having the protections or regulations in place to protect [them].”
8. Connecticut internist Steven Murphy, MD, who ran COVID-19 testing sites for several towns, but conducted allegedly unnecessary add-ons such as screening for 20 other respiratory pathogens. He also charged insurers $480 to provide results over the phone, leading to total bills of up to $2,000 per person.
“As far as I know, having an MD is not a license to steal, and this guy seemed to think that it was,” said Brownlee.
“Colloidal silver has no known health benefits and can cause seizures and organ damage. Oleandrin is a biological extract from the oleander plant and known for its toxicity and ingesting it can be deadly,” said Saini.
Others named by the Lown Institute include Jennings Ryan Staley, MD — now under indictment — who ran the “Skinny Beach Med Spa” in San Diego which sold so-called COVID treatment packs containing hydroxychloroquine, antibiotics, Xanax, and Viagra, all for $4,000.
Berwick commented that such schemes indicate a crisis of confidence in science, adding that without facts and science to guide care, “patients get hurt, costs rise without any benefit, and confusion reigns, and COVID has made that worse right now.”
Brownlee mentioned the “huge play” that hydroxychloroquine received and the FDA’s recent record as examples of why confidence in science has eroded.
10. Two private equity-owned companies that provide physician staffing for hospitals, Team Health and Envision, that cut doctors’ pay during the first COVID-19 wave while simultaneously spending millions on political ads to protect surprise billing practices. And the same companies also received millions in COVID relief funds under the CARES Act.
Berwick said surprise billing by itself should receive a deputy Shkreli award, “as out-of-pocket costs to patients have risen dramatically and even worse during the COVID pandemic… and Congress has failed to act. It’s time to fix this one.”
In late November, Cliff Willmeng’s wife handed him a sealed envelope at their Minneapolis home “with some trepidation,” he recalled. He looked at the sender printed on the front: “Minnesota Board of Nursing.” Willmeng, a registered nurse, openedtheletter and read that the board was investigating his conduct as a nurse at United Hospital in St. Paul, from which he’d been fired in May. Clearly his license was at stake.
Willmeng was disappointed, but not surprised. He believes the review is due to his standing up for his own safety and that of other nurses, and for filing a lawsuit and union grievance against United’s parent company, Allina Health, after his termination.
He also thinks the investigation, like his firing, has been orchestrated to scare other healthcare workers away from reporting safety violations and concerns as the pandemic rages, and to make an example out of the former union steward.
The investigation is being led by a former Allina executive: “It feels meant to intimidate me,” he said.
Taking a Stand for Safety
Willmeng is a 13-year nursing veteran, husband, and father, who began working at United in October 2019.
When the pandemic hit late last winter, managers instructed nurses to use and reuse their own scrubs rather than hospital-issued scrubs. They were asked to launder their scrubs themselves at home.
Willmeng and others worried about bringing the virus home and pressed for the hospital scrubs. These scrubs were available, he said, and healthcare workers were permitted to wear hospital gear at Abbott Northwestern, another Allina hospital in Minneapolis.
In addition, while United managers told staff their laundering co-op could not keep up with demand for all the scrubs, the co-op denied that assertion, said Brittany Livaccari, RN, an ER nurse and union steward at United.
Willmeng addressed his concerns with management, filed state OSHA complaints, and enlisted the Minnesota Nurses Association (MNA). “He was taking action 100% to protect himself and to protect his patients,” Livaccari said.
But management did not change its policy, which was devised before the pandemic, and pointed to early-pandemic CDC and Minnesota Department of Health (MDH) guidelines — even when Willmeng shared emerging reports suggesting the policy was jeopardizing safety.
“It did feel like a pissing match,” Livaccari said. “We didn’t feel like we were being protected. … We weren’t being valued.”
Managers repeatedly wrote up Willmeng and colleagues who wore the hospital scrubs despite the policy. “It definitely felt like an intimidation tactic — ‘You’re going to do this, you’re going to follow these policies,'” Livaccari said. “A lot of staff chose to stop wearing those scrubs because they needed their job, they have families to pay for, they were afraid.”
Willmeng continued to wear the hospital scrubs. “I had to decide whether that policy was most important, or the safety of my workplace and public health and my family,” he said.
On May 8, the hospital terminated Willmeng. He said its stated cause was violating hospital policies regarding uniform code and a respectful workplace.
Two weeks later, the local nurses’ union held a rally that drew hundreds of supporters for Willmeng and blasted the hospital’s scrub policy.
‘I’m Not a Bad Nurse’
In June, Willmeng sued Allina for whistleblower retaliation and wrongful termination. The case is scheduled to be heard next August.
His union grievance is set to be arbitrated in January. He maintains his firing was not for “just cause” because United’s uniform code policy violated standard nursing practices.
Willmeng has been running the website WeDoTheWork, which describes itself as “worker-run journalism.” It’s an independent but union-affiliated publication that “unflinchingly tells our side of the story, and takes the fight to management.”
Willmeng is applying for jobs, but despite his experience, a national nursing shortage, and reports of severe understaffing as hospitalizations surge again, Willmeng has not even been interviewed by any of the roughly 20 medical centers he has applied to.
He thinks he is being blackballed. “I’m not a bad nurse,” he said.
The board letter cited these concerns: “On April 16, 2020, you received a written warning for not following the uniform policy,” reads one item, citing a report shared with the board. “On May 5, 2020, you were issued a final written warning for repeatedly violating policy. … On May 8, 2020, you were terminated from employment based on violating hospital policies, behavioral expectations, code of conduct, and not following the directions of your manager.” The letter asks Willmeng to respond to eight questions.
“This looks like it was taken right out of my HR file,” he said. The board will not reveal who reported him, citing confidentiality policies. But he is certain — given the detail in the letter — that it was Allina/United management.
The nursing board cannot comment on Willmeng’s review to protect confidentiality, said executive director Shirley Brekken, MS, RN. The board receives about 1,200 complaints annually and first determines whether a complaint would merit disciplinary action if true. If so, it launches a review.
Allina declined to answer questions via a spokesperson, citing the lawsuit. “We cannot appropriately retain employees who willfully and repeatedly choose to violate hospital policies,” according to an emailed statement. Throughout the pandemic Allina has been following CDC and MDH guidelines, “which do not consider hospital issued scrubs as PPE [personal protective equipment].”
“In the early days of the pandemic, our local and national supply chain was extremely stressed,” the statement continues. “Our practices are aligned with other local and national hospitals … and have enabled us to allocate the appropriate supplies for daily patient care and ongoing care for COVID-19 patients.”
But United healthcare workers still lack hospital scrubs and enough N95 masks, Livaccari said, and the hospital is severely understaffed as the patient load increases. “We hear, ‘It’s a pandemic. You have to do more with less,'” she said. “It’s a really bad situation.”
Retaliation and Intimidation
Some think Willmeng’s review was initiated primarily to retaliate against him, not to protect public health and safety.
“Hospitals, they want a docile workforce, they want a workforce they can control,” said John Kauchick, RN, a retired 37-year nursing veteran who advocates for workplace rights. They do so “by fear and intimidation,” he added. “A nurse’s number one fear is to be turned in to a board of nursing for anything.”
“If you’re a whistleblower and you speak truth to power, that will get you a disciplinary hearing even more so than if there is patient harm.”
The letter was drafted more than six months after Willmeng was fired, and after he filed the lawsuit and union grievance. Just before he received the letter, he was elected to the MNA board. The timing strikes Willmeng and Kauchick as significant.
“If you think there’s been a violation, you are supposed to report that in a much shorter time period,” Kauchick said. Kauchick thinks Allina filed the complaint as leverage, to persuade Willmeng to drop the grievance and lawsuit.
But Livaccari noted the process can take up to six months, and that every firing is supposed to be reported to the board.
Like Kauchick, she takes umbrage with the review’s leader: Stephanie Cook, MSN, RN, a board nursing practice specialist who spent 24 years as a director with Allina. She was a member of multiple Allina committees, including its ethics committee, according to reports. She was with Allina as recently as 2018. Brekken confirmed her employment with Allina, noting that it’s “a very large system.”
Regardless, that’s a conflict of interest, Kauchick and Livaccari said, arguing that Cook should not be part of the review. “It’s just so blatantly obvious. How are you going to look at this with an unbiased lens when you worked for the organization that says Cliff was in the wrong?” Livaccari said. “It’s so inappropriate.”
This is not uncommon, Kauchick said, noting state nursing board reviews are “really just designed to get rid of whistleblowers. It’s like a buddy system. They hire higher-ups from big hospital systems. It’s just incestuous.”
Brekken was aware of Cook’s background before a colleague assigned this review to Cook, she said, noting the board vets staff for personal involvement in cases. Brekken “might consider” removing Cook from the review given her connection to Allina, she said, but added: “Many individuals on our staff may have worked for a particular health system throughout their career.”
The board could throw out the complaint or take action. Such actions typically range from a reprimand to revoking a nurse’s license, Brekken said. A staff member and board member together will review the report and Willmeng’s response, but she said the board itself makes final decisions.
Willmeng is also focused on the grievance, which asks Allina to provide full back pay and reinstate him.
“I would not feel comfortable; I’d feel very anxious” going back, he said. “But I’m an ER nurse. I belong in the ER…. It’s important for a frontline healthcare worker to demonstrate that when they stand up and speak truthfully and assertively about working conditions and patient safety, that they can’t just be triangulated.”
His salary — about twice his current unemployment benefits — is also a draw, he acknowledged.
Meanwhile, he continues applying for other jobs. His life insurance cost doubled and his family switched to his wife’s lesser health insurance plan, he said. A fourth-grade teacher with a local public school system, her salary is the primary support for themselves and their two children.
Willmeng also just hired an attorney at $250 an hour to help him respond to the board letter. “It’s not something I take lightly,” he said. “There’s cause for real concern. That’s my nursing license, that’s everything.“
Horizon Blue Cross Blue Shield of New Jersey threatened to stop paying medical claims for about 14,000 employees of the Jersey City Board of Education, a lawsuit filed by the board alleges, according to NJ.com.
Horizon Healthcare Services, the district’s medical claim manager, planned to stop processing insurance claims Nov. 25 amid an ongoing dispute over payment, the lawsuit alleges. On Nov. 24, a judge granted a temporary restraint aimed at protecting the insured until Dec. 17.
The school board accused Horizon of not complying with lowering out-of-network rates and charging hidden fees, among other allegations, according to the lawsuit.
Horizon denied the allegations. In a statement to NJ.com, Thomas Vincz, public relations manager for Horizon Blue Cross Blue Shield of New Jersey, said: “At no time did Horizon ever threaten to terminate the [Board of Education]’s coverage and Jersey City Board of Education employees should know that their coverage has remained in place, uninterrupted, while we continue to work with Board staff to resolve the issues preventing them from paying the charges owed under their existing contract.”
The lawsuit was filed in the Hudson County Superior Court. Horizon has until Dec. 9 to respond to the lawsuit, according to NJ.com.
Sanford Health’s CEO Kelby Krabbenhoft is leaving the top exec role after almost 25 years, according to a Tuesday announcement from the Sioux Falls, South Dakota-based system, following controversial statements the outgoing CEO made about mask wearing during the coronavirus pandemic.
Krabbenhoft, who has served as CEO since 1996, sent an internal memo to Sanford’s 50,000 employees on Wednesday arguing wearing a mask would defeat its purpose, as he’d already contracted COVID-19 and was therefore immune for at least seven months, as first reported by Forum News Service.
Experts dispute, however, that people previously infected with the novel coronavirus are entirely immune, as the data is not yet definitive. Other Sanford executives sent an email to employees Friday recommending mask wearing and contradicting Krabbenhoft’s claims.
On the heels of the news, Sanford’s board of trustees and Krabbenhoft have now “mutually agreed to part ways,” according to the release. The turnover comes at an acutely crucial time for the major Midwest health system, as it signed a letter of intent last month to merge with Salt Lake City-based Intermountain Healthcare.
If the deal closes, the two would operate 70 hospitals and 435 clinics — many of which will be located in rural communities across the country — and insure 1.1 million people. The merger would form one of the nation’s largest nonprofit health systems with more than $13 billion in combined annual revenue. It’s expected to close in 2021, pending regulatory approvals.
While Intermountain CEO Marc Harrison is slated to lead the combined organization, Krabbenhoft was poised to serve as president emeritus. It’s unclear what the plans are now after Krabbenhoft’s exit.
Sanford, which operates 46 hospitals in 26 states, did not reply to requests for comment by time of publication.
Since Beaumont Health announced its intent to merge with Advocate Aurora Health in June, physicians, nurses and trustees of the Southfield, Mich.-based system have raised concerns about its leaders and the potential deal.
Below is a timeline of the news about the merger and subsequent complaints:
June 17:Beaumont Health announces it is in partnership talks with Advocate Aurora Health, less than one month after canceling a plan to merge with Akron, Ohio-based Summa Health. Advocate Aurora Health has dual headquarters in Downers Grove, Ill., and Milwaukee. The merger would create a $17 billion system with 36 hospitals. Beaumont has eight hospitals in Michigan, and Advocate Aurora has 16 hospitals in Wisconsin and 12 in Illinois.
July 22:News breaks that a no-confidence petition is being circulated by some physician leaders at Beaumont Health. Beaumont Health President and CEO John Fox and Executive Vice President and CMO David Wood Jr., MD, are targets of the petition, which cites concerns about the “imminent threat” of Beaumont’s merger with Advocate Aurora.
July 24: After concerns are raised by physicians, Beaumont’s board of directors pens a letter to employees voicing support of the potential merger and emphasizing it is not “selling” Beaumont. “Beaumont Health will continue to be a Michigan corporation with its own board of directors, leadership team and regional headquarters,” the board’s letter reads. “Stating anything other than this is simply factually wrong.”
Aug. 17:Beaumont confirms its board of trustees has agreed to delay a final vote on a merger with Advocate Aurora until physicians concerns are addressed.
Aug. 19: Details of a survey completed by 1,500 of Beaumont physicians are released. The survey, which asked physicians to agree or disagree with several statements, revealed a lack of confidence in the system’s leadership. Specifically, 76 percent of the physicians who responded to the survey said they strongly disagree or somewhat disagree with the statement “I have confidence in corporate leadership.” The survey also revealed that 70 percent of physicians said they strongly disagree or somewhat disagree that “The proposed merger with Advocate Aurora Health is likely to enhance our capacity to provide compassionate, extraordinary care.”
Aug. 20. A report details the results of a survey completed by a group of nurses at Beaumont. The survey reveals that Beaumont’s leadership has lost the confidence of 650 nurses, and they also are concerned about the planned merger.
Sept. 10: It is reported that former Beaumont Health board vice chair and trustee Mark Shaevsky sent a letter to Michigan’s attorney general calling for the firing of Beaumont’s CEO, COO and CMO. Mr. Shaevsky told Crain’s that patient safety concerns raised by clinical leaders have not been addressed, and he is frustrated that the board supports the proposed merger. He also calls for the delay of the merger. Mr. Shaevsky served on the eight-hospital system’s board for 17 years.
Huntington Hospital in Pasadena, Calif., has entered into a definitive agreement to join Los Angeles-based Cedars-Sinai Health System, roughly four months after the organizations signed a letter of intent to explore an affiliation.
The agreement calls for investments in 619-bed Huntington Hospital’s information technology, ambulatory services and physician development. Under the agreement, Huntington Hospital would be governed by a local board and its philanthropy and volunteer support would be locally controlled, the organizations said.
“On behalf of everyone at Huntington Hospital, we are all very pleased to have reached this important milestone,” said Jaynie Studenmund, chair of the Huntington Hospital board of directors, in a news release. “We pledge to work cooperatively with all the relevant parties and believe that this proposed affiliation is in the best interest of all of our stakeholders and the greater San Gabriel Valley community.”
The definitive agreement will now be submitted for regulatory review and approval. The review process is expected to take several months.
The U.S. Department of Justice is charging 10 defendants for an “elaborate” pass-through billing scheme that used small rural hospitals across three states as shells to submit fraudulent claims for laboratory testing to commercial insurers, jacking up reimbursement.
The defendants, including hospital executives, lab owners and recruiters, billed private payers roughly $1.4 billion from November 2015 to February 2018 for pricey lab testing, reaping $400 million.
The four rural hospitals used in the scheme are: Cambellton-Graceville Hospital, a 25-bed rural facility in Florida; Regional General Hospital of Williston, a 40-bed hospital in Florida; Chestatee Regional Hospital, a 49-bed facility in Georgia; and Putnam County Memorial Hospital, a 25-bed hospital in Missouri. Only Putnam emerged from the scheme relatively unscathed: Chestatee was sold to a health system that plans to replace it with a newer facility, Cambellton-Graceville closed in 2017 and RGH of Williston was sold for $100 to an accounting firm earlier this month.
The indictment, filed in the Middle District of Florida and unsealed Monday, alleges the 10 defendants, using management companies they owned, would take over rural hospitals often struggling financially. They would then bill commercial payers for millions of dollars for pricey urine analysis drug tests and blood tests through the rural hospitals, though the tests were normally conducted at outside labs, and launder the money to hide their trail and distribute proceeds.
The rural hospitals had negotiated rates with commercial insurers for higher reimbursement for tests than if they’d been run at an outside labs, so the facilities were used as a shell for fraudulent billing for often medically unnecessary tests, the indictment alleges.
The defendants, aged 34 to 60, would get urine and other samples by paying kickbacks to recruiters and healthcare providers, like sober homes and substance abuse treatment centers.
Screening urine tests, to determine the presence or absence of a substance in a patient’s system, is generally inexpensive and simple — it can be done at a substance abuse facility, a doctor’s office or a lab. But confirmatory tests, to identify concentration of a drug, are more precise and sensitive and have to be done at a sophisticated lab.
As such they’re more expensive and are typically reimbursed at higher rates than screening urine tests. None of the rural hospitals had the capacity to conduct confirmatory tests, or blood tests, on a large scale, but frequently billed in-network insurers, including CVS Health-owned Aetna, Florida Blue and Blue Cross Blue Shield of Georgia, for the service from 2015 to 2018, the indictment says.
Rural hospitals are facing unprecedented financial stress amid the pandemic, but have been fighting to keep their doors open for years against shrinking reimbursement and lowering patient volume. That can give bad actors an opportunity to come in and assume control.
One of the defendants, Jorge Perez, 60, owns a Miami-based hospital operator called Empower, which has seen many of its facilities fail after insurers refused to pay for suspect billing. Half of rural hospital bankruptcies last year were affiliated with Empower, which controlled 18 hospitals across eight states at the height of the operation. Over the past two years, 12 of the hospitals have declared bankruptcy. Eight have closed, leaving their rural communities without healthcare and a source of jobs.
“Schemes that exploit rural hospitals are particularly egregious as they can undermine access to care in underserved communities,” Thomas South, a deputy assistant inspector general in the Office of Personnel Management Office of Inspector General, said in a statement.
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.