Readers Respond: Trinity Health’s President on Bond Ratings

https://gisthealthcare.com/readers-respond-trinity-healths-president-bond-ratings/

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In last week’s edition of the Weekly Gist, I shared an exchange I’d had with the CFO of one of our clients during a meeting of their health system’s board of directors. The topic was the importance of the system’s AA bond rating to the board, and the impact that maintaining that rating might have on the strategic flexibility of the system. I wrote, “As big strategic decisions loom (shifting the business model, taking on risk, responding to disruptive competitors), it’s worth at least asking whether we’ve passed the time for “keeping dry powder”, and whether systems are being held back by conservative financial management.”

One of the true pleasures of our work at Gist Healthcare is engaging in an ongoing dialogue with our clients, readers, and colleagues across the industry. Shortly after sending out the Weekly Gist last week, we heard from long-time friend Mike Slubowski at Trinity Health. He shared his somewhat different (and much more informed!) view of the importance of bond rating to hospital systems, and was kind enough to engage in a brief Q&A over email to expand on his thoughts. We hope you’ll find his perspective as enlightening as we have.

 

Gist Healthcare: How do you think about financial strength for a health system? What characteristics and metrics are most important?

Mike Slubowski: Financial strength is ultimately measured by strong operating cash flow—is the system generating enough cash to cover expenses including debt service, fund depreciation, and to meet capital spending requirements? Operating margin, days’ cash, and leverage ratios are also important metrics of financial strength. We compare these metrics to published ranges from Rating Agencies on rating categories. Finally, what is the organization’s profitability or loss on Medicare? Is the cost structure of the organization (as measured by cost per adjusted discharge or similar metrics) competitive and attractive to payer and purchasers, or is it a high cost organization that’s been living off high commercial payment rates because of its market relevance? That will come back to bite them at some point in the not-too-distant future.  Finally, financial strength is simply a means to an end. In the case of not-for-profit health systems, our mission is to improve the health of the people and communities we serve. Are we using that financial strength to make a measurable difference for our communities? That question has to always be pondered.

In my opinion a system’s bond rating is very important. Our organization strives to maintain an AA rating

GH: How important is the bond rating, and the broader evaluation of the system’s financial outlook by the banking community?

MS: In my opinion a system’s bond rating is very important. Our organization strives to maintain an AA rating. While it is true that the interest rate spreads between, say, an AA and an A rating are small, the reality is that a positive financial outlook and rating from the rating agencies is a “Good Housekeeping Seal of Approval” for a not-for-profit health system. In most instances, acquisitions in not-for-profit healthcare are accomplished by member substitutions, and rather than cash changing hands, the entity being acquired agrees to merge because of future capital investment commitments made by the acquiring entity and their belief that the acquirer will bring economies of scale. They aren’t going to join a system if it has a weak credit rating, because they’d be concerned that the acquiring system wouldn’t be able to fulfill the capital investment commitment.

GH: What are some considerations you’d recommend to health systems thinking about “trading off” a strong bond rating to gain strategic flexibility?

MS: A difficult question, to be sure. First of all, it depends on your starting point. There’s a lot more risk in going from an A- to BBB rating than, say, an AAA rating to an AA rating. Second, it really depends on what strategic opportunities the organization is pursuing—are they opportunities within the wheelhouse of the organization’s leadership competencies? There have been a lot of providers that have ventured into other businesses, such as insurance, long-term care, physician practices and other for-profit ventures, and they have lost a lot of money because they spread themselves too thin and didn’t know how to successfully manage these different businesses. Does the opportunity provide more market relevance? Is the new opportunity accretive? Is there a solid business plan that gives the organization confidence that the new opportunity will be accretive within a defined timeframe? There are a lot of “hockey stick” business plans (i.e., up front losses that predict large profits in later years) that never deliver the desired results. So rating agencies and investors are always wary of these wildly optimistic business plans.

I’m not suggesting that organizations become so conservative that they don’t take risks on strategic opportunities—but it’s important to go into these new ventures with eyes wide open. I think it is important for health care organizations that have been acute-care focused to develop a continuum of services that grow cost-effective home-based services, primary care and other ambulatory services, as well as consumer-focused digital health solutions. They also need to develop clinically-integrated provider networks that are positioned to assume risk for cost and outcomes as payers shift from fee-for-service to value-based payment. Otherwise they will be one-trick-pony dinosaurs while the rest of the world around them is transforming and diversifying.

I’m not suggesting that organizations become so conservative they don’t take risks…but it’s important to go into new ventures with eyes wide open

GH: As health systems take on more risk (strategic, actuarial, operational), how can they best make the case to their financial stakeholders (bondholders, shareholders, public funders) to justify increasing risk?

MS: I think that historical track records are important. Does the organization have an experienced and competent leadership team? Do they recruit leaders with needed skills for new businesses? How has the organization performed with previous new ventures? Have they been able to adjust if things go south? Do their business plans include a sensitivity analysis with upside and downside potential, along with immediate actions they would take if performance does not meet the plan?  Does the opportunity improve market relevance and create a diversified portfolio and/or a continuum of services? At the end of the day, confidence in an organization and its leadership comes from their track record.

 

 

 

Envisioning a range of new roles for the health system

https://gisthealthcare.com/weekly-gist/

 

 

Over the past few weeks, we’ve been sharing our framework for thinking through the path forward for traditional health systems, as they look to drive value for consumers. We began by describing today’s typical health system as Event Health”, built around a fee-for-service model of delivering discrete, single-serve interactions with patients. We then proposed the concept of Episode Health, which would ask the health system to play a coordinating role, curating and managing a range of care interactions to address broader episodic needs. Finally, last week we shared our vision for Member Health, in which the system would re-orient around the goal of building long-term, loyalty-based relationships with consumers, helping them manage health over time. In this broader conception, the health system would curate a network of providers of episodes, and events within those episodes, and ensure that the consumer (and their information) moves seamlessly across a panoply of care interactions over time.

This week we bring those three, distinct visions for the role of the health system together in one framework, shown below. A couple of points are worth mentioning here. To begin, our view is that health systems face a fundamental choice over the near term: either begin to embrace the broader aspiration of evolving toward Episode Health and Member Health or become reconciled to the reality of a future as a subcontractor of events and being part of some other organization’s curated network. There’s nothing wrong with being a subcontractor, as long as your cost and quality positions allow you to win business and thrive. You might be the best acute care hospital choice in the market, or the most efficient surgery provider, or the best diagnostic center. But competition will be intense among those subcontractors and earning the business of those who coordinate episodes and control referrals will be increasingly demanding.

Most health systems have already begun to look beyond Event Health, investing in strategies that allow them to span the full continuum of care. Other systems have pushed even further, into the “risk business”—looking to become Member Health and take on the role of managing a consumer’s care across time. But contrary to common wisdom, this evolution does not require a binary choice. Systems are not moving “from one canoe to the other”; rather, most successful systems will play a combination of all three roles at the same time, in perpetuity. While it’s always worth evaluating whether others might be more efficient providers of some Event Health services (diagnostics, rehab, and so forth), most systems will want to maintain a robust base of providing Event Health, even as they embrace a more comprehensive role.

Finally, there is a space we describe as “Beyond Health”, which comprises all of the additional components of consumer value delivery which may be beyond the ability of most systems to handle on their own. Most notably, these include services that address many of the social determinants of health—housing, nutrition, transportation, and the like. Our recommendation is that health systems look to partner with other organizations at a local and national level to address issues that, however critical, lie beyond their ability to fully solve on their own.

Next week we’ll begin to share some additional implications of our Event-Episode-Member Health framework and discuss the operational challenges that face health systems looking to make this evolution.

Take off your clothes?

https://interimcfo.wordpress.com/2018/08/30/take-off-your-clothes/

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Abstract:  This article takes a look at the role of culture in organizational performance.

It has been a while since I have written for my blog.   I’ve been a little busy on an engagement that has taken a lot of my time.   One of the most challenging aspects of working with organizations in transition is dealing with culture.   I have written a lot about culture in my blog and it continues to be one of the most vexing aspects of leadership and Interim Executive Consulting.    The following story is true and it happened almost spontaneously.   I now use this experience to make a point that people will remember about how they allow their cultural limitations to limit their capability.

I was listening to a group of managers debating the hospital’s preparedness for a regulatory survey.   Concern was being expressed about the fact that there were multiple known deviations from standards.   The longer I listened to this, the more frustrated I became.   At the breaking point of my patience, I stood up and said, “OK, that’s enough.”  “Everyone in the room, take off your clothes.”  The shock and awe were palpable.   People sat staring at me as they tried to comprehend what they had just heard.   I said, “I’m serious.   Everyone.   Take off your clothes right now.”  My audience was dumbfounded.   I suspect some of them were wondering if the psychiatrist was in the building.

I said, “Let me ask you folks a question.   If I continue to press this point, my prediction is that at least one of you will take the position that you will not take off your clothes.   You will refuse to do this because you have modesty, morals, ethics, decency and or religious convictions upon which you will base your refusal.”  My question was, “If you have standards that prevent you from taking your clothes off when all that is involved is a simple violation of modesty, how do you rationalize having knowledge of regulatory deficiencies in your areas of responsibility and not having done enough to resolve them when patient safety may be compromised?”  Remember the movie, ‘A Few Good Men?’  Tom Cruise asked, “Can you explain this?”

And so, I had another head-on collision with entrenched dysfunctional culture.   Several years ago, I had the privilege of doing work with Northside Hospital in Atlanta.   Northside’s culture as it relates to regulatory compliance is very simple:  Every department is expected to operate 100% compliant with applicable standards 100% of the time.   As a result, a compliance survey is or should be a non-event at Northside.   This is dramatically different from the culture in other hospitals I have worked in that go through episodes of horror when they are in the survey window and word comes that surveyors have been spotted in the next town.   These hospitals have a culture that says it is OK to have a laissez-fair attitude and approach toward regulatory compliance until they think they might be surveyed.  Then there is a mad rush to get into compliance.

I told the leadership team that the Board of Trustees had decided to commit the hospital to applicable accreditation standards.   Therefore, the question as to whether or not managers are expected to follow regulations is off the table.   Anyone that does not agree with this position of the Board should ‘punch the clock and get over the hill,’ as my dad would say.   I went on to tell the group that in deciding to comply with regulatory standards, the Board had a reasonable right to expect that the standards were being followed on a continuous basis and not just when the hospital was in the survey window.

I told the group that I needed a volunteer, someone that could explain to the Board if the survey turned out as bad as they predicted, how the organization had developed a culture of tolerance of areas of non-compliance with so many standards.   To my chagrin, I did not get a volunteer.   I told the group that this depressed me so much that I was going to go to the store, buy a bottle of wine and drink the whole thing, I was then going to bring the bottle back to the next meeting and use it to play spin the bottle to determine who the spokesman from the group to the Board would be.  I then exited the room.

Over the next couple of weeks, the leadership team of the organization responded admirably.   There was no need to go back to the meeting to play spin the bottle.   Every manager of every department went to work, around the clock in some cases to bring their areas into compliance with regulations.   Sure enough, in less than two weeks, the surveyors showed up.   The hospital had one of the best if not the best surveys in its history.

Was this result due to me making a speech?  I don’t think so.   All I did was challenge the hypocrisy of a dysfunctional culture that in some cases could potentially jeopardize patient safety.   What changed was that a group of managers decided independently that they were no longer going to be associated with substandard compliance in their areas of responsibility.   There is a one-liner that states that “You don’t have to move all of the cattle to change the direction of a herd.   All you have to do is to change the direction of the lead steer.”  Peer influence in an organization is extremely powerful.   This is what led me to redefine my own  understanding of the word ‘culture.’  Webster defines culture as the beliefs, customs, arts, etc., of a particular society, group, place, or time: a particular society that has its own beliefs, ways of life, art, etc.: a way of thinking, behaving, or working that exists in a place or organization.   I define culture as the lowest level of excellence a group will accept as tolerable and normal.   Groups in my experience do a very good job of enforcing the culture of the organization on their peers for better or worse.   When a group decides to hold itself to a higher level of performance or rejects the mediocrity that has held it back, its performance improves measurably.

So, I conclude with questions for you.   To what degree are you being limited by the culture that is surrounding you in your present situation?  What are you doing to change the culture?  Do you have the support you need to get the culture from where it is to where it needs to be?

Remember my challenge to take off your clothes.   Give some thought to where you will draw the line when it comes to the level of mediocrity you will accept and tolerate.

Please feel free to contact me to discuss any questions or observations you might have about these blogs or interim executive services in general.  As the only practicing Interim Executive that has done a dissertation on Interim Executive Services in healthcare in the U.S., I might have an idea or two that might be valuable to you.  I can also help with career transitions or career planning.

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If you would like to discuss any of this content or ask questions, I may be reached at ras2@me.com.  I look forward to engaging in productive discussion with anyone that is a practicing interim executive or a decision maker with experience engaging interim executives in healthcare.

Temple University Health System hires restructuring officer for potential sale

https://www.beckershospitalreview.com/hospital-transactions-and-valuation/temple-university-health-system-hires-restructuring-officer-for-potential-sale.html

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Philadelphia-based Temple University’s board of trustees announced June 20 the institution will hire a chief restructuring officer for its affiliated health system, and is considering the potential sale of two of its hospital assets, according to The Inquirer.

Temple University President Richard Englert and Temple University Health System CEO Larry Kaiser, MD, said in a joint statement to the community TUHS “faces significant operational and financial challenges. More must be done to maintain a viable and sustainable healthcare enterprise in a highly competitive and volatile market,” according to the report.

Officials also said the health system is considering the sale of Jeanes Hospital and the Fox Chase Cancer Center, both in Philadelphia.

The Inquirer reports Temple University Health System incurred a net loss of $31.1 million in the nine months ended March 31, compared to the system’s $19.9 million loss the year prior.

 

CEO, CFO of Missouri hospital resign over inappropriate reimbursements

https://www.beckershospitalreview.com/hospital-executive-moves/ceo-cfo-of-missouri-hospital-resign-over-inappropriate-reimbursements.html

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The CEO and CFO of Ranken Jordan Pediatric Bridge Hospital in Maryland Heights, Mo., have resigned after the hospital board discovered the executives violated the hospital’s paid time off policy, according to the St. Louis Post-Dispatch.

The hospital board requested and accepted the resignations of president and CEO Lauri Tanner and vice president and CFO Jean Bardwell, effective May 2, according to the report.

In a statement to the St. Louis Post-Dispatch, the hospital said the two executives were allegedly paid for time off “to which they were not entitled.” The hospital said the board is demanding Ms. Tanner and Ms. Bardwell repay the hospital, but it did not disclose the amount of inappropriate reimbursement the executives allegedly received.

The board’s executive committee initially identified the potential irregularities, and the board subsequently launched an investigation, which allegedly revealed the two executives violated hospital policy, according to the report.

To help prevent a similar issue from occurring in the future, the hospital has put corrective measures in place.

Ranken Jordan Pediatric Bridge Hospital COO Brett Moorehouse has been named interim president and CEO, and a hospital board member will serve as interim CFO, according to the St. Louis Business Journal.

 

Operator to bar New York hospital CEO, CFO and COO from expensing bi-yearly trips to Cayman Islands

https://www.beckershospitalreview.com/hospital-management-administration/board-to-bar-new-york-hospital-ceo-cfo-and-coo-from-expensing-bi-yearly-trips-to-cayman-islands.html

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East Meadow, N.Y.-based Nassau Health Care Corp. officials expect to pass a resolution March 8 barring East Meadow-based Nassau University Medical Center officials from traveling to the Cayman Islands twice a year and charging the hospital for expenses incurred on the trip, according to Newsday.

George Tsunis, chairman of the board of Nassau Health Care Corp., which operates NUMC, told the publication the proposal is part of a series of resolutions to cut costs at NUMC, prevent corruption and make the public more aware of executives’ actions.

Nassau Health Care Corp. created a limited liability company, called NHCC LTD, in the Cayman Islands for tax purposes to self-insure for malpractice and general liability claims, according to the report. Company officials must meet outside the U.S. at least once a year to maintain the Cayman Islands location. NUMC’s CEO, COO, and CFO were all named to NHCC LTD’s board, and previously traveled to the islands for two weeks out of the fiscal year to discuss the company’s financial and operational activities.

Under the proposal, two NUMC executives will meet once a year for one day at an offshore location, such as a Canadian airport, to discuss the company’s activities.

The series of resolutions also calls for a reduction in the use of outside legal firms to handle internal legal issues, and to enact anti-nepotism disclosure requirements for hospital trustees, among other initiatives.

Nassau Health Care Corp. officials did not disclose how much the organization would save as a result of the proposed changes, Newsday reports.

Mr. Tsunis said as a safety-net hospital, NUMC should adhere to federal expense guidelines and not use taxpayer money to fund executives’ trips.

“[The proposed resolutions are] essential for credibility. The taxpayers of Nassau County need to be assured that we are protecting their tax dollars and operating at the highest ethical levels,” Mr. Tsunis told Newsday.