Tag Archives: Strategy

Catholic Health Initiatives CFO Dean Swindle’s advice to other systems: ‘Don’t get too comfortable with your past success’

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Englewood, Colo.-based Catholic Health Initiatives embarked on a turnaround plan several years ago with the goal of improving its financial picture while providing high-quality care at its hospitals and other facilities across the nation. The system has made great strides toward its goal, yet there is still a lot of work to be done.

CHI has been laser-focused on performance improvement over the past three years, but rolling out a comprehensive turnaround plan across an organization with 100 hospitals is challenging, and progress is slow. The health system’s efforts just began to take hold in the second half of fiscal year 2017. Although CHI has encountered obstacles on its path to financial stability, the system is pleased with the headway it has made and expects more improvement in the coming months.

CHI’s cost-cutting initiative

To improve its finances, CHI set out to cut costs across the system. It put a great deal of energy into lowering labor and supply costs, which combined can make up two-thirds or more of the system’s operating expenses. CHI developed plans and playbooks focused on reducing these costs several years ago, knowing it would not immediately see results.

In the labor area, CHI President of Enterprise Business Lines and CFO Dean Swindle says the system had to incur costs to cut costs. “In the second half of the year [fiscal 2017] we began to see the benefits of our labor activities in the markets, but we also had cost,” he says. For example, CHI incurred the one-time expense of hiring advisers to help the system develop new labor management techniques. The system also cut jobs, which resulted in severance costs.

“When we got to the second half of 2017, we were very confident and felt very pleased that we were seeing benefit … but it was difficult for others to see it because it was for half of the year, and we had the one-time costs that were burdening that,” Mr. Swindle says.

After factoring in expenses and one-time charges, CHI ended fiscal year 2017 with an operating loss of $585.2 million, compared to an operating loss of $371.4 million in fiscal year 2016.

However, CHI saw its financial situation improve in the first quarter of fiscal year 2018. The system’s operating loss narrowed to $77.9 million from $180.7 million in the same period of the year prior. “What you were able to see in the first quarter [of fiscal 2018] … was the one-time costs had gone away for the most part; those weren’t burdening our results,” says Mr. Swindle.

He says although the system employed more physicians, its absolute labor costs were lower year over year. CHI’s supply costs, including drug costs, were also lower in the first quarter of fiscal year 2018 than in the first quarter of last year.

Mr. Swindle says CHI saw its finances improve in a difficult operating environment. Patient volume was lower in the first quarter of fiscal year 2018 than a year prior, and the system also experienced a nearly $26 million loss from business operations as a result of Hurricane Harvey.

“[This has] given us a level of confidence that we can move forward and address the difficulty that our industry is going to be facing over the next several years,” he says.

In early January, Fitch Ratings affirmed CHI’s “BBB+” rating and upgraded its credit outlook to stable from negative. The credit rating agency cited the health system’s strong start to the 2018 fiscal year and financial improvements in several markets as key reasons for the upgrade.

Preparing for new challenges

Although healthcare organizations are currently facing many challenges, including regulatory uncertainty and dwindling reimbursement rates, Mr. Swindle anticipates hospitals and health systems will face new obstacles over the next few years.

For example, hospitals will be challenged by changes to the 340B Drug Pricing Program. CMS’ 2018 Medicare Outpatient Prospective Payment System rule finalized a proposal to pay hospitals 22.5 percent less than the average sales price for drugs purchased through the 340B program. Medicare previously paid the average sales price plus 6 percent.

“I don’t think 340B was by chance and in isolation,” says Mr. Swindle. “I think we’re entering one of those cycles that the whole economic environment of our industry is going to be working against us.”

The pressures in the industry are driving hospitals and health systems to join forces. After more than a year of talks, CHI and San Francisco-based Dignity Health signed a definitive merger agreement in December 2017. The proposed transaction will create a massive nonprofit Catholic health system, comprising 139 hospitals across 28 states.

In the short term, the combination of the two systems is expected to drive synergies in the $500 million range, according to Mr. Swindle. In the coming months, the two systems will dive deeper into the synergies they expect to achieve over a multiyear period. “We do believe beyond the synergies there are some strategic initiatives we can put into place as a combined organization that we couldn’t do individually,” Mr. Swindle says. “You won’t see the benefit of those as much in the short term.”

“Take a deep breath”

Mr. Swindle knows firsthand that developing and executing an operational turnaround plan is no easy task. However, today’s healthcare landscape requires health systems to re-engineer their business models.

“Regardless of how good your results … have been over the last five to 10 years, we’re all going to have to transform ourselves in our own way to meet the characteristics of our organizations,” says Mr. Swindle.

When embarking on a performance improvement plan, the first thing health system CFOs should do is “take a deep breath,” he says. Then, they should focus on the things they have more control over. Mr. Swindle says it is critical for health systems to continue to drive improvement in patient experience and quality. They also need to be strategic cost managers.

“It’s not going to be as easy as just saying we’re going to take these [full-time employees] out or reduce this service. You’re really going to have to be very smart and very thoughtful about how you become a good cost manager that adds value to your communities,” says Mr. Swindle. “Don’t get too comfortable with your past success and your past models.”

 

Penn State Health, Highmark Health sign $1B value-based care network deal

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Business executives shaking hands

Penn State Health and Highmark Health have inked a $1 billion deal to form a value-based community care network that aims to improve population health and protect market share by keeping more patients in the region, especially for complex care.

Anchored by the Milton S. Hershey Medical Center, the plan also calls for collaboration with community physicians and will include new facilities and co-branded health insurance products.

The move doesn’t affect existing agreements: Penn State Health can still partner with other health insurance companies, and Highmark will continue to partner with other providers.

“Penn State Health will offer more primary, specialty and acute care locations across central Pennsylvania so that [patients] will have easier access to our care, right in the communities where they live,” A. Craig Hillemeier, CEO of Penn State Health, said in an announcement. “Our two organizations share the belief that people facing life-changing diagnoses should be able to get the care they need as close to home as possible.”

Highmark Health will join Penn State as a member of Penn State Health with a minority interest. The payer will get up to three seats on the 15-member board of directors.

“We want to collaborate with forward-thinking partners who, like us, are committed to creating a positive healthcare experience for members and patients,” Highmark Health CEO David Holmberg said in the announcement.

Value-based care and population health continue to drive deals such as this one, including in the competitive Pennsylvania market. Earlier this year, PinnacleHealth announced that it would partner with the University of Pittsburgh Medical Center, the state’s largest integrated health system, and also agreed to acquire four Central Pennsylvania hospitals from Community Health Systems.

 

Scripps Sees ‘Sober Warning,’ Slashes CEO Positions

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Organizational overhaul prompted by signs of ‘harder times to come.’

Scripps Health failed to meet its operating budget last fiscal year for the first time in 15 years, prompting the San Diego-based health system to restructure its executive team and look to cut corporate services costs by $30 million.

Although the system remains on solid financial footing, the news came as “a sober warning of harder times to come,” Scripps president and CEO Chris Van Gorder wrote in a memo to staff and physicians last week. The memo, which Scripps released in full to HealthLeaders Media, was as much a rallying cry as it was a bulletin of somber news.

“We can sit back and fool ourselves into thinking change is not really needed, and risk the consequences,” Van Gorder wrote. “Or like our founders, we can have the courage to boldly move ahead and do what’s needed for our patients, our community and their legacy.”

The memo outlined several organizational changes coming to Scripps in the next 30-60 days, including the following:

  • CEOs: Rather than keeping a CEO at each Scripps hospital, the system will establish three regional CEOs.
  • COOs: In the absence of a CEO, COOs will take over daily operations at each hospital.
  • Corporate services: Scripps will look to cut costs on corporate services by $30 million. It will evaluate a shared-services model for corporate services to improve accountability.

The southern region—which will get one of the three new CEO positions—includes Scripps Mercy San Diego and Chula Vista, overseen by current CEO Tom Gammiere. The northern region will include sites in Encinitas, Green, and La Jolla, which are overseen by CEOs Carl J. Etter, Robin B. Brown Jr., and Gary G. Fybel, respectively. The third region will comprise Scripps ancillary services.

It appears Etter, Brown, and Fybel are the most likely candidates to fill the new northern-region CEO and ancillary-services CEO positions. It’s possible, though, that Scripps could bring in outside talent, promote from within, or even shift Gammiere to the northern region. This is an overhaul, after all.

Scripps Not Alone

In his memo last week, Van Gorder noted that Scripps is far from the only healthcare organization to face the kind of financial pressures that prompted these changes.

“Hospitals and health systems across the country, small and large, are being affected in similar ways,” he wrote, citing two peer institutions: Partners HealthCare and the Cleveland Clinic.

Partners HealthCare, based in Boston, reported an operating loss of $108 million last year, Van Gorder noted. Last spring, Partners offered buyouts to 1,600 workers at its Brigham and Women’s Hospital and announced plans to cut costs by more than $600 million over three years, as The Boston Globereported.

“This is an effort fundamentally to change not our values and our culture, but how we manage ourselves, how we focus on efficiency, the patient experience, the service we deliver, and try to be reflective of the pressures of being efficient,” Partners CFO Peter K. Markell told the Globe.

Cleveland Clinic, meanwhile, saw its operating income slump 71% last year, Van Gorder noted. The clinic’s president and CEO, Toby Cosgrove, MD, said the healthcare challenges putting pressure on systems these days are “unprecedented in their size, speed, and scope.”

Harvard Business Review (HBR) and other publications have covered the problem, Van Gorder told his team, noting that declining reimbursement rates are squeezing healthcare organizations nationwide.

“For the past decade, the consensus strategy among hospital and health-system leaders has been to achieve scale in regional markets via mergers and acquisitions, to make medical staffs employees, and to assume more financial risk in insurance contracts and sponsored health plans,” HBR’s Jeff Goldsmith wrote in October. “In the past 18 months, the bill for this strategy has come due, posing serious financial challenges for many leading U.S. health systems.”

The case against hospital beds

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https://www.politico.com/agenda/story/2017/11/08/the-case-against-hospital-beds-000575

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Two summers ago, I opened The New York Times Magazine and saw a startling centerfold ad that seemed to foretell the future: a sweeping panoramic image of people relaxing and strolling in Central Park, overlaid with large block text that read, “IF OUR BEDS ARE FILLED, IT MEANS WE’VE FAILED.” You could hardly have guessed it was a hospital ad. The logo for the Mount Sinai Health System was stamped in the upper corner, almost like an afterthought.

Around the same time, I was beginning a project funded by the Robert Wood Johnson Foundation to examine whether hospitals and health care facilities are well designed for their modern purposes—to produce more health, rather than just deliver more health care. And it became clear that one of the most important challenges for hospitals to address will be a simple one: the association of hospitals with beds.

When the health care industry talks about hospitals, it tends to use the language of facility planners—one in which “patients” and “beds” are equivalent. This is the legacy of a very different era in medicine. Modern hospitals are historically rooted in the sanatoria and asylums of the mid-19th century, originally conceived to isolate patients with conditions such as tuberculosis and lunacy from the community, not to protect their rights. The move from open wards to closed rooms was perhaps the first major reform in hospital design—motivated by a need for isolation as our understanding of communicable diseases and infection control became more sophisticated.

Today, hospitals are struggling with the next reform—how to move on from an era when bedrest was the default medical therapy. When President Dwight Eisenhower had a heart attack in 1955—before we had beta blockers, angiograms and stents—his White House physician recommended prolonged bedrest. Today, bedrest is still the default treatment for stomach bugs and colds, certain types of musculoskeletal injuries and pregnancy conditions. And indeed, convalescing in bed has value for some conditions. But increasingly, we’re learning that even relatively short bed confinement can be unhelpful for many patients—and prolonged bedrest can be dangerous at worst. Getting up and walking, even after hip surgery, has been shown to improve circulation, prevent blood clots and promote wound healing.

However, this isn’t how hospitals are built. Currently, very few hospital spaces are designed with the assumption that most of our patients need to walk to be healthier. The patient in a gown staggering down a cluttered hospital hallway, IV pole in hand, is as comically out of place in real life as it is on TV. A patient canwalk, but it’s awkward. Patients are frequently required to dodge bustling clinicians, carts and stretchers along the way.

To fix the immediate challenge of letting patients walk in a building built around beds, some hospitals have begun investing in walking tracks or trails, as well as indoor and outdoor nonclinical-appearing “healing gardens.”

But our changing understanding of how people get healthier raises bigger design questions for hospitals—as well as the broader question of when hospitals are even the right place to get healthier. In my own specialty, obstetrics, there’s evidence that the current design of labor and delivery units may be associated with avoidable, and frankly harmful, C-sections. With colleagues at Boston’s Ariadne Labs and the MASS Design Group, we compared childbirth facilities across the country and found that there are no standards for how many labor rooms or operating rooms a hospital needs to have based on the number of babies it delivers. As a result, the capacity of hospitals to care for patients varied widely. Hospitals that had relatively more operating rooms and relatively fewer labor rooms tended to do more surgery.

Part of the reason may be that many of these units are retrofitted from spaces that were not originally intended to support normal labor. Indeed, for pregnant women, walking regularly throughout labor, particularly during the early phases, is thought to promote progress toward delivery.

Some corners of the health care world are already starting to embrace new, less bed-focused models of care. Ambulatory surgical centers have latched on to a strong business model for the growing number of operations for which several days in bed are neither required nor recommended. A venture-capital based birthing center franchise is currently aiming to do the same—birthing families are often admitted and discharged on the same day, and beds are in the corner of the room (for resting and breastfeeding after the baby is born), rather than in the center; the idea is to encourage the mom to use movement as much as possible to support her labor by literally sidelining the bed. Health systems are increasingly investing in other types of spaces where bedrest is not the default, including skilled nursing and rehabilitation facilities, as well as home visiting nurses and health coaches to help high-need patients with acute and chronic conditions stay out of the hospital.

It’s not just keeping patients in bed that could use a rethink—it’s keeping them all closed off. In 2017, both community and hospital-acquired infections are still a clinical concern, but the dominant threats to human health—heart disease and cancer, for instance—no longer require isolation. In fact, with the exception of a few acute instances in our lives, most of us benefit from the opposite. Former Surgeon General Vivek Murthy has recently characterized loneliness as the most common “pathology” he encountered in medical practice—insidious but present on an epidemic scale. Future hospitals may find opportunity to intentionally forge connections. A community hospital in Massachusetts recently created an early labor lounge for patients who did not yet need a labor and delivery room, but could not return home. Rather than curtaining her off, the lounge was set up to let mothers socialize with their families and with one another in a relaxing and comfortable setting. Anecdotally, the lounge seemed to be most effective at preventing premature hospital admission when it was full.

They may also get a boost from new payment models, in which health systems have an incentive to take on the challenge of population health management. Rather than getting paid by the procedure, which creates an incentive to put more patients in more beds and offer larger amounts of care, they’re opting for models in which they get paid for producing larger amounts of health—which requires considering where patients really get healthier, whether that’s at the hospital or in homes or in community settings. The future demands this shift, as year after year, the costs of care continue to rapidly outstrip the benefits.

Michael Murphy, a visionary architect who has pushed his field to consider ways that hospitals can better promote human health, claims that design is never neutral. He says design either hurts or it heals. The more we know about healing, the more it appears that health care spaces will need a different approach—one that sometimes looks more like a park than a long fluorescent hallway full of beds.

 

The Single Greatest Hospital Success Indicator

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Is your hospital part of a health system? A turnaround and consulting firm’s data suggest much of your organization’s success can depend on just that one factor.

But it’s rapidly becoming less so. Since I wrote this column years ago, the pressures on standalones have only increased.

Hospitals that are part of a system do far better financially than their counterparts.

“Over the past two years, we’ve noticed that the single greatest indicator of success for hospitals is whether or not they’re part of a multi-hospital system,” says Scott Phillips, managing director of Healthcare Management Partners, a Nashville-based turnaround and consulting firm that focuses on hospitals that are experiencing financial challenges and is led by experienced former C-level executives such as Phillips.

“Just that one factor provides a bottom-line advantage of four to nine percentage points [in profitability], which is almost insurmountable.”

Means to an End

Not that financial success is the overarching goal of healthcare—especially in nonprofit or government-owned healthcare, which still makes up 78.7% of hospital systems, according to Kaiser Family Foundation. But as I’ve heard countless CEOs say, “no margin, no mission.”

As a standalone hospital, you’re distressed almost by definition, Phillips says.

The firm’s data, based on Healthcare Cost Report Information System (HCRIS) data from more than 200,000 Medicare Cost Reports filed by hospitals, nursing homes, home health agencies, and other providers since 1994, supports this contention overwhelmingly. Standalone hospitals still represent roughly a third of hospitals and 30% of the beds, but they tend to be small, and are disproportionately government- or health district–owned.

When you look at standalones closely, Phillips says, usually they’re not in a position to choose their own market in any way, and single-market nonprofit systems haven’t wanted them as acquisitions for those reasons. This dynamic creates an increasing canyon between the so-called “haves” and “have nots.”

“For the have-nots, life is getting increasingly difficult,” he says. “Will many, or even most of those hospitals continue to operate inpatient beds?”

Maybe they shouldn’t. And maybe they should instead switch to providing ambulatory health services.

Many standalones have such an increasing disadvantage, he says, that they, and healthcare costs generally, would be better off if they could convert. But many can’t afford the investment to do so in either dollar terms—access to capital—or in political will.

“If they can convert to diagnostic and ambulatory centers, they would be very busy,” Phillips says.

To convert into an attractive ambulatory center is a $6 million to $10 million investment, he says, and most of them don’t have that money.

Better Management

Phillips says HMP’s data shows that every year in the system hospitals, particularly the larger hospitals, management keeps getting better. Hospitals in the top two quartiles keep getting more profitable in spite of the uncertainty around the changes in healthcare’s business model from volume to value, he says. They’re getting that principally through greater economies of scale but they are extracting more profitability at the expense of their competitors.

One of the bigger differentiators in terms of profitability is in labor efficiency, he says, the biggest element of cost.

“There’s a pretty dramatic difference in labor costs between hospitals that are in systems than are not in systems,” he says.

Government-owned hospitals are further challenged in this regard in the form of pension costs.

Declining Populations

Secondly, standalone hospitals are in 90% of the counties in the U.S., many, if not most, of which are experiencing loss of population, he says. People are moving into cities, not into the hinterlands.

“Healthcare, whether you’re talking nursing homes or hospitals, is essentially a fixed-cost business,” Phillips says. “If your population is declining, your demand for services will decline. So the best you can hope for is an increasing share in a declining market.”

That leads to declines in inpatient utilization, and for a few years, there’s been a dramatic shift from inpatient to outpatient. Another distinguishing trend is that standalones are well behind the curve in reinvestment, particularly in new clinical technologies and information technology.

Phillips says rural areas could be better served by investing in remaking many hospitals into outpatient centers and taking advantage of telemedicine, where state laws and regulations have not made that impossible or impractical.

“It’s insane that state policymakers have not opened that whole market to telemedicine,” he says. “It could be a tremendous antidote to many of the problems these hospitals have.”

Moody’s: Shareholder pressure may lead Tenet to make drastic changes

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https://www.beckershospitalreview.com/finance/moody-s-shareholder-pressure-may-lead-tenet-to-make-drastic-changes.html

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Dallas-based Tenet Healthcare has sufficient liquidity and plenty of flexibility from a debt covenant perspective to give the company time to improve its operations or change its strategic direction before it needs to undertake material refinancing, according to a Moody’s Investors Service report.

While Tenet’s leverage is high, its next maturity is $500 million in March 2019. “We believe Tenet can repay this with a combination of cash, which will be increasing due to proceeds from anticipated asset sales, and use of its $1 billion revolving credit facility,” said Moody’s.

The company has no amortizing debt requiring periodic payments, and its bond indentures include no financial maintenance covenants or debt incurrence covenants, according to Moody’s.

Moody’s also noted Tenet’s earnings have longer-term growth potential. Although Tenet’s facilities are generally located in highly competitive urban areas, these areas have growing populations. Across all service areas, Moody’s views Tenet’s ambulatory surgery center business as having higher growth prospects than its acute care hospitals.

Despite financial flexibility, Tenet is facing increasing shareholder pressure, which Moody’s said may lead the company to take more drastic measures, such as larger asset sales or even the sale of the entire company.

What Trump’s opioids plan will — and won’t — accomplish

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“We can be the generation that ends the opioid epidemic,” President Trump said yesterday. But there’s broad agreement among public health experts that the plan Trump released isn’t enough to get there.

The bottom line: The steps Trump announced yesterday will help, experts say. At a minimum, they won’t hurt. But they’re not enough. To tackle this public health crisis, the administration will need a more complete strategy and a lot of money.

What they’re saying:

  • “What’s missing is a comprehensive plan,” Georges Benjamin, the executive director of the American Public Health Association, told me in an interview. “We’ve got to understand what success means.”
  • And with such a sprawling problem — one that reaches into health care, law enforcement, border control, labor and beyond — it would help to have someone focused on, and accountable for, the opioid response as a whole, Benjamin said.
  • “President Trump ran a business based on results. And so far, when it comes to the opioid epidemic, we have seen no results,” Shatterproof, a non-profit focused on addiction recovery, said in a statement.
  • Democrats and outside experts also emphasized that tackling the opioid epidemic will require more money — a lot of it.

The bright side: Trump’s actions might not be enough to tame the opioid crisis, but some of them could make a real difference.

  • Benjamin singled out expanded access to telemedicine, which could help people in rural areas gain quicker access to alternative pain treatments and addiction-recovery resources.
  • Loosening some regulatory restrictions will also help, according to public health experts, who said states’ hands have been tied as they try to redirect some of their own resources toward the problem.

The hospital divestiture trend is heating up, and not going away anytime soon

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http://www.healthcaredive.com/news/the-hospital-divestiture-trend-is-heating-up-and-not-going-away-anytime-so/505566/

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Not long ago, health systems gobbled up hospitals with the overriding goal of growth, expanded footprints and market share. Some major health systems are now regretting those buys as they have become saddled with community hospitals that are losing money and struggling with large debt and capital needs.

Two major health systems facing this issue are Community Health Systems (CHS) and Tenet Healthcare, who are both looking to shed facilities.

“The strategy that CHS, Tenet and many others had was to really build around scale without really thinking about the regional economics of how these hospitals work together,” Gregory Hagood, senior managing director at SOLIC Capital Advisors, which works with hospitals on mergers and acquisitions, told Healthcare Dive.

Health systems like CHS and Tenet grew their systems with large purchases, but they’ve learned from their experiences and are now looking at divestiture options as a way to shed unprofitable hospitals and billions of debt. No longer are major systems and investors interested in buying struggling hospitals, which CHS did when it purchased the struggling Florida system Health Management Associates for $7.5 billion in 2014.

CHS and Tenet look to cut facilities, debt

CHS, a for-profit system with 137 hospitals in 21 states, is looking to divest at least 30 hospitals this year. They have already announced more than 20 hospital sales this year. CHS’ divestitures come after the health system lost $1.7 billion last year and accumulated about $15 billion in debt. Given their financial situation, Moody’s Investors Service recently downgraded CHS’ corporate family rating, probability of default rating and senior unsecured notes.

Meanwhile, Tenet Healthcare, the third largest investor-owned U.S. health system, is looking into strategic business options that may include a sale. The Wall Street Journal estimated Tenet has a market value of $1.6 billion, which is a far cry from what it owes. Fitch Ratings reported that Tenet had about $15.4 billion of debt at the end of June.

Tenet recently announced it’s selling eight U.S. hospitals and all of its nine U.K. facilities, which CEO Trevor Fetter said will yield between $900 million and $1 billion.

In addition to the sales, the company is dealing with executive and board shake-ups. Fetter recently announced his impending departure and two board members left the board because of “irreconcilable differences regarding significant matters impacting Tenet and its stakeholders.”

CHS and Tenet might be the most high-profile systems looking to shed debt and facilities, but they’re far from the only ones. A recent report by Kaufman Hall found that hospital and health systems mergers and acquisitions increased 15% in Q2. Big players are especially active. There were six transactions of health systems with nearly $1 billion or more in revenues announced in the first half of 2017. There were only four such deals in all of 2016.

Though hospital M&A activity remains high, healthcare financial experts say the days of health systems swallowing small, unprofitable hospitals as part of larger deals to solely build a system’s footprint are gone. Those days have been replaced by more strategic decisions as to what is right for the organizations, Richard Gundling, senior vice president of healthcare financial practices at the Healthcare Financial Management Association, told Healthcare Dive.

Health systems are now taking a strategic view of hospitals to see if they fit into their culture. They are also ignoring small, community hospitals with debt or buying them for much less than they may be worth.

The systems that are selling unprofitable hospitals are also faced with a market in which investors aren’t interested in paying top dollar for struggling hospitals with heavy debt. Instead, Hagood said, investors are more interested in post-acute care services like rehab and long-term care and ambulatory care initiatives. They don’t typically see hospitals as a wise investment.

“Smaller systems that have huge debt loads or pent-up capital demands have received a lukewarm reception at best,” Patrick Allen, managing director with Kaufman Hall’s mergers and acquisitions practice, told Healthcare Dive.

Why are health systems divesting?

Health systems, especially ones that have built up debt, are having trouble making up lost revenues. Hospitals could once cover a struggling type of care through a different, more profitable service. That’s no longer the case as payers and the CMS have squeezed hospital margins.

Sagging reimbursements and payer policies that move patients from hospitals to outpatient care and freestanding facilities are hurting hospital finances. There’s also a CMS proposal to allow hip and knee replacement surgeries for Medicare patients on an outpatient basis. Those kinds of surgeries are often the most profitable for hospitals, which means they may soon lose another revenue driver.

Beyond those direct payer impacts, health systems are looking to protect themselves against a changing industry in which market share isn’t as important as flexibility and efficiency.  “As all of these changes are occurring, the systems are strategically moving and gathering their assets to be able to deal with expected changes,” Gundling said.

Gundling said another issue facing large systems that may lead to divestiture is cultural mismatch. A large system may have swooped in and bought a 100- or 150-bed community hospital as part of a larger purchase. The hospital’s community may have bristled at the idea of a large out-of-state corporate entity buying a mainstay of their community. Plus, physicians may dislike a new system’s clinical protocols.

“There might be times when you say it might not be the right fit for us after all … That can lead to a divestiture decision,” Gundling said.

How are health systems handling divestitures?

Health systems are taking different avenues to deal with possible divestitures. Some systems want to completely rid themselves of certain hospitals. Others look to repurpose small hospitals for outpatient, skilled nursing facilities, labs or imaging while maintaining a large regional hospital. Still others forge partnerships, so they don’t completely sell the properties.

Allen said many health systems see their small community hospitals aren’t bringing in enough revenue and can’t be competitive in every service line and business. So, instead, they are dropping unprofitable services and sticking with what works for them.

Gundling compared health systems’ decisions about divestiture to an individual creating the right investment balance. For health systems, divestitures are not about selling properties, but strategically managing risk. “They aren’t just selling off to sell off. All have different strategies,” said Gundling.

Allen said divestitures are a balancing act for systems. They can shed debt and assets, but that comes with revenue loss. “The balance is always what is the right sale price for the exchange of cash flow when it becomes less than profitable. Balancing those two are always tough,” said Allen.

When deciding on whether to divest, merge or partner with other facilities, Allen said systems need to figure out the community’s needs, the area’s business climate, what the facility wants to be and potential partnership opportunities. Allen, whose company works mostly with nonprofit systems, said many are repurposing underutilized facilities into other uses like rehab, skilled nursing facilities, labs and imaging.

“Once you have a handle on what the market needs and what the market provides, then you can make strategies to get you there,” he said.

Another issue facing health systems is infrastructure. Many smaller hospitals don’t meet today’s care delivery system. “A lot of hospitals don’t lend themselves very efficiently to quality care based on their 30- and 40-year old design,” said Hagood. “That factor can accelerate their repurposing.”

The results and future of the divestiture trend

Allen said divestitures have resulted in systems being able to reallocate capital and move forward with less debt. However, Hagood said one major reason health systems have for divestitures — shedding debt — hasn’t completely worked. Part of the problem is that the new investors aren’t paying top dollar for a struggling community hospital with debt.

“The biggest challenge so far is that they have struggled to get value for those assets to effectively repay that debt,” he said.

Gundling said health systems that have shed debt have followed the divestitures by focusing on cost efficiencies, supply chain management and revenue cycle management.

The hospital divestiture trend has led to sales, mergers and partnerships, with repurposed or downsized facilities, but it hasn’t closed many facilities. That may be coming soon, though.

Hagood said pending mergers, including the Mountain States Health Alliance and Wellmont Health System deal in Tennessee and Virginia, will likely lead to facility closures. There aren’t enough healthcare dollars to support the number of facilities in some of the Appalachian communities involved, he said.

Most of the large divestiture action has been centered around for-profit systems, but Hagood said to watch for more nonprofit action, including Catholic Health Initiatives (CHI), which recently reported a $585.2 million operating loss for fiscal year 2017 after losing $371.4 million in 2016.

Earlier this year, Moody’s Investor Service downgraded CHI’s rating on long-term debt and variable rate demand bonds because of poor operating performance since 2012 and a relatively low level of liquid assets. Moody’s warned that further downgrades could occur unless CHI improves its operating performance.

CHI divested its KentuckyOne facilities earlier this year, a move expected to bring in $534.9 million. Given the company’s finances and healthcare environment, Hagood said there could be more divestitures.

“Nonprofits are going to move slower, but I think you’re going to see them (divest) as economics continue to shift,” he said.

Experts agree the divestiture trend is just heating up as health systems deal with the greater emphasis on outpatient care and freestanding centers. Hagood predicted 24-7 inpatient facilities with full emergency rooms and surgical facilities will continue to dwindle in the coming years as systems repurpose facilities.

“There are 5,000-plus hospitals today. I think you’re going to see that consolidate down,” he said.

 

How U.S. Hospitals and Health Systems Can Reverse Their Sliding Financial Performance

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https://hbr.org/2017/10/how-u-s-hospitals-and-health-systems-can-reverse-their-sliding-financial-performance

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Since the beginning of 2016, the financial performance of hospitals and health systems in the United States has significantly worsened. This deterioration is striking because it is occurring at the top of an economic cycle with, as yet, no funding cuts from the Republican Congress.

The root cause is twofold: a mismatch between organizations’ strategies and actual market demand, and a lack of operational discipline. To be financially sustainable, hospitals and health systems must revamp their strategies and insist that their investments in new payment models and physician employees generate solid returns.

For the past decade, the consensus strategy among hospital and health-system leaders has been to achieve scale in regional markets via mergers and acquisitions, to make medical staffs employees, and to assume more financial risk in insurance contracts and sponsored health plans. In the past 18 months, the bill for this strategy has come due, posing serious financial challenges for many leading U.S. health systems.

MD Anderson Cancer Center lost $266 million on operations in FY 2016 and another $170 million in the first months of FY 2017. Prestigious Partners HealthCare in Boston lost $108 million on operations in FY 2016, its second operating loss in four years. The Cleveland Clinic suffered a 71% decline in its operating income in FY 2016.

On the Pacific Coast, Providence Health & Services, the nation’s second largest Catholic health system, suffered a $512 million drop in operating income and a $252 million operating loss in FY 2016. Two large chains — Catholic Health Initiatives  and  Dignity Health — saw comparably steep declines in operating income and announced merger plans. Regional powers such as California’s Sutter Health, New York’s NorthWell Health, and  UnityPoint Health, which operates in Iowa, Illinois, and Wisconsin, reported sharply lower operating earnings in early 2017 despite their dominant positions in their markets.

While some of these financial problems can be traced to troubled IT installations or losses suffered by provider-sponsored health plans, all have a common foundation: Increases in operating expenses outpaced growth in revenues. After a modest surge in inpatient admissions from the Affordable Care Act’s coverage expansion in the fall of 2014, hospitals have settled in to a lengthy period of declining hospital admissions.

At the same time, hospitals have seen their prices growing at a slower rate than inflation. Revenues from private insurance have not fully offset the reductions in Medicare payments stemming from the Affordable Care Act and federal budget sequestration initiated in 2012. Many hospitals and health systems strove to gain market share at the expense of competitors by deeply discounting their rates for new “narrow network” health planstargeted at public and private health exchanges, enrollments from which have far underperformed expectations.

The main cause of the operating losses, however, has been organizations’ lack of discipline in managing the size of their workforces, which account for roughly half of all hospital expenses. Despite declining inpatient demand and modest outpatient growth, hospitals have added 540,000 workers in the past decade.

To achieve sustainable financial performance, health systems must match their strategy to the actual market demand. The following areas deserve special management attention.

The march toward risk. Most health system leaders believe that population-based payment is just around the corner and have invested billions of dollars in infrastructure getting ready for it. But for population-based payment to happen, health plans must be willing to pay hospitals a fixed percentage of their income from premiums rather than pay per admission or per procedure. Yet, according to the American Hospital Association, only 8% of hospitals reported any capitated payment in 2014 (the last year reported by the AHA) down from 12% in 2003.

Contrary to widely held belief, the market demand from health insurers for provider-based risk arrangements has not only been declining nationally but even fell in California where it all began more than two decades ago. This decline parallels the decline in HMO enrollment. Crucially, there is marked regional variation in the interest of insurers in passing premium risk to providers. In a 2016 American Medical Group Association survey, 64% of respondents indicated that either no or very limited commercial risk products were offered in their markets.

The same mismatch has plagued provider-sponsored health-plan offerings. Instead of asking whether there are unmet needs in their markets reachable by provider-sponsored insurance or what unique skills or competencies they can bring to the health benefits market, many health systems have simply assumed that their brands are attractive enough to float new, poorly configured insurance offerings.

Launching complex insurance products in the face of competition from well-entrenched Blue Cross plans with lavish reserves and powerful national firms like UnitedHealth Group, Kaiser, and Aetna is an extremely risky bet. Many hospital-sponsored plans have drowned rapidly in poor risks or failed to achieve their enrollment goals. A recent analysis for the Robert Wood Johnson Foundation shows that only four of the 37 provider-sponsored health plans established since Obamacare was signed into law were profitable in 2015.

The regular Medicare and commercial business. Most hospitals are losing money on conventional fee-for-service Medicare patients because their incurred costs exceed Medicare’s fixed, per-admission, DRG payments. Moreover, there is widespread failure to manage basic revenue-cycle functions for commercial patients related to “revenue integrity” (having an appropriately documented, justifiable medical bill that can be  collected), billing, and collection. All these problems contribute to diminished cash flows.

Physician employees. For many health care system, physician “integration” — making physicians employees of the system — seems to have become an end in itself. Yet many hospitals are losing upwards of $200,000 per physician per year with no obvious return on the investment.

Health systems should have a solid reason for making physicians their employees and then should stick to it. If the goal is control over hospital clinical processes and episode-related expenses, then the physician enterprise should be built around clinical process managers (emergency physicians, intensivists, and hospitalists). If the goal is control over geographies or increasing the loyalty of patients to the health care system, the physician enterprise should be built around primary care physicians and advanced-practice nurses, whose distribution is based on the demand in each geography. If the goal is achieving specialty excellence, it should be built around defensible clusters of subspecialty internal medicine and surgical practitioners in key service lines (e.g., cardiology, orthopedics, oncology).

To create value by employing physicians, health systems must actually manage their physicians’ practices. This means standardizing compensation and support staffing, centralizing revenue-cycle functions and the negotiations of health plan rates, and reducing needless variation in prescribing and diagnostic-testing patterns. Health system all too often neglect these key elements.

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If health systems are to improve their financial performance, they must achieve both strategic and operational discipline. If they don’t, their current travails almost certainly will deepen.