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September 19, 2018 Article 4 min read
The hospital business is becoming more challenging, putting some hospitals’ sustainability in jeopardy. Does your management team and board have the right skill sets to navigate the challenges and turn the situation around?

A picture of pristine, white hospital hallway leading towards two double doors.

The rate of rural hospital closures is on the rise. Since 2010, over 80 rural hospitals have closed, and nearly 700 are currently not meeting minimum financial thresholds and, therefore, are vulnerable to closure. Critical access hospitals, urban safety net hospitals, and small rural hospitals are particularly prone to serious financial situations that may lead to severe and permanent consequences.

Critical access hospitals, urban safety net hospitals, and small rural hospitals are particularly prone to serious financial situations that may lead to severe and permanent consequences.

Given the uncertainty of healthcare reform and the financial crises occurring in many states, more and more hospitals are going to find their sustainability in question. Often in these situations, hospital leaders opt to bring in a turnaround team to manage all, or a portion, of their hospital’s operations. But, engaging a turnaround team is one of the most important and difficult decisions a board of directors can ever consider. Frequently, leaders put it off too long, leaving the hospital vulnerable to closure, acquisition at a nominal value, or to systemically reduce service levels that render it a shell of its former self.

In each case, the fundamental mission of the hospital is significantly compromised, and the economic impact to the community can be severely reduced. This is especially true in urban or rural settings where the hospital is critical to providing healthcare services to the community, and also serves as the community’s primary economic engine.

Recognize the signs.

No two situations are exactly alike, although many share certain precursors. The following checklist illustrates conditions that hospitals with potentially serious sustainability concerns might experience:

  • Dangerously low cash balances, concerns about meeting payroll obligations, or unfunded professional liability or pension obligations
  • Noncompliance with debt covenants, difficulty accessing debt, or high vendor debt
  • A going concern audit opinion
  • Reduced patient volumes or low satisfaction scores
  • An aging physician population, difficulty recruiting physicians, physician behavior issues, clinical quality concerns, and inconsistent use of evidence-based medicine protocols
  • Outmigration of specialty services or outdated technology or facilities
  • Lack of clear strategy, divided board of directors and management team, or concerns about management capabilities
  • Accreditation concerns

Unfortunately, many boards of directors and executive management teams either don’t recognize these symptoms or try to manage them internally and fail. They often wait too long to act and, by the time they do, the situation is so compromised that the intervention strategies required can’t be implemented.

Achieve sustainability.

An alternative to divesting of the hospital, either voluntary or nonvoluntary, is to improve its clinical and operating performance. The skill sets required to accomplish this are very different than those required to maintain normal hospital operations and, therefore, outside assistance is generally required.

Many stakeholders need to be actively engaged and involved in any turnaround initiative. The board, medical staff, vendor community, employees, all state and federal payment agencies, financial institutions, and the political community comprise critical audiences. In addition, precise financial and operational plans need to be developed and implemented, with results frequently communicated to the board. The journey to sustainability can be lengthy, and difficult decisions need to be made but, when successful, the hospital will be in a position to continue to deliver on its mission.

Balance cost reduction and revenue enhancement.

A cash management and expense reduction plan will need to be developed, quickly, to address the negative cash flow situation. The plan needs to be data-driven and thoughtful to mitigate the impact of unintended consequences and to avoid any patient safety or patient satisfaction concerns. In times of desperation, many organizations implement across-the-board reductions and other rudimentary initiatives that aren’t strategic or customized to the situation at hand. Such approaches actually punish parts of the organization that have already been focused on achieving operational efficiencies.

In times of desperation, many organizations implement across-the-board reductions and other rudimentary approaches that aren’t strategic or customized to the situation at hand.

Although aggressive expense reduction initiatives are often immediately required, long-term sustainability isn’t achievable exclusively through these efforts. Revenue enhancement opportunities also are necessary to achieve long-term sustainability. These may include, for example, the development of Centers of Excellence for specified clinical services so the hospital becomes a destination site for these services. Ultimately, a successful outcome will be driven by both expense reduction and revenue enhancement opportunities.

Take a longer view.

A turnaround team may be essential for a period of time to develop and implement a strategic, financial, and operations plan. These plans should focus on the delivery of high-quality patient care in the lowest possible cost setting, a fundamental initiative that all hospitals must achieve to be sustainable. This isn’t only good for the financial profile of the hospital, but also reflects evidenced-based medicine and supports positive clinical outcomes. Over time, the delivery of high-quality patient care in the lowest cost setting increases patient satisfaction and may lead to market share gains. This allows the hospital to increase its revenue and spread its fixed costs over a larger base — a key element to sustainability.

The hospital business is evolving and becoming more challenging. Management teams and boards of directors need to reflect honestly on their ability to navigate and respond to these challenges and consider engaging outside experts in situations where sustainability may be in jeopardy. Don’t wait until it’s too late. Acting promptly can position a struggling hospital for a long and healthy future.