COASTAL MEDICAL CENTER COMPREHENSIVE CASE STUDY I N T RO D UC TI O N This comprehensive case study is used as a basis for the exercises included throughout the book. Coastal Medical Center (CMC) is a licensed, 450-bed regional referral hospital providing a full range of services. The primary service area is a coastal city and three counties with a total population greater than 825,000, located in the Sun Belt. This tri-county area has had one of the fastest growth rates in the country for the last five years. According to the local Health Planning Council, the tri-county population is projected to increase by 15 percent from 2009 to 2015. Appendix A at the end of this case study provides detailed population statistics for the city and tri-county area. The population growth rate for households (families) has been one to two percentage points higher than the overall population growth. The high percentage of population growth below age 44 shows a young and growing community. Per capita (i.e., per person) income in the tri-county area is high, although growing unemployment is a concern. As the population of the tri-county area increases, the need for 1 2 Essentials of Strategic Planning in Healthcare healthcare services is anticipated to increase. The area’s economy is largely supported by manufacturing, with service companies and agriculture accounting for 35 percent. Unemployment is typically 6 percent, although it ranges from 5.5 percent to 7.5 percent. The overall poverty rate is 12.4 percent. A recent study revealed that 40,000 city residents are below 125 percent of the established federal poverty level. H E AL T H CA RE C O S T S Healthcare costs in the region are high in comparison to healthcare costs in most other areas in the state. In response to what they feel are excessively high healthcare costs, county businesses recently formed a business coalition, hired a full-time executive, and publicly stated their intent to achieve reduction in healthcare costs. The local press has expressed its concern about the high cost of healthcare in the local community and consistently bashes the area’s hospitals and physicians. The coalition refused to allow the three major medical centers in the area to join, despite that each is a major employer. T HE C O M P E T I TI O N Full-time equivalent (FTE) the total number of full-time and part-time employees, expressed as an equivalent number of full-time employees Adjusted occupied bed the number of inpatient occupied beds, adjusted (increased) to account for the bed occupancy attributed to outpatient services, partial hospitalization, and home services Profit margin the difference between how much money the hospital brings in and its expenses CMC has two major competitors. Johnson Medical Center (JMC) is the largest of a twohospital for-profit healthcare system, and Lutheran Medical Center (LMC) is the largest of a two-hospital faith-based not-for-profit healthcare system. JMC is located less than two miles from CMC and is a 430-bed tertiary care facility. JMC owns four nursing homes, two assisted living facilities, a durable medical equipment company, a wellness center, an ambulance service, and an industrial medicine business. These facilities are located in the tri-county area and are within a 30-minute drive of the main CMC facility. JMC’s parent company, Johnson Health System, also owns one small hospital in the region. JMC has 1,920 full-time equivalents (FTEs), which translates to 5.2 FTEs per adjusted occupied bed. JMC recently used a consultant to reduce FTEs, flatten its structure, broaden its control, and improve its operations in general. JMC has been averaging an occupancy rate of 74 percent. Outpatient revenues are 40 percent of total revenues and have grown at about 6 percent per year for the past two years. JMC had a bottom line (i.e., net income) of $15 million last year. Bottom lines for the two years prior to last year were $11 million and $14 million. Profit margins have exceeded 5 percent or better the past three years. In essence, JMC is a major strong competitor. The organization is reported to have a “war chest” of reserves exceeding $70 million. LMC is a 310-bed acute care hospital located outside the city limits but within the tri-county area. It does not offer tertiary, intensive services to the extent that CMC and JMC do, but it is a highly regarded general hospital that enjoys an occupancy rate of 75 percent. It is especially strong in obstetrics, pediatrics, general medicine, and ambulatory care. It attracts well-insured patients from the affluent suburban area. Coastal Medical Center Comprehensive Case Study 3 LMC has 1,180 FTEs and typically operates at 6.1 FTEs per adjusted occupied bed. LMC provides a great deal of indigent care and, in accordance with the philosophy of the church, its budgets are set to generate only a 2 percent annual profit margin. H I G HLI G HT S OF C O AS T AL M E DICAL C E N T E R As a referral center, CMC offers almost every level of care, including a number of tertiary care services, with the exception of neonatology and severe burn unit services. Many of its patients require high-intensity services. For this reason, its costs are the second highest in the entire state. The average length of stay of a patient at CMC is 9.2 days, compared to a statewide average of 6.4 at hospitals of similar size and services. This difference is probably attributable to the intensity of services CMC offers. CMC’s expenses per patient day are also the highest in the state, with the exception of two large university-affiliated teaching medical centers. Its FTEs per adjusted occupied bed (7.5), paid hours per adjusted patient day (35.20), and paid hours per patient discharge (238.5) all greatly exceed those of competitors and the norms of comparable facilities. CMC is presently authorized 2,240 positions but actually employs 2,259 FTEs. Salary expenses per adjusted discharge and adjusted patient day are $2,760 and $491, respectively. A recent one-year market share analysis for the broader eight-county region revealed the data presented in Exhibit Case.1. CMC has market advantage in substance abuse, psychiatrics, pediatrics, and obstetrics. JMC has a decided market advantage in adult medical and surgical care. At a recent administrative meeting, the following CMC utilization figures were reviewed: ◆ Admissions are down 14 percent for the year. ◆ Medicaid admissions are up 11 percent for the year. ◆ Ambulatory care visits are down 10 percent for the year. ◆ Surgical admissions are down 6.7 percent for the year. Facility Discharges Percentage of Total CMC 7,819 18% JMC 8,989 21% LMC 6,820 16% All others 19,546 45% Total 43,174 100% EXHIBIT CASE.1 One-Year Market Share Analysis 4 Essentials of Strategic Planning in Healthcare A recent auditor’s report included the following notes: ◆ A significant adjustment was required at year-end to correctly reflect contractual allowance expense (i.e., the amount of money spent in hiring outside contractors). (The data used at the beginning of the year to estimate contractual allowance expense was grossly inaccurate.) ◆ Insurers were not billed for services by certain hospital-based employed specialists ($7 million for the past year) as a result of incompetence on the part of the hospital billing staff. ◆ A total of $1.7 million of Medicaid reimbursement was not authorized. No follow-ups were done and no claims were resubmitted. H I S T O RI CA L P E RS P E CT IVE CMC was founded just after World War II using a Hill-Burton grant (see Highlight Case.1) and funds raised locally. From a modest beginning with 100 beds and a limited range of acute care service offerings, the medical center has grown to its present size of 450 beds and now offers a full range of services. Credit for the major growth and past success of CMC has ȝ HIGHLIGHT CASE.1 Hill-Burton Act In the mid-1940s, many hospitals in the United States were becoming obsolete because they did not have money to invest in their facilities after the Great Depression and World War II. To combat this lack of capital and help states meet the healthcare needs of their populations, senators Lister Hill and Harold Burton proposed the Hospital Survey and Construction Act, also known as the Hill-Burton Act. This act provided federal grant money to build or modernize healthcare facilities. In exchange, hospitals receiving the grant were obligated to provide uncompensated (free) care to those who needed care but could not pay for it. The Hill-Burton Act expired in 1974, but in 1975 Congress passed Title XVI of the Public Health Service Act. Title XVI continues the Hill-Burton program by providing federal grant money for healthcare facility construction and renovation but more clearly defines requirements the facility must meet. For example, facilities receiving grant money must prove they are providing a certain amount of uncompensated care to populations that meet particular eligibility requirements. Coastal Medical Center Comprehensive Case Study been given to Don Wilson, who served as chief executive officer (CEO) from 1990 until his retirement in early 2008. Wilson was a visionary and was successful in transforming the medical center to its present status as a tertiary care facility offering high-intensity care including open-heart surgery and liver and kidney transplants. Wilson’s successor was Ron Henderson. During the past two years, Mr. Henderson practiced a loose, informal style of management. He seemed to sit back and enjoy himself while others ran the medical center. He was often characterized as a caretaker. The medical center made $15.4 million in 2008 following Mr. Wilson’s retirement (due to an excellent revenue stream and a strong balance sheet), so he was not pressed to make major changes. Mr. Henderson encouraged the board of trustees, medical staff members, and his administrative staff to submit new ideas for improved community healthcare services using CMC as the focal point for delivery. An avalanche of ideas was submitted during the first two years of Mr. Henderson’s tenure. He moved quickly on these ideas and established himself as a person who made swift decisions on new ventures and kept things rolling. He simply let other executives “do their thing” and neither discouraged nor evaluated their work. His strategy was apparently rapid growth and diversity in new businesses. He made major fund commitments to new ideas, but he did little to evaluate the ideas with respect to their compatibility with CMC’s mission and its strategic direction, and he usually did not consider the financial implications of these ventures. His approach was “let’s do it.” Before 2008, CMC was in good financial shape and faced few financial problems. In 2008, however, expenses began to skyrocket while utilization and revenues failed to keep pace. In addition, a hospital census indicated that, on average, 58 percent of CMC’s patients were Medicare patients and 18 percent were Medicaid patients. As a result, the medical center suffered from reductions in reimbursement. Notable among CMC’s excessive costs are labor, material, and purchased services. The chief financial officer (CFO) is convinced that a major part of this problem is the presence of three unions, including unionized employees in support services and unionized employees throughout nursing services. Added to this cost burden is the more than $5 million being transferred to subsidize other CMC subsidiary companies. During the second year of his tenure, Mr. Henderson began to receive criticism from the board of trustees. Henderson had added 127 new positions despite solid evidence that utilization was experiencing a steep decline. His reasoning was that the declines were temporary and that business would soon be back to normal. In late 2009, the medical center suffered a deficit of $8.6 million (see Appendix B). Surprised by this major loss, the board of trustees fired Mr. Henderson. They contended that they should have been informed of these serious problems. They felt that there should have been a better strategic planning process in place for the selection of projects, on which millions of dollars had been spent. The board of trustees could not understand how overall corporate net income could drop to a loss of $8.6 million when $15.4 million in profit had been made the previous year. 5 6 Essentials of Strategic Planning in Healthcare G O VE RN I N G B O ARD CMC’s governing board has 27 members. All of its trustees are prominent, influential, and generally wealthy members of the community. The board is self-perpetuating. The same chair has served for ten years. Average tenure on the board is 17 years. Committees of the board are detailed in Exhibit Case.2. One physician-at-large is also included on the board. The chief of staff and the CEO attend all board meetings but are not allowed to vote on board decisions. There are no minority members despite that racial minorities account for about 12 percent of the service area population. Only one of the 27 members of the board is a woman. The average age of the trustees is 66. P ARE N T C O RP O RATI O N The parent corporation of CMC is Coastal Healthcare Incorporated. This parent board was created through corporate restructuring several years ago, but its role has never been clear. The parent board is made up of “friends” of the most powerful among the trustees of the CMC board. In essence, when corporate restructuring was the “in thing” to do, EXHIBIT CASE.2 Committees of the Coastal Medical Center Board Committee Executive Size 16 Meeting Frequency Monthly Joint Conference 24 Monthly Finance 13 Monthly Budget 18 Quarterly Executive Compensation 9 Annually Construction 13 Monthly Strategic Planning 16 Monthly Quality Assurance 9 Monthly Patient Care 11 Monthly Ambulatory Care 11 Monthly Public Relations 9 Monthly Personnel 11 Monthly Material and Equipment 11 Monthly Audit 9 Quarterly Coastal Medical Center Comprehensive Case Study 7 this holding company was formed. By appointing a few CMC trustees to also sit on the parent board and by appointing friends of present CMC trustees, it was believed that the two boards would function as one happy family. However, there has been constant conflict from the beginning regarding the relative powers and roles of the two boards. The parent company board has 19 members, all of whom are white and male. Backgrounds of the parent board of trustees tend to mirror those of the medical center trustees in that they are prominent and mostly wealthy. Membership includes bankers, attorneys, business executives, business owners, developers/builders, and prominent retired people. Committees of the Coastal Healthcare Inc. (parent) board are detailed in Exhibit Case.3. The following are some of the conflicts that have occurred between these two boards over the years: ◆ The parent board refused to approve the appointment of a new hospital CEO selected by the CMC board. ◆ In 2006, the two boards hired separate consultants to develop a long-range strategic plan. Two plans were produced but were never integrated and never really implemented. ◆ Various committees from the parent board often request information about functions of the medical center, which creates conflict because the parent board has a tendency to micromanage CMC’s routine operations. ◆ Separate committees of both boards have worked more than two years trying to revise CMC’s mission statement. M E D I CAL S T AF F The medical staff at CMC has historically been a difficult group when it comes to cooperation with the board and administration. Patient length of stay is excessively high in most specialties, yet the physicians refuse to be educated on reimbursement and the need to reduce length of stay, excessive tests, and so on. Approximately 90 percent of the medical staff also has privileges at one or more competing hospitals in town. Committee Executive Size 11 Meeting Frequency Monthly Finance 11 Monthly Strategic Planning 11 Quarterly EXHIBIT CASE.3 Committees of the Coastal Healthcare Inc. Board 8 Essentials of Strategic Planning in Healthcare A number of the medical staff members have set up their own diagnostic services, especially the radiologists and neurologists, despite that they have been granted exclusive service contracts at CMC. In recent years, there has been considerable dissatisfaction among the specialists who represent the majority of the medical staff. They complain that their referrals are decreasing or flat and that CMC is not doing enough to help them establish and maintain a sufficient number. Hospital admissions for specialty services are declining drastically. To compound the problem, the competing medical centers are courting these specialists aggressively with attractive offers, such as priority scheduling in surgery and other special arrangements, all of which are legal. The medical staff also rated various aspects of medical center operations unsatisfactory in a recent survey. The subjects of their complaints were across the board and included key areas such as the following: ◆ Dissatisfaction with nursing services and especially the nurses’ attitudes (Nurses have formed themselves into shared governance councils and are taking issue with both physicians and administration regarding their autonomy.) ◆ Excessive delays in every aspect of operations (e.g., late starts in the operating room, lack of supplies or equipment when it is needed, excessive patient processing time [for example, over three hours for pre-surgical testing for outpatient surgery]) The medical staff also feel they should have more voice in both financial and operational matters, especially in capital budgeting. They feel they are asked to provide free services too frequently (e.g., by committees), and many have refused to serve without compensation to offset the practice income they have lost. There are also quality problems. Two physicians probably should have their privileges revoked, three apparently have substance abuse problems, and several are obsolete in their practices and should be asked to retire. The problem is getting their peers to act in these cases. It has also been difficult to get physicians to hold elected offices and accept committee responsibility. Payment of honoraria has helped, but support is still difficult to procure. Over $200,000 is being paid out to entice doctors to serve on committees. S UBS I DI ARY C O M P A N IE S Including CMC, there are 24 subsidiary corporations of Coastal Healthcare Inc.: ◆ Medical Enterprises is a for-profit joint venture with physicians. The company is developing computers that enhance imaging services. Thus far, CMC Coastal Medical Center Comprehensive Case Study 9 has invested $18 million in this company. No cash flow is expected for three to four years. ◆ Coastal Healthcare Inc. has three nursing homes. Collectively, these longterm care facilities are losing almost $1 million annually. Debt service on two of them is very high. Only one is within patient transfer distance of CMC. The second is 70 miles away, and the third is 82 miles away. All three have unions. Almost all of the residents of the two facilities losing the greatest amount are Medicaid patients; there are only a few self-pay patients. ◆ CMC Management Services was formed to sell management and consulting services. The company lost $360,000 last year, which was its third year of operation. ◆ Regional Neuroimaging is a joint venture with physicians. The company lost $920,000 its first year of operation. Capital invested by the hospital to date totals $9 million. ◆ American Ambulance is a local ambulance company. Financially, it breaks even, but it does increase admissions to CMC, especially through trauma pick-ups. ◆ Home Health, Inc. provides home health care services in an eight-county area. Its operating loss last year was $290,000. The company has considerable difficulty attracting and retaining professional personnel, especially nurses and physical therapists. ◆ Industrial Services Inc. provides health services to industrial companies throughout the state. Only one of the six operating locations is close enough to generate referrals. None of the operating sites is making a profit despite that the company is five years old. ◆ MRI Enterprises is a successful mobile magnetic resonance imaging (MRI) joint venture with a physician group. It has a consistent, positive bottom line. ◆ Textile Enterprises is a large, high-tech laundry completed three years ago. It was intended to serve the medical center and many other companies in the region. Because of its debt service, union wages, and remote location, the laundry has yet to break even. After three years, it still does not have its first non-CMC service contract. ◆ Coastal Healthcare Inc. owns three hospitals: Caroleen Hospital (60 beds), Grant Hospital (74 beds), and Ellenboro Hospital (90 beds). All are small Debt service cash required over a given period for the repayment of interest and principal on a debt 10 Essentials of Strategic Planning in Healthcare rural hospitals purchased to feed patients to CMC. All are unprofitable. Collectively, the three of them require $2.5 million in subsidies annually. ◆ Health Partners is a health maintenance organization joint venture with 20,000 subscribers. After three years of operation, its costs are still rising. Last year, it required $2 million in subsidies. ◆ Northeast Clinic is a large multispecialty group of 11 physicians who were fed up with government red tape and sold out to CMC last year. CMC now employs these physicians and is responsible for all medical group operations. It is too early to determine the success of this venture. ◆ Imaging Venture is a recently formed radiology joint venture. Until/if it becomes successful, it will cost just under $1 million in debt service annually. ◆ North Rehabilitation, a 60-bed inpatient rehabilitation facility, was just opened. It is expected to be successful because CMC will refer all of its rehabilitation patients to this facility and there is no other rehabilitation facility in the region. ◆ Center for Pain has been a successful outpatient facility and is expected to remain successful. Its space is leased. Overhead is kept low. The physicians are salaried. ◆ Coastal Wellness, a fitness and wellness center, was developed five years ago at a cost of $10 million. It is located in a coastal community and is intended to attract those from the wealthy areas. A significant number of CMC employees and their family members use Coastal Wellness at a lower monthly rate, which is subsidized by CMC. Coastal Wellness is currently underutilized, so CMC subsidizes it with $220,000 annually. ◆ Central Billing was formed to attract patient billing contracts from health facilities and physician groups. It has been moderately successful and reached the break-even point this past year. ◆ City Contractors, a separate, small general contracting company, was just formed. It will require about $200,000 annually in subsidy. ◆ Bay Enterprises is a land acquisition and holding company. E X E CUT I VE S AN D M I D D L E M AN A GE M E N T CMC employs 20 executives. (Executives are defined as positions above the administrative director level.) Total annual executive compensation is $2.2 million. Each executive has an Coastal Medical Center Comprehensive Case Study executive secretary. The annual average compensation among the 20 secretaries is $35,000, which amounts to an executive-level support cost of $700,000. Each of the other 23 subsidiary companies also employs executives and support personnel in addition to regular employees. This executive overhead is a drain on CMC because many of the subsidiary companies do not break even and thus must be subsidized. CMC employs 15 administrative directors, who function between vice president and department directors. Their principal purpose is to handle problems at the department level so these problems do not escalate to the vice president. There are also 67 director-level positions in the organization. Directors are responsible for a particular department or function. Managers are the next level down the line of supervision. There are 31 managers. Collectively, these managers have 68 supervisors working for them. The compensation and benefits policy of CMC appears to deviate substantially from industry norms. For example, the directors’ annual salaries range from $85,000 to over $170,000. C O RP O RAT E S T AF F The parent corporation consists of the following offices: ◆ Office of the CEO, who has five “assistants to the president” (i.e., an administration, board, ethics, community, and staff assistant) ◆ Office of the senior vice president for finance (three people) ◆ Office of the senior vice president for corporate affairs (four people) ◆ Office of the senior vice president for corporate development (three people) ◆ Office of the vice president for legal affairs (five people) ◆ Office of the vice president for medical affairs (two people) ◆ Office of the vice president for marketing (two people) ◆ Office of the vice president for strategic planning (two people) The corporate staff serve as advisers and coordinators, oversee their functional areas at CMC, and, where needed, oversee the various subsidiary companies. Total FTEs for the parent company corporate staff are 29. Total costs of corporate overhead are $2.3 million annually. In addition, during the past year the corporate officers of the parent company purchased the consulting services listed in Exhibit Case.4. 11 12 Essentials of Strategic Planning in Healthcare EXHIBIT Case.4 Consulting Services Purchased by Parent Company Consultant Purpose Conduct board retreat Prepare restructuring recommendations $65,000 Write organization history $60,000 Provide policy advice $25,000 Lobbying $50,000 Compensation (wage/salary) study $72,000 Labor negotiations $120,000 Management development $90,000 Managed care study $47,000 Total D UP L ICA T I O N OF Cost $35,000 $564,000 F UN CT I O N S Throughout CMC, functions were duplicated as the organization grew. For example, there are three education departments and three transportation departments. There is both an inpatient and outpatient pharmacy, each with its own director. CMC and 12 of the larger subsidiary companies have separate human resources management functions. There are 24 boards, one for each subsidiary company, and each board has a large number of committees. Executives from CMC and the parent corporation sit on these boards and their committees. S E RVI CE /P RO F E S S IO N AL C O N T RAC T S CMC contracts with many service providers. Service contracts include housekeeping, food service, record transcription, biomedical maintenance, security, and many others. These contracts are renewed regularly with the same firms. CMC also contracts with countless health professionals. For example, the contract for coverage of CMC’s pediatrics clinic by two physicians is $380,000, and CMC furnishes the facilities and professional and support personnel. Numerous physicians have negotiated arrangements through which they regularly receive checks for committee service, advice, and so on. Many of these negotiations are not documented in written contracts. The hospital-based specialists’ contracts are based on a percentage of gross earnings, with no provision for any type of adjustments to the gross. Several of these arrangements are long-standing but unwritten agreements. Coastal Medical Center Comprehensive Case Study M AT E RI AL M AN AG E M E N T CMC is organized traditionally, meaning there is no centralized material management function. Purchasing is done throughout the organization from a large number of vendors. The pharmacy, laboratory, and other services do their own ordering, arrange contracts, and handle other supply and equipment matters. For example, the laboratory recently purchased a large computer software package without the knowledge of the purchasing agent or the information services department. Large stores of inventory can be found throughout the facility. CMC also harbors excessive and obsolete equipment. Central storage occupies a huge amount of space and carries what appears to be an overabundance of many items. S P E CI AL P RO JE CT S Fifty-three “special projects” in various stages of progress are underway at CMC, ranging from the addition of a new education center to renovation of the food service department. A large number of start-ups are also under development. For example, CMC is considering a joint venture with physicians to build an ambulatory surgery center offering the latest robotic surgery technology. Analysis of the projected costs of these projects, and of the working capital many of them will need before they become profitable, if they ever do, revealed that the organization will suffer severe financial distress if these projects continue. Moreover, there is considerable uncertainty regarding the financial feasibility of many of them. Finally, these projects have not been centrally coordinated, nor has their potential impact on the organization’s mission and strategic direction been discussed. These projects were simply developed on the basis of individual interests of various executives and managers. By his inaction and lack of leadership, Mr. Henderson gave everyone free rein to do their own thing—and they did. N E W CEO A RR IVE S CMC hired an executive search firm specializing in healthcare to look for a new CEO. After a nationwide search, the board of trustees decided to hire Richard Reynolds. Mr. Reynolds appeared to be a no-nonsense CEO who had the knowledge and skills to determine the problems at CMC and resolve them. During his first few weeks in the new position, Mr. Reynolds did an exhaustive analysis of CMC with the assistance of a transition consultant and the executives and managers of the organization. The following list highlights his findings: 1. Compared to national personnel standards, a large percentage of the departments at CMC are grossly overstaffed. More than 100 new positions were 13 14 Days accounts receivable average number of days an organization takes to collect payments on goods sold and services provided, calculated as follows: average accounts payable (in dollars) × 365 (days per year) ÷ sales revenue (The “normal” average range is 40 to 50 days. A number significantly greater than 50 days indicates that the organization is having difficulty collecting payments from its clients; a number significantly lower than 40 indicates that the organization has overly strict credit policies that might be preventing it from taking in higher sales revenue.) Essentials of Strategic Planning in Healthcare added during the most recent fiscal year, despite that utilization did not justify these positions. The overall administrative structure is top-heavy. 2. Fifty-eight general contracts were identified, many of which are standing contracts with consultants who appear to be receiving large monthly retainers but are not providing services. In addition, a total of 121 contracts with physicians were identified. Again, these physicians appeared to be providing few services. The prior CEO apparently made numerous agreements to subsidize various physicians and pay them large sums for performing administrative services that are normally done on a voluntary basis by members of the medical staff. 3. Fifty-three major new service projects in the planning or construction phase were identified. An analysis indicated that they would require over $100 million in future commitments, and Mr. Reynolds was not sure that CMC would be able to service the necessary debt. No project priorities existed and no feasibility studies had been done for most of the projects, so there was no way to project the financial impact of these “innovative ideas” on the organization. 4. A large number of duplicate departments were identified. Mr. Reynolds pinpointed many departments and services that could be consolidated. 5. Sixty-six “special” programs are collectively accounting for a $6 million outflow of cash from CMC. These programs are not directly related to CMC’s tertiary care mission. CMC seemed to have developed every type of program conceivable from one end of the care continuum to the other without considering whether the programs supported its mission or generated a positive cash flow. 6. In material management, Mr. Reynolds found nearly $8 million in “unofficial” inventory stored throughout various facilities of the medical center. There is no centralized material management system for purchasing, storage, distribution, and accountability of materials. 7. While the median operating margin for medical centers of similar size and service was about 2.5 percent the past year, CMC had experienced a multimillion-dollar loss. In addition, the medical center’s return on equity was a major problem. The number of days accounts receivable (i.e., average number of days it takes to collect payments that clients owe to the organization) in other medical centers averaged 68 days during the past year; CMC’s accounts receivable days were far greater. Most alarmingly, CMC’s cash on hand at any given time represented only 22 operating days. Finally, the hospital’s major bond issue was recently downgraded to the lowest credit rating. 8. Medicare has just notified the CFO that recovery of $4 million is forthcoming due to past errors in the Medicare Cost Report. Coastal Medical Center Comprehensive Case Study 9. The business coalition is becoming well established and intends to aggressively pursue discounted services through direct contracting. 10. The parent company (Coastal Healthcare Inc.) is not structured nor functions as a local healthcare system. Clinical services and administrative support are not integrated. For this reason, Coastal Healthcare Inc. does not meet the classic definition of a healthcare system provider. 11. Nationally, capitation payment arrangements have not been successful for many hospitals. CMC is not in a favorable position to become an accountable health plan. To become an accountable health plan, CMC would have to partner with primary care and specialty physicians to meet the total healthcare needs of a defined patient population. 12. No value-oriented efforts have been initiated at CMC (e.g., continuous quality improvement, benchmarking). 13. There has been no leadership development for the board of trustees, medical staff, and administration. 14. No formal strategic planning process is in place at the CMC or Coastal Healthcare Inc. (holding company) level. 15. There are no existing physician–hospital organizational arrangements. G E N E RAL C O N D IT I O N S Mr. Reynolds also quickly learned that he had taken a position in an organization with a governing board that was generally content to approve anything the previous CEO recommended. The medical staff appears no better in that they are principally focused on their own self-interests and show little interest in the affairs of the medical center. Control systems are lacking, and CMC does not have a comprehensive information system. Moreover, quality of care appears low; a large number of legal cases against the medical center are pending. With respect to material management, several suppliers have refused to deliver supplies because of delays in accounts payable. Mr. Reynolds summed up the medical center’s situation by reporting to the members of the board that there is an immediate cash flow problem, people-related expenses are far too high, material-related expenses are well above those expected, plant-related expenses are excessive, contract amounts are excessive, and accounts receivable are too high. He also remarked that CMC seems to have no sense of direction or overall corporate strategy. With the help of his transition consultant, Mr. Reynolds surveyed and interviewed his department heads. Given the financial situation and the results of the survey, Mr. Reynolds knew he faced a difficult challenge. 15 16 Essentials of Strategic Planning in Healthcare Mr. Reynolds concluded that the prior CEO had engaged in the “one man rule” concept and had failed to build necessary knowledge and management skills among the vice presidents. Thus, when difficulties occurred in the organization, inertia set in. The reaction of executives and managers was that of indecisiveness and unwillingness to take risk for fear of compromising their job security. He also reported that there are an excessive number of administrative positions. An examination of CMC’s balance sheet (see Appendix C), financial ratios (Appendix D), and structure led Mr. Reynolds to conclude that the corporation was overexpanded, over-leveraged, and over-dependent on a narrow market. The organization is too expensive to operate, bloated with bureaucracy, inefficient in its services, and unimaginative in its approach to strategic planning and change. From his discussion with the leadership team and other hospital staff, Mr. Reynolds believes there is no clear organizational mission and that there is considerable dissatisfaction among the leaders. To confirm his beliefs, he had the transition consultant administer a brief leadership survey. Appendix E reports the results of this survey, providing detailed information on corporate culture and job satisfaction. Mr. Reynolds has already decided to do a similar survey of all hospital staff within the next six months to obtain more baseline data on the organization’s corporate culture and its ability to deal with the changes he knows are coming. N E W B US I N E S S I NI T I AT IVE S To expand its physician staff, CMC has constructed a hospital-owned medical office building in a growing community five miles from the hospital. This effort has been successful and has attracted a prominent group of orthopedic physicians who are now referring their surgical procedures to the hospital. As part of this expansion and with the growing orthopedic workload, CMC is exploring the financial feasibility of opening a physical therapy clinic at this new location. On the basis of current physician referral patterns, CMC anticipates $250,000 in outpatient physical therapy net income at the new location during the upcoming 12 months. C O N CL US IO N As Mr. Reynolds ponders the many problems he had uncovered upon arrival at CMC, he wonders what other problems might be beneath the surface. Every day he uncovers additional major problems. At this point, Mr. Reynolds is so overwhelmed by the problems that he is unsure of how to proceed. He does know, however, that priorities need to be Coastal Medical Center Comprehensive Case Study set, the deteriorating situation needs to be turned around, and a strategic plan needs to be developed to chart the future of the organization. E X E RCI S E S Assume you are Mr. Reynolds. Being new to the position, you are faced with major challenges. The questions and exercises listed at the end of each chapter provide an opportunity to gain leadership experience in managing change in a healthcare organization. Most important, you will gain experience in developing a strategic plan. A P P E N DI X A: P O P UL AT I O N AN D H O US EH O L D D AT A Riverside County POPULATION AND HOUSEHOLD Square miles Population density per square mile Population 1992 Population 2004 Population 2009 % Population growth 1992–2004 % Population growth forecast 2004–2009 Households 1992 Households 2004 Households 2009 % Household growth 1992–2004 % Household growth forecast 2004–2009 Average household size Families % Urban population % Rural population % Female population % Male population % White population % Black population % Asian population % Hispanic origin population Other population % Population 0–5 years % Population 6–11 years % Population 12–17 years % Population 18–24 years % Population 25–34 years % Population 35–44 years % Population 45–54 years % Population 55–64 years 609 214 83,829 129,832 148,289 54.88% 14.22% 33,431 52,322 59,895 56.5% 14.5% 2.48 35,793 56.5% 43.5% 51.2% 48.8% 91.1% 6.5% 1.4% 2.7% 1.4% 6.5% 8.1% 8.2% 6.4% 9.7% 17.8% 17.0% 10.2% Metro City Rural County 775 1,028 672,971 794,569 842,179 18.08% 5.10% 256,772 310,603 331,539 20.97% 6.75% 2.57 205,123 98.7% 1.5% 51.5% 48.7% 67.4% 28.5% 3.8% 4.3% 2.1% 8.7% 9.1% 8.7% 8.9% 14.4% 18.1% 14.6% 7.7% 601 245 105,986 146,739 163,082 38.45% 11.14% 36,664 52,448 58,623 43.05% 11.77% 2.8 40,907 59.6% 40.4% 50.7% 49.3% 88.6% 7.3% 3.0% 4.4% 3.1% 8.0% 9.6% 10.2% 7.2% 11.6% 18.7% 15.9% 8.9% Ocean County 485 111 28,701 53,506 63,543 86.43% 18.76% 11,882 22,904 27,305 92.76% 19.21% 2.34 16,766 59.9% 40.1% 51.5% 48.5% 87.9% 9.5% 1.6% 5.2% 2.3% 4.9% 6.0% 6.7% 4.4% 7.3% 12.9% 14.3% 14.4% 17 18 Essentials of Strategic Planning in Healthcare % Population 65–74 years % Population 75 years and over Median age 8.8% 7.3% 41.3 5.7% 5.1% 35.5 5.6% 4.3% 36.8 17.2% 11.9% 50.5 INCOME AND EDUCATION Total household income ($US) $5,145,536,895 $20,994,962,608 $3,656,788,183 $1,650,526,132 Median household income ($US) $49,103 $41,410 $49,270 $42,975 Per capita income ($US) $39,632 $26,423 $24,920 $30,847 High income average ($US) $474,930 $430,207 $348,177 $450,993 Education—% less than high school (age 25+) 11.2% 13.6% 11.5% 12.6% Education—% high school (age 25+) 31.6% 33.9% 35.4% 36.6% Education—% some college (age 25+) 25.5% 26.9% 29.9% 27.1% Education—% college (age 25+) 22.1% 19.3% 16.8% 15.4% Education—% graduate degree (age 25+) 9.6% 6.4% 6.5% 8.3% EMPLOYMENT AND OCCUPATION Males employed (age 16+) Females employed (age 16+) Total employees (age 16+) % White-collar occupations % Blue-collar occupations % Service occupations % Local government workers % State government workers % Federal government workers % Self-employed workers CONSUMER EXPENDITURES Annual expenditures per capita ($US) Healthcare expenditures per capita ($US) Healthcare insurance expenditures per capita ($US) 35,604 29, 337 64,941 62.9% 22.8% 14.3% 7.6% 3.2% 1.8% 9.0% 201,461 169, 863 371,324 63.1% 23.6% 13.3% 7.0% 2.4% 3.5% 5.2% 40,722 30,949 71,671 61.8% 25.9% 12.4% 7.4% 2.2% 6.3% 6.3% 12,093 9,654 21,747 57.3% 27.5% 15.2% 7.7% 1.6% 0.9% 9.2% $18,211.60 $2,347.20 $428.00 $16,580.10 $2,183.90 $385.00 $16,226.00 $2,105.70 $370.00 $18,322.00 $2,390.30 $482.20 147.1 211.3 147.1 211.3 147.1 211.3 147.1 211.3 COST OF LIVING Consumer price index Medical care consumer price index A P P E N D I X B: C O AS T AL M E DICAL C E N T E R : S T AT E M E N T ( I N T HO US A N D S O F D O L LA RS ) OF 2008 2009 Operating revenue Inpatient Outpatient Other operating revenue Gross operating revenue 130,775 28,923 2,604 162,302 131,470 31,211 2,225 164,906 Less provisions for allowances Third-party reimbursement programs Doubtful accounts Charity care Total provision for allowances (31,422) (5,112) (2,705) (39,239) (42,081) (7,320) (2,993) (52,394) I N CO M E Coastal Medical Center Comprehensive Case Study Net operating revenue 123,063 112,512 Expenses Salaries, payroll taxes, and fringe benefits Dietary, pharmaceutical, and other supplies Purchased services Depreciation and other capital costs Medical specialists Insurance Interest expense and amortization of financing costs Utilities Other Total expenses 61,757 17,450 12,971 7,281 4,091 3,112 2,408 2,257 2,336 113,663 64,858 18,534 14,306 7,929 5,893 3,722 2,560 2,268 2,203 122,271 9,420 (9,759) 1,268 81 1,349 10,769 1,040 58 1,098 (8,661) Income from operations Nonoperating revenue Interest income Other Total nonoperating revenue Net income A P P E N DI X C: C O AS T AL M E D ICAL C E N T E R : B AL AN C E S HE E T ( I N T HO US AN D S O F D O L L ARS ) ASSETS Current assets Cash and cash equivalents Accounts receivable Inventories Current portion of assets Prepaid expenses and other assets Total current assets Facilities and equipment Land and land improvements Buildings and improvements Equipment Construction Less accumulated depreciation Total facilities and equipment Assets of limited use Funds held by trusts Assets segregated for capital purposes Donor restricted funds Investment in deferred compensation annuities Total assets of limited use Less assets of limited use and required for current liabilities Total assets of limited use 2008 2009 2,337 23,781 2,251 3,030 1,678 33,077 2,964 25,345 2,638 3,947 1,729 36,623 3,209 44,053 36,024 4,389 (36,036) 51,636 3,279 46,369 38,400 15,774 (41,222) 62,600 40,475 970 2,045 6,058 48,545 (3,030) 45,516 29,469 10 2,049 6,212 37,740 (3,947) 33,793 19 20 Essentials of Strategic Planning in Healthcare Other noncurrent assets Deferred financing costs Due from affiliated organizations Other Total other noncurrent assets TOTAL ASSETS LIABILITIES AND FUND BALANCES Current liabilities Current portion of long-term debt Advance from donations Accounts payable Accrued expenses Payroll and related fringe benefits Interest payable Other liabilities Total current liabilities Other liabilities Deferred compensation Estimated malpractice liabilities Deferred reimbursement program liabilities Retirement incentive liabilities Subtotal Long-term debt, less current portion Commitments and contingencies Donor restricted fund balances Unrestricted fund balances TOTAL LIABILITIES AND FUND BALANCES 2,740 1,587 326 4,653 2,536 1,865 1,417 5,818 134,882 138,833 2008 2009 1,156 2,405 2,440 3,030 7,647 2,600 1,302 17,549 1,073 5,155 6,690 3,947 7,926 2,228 3,074 26,148 5,056 6,212 1,978 1,669 7,034 7,881 53,717 52,745 2,045 54,537 2,049 50,010 134,882 138,833 A P P E N DI X D: C O AS T AL M E D IC AL C E N T E R : F I N AN CI AL R AT I O S Liquidity ratios Current ratio Days in patient accounts receivable Average payment period ratio Days cash on hand Capital structure ratios Equity financing ratio Long-term debt to equity Fixed asset financing ratio Times interest earned ratio Debt service coverage ratio Cash flow to debt ratio 2008 2009 1.885 70.5 42.7 10.9 1.401 82.2 58.3 13.3 0.404 0.985 0.613 5.47 5.74 0.657 0.360 1.055 0.508 (2.38) 0.503 0.413 Coastal Medical Center Comprehensive Case Study Activity ratios Total asset turnover ratio Fixed asset turnover ratio Current asset turnover ratio 1.203 3.143 4.907 1.188 2.634 4.503 Profitability ratios Deductible ratio Markup ratio Operating margin ratio Return on assets 24.55 1.42 0.077 0.08 32.20 1.34 0.087 0.062 A P P E N DI X E: C O AS T AL M E DI CAL C E N T E R L E AD E RS H I P S URVE Y PERCEIVED CORPORATE CULTURE Item 1. Leadership 2. Structure 3. Control 4. Accountability 5. Teamwork 6. Organization identity 7. Work climate 8. Risk taking 9. Conflict management 10. Perceived autonomy 11. Results oriented 12. Mutual trust 13. Communication 14. Team spirit 15. Attitudes 16. Vision 17. Reward system 18. Group interaction 19. Value of meetings 20. Faith in organization S E L F -E V A L U A T I O N Positive % 28 22 66 20 26 31 17 15 24 51 29 36 24 7 21 19 36 20 26 28 OF Neutral % 9 14 20 7 7 17 17 9 24 12 20 8 7 21 22 5 27 45 7 6 Negative % 63 64 14 73 67 52 66 76 52 37 51 56 69 72 57 76 37 35 67 66 POSITION Item 1. Sufficient decision-making authority 2. Clear understanding of role 3. Clear understanding of performance expectations 4. Fully use training and experience 5. Mix of management and routine is correct 6. Amount of work is reasonable 7. Work offers challenge, satisfaction, and growth 8. Performance is recognized 9. Compensation is satisfactory 10. Quality work is recognized and rewarded 11. Upward communication is effective 12. Downward communication is effective True % 34 43 26 27 33 28 30 38 45 29 21 17 Partly true % Not true % 50 16 30 27 44 30 33 40 30 37 32 40 30 40 32 30 35 20 41 30 40 39 50 33 21 22 Essentials of Strategic Planning in Healthcare 13. Cross communication is effective 14. Operations problem solving is timely and thorough 15. Strategic decisions are timely and effective 15 17 26 55 43 30 30 40 44 A P P E N DI X F: H O S P I T A L C O M P ARE Q UAL I T Y D AT A CMS ID HospitalName Accreditation EmergencyService HeartAttackPatientsGivenACEInhibitororARBforLeftVentri HeartAttackPatientsGivenAspirinatArrival HeartAttackPatientsGivenAspirinatDischarge HeartAttackPatientsGivenBetaBlockeratArrival HeartAttackPatientsGivenBetaBlockeratDischarge HeartAttackPatientsGivenPCIWithin120MinutesofArrival HeartAttackPatientsGivenSmokingCessationAdviceCounseling HeartAttackPatientsGivenThrombolyticMedicationWithin30Mi HeartFailurePatientsGivenACEInhibitororARBforLeftVentr HeartFailurePatientsGivenanEvaluationofLeftVentricularS HeartFailurePatientsGivenDischargeInstructions HeartFailurePatientsGivenSmokingCessationAdviceCounseling PneumoniaPatientsAssessedandGivenInfluenzaVaccination PneumoniaPatientsAssessedandGivenPneumococcalVaccination PneumoniaPatientsGivenInitialAntibioticswithin4HoursAf PneumoniaPatientsGivenOxygenationAssessment PneumoniaPatientsGivenSmokingCessationAdviceCounseling PneumoniaPatientsGiventheMostAppropriateInitialAntibiotic PneumoniaPatientsWhoseInitialEmergencyRoomBloodCultureWa SurgeryPatientsWhoReceivedPreventativeAntibioticsOneHou SurgeryPatientsWhosePreventativeAntibioticsareStoppedWi 11111X CMC Yes Yes 78% 92% 95% 90% 92% 49% 83% 63% 81% 93% 46% 71% 58% 44% 53% 98% 76% 75% 80% 62% 62% 22222Y JMC Yes Yes 82% 97% 98% 91% 97% 52% 98% 33% 82% 97% 37% 78% 59% 60% 61% 98% 77% 81% 85% 75% 75% 33333Z LMC Yes Yes 91% 100% 96% 97% 93% 66% 98% 100% 89% 96% 58% 100% 77% 83% 81% 99% 100% 90% 81% 74% 74% State National average average 82% 91% 94% 85% 92% 65% 98% 40% 73% 92% 39% 87% 43% 39% 72% 98% 92% 81% 80% 80% 80% 83% 94% 95% 86% 94% 68% 99% 50% 75% 93% 49% 97% 45% 49% 73% 99% 95% 85% 90% 81% 81% 
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